Bankruptcy Litigation Committee

ABI Committee News

Hiring an Expert Witness in Bankruptcy Preference Actions, Now and Tomorrow

With commercial bankruptcy filings presently at an all-time low and a steady decrease in filings occurring each year going back to 2003, it has become a much longer and drawn-out process to resolve a bankruptcy preference action. In the past, a preference action was something that got a quick resolution between the plaintiff’s and defendant’s counsels, and the possibility of it ever reaching the “daylight” of a courtroom was almost unheard of.

Today it seems quite commonplace to file summons and discovery motions, require depositions and line up mediators to resolve these issues. Now the requirement of hiring an independent, expert witness to refute the plaintiff’s assessment of the preference amount has become part of “the ordinary course of business.”

Previously, the hiring of an independent expert witness was only used in large-dollar, high-volume transaction cases that required a professional interpretation of the events leading up to the bankruptcy filing. Now, even small-dollar, low-volume cases are in need of expert witnesses.

How to Find an Expert Witness

What should you look for when locating, hiring and working with an independent expert witness? There are many ways to locate an expert witness:

  1. Internet
  2. search firms
  3. nonprofit organizations such as the National Association of Credit Management (NACM).

One example of the latter is NACM’s program that educates, tests and certifies trained and experienced professionals to become certified expert witnesses in bankruptcy preference actions.

Narrowing the Field

Once you have located potential expert witnesses, you need to determine if any of them meet your needs in terms of knowledge of the industry and also if there are any conflicts that would bar your witness from rendering an opinion (e.g. already working for the opposing counsel). A copy of the candidates’ C.V. (curriculum vitae), as well as references, should be requested to determine his or her qualifications and experience along with his or her case-document requirements and fee structure. If he or she is part of a company, information related to the company and its officers should also be requested.

Getting Started

Once you have narrowed the list down to two or three candidates, a formal interview should be conducted with the remaining experts to determine who will best represent your client’s main interest. If the expert has already worked on cases related to the bankruptcy case that you are involved in or similar cases, a review of the events of that case should be discussed.

If the candidates have access to industry standards that will support your case, this is a major plus in the hiring of that expert. Experience related to the defendant’s industry – either hands-on or via other means, such as being an instructor – will enhance the hired expert witness firm’s stance in the case. Finally, he or she should be able to provide an estimate range of the costs involved in providing a finished report. A word of caution: The fee for the preparation of an expert report does not include any costs related to attendance at depositions, mediation or court appearances, so it is vital that your client understands that just because they have an expert report for the case, costs related to the expert witness may not be over yet.

Once the candidate is on board, the true uphill battle begins. Another word of caution: If possible, don’t wait until the last minute to decide to hire an expert witness. Providing the expert witness with the greatest amount of time available to render an opinion may help you get the best results and allows the expert witness to consider additional facts that may become available at a later date.

It is wise to have your candidate consider all defenses rather than the ones that you may have used in the past to eliminate a preference action. A second set of eyes along with an understanding of the best way to defend an action can make the difference in achieving the ultimate goal of the best results for your client. We have found that after staring at a case and the data that supports it for many hours, even the most brilliant attorney or an equally brilliant paralegal can make or overlook the simplest mathematical errors. Likewise, if the expert witness has considerable experience in many industries, he or she may have developed other strategies from previous cases to be used in the resolution of your preference action.

Documentation

As for documents, it is best to have at least 27 months’ worth of data from the bankruptcy filing date (i.e., invoice copies including the unpaid invoices prior to filing date, lockbox date, stamped check stubs, payment history, internal reports, etc.) available for the expert to review. This provides not just one but two full years to compare against the 90-day preference period. Documents related to contact between the parties, pertinent documents such as a copy of the complaint, any promissory notes, distribution or sales agreements and a list of all credit terms extended during the life of the relationship between the plaintiff and the defendant should be available for review by the expert witness. Finally, an estimate of when the two parties first started doing business together would also be helpful.

If you are representing the defendant, then it is also wise to provide the expert with copies of all cancelled checks (front and back) that make up the preference amount supplied from the plaintiffs’ counsel. This confirms that all checks listed in the preference complaint are within the 90-day preference period and are viable to be considered in the action.

While this may seem like a considerable amount of documents needed to complete a report on a small preference action, it depends on the degree of difficulty to defend the action and the reluctance of the parties to resolve the matter amiably for you to determine how far you will need to go to resolve the matter. The dollar amount of the action should always make the final determination of just how much effort and costs your client should bear to reach an amiable resolution. While they may want to “go to the mat” on this one, explaining what it will truly cost them to win and pay the opposing side nothing may convince them that to achieve this lofty goal it may cost them more than the amount of the original preference action.

Review the Draft Report

Once the expert has completed his or her report and has submitted it to you for your review, it should be examined and edited to enhance the final results. The expert must make the final determination that the facts are clearly stated and verified from his or her examination of the documents provided. He or she must also be allowed to change an opinion if additional documents become available for review.

The final work needed from an expert comes in the form of depositions, mediations and court appearances as needed. Working with the expert and setting up dates that work for all parties involved makes the resolution more manageable. The expert witness needs to be fully prepared for all types of questions and ready to present a clear explanation of what he or she has determined from the examination of the facts. We highly recommend that your expert witness be in attendance at all mediations in order to answer questions that may arise at the meeting, which may be instrumental in bringing the case to reasonable conclusion.

Mediation

Typically we recommend having a non-binding mediation occur before depositions as a way to reach a resolution of the action before it gets more complicated or expensive for your client. Sometimes having a neutral third party evaluate each side’s facts in the case can convince both parties that their decision to go to court is less solid than they think. The cost of using a mediator should be split between the parties, and the firm performing the mediation should be acceptable to both sides of the preference action. This helps to keep the mediator truly independent and unbiased during the negotiations.

A mediator should be proactive and limit the parties’ discussions of their cases. The mediation cannot turn into a “fishing expedition,” “rock-throwing contest” between attorneys or a “mini-deposition” of each side’s expert. Having opening statements by representative counsel with complete attendance by all parties followed by separation of the two sides provides a proper start to negotiations.

Once both groups are separated, the defendant’s attorney should open discussions with the mediator and answer any questions that he or she may have. This is where having the expert witness is crucial to the negotiations, as he or she can help the mediator understand any areas that need to be addressed as related to the report and consideration of the industry standards. Once all is clear, the mediator needs to make the opposing parties aware of the defenses being considered and discuss any rebuttals they may have including comments from the plaintiff’s counsel’s expert witness to what has been presented to the mediator.

In the mediation, all aspects of the case should come into play as gambits to settle the action. If there is a proof of claim, can all or part of it be used as final settlement of the action? If there is any possible actual dollar payout to be made, can the additional claim for the payment be waived as a means to “sweeten the pot?” At this point, back-and-forth negotiations begin, and any further points are discussed until either an amiable settlement is reached or the parties decide that no agreement can be reached. If settlement is not reached, then depositions may follow at a later date with a court date following thereafter. If there is any possibility of reaching a final resolution through mediation, then the final mediator’s report to the court should state that a final conclusion remains open for the time being with a final date set for resolution under mediation.

So now you feel that an expert witness may be a necessary evil, but what happens once BAPCPA kicks in? Once again, the expert witness will be needed. With the changes to the ordinary-course defense, cases filed on Oct. 17, 2005, or later will now be covered by BAPCPA. This means that ordinary course can be proven by comparing the 90-day preference period to the previous experience or to industry standards, but a comparison to both will no longer be required.

Effect of BAPCPA

So where does the expert witness come into play here? Considering the degree of difficulty most companies have in resurrecting documents that are more than one year old, let alone providing documents that go back as many as four or five years, this will still be a nightmare to them. It is far easier to let an expert witness define an industry’s standard payment range than go through mountains of documents supplied by a defendant or an estate. It is less costly for the client as well.

If, however, the expert determines that the defendant’s industry does not match well against the 90-day preference period, then a comparison against previous experience can always be done. At this point, the same procedure as listed earlier in reviewing the payment documents, invoice copies, etc. can be performed by the expert witness. Needless to say, if the plaintiff feels that an expert witness needs to be heard from in order to change their opinion on the preference action, they will indeed insist on this in order to force a higher settlement amount. At this point, it will be up to the defendant and their counsel to decide whether to settle or hire the expert witness to obtain the best result.

Concluding Thoughts

In summary, the hiring of an expert may not be necessary in every case, but you may find that it has now become more the “ordinary” rather than the unusual course of action in preference proceedings. We recommend that you consider your client’s situation and the final results that can be achieved with hiring an experienced expert witness.