Bankruptcy Litigation Committee

Volume 6, Number 1 / January 2009

In This Issue

• The Emergence of E-Discovery in Bankruptcy
• The Availability and Application of Civil Sanctions in Bankruptcy Court
• So Who’s An Expert Anyway?

• Committee Officers
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So Who’s An Expert Anyway?

by: Steven Jay Katzman
Bienert, Miller, Weitzel & Katzman; San Clemente, Calif.

Luis A. Feldstein
Bienert, Miller, Weitzel & Katzman; San Clemente, Calif.

Imagine yourself representing former insiders of a chapter 11 debtor in an adversary proceeding charging your clients with breach of fiduciary duties. In an affidavit, a certified turnaround professional hired postpetition testifies as to the financial affairs of the debtor and the role of your clients in the debtor's operations, going so far as to opine that your clients "heedlessly exposed the debtor to unwarranted risk" and were guilty of a "complete lack of credit-risk assessment in connection with the debtor's business operations." The witness adds a few adjective-laden references to your clients' "exorbitant salaries" and their "completely irrational" business decisions.

Determined to exclude this evidence, you turn to Fed. R. Evid. 702's definition of an expert witness: "a witness qualified as an expert by knowledge, skill, experience, training, or education" whose "specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue." You then turn to Fed. R. Civ. P. 26(a)(2), which requires the pretrial disclosure of expert trial witnesses, their opinions and basis and reasons for them. Finally, you review the trustee's expert disclosures but can't find the witness mentioned anywhere. Should the court grant a motion to exclude the evidence as improper lay opinion testimony?

As the U.S. economy slides deeper into recession and companies turn increasingly to forensic professionals to sort through the financial wreckage, the question is likely to come up repeatedly in the bankruptcy context: What constitutes expert testimony? The above hypothetical-based loosely on an actual dispute decided last February in In re Perry H. Koplik & Sons Inc., 382 B.R. 599 (Bankr. S.D.N.Y. 2008)-is part of a growing line of cases reflecting the federal judiciary's efforts to distinguish between expert and lay testimony to ensure that expert testimony is held to the heightened disclosure and reliability standards under the rules of civil and criminal procedure.

These efforts gained new impetus with the adoption of the amendments to Fed. R. Evid. 701 in 2000, which added a new subsection, (c), expressly subjecting opinion testimony to Rule 702's reliability standards whenever the testimony is based on "scientific, technical or other specialized knowledge within the scope of Rule 702." As explained in the advisory committee note, the purpose of the new Rule 701(c) was to "eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the simple expedient of proffering an expert in lay witness clothing." The new Rule 701(c) also had the effect of subjecting such testimony to the notice and disclosure requirements of Fed. R. Civ. P. 26(a)(2) and Fed. R. Crim. P. 16(a)(1)(G), which aim to minimize the surprise that often results from unexpected testimony, minimize continuances, and give opponents a fair opportunity to test the merits of an expert's testimony through cross-examination and rebuttal expert testimony. "By channeling testimony that is actually expert testimony into Rule 702, the amendment also ensures that a party will not evade the expert witness disclosure requirements...by simply calling an expert witness in the guise of a layperson." Fed. R. Evid. 701 adv. comm. notes.

Notwithstanding the tenure of the amendment, courts continue to have difficulty applying the new Rule 701(c) to witnesses who give both expert and lay testimony. See United States v. Poulsen, 2007 WL 4248206 (S.D. Ohio Nov. 30, 2007) (where government witness combines qualities of fact and expert witnesses, government is required to abide by the disclosure requirements with respect to the expert portion of witness' testimony). In fact, it has been suggested that some courts continue to rely on the former version of Rule 701. In Hynix Semiconductor Inc. v. Rambus Inc., 2008 WL 504098 (N.D. Cal. Feb. 19, 2008), the court was confronted with a number of appellate decisions that admitted lay opinion testimony. The Hynix court noted that certain of these decisions had relied on the preamendment version of Rule 701 or on case law interpreting it. Citing the 2000 advisory committee note to Rule 701, the Hynix court excluded certain alleged percipient witness testimony as improperly disclosed expert testimony.  The court observed that rule 701(c) "contemplates a strict separation between lay and expert testimony that did not exist before 2000." Id. at *3.[1]

The Koplik court, following Bank of China, New York Branch v. NBM LLC, 359 F.3d 171 (2d Cir. 2004) (senior bank employee's specialized knowledge of international banking transactions "does not preclude him from testifying pursuant to Rule 701, so long as the testimony...was not rooted exclusively in his expertise in international banking") and U.S. v. Rigas, 490 F.3d 208 (2d Cir. 2007) (forensic accountant retained to examine company's books and records and to investigate transactions permitted to testify as to his findings, which were found to be based on witness perception), permitted opinion testimony that helped the fact-finder understand the turnaround professional's perceptions of what transpired, even where he was aided in forming his perceptions by his training and experience. However, the Koplik court excluded testimony reflecting the witness' views on (1) whether what he perceived was right or wrong, (2) what should have been done, (3) what is customary in business practice or (4) what his training and experience told him about appropriate conduct. Id. at 603. Koplik noted that a rule allowing testimony that blends personal perceptions with the benefit of professional expertise, so long as the testimony is not "rooted exclusively" in the witness's expertise, could be read "as suggesting that a peppercorn of personal perception would permit a great deal of lay opinion testimony, circumventing the safeguards of Fed. R. Evid. 702 and Fed. R. Civ. P. 26." Id. at 601 n.3. The Koplik court accordingly cautioned that it is "truer to the language and spirit of [Second Circuit law] to try to separate the testimony based on perception from that based on opinion on an answer-by-answer basis...permitting testimony only to the extent that any aspect of a larger body of testimony embodies, in material part, witness perception." Id.

As the courts continue to define the parameters of what constitutes expert testimony, practitioners should carefully consider the applicable law in their respective jurisdictions to determine the nature and extent of their (and opposing counsel's) expert disclosures. To avoid unforeseen problems, the best policy is to understand the nature of your witnesses' testimony before trial and disclose any part of that testimony that could be characterized as expert. While it may be strategically useful in some cases to omit such testimony from expert disclosures, the result may be the exclusion, in whole or part, of the testimony.