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Avomeen Holdings, LLC v. Thanedar

United States District Court, E.D. Michigan, Southern Division

August 1, 2019

SHRI THANEDAR, ET AL., Defendants.

          Anthony P. Patti Magistrate Judge


          Hon. Gershwin A. Drain United States District Court Judge

         I. Introduction

         This action arises out of an Equity Purchase Agreement, under which Defendant Shri Thanedar sold Plaintiff a majority interest in Avomeen, LLC (“Avomeen”) -- a chemical testing laboratory. Plaintiff asserts that in pre-close discussions with its representatives, Defendant Thanedar made several inaccurate representations that inflated the value of the company. Plaintiff has thus filed the instant suit, asserting it was induced into overpaying for Avomeen.

         Present before the Court are two Motions in Limine. First, Defendants have filed a Motion in Limine to Exclude the Testimony, Opinions, Reports, and Declarations of Plaintiff's Expert Witness, J. Bradley Sargent. Dkt. No. 49/50. Second, Plaintiff has filed a Motion in Limine to Exclude Certain Testimony of Defendants' Expert Witness, Rodney L. Crawford. Dkt. No. 47. The Motions are fully briefed, and the Court will resolve both without a hearing. See E.D. Mich. LR 7.1(f)(2). For the reasons set forth below, the Court will DENY Defendants' Motion [#49/50] and GRANT IN PART AND DENY IN PART Plaintiff's Motion [#47].

         II. Legal Standard

         A motion in limine refers to “any motion, whether made before or during trial, to exclude anticipated prejudicial evidence before the evidence is actually offered.” Luce v. United States, 469 U.S. 38, 40, n.2 (1984). The purpose of these motions is “to narrow the issues remaining for trial and to minimize disruptions at trial.” United States v. Brawner, 173 F.3d 966, 970 (6th Cir. 1999). In disposing of a motion in limine, the guiding principle is to “ensure evenhanded and expeditious management of trials.” Ind. Ins. Co. v. GE, 326 F.Supp.2d 844, 846 (N.D. Ohio, 2004).

         Under Federal Rule of Evidence 702, “an expert's opinion is admissible, by the discretion of the trial court, if: (1) the expert is qualified as such by knowledge, skill, experience, training or education; (2) the testimony is relevant, meaning it will assist the trier of fact to understand the evidence or to determine a fact in issue; and (3) the testimony is reliable, meaning it is based on sufficient facts or data, is the product of reliable principles and methods, and the witness has applied the principles and methods reliably to the facts of the case.” Little Hocking Water Ass'n, Inc. v. E.I. du Pont de Nemours and Co., 90 F.Supp.3d 746, 751 (S.D. Ohio 2015) (citing In re Scrap Metal Antitrust Litig., 527 F.3d 517, 528-29 (6th Cir. 2008)). “The task for the district court in deciding whether an expert's opinion is reliable is not to determine whether it is correct, but rather to determine whether it rests upon a reliable foundation, as opposed to, say, unsupported speculation.” Id. at 752. “Where the reliability of the evidence is in dispute, it is more appropriate for a judge to admit the evidence than to keep it from the fact-finder because ‘vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.'” Id. (quoting Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 596 (1993). Stated differently, “rejection of expert testimony is the exception, rather than the rule.” In re Scrap Metal, 527 F.3d at 530.

         III. Discussion

         A. The Court will Deny Defendants' Motion to Exclude the Testimony, Opinions, Reports, and Declarations of Plaintiff's Expert Witness, J. Bradley Sargent [#49/50].

         Defendants ask the Court to exclude the testimony, opinions, reports, and declarations of Plaintiff's expert witness, J. Bradley Sargent. Sargent, who is a Certified Public Accountant, performed an analysis of the Avomeen transaction and made the following findings and conclusions:

a) Thanedar, in his capacity as Avomeen's Chairman and Interim CEO, was intimately involved with and exerted control over accounting methodology, specifically regarding revenue recognition.
b) At Thanedar's direction, Avomeen's accounting practices for revenue recognition changed materially in 2016 and violated Generally Accepted Accounting Principles (“GAAP”) and Generally Accepted Auditing Standards (“GAAS”).
c) Thanedar made misrepresentations to the plaintiff and/or the plaintiff's agents that were material in nature.
d) Due to Thanedar's acts, Avomeen's earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the period of October 1, 2015 through September 30, 2016 were overstated by at least $634, 530.
e) Due to Thanedar's acts, the plaintiff utilized an earnings multiple which was above market and overstated.
f) As a result of the material overstatements of EBITDA and the earnings multiple applied by the plaintiff, the plaintiff should have paid $25, 619, 555 to $26, 604, 923 for Avomeen. The plaintiff paid $33, 600, 000, an overpayment resulting in economic damages of at least $6, 6995, 077 to $7, 980, 445.

See Dkt. No. 50, p. 8 (Pg. ID 3294). Defendants contend that the first three findings are inappropriate because they reach legal and factual conclusions meant for the jury to resolve. They assert that the latter three findings are not based on reliable methodology or on the factual record in this case.

         1. Sargent's Opinions and Findings will not be Excluded on the Basis that they Touch on Legal and/or Factual Questions.

         Defendants first argue that Sargent should not be permitted to testify because his opinions -- that Defendant Thanedar was intimately involved with and exerted control over Avomeen's accounting methodology, and that Avomeen made changes to its accounting practices at the direction of Thanedar -- reach conclusions on disputed facts that are solely the jury's province. Defendants provide no legal authority to support their argument. Nevertheless, the law is clear that an expert witness may offer an opinion at trial despite their reliance on disputed facts. See Gonzales Prod. Sys., Inc. v. Martinrea Int'l, Inc., 2015 WL 4771096, at *10 (E.D. Mich. Aug. 13, 2015) (Drain, J.) (citing with approval Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 1392 (Fed. Cir. 2003) (“When, as here, the parties' experts rely on conflicting sets of facts, it is not the role of the trial court to evaluate the correctness of facts underlying one's expert's testimony); Pipitone v. Biomatrix, 288 F.3d 239, 249-50 (5th Cir. 2002) (holding that jury was entitled to hear expert testimony and decide whether to accept or reject it after considering whether predicate facts on which expert relied were accurate)).

         Here, Sargent's expert report sets forth the factual basis underlying the opinions referenced above. The report reveals that Sargent predicated his opinions on the deposition testimony of several employees who worked under Defendant Thanedar at Avomeen, as well as a number of documents found in the record. See Dkt. No. 50-2, pp. 9-18 (Pg. ID 3326-35). The Court will not exclude Sargent's opinions on the ground that Defendants dispute their factual underpinnings. See Gonzales, 2015 WL 4771096, at *10. Instead, Defendants can challenge the accuracy of Sargent's testimony on cross-examination.

         Additionally, Defendants ask the Court to exclude a portion of Sargent's testimony where he purportedly reached an improper legal conclusion. Specifically, Defendants point to Sargent's opinion that Defendant Thanedar made “misrepresentations” that were “material in nature.” Defendants argue that this conclusion opines on an explicit element of a Rule 10b-5 claim, which is at issue in this case. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008) (“[A] plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”); see also Keyes v. Ocwen Loan Servicing, LLC, 335 F.Supp.3d 951, 959 (E.D. Mich. 2018) (Drain, J.) (“[E]xpert witnesses are not permitted to make legal conclusions.”); Alvarado v. Oakland Cty., 809 F.Supp.2d 680, 688 (E.D. Mich. 2011) (‘[T]he expert's opinion must stop short of embracing the ‘legal terminology' which frames the ultimate legal conclusion which the jury must reach in the case.”); Woods v. Lecureux, 110 F.3d 1215, 1221 (6th Cir. 1997) (Testimony “which attempts to tell the jury what result to reach and which runs the risk of interfering with a district court's jury instructions, hardly can be viewed as being helpful to the jury.”). But even if so, “[a]n opinion is not objectionable just because it embraces an ultimate issue.” FRE 704(a); see Berry v. City of Detroit, 25 F.3d 1342, 1353 (6th Cir. 1994) (“Although an expert's testimony may embrace an ultimate issue to be decided by the trier of fact, the issue embraced must be a factual one.”) (internal quotations and citations omitted).

         Within the context of securities litigation, “[c]ourts routinely allow expert testimony regarding whether undisclosed information, or information that was later disclosed, was material.” S.E.C. v. ITT Educ. Servs., 311 F.Supp. 3D 977, 995 (S.D. Ind. 2018) (citing S.E.C. v. Ferrone, 163 F.Supp.3d 549, 565 (N.D. Ill. 2016); United States v. Martoma, 993 F.Supp.2d 452, 457 (S.D.N.Y. 2014)). In ITT Educational Services, the Southern District of Indiana explained the difference between an impermissible legal conclusion and a permissible factual finding:

Defendants seek to exclude Dr. Thakor's testimony regarding what investors would have wanted to know and the materiality of that information, arguing that his opinion “goes to the ultimate issue of whether Defendants engaged in securities fraud under the securities laws.” The Court disagrees. Dr. Thakor's opinions differ significantly from the opinions of Mr. Pitt and Mr. Kisner that the Court has excluded. Mr. Pitt and Mr. Kisner both sought to provide opinions regarding whether Defendants provided adequate disclosures in their SEC filings. Dr. Thakor's opinion relates to whether information that Defendants did not disclose (which is a factual question) would have been the type of information investors would have wanted to know-whether that information was material.

Id. (internal citations omitted). Plaintiff maintains that Sargent's findings fall into latter category, and thus, do not reach a legal conclusion. See Dkt. No. 65, p. 20 n.2 (Pg. ID 4860) (“Mr. Sargent primarily uses the word ‘material' in his report to discuss accounting materiality.”). But out of precaution, Plaintiff does not object to having Sargent replace the word “material” with some other term. See Id. The Court finds that this is an appropriate solution. Accordingly, rather than exclude this portion of Sargent's testimony, the Court will ORDER the parties to come to an agreement on an alternative descriptor for Sargent to use during trial.[1]

         While on the topic of language, Defendants also take issue with Sargent's likening of Avomeen's revenue recognition practices to a “Ponzi Scheme” or “Pulling Scheme.” Defendants argue that such descriptors have no basis in fact, and further, would lead to unfair ...

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