Litigating on a Budget
LITIGATING ON A BUDGET:
Panel: Stephen Berken, Esq., Honorable Joseph Rosania, D. Colo., Cynthia Kennedy, Esq.
I. Analyzing Your Case
A. Research Your Claims and Defenses
1. Is there a State Court or Administrative Judgment/Ruling/Determination which may bar your claim/defense? Or give you a basis for a Motion to Dismiss? People (and entities) come to bankruptcy court with creditors in tow. Often there are proceedings elsewhere which will define your offensive/defensive options:
a) Rooker-Feldman. If there is truly a state court judgment which has ruled on the matter at hand, it is determinative. This is jurisdictional.
b) Res Judicata. Both offensive and defensive res judicata claims can be waived. Use it or lose it. This is one circumstance where YOU MUST bring the pre-trial motion.
c) Collateral Estoppel. Same as res judicata above. Don’t wait until trial or closing to add this issue.
See full article included in materials.
2. Does the Complaint State a Cause of Action?
a. Motion for Judgment on the Pleadings – Fed.R.Bankr.P. 7012(c)
i. A Motion for Judgment on the Pleadings can be a cost-effective strategy for a plaintiff to the extent that, based upon the pleadings alone, plaintiff is entitled to judgment as a matter of law; the process provides for a shortcut to judgment if a judgment can be rendered based upon the allegations in the pleadings alone.
ii. A Motion for Judgment on the Pleadings should be filed after the case is at- issue and must be filed early enough not to delay trial.
iii. A Motion for Judgment on the Pleadings is treated as a request for summaryjudgmentifthecourtistoconsidermattersoutsideofthepleadings. See Fed.R.Bankr.P. 7012(d). However, if the matter is referenced in the pleadings (i.e., a contract) or is external to the claims (i.e., jurisdictional), the “outside the pleadings” rule may not apply.
iv. Special matters (e.g., fraud) must be pled with specificity under Fed.R.Bankr.Proc. 7009. If not pled properly, consider a motion for failure to state a claim or for judgment on the pleadings. Fraud is one area where it may be better to raise the issue earlier rather than must litigate the issue at trial.
b. Vague Claims. Some claims have traditionally been so vague they were hard to get a court to dispose of early, such as alter ego cases. The cases of Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 561 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1949 (2009) created a new standard for assertion of claims—the complaint must state a facially plausible set of facts meeting the elements of the claim.
Since Twombly and Iqbal, courts routinely reject attempts to pierce the corporate veil when the complaint contains only conclusory allegations. See Madison Cnty. Commc’ns Dist. v. Century Link, Inc., 2012 WL 6685672 (N.D. Ala. Dec. 20, 2012); Mark IV Transp. & Logistics, Inc. v. Lightning Logistics, LLC, 2012 WL 4506470 (D.N.J. Sept. 28, 2012); Landmark Ventures, Inc. v. Wave Systems Corp., 2012 WL 3822624 (S.D.N.Y. Sept. 4, 2012); Legal Additions LLC v. Kowalski, 2010 WL 335789, at *6 (N.D. Cal. 2010); Partners Coffee Co., LLC v. Oceana Servs. & Prods. Co., 700 F. Supp. 2d 720, 736 (W.D. Pa. 2010).
State courts are beginning to adopt this higher standard of pleading. See e.g., Warne v. Hall, 2016 CO 50, 373 P.3d 588, 590 (Colo. 2016).
3. Know the Elements. You Need to Prove/Defend Against—this will help you tailor your discovery and focus your efforts.
4. Burden of Proof. Which side has the initial burden of going forward and which the ultimate burden of persuasion? See e.g., In re Anthem Communities/ RBG, LLC, 267 B.R. 867 (Bankr. D. Colo. 2001) (Bank’s insufficient evidence to meet burden of going forward determinative;Debtor’sreciprocalburdentoshowadequateprotectionnotinvoked). Istherea possibility of shifting the burden? Are any rebuttable presumptions involved?
B. What Evidence Will It Take to Prove/Defend Your Case.
1. Think up Front. Figure out early what kind of evidence you need to prove or disprove each element and whether you will need expert testimony to get there.
2. Think About Expert Testimony. Now is time to think about what elements require expert testimony. Accountants may not be required (a judge can do math) but may make the presentation of damages much easier; whereas you may absolutely need them for monetary conversion figures or historical stock prices, for example. Experts can be anyone from the computer repair person who can testify the debtor’s records were destroyed in a computer failure (relevant re 727 claim of lost records), to an auctioneer rendering a liquidation value, to an economist projecting farm yields and interest rates, to a medical doctor testifying on a student loan hardship discharge case.
C. Can You Win? Try to be objective. All our clients are morally outraged at their circumstances and although our position is to be advocates, bankruptcy attorneys are pragmatists and we best represent our clients when we have the appropriate distance from the issues.
D. Prepare a Budget
1. Think it Through. Think through the entire case and attempt and prepare a reasonable outline of fees and costs anticipated and allowances for contingencies.
2. Talk to the Client. Sit down and discuss the budget with the client so that any determinations to increase or adjust expenditures are made with the client knowing the exposure and risk of, for example, going without an expert.
3. Consider Settlement. Consider the value of settlement as opposed to the cost and uncertainty of trial. Advise client of all non-litigation alternatives. This is where long experience and creativity come in.
II. Preparing Your Case
1. Proportional Discovery is now the expectation. Cull those “kitchen sink”
interrogatories and requests and focus on the documents you need to prove/disprove the elements of the case.
2. Narrowly Tailored discovery requests accomplish two things. First, the opposing side is more likely to respond to them instead of devise blanket objections. Second, when you go before the judge (if necessary) on a discovery issue, you look reasonable and are more likely to get what you need.
3. Know Your Court/Judge. LOOK UP THE WEB SITE FOR YOUR JUDGE/COURT. Most courts/judges now have streamlined methods for resolving discovery disputes.
4. Investigate. You can call those witnesses on the other side’s list. You can do internet searches, property searches, etc.
B. Document Subpoenas
1. Third Party Subpoenas. Get documents directly from the source, i.e., serve the bank directly for the bank’s records relating to the debtor’s checking account. Getting documents directly from the source assures they are complete and accurate.
2. Under Fed.R.Civ.P. Rule 45, a subpoena must:
- (i) state the court from which it is issued;
- (ii) state the title of the action and civil action number;
- (iii) command each person to whom it is directed to do the following at the specified time and place: attend and testify; (and/or)produce designated documents, electronically stored information, or tangible things in that person’s possession, custody, or control; or permit the inspection of premises; and
- (iv) set out the text of Rule 45(d) and (e).
3. Issuance. A subpoena may be issued by the court clerk or an attorney who is
authorized to practice in the issuing court. Fed.R.Civ.P. 45(a)(3). A copy of the notice of subpoena must be served on all parties prior to the subpoena being served on the party to whom the subpoena is directed. Fed.R.Civ.P. 45(a)(4).
4. Limitations. When serving a subpoena for documents, keep in mind that the rules impose limitations on where the subpoena may command production of documents. Specifically, a subpoena may only be issued within 100 miles of where the person resides, is employed, or regularly transacts business in person. Fed.R.Civ.P. 45(c)(2).
1. Depositions May or May Not be Necessary.
a. Experts. See the attached article on Real Property Valuations regarding depositions of
appraisers. There are times when the best strategy is not to depose the other side’s experts, particularly if the deposition might expose the weakness in their theories.
b. Fact Witnesses. Regarding fact witnesses, it rarely hurts to know what the other side is going to say ahead of time and a deposition pins them down and avoids surprises at trial. If the deposed party does not testify as expected at trial, you can use the deposition to refresh a witness’s recollection or for impeachment purposes. Impeaching witnesses reduces their credibility. Remember the golden rule: If you don’t know the answer, don’t ask the question. Depositions are also very useful to determine which exhibits you will need help authenticating.
2. Deposition Strategies. This is not the time to prove your case to the other side. It is the time to obtain information and narrow issues. Use a circular technique where you move through a subject, let the deponent breathe a sigh of relief that you are done with that area, and then circle around to the killer questions latter when he/she is off guard. You can always cut and paste for trial prep.
3. Uses of the Deposition. Pursuant to Rule 7032, Fed. R. Bankr. P., at a hearing or trial, generally, all or part of a deposition may be used against a party if the party was present or represented at the deposition and had reasonable notice of it, if it would be admissible under the Federal Rules of Evidence if the deponent were present and testifying, and the use is otherwise allowed under the Federal Rules. Fed. R. Bankr. P. 7032(1). Additionally, deposition testimony can be used for impeachment purposes or for any purpose if the court finds that the witness is dead, the witness lives more than 100 miles away from the hearing or trial, the witness cannot
testify because of age, illness or incarceration or the witness’s attendance could not be procured atthehearingortrialthroughuseofasubpoena. Fed.R.Bankr.P.7032(2)and(4).
4. Budget Considerations. For Out of State Witnesses consider telephonic depositions.
III. Post-Discovery/Pre-Trial Matters
A. Motion for Summary Judgment – Fed. R. Bank. P. 7056
1. Undisputed Facts. A Motion for Summary Judgment can be cost effective if the
disputed issue is solely a legal issue and the parties agree to stipulate to all issues of fact. 2. Factual Issues. If factual issues exist for the trier of fact, a Motion for Summary
Judgment is generally not the most cost-effective approach as courts routinely deny these motions on the basis that there are material facts in dispute which prohibit entry of summary judgment.
3. Reasons to File It Anyway. However, a Motion for Summary Judgment results in each party presenting its best case—you are forced to really analyze and apply the legal elements to your evidence. You get to know what evidence the other side must create the “question of fact”. This information can be invaluable both to let you know the weaknesses in your own case and those of the opponent. The resulting analysis can lead to meaningful settlement discussions.
B. Motion to Strike
1. Redundant or Scandalous Material. A Motion to Strike can also be a cost-effective
way to eliminate evidentiary issues related to an insufficient defense or any “redundant, immaterial, impertinent, or scandalous matter.” However, in a trial to court one may presume the judge is ignoring such improper filings.
2. Timing. A Motion to Strike may be raised by the court or by a party before responding to the pleading. Consider a Motion to Strike for pleadings or filings that are not timely filed.
3. Failures to Disclose Witnesses or Exhibits
a. Pursuant to Fed.R.Civ.P. 37(c), in the event a party fails to provide information or identify a witness as required by Fed.R.Civ.P.26(a), the party is “not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless.” Fed.R.Civ.P. 37(c)(1), Fed.R.Bankr.P. 7037.
b. “The determination of whether a Rule 26(a) violation is justified or harmless is entrusted to the broad discretion of the district court.” Woodworker’s Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 993 (10th Cir.1999).
c. A Motion to Strike based on timeliness can be a cost-effective way to narrow issues for trial and limit time spent at trial.
C. Motion in Limine. Such motions are used primarily in jury trials where preventing the trier of fact from seeing the evidence is important because of its prejudicial nature. Most bankruptcy related trials are in front of judges; however, if the elimination of large amounts of evidence can be accomplished by motion, it may save time and cost at trial.
IV. Presenting Your Case—General Tips
1. Owner Testimony. “A person may testify as a lay witness only if his opinions or
inferences do not require any specialized knowledge and could be reached by any ordinary person.” LifeWise Master Funding v. Telebank, 374 F.3d 917 (10th Cir. 2004); Doddy v. Oxy USA, 101 F.3d 448 (5th Cir. 1996). “Admittedly, the law permits the owner of a business to give his lay opinion as to the business’ value.” James River Ins. Co. v. Rapid Funding, LLC, 658 F.3d 1207, 1216 (10th Cir. 2011). But see In re Behrends, 2017 Bankr. LEXIS 3674 (Bankr. D. Colo. Apr. 10, 2017). “[T]he Court determines the weight and credibility of [debtor’s] testimony. Based on the surrounding circumstances, the Court does not find Debtor’s valuation testimony credible.”
2. Prepare Your Witnesses. This should be obvious, but is time consuming. You need to take the time. See Witness Demeanor below.
B. Getting Documents into Evidence
1. Request for Judicial Notice – F.R.E. 201: If a fact of your case is not subject to reasonable dispute and generally known or capable of determination through sources that cannot reasonably be disputed, a request for judicial notice of a fact can be a cost-effective way to get evidence before the court.
2. Self-Authenticating Documents – F.R.E. 902: If you are using a document under seal, a certified document or acknowledged document, etc. (see F.R.E. 902(1-12)), it is important to note that extrinsic evidence of authenticity is not required to admit certain documents into evidence. Therefore, the use of these documents can be cost effective in lieu of a witness to authenticate the document.
3. Authentication. The first objection may be that the document has not been authenticated. Federal Rules of Evidence (FRE) 901 and 902 govern authentication.
a. FRE 901 (a) states that evidence is authenticated if there is “evidence sufficient to support a finding that the matter in question is what its proponent claims.” FRE 901 (b) then provides a list of potential ways that a litigant can satisfy this standard. Perhaps the easiest way to authenticate a document or data is under FRE 901(b)(1), which simply stares that a witness with personal knowledge testifies that the document is what it is claimed to be.
b. An alternative is 90l (b)(4), which refers to distinctive characteristics. This rule states that evidence may be authenticated by appearance, content, substance, internal patterns, or other distinctive characteristics, taken in conjunction with circumstances.
4. Internet Materials. A website posting found at a distinctive Web address might be enough to satisfy the evidentiary burden of showing authenticity. The burden then shifts to the other side to challenge the authenticity. You may be able to forgo this examination of your client if the document you wish to admit is “self-authenticating” under FRE 902. Rule 902 says that extrinsic evidence of authenticity as a condition precedent to admissibility is not required with respect to the following:
(4) Certified copies of public records.
(5) Official publications. Books, pamphlets, or other publications purporting to be issued by public authority.
(6) Newspapers and periodicals. Printed materials purporting to be newspapers or periodicals.
You may also apply FRE 201 (b), Judicial Notice, to authenticate internet materials. The rule allows a fact to be introduced into evidence if the truth of that fact is so notorious or well known, or so authoritatively arrested, that it cannot reasonably be doubted. The source does not necessarily have to be produced in court, but just identified by the witness as the website used to find the evidence of value for the property-although a printout of the website data is more helpful.
5. Hearsay. Most of the evidence presented on property will be based on out-of-court statements offered to prove value. There are some exceptions that will help get around the hearsay objection.
a. FRE 803(8) Public Records, etc. addresses public records or reports: records, reports, statements or data compilations for a public office on matters as to which there was a duty to report. This rule could apply to tax assessor statements for real property or other government records.
b. FRE 803(17) is an exception for market reports (think MLS for realtors) and commercial publications. If the evidence you wish to present is a marker quotation, tabulation, directory, or other published compilation and is generally used or relied upon by the public or persons professions, you will get by the hearsay objection. Many of the forms of data discussed below for real estate, automobiles, and stock fir nicely into the hearsay exception FRE 803(17).
6. Relevance FRE 401, 402. You will not draw an objection if you make sure the information in the documents you intend to use bears on the issues before the court.
7. Original Document/Best Evidence FRE 1002. To prove the content of a writing, the original is required with some exceptions, most notably, duplicates (FRE 1003) and public records (FRE 1005). This rule applies most commonly to contracts, wills, leases, and things of that nature where the actual terms of the document itself are debated. You can expect that a copy of a buy-sell agreement for a business and a purchase agreement for an automobile or home may be objected to under FRE 1003. Have originals of those types of documents available.
1. Well Placed Objection is Priceless. Even a veteran litigator can lose their train of thought at an evidentiary objection and never get back to the essential question. You don’t want to annoy the judge, but objections can be very effective. The secret is to know ahead of time which battles you are prepared to take on.
2. But Don’t You Let an Objection Fluster You. Because you have thought out the evidentiary basis for every exhibit you have, you will not be caught off guard. The secret both to well-placed objections and to addressing those tossed out at you, are in the Rules of Evidence. Take the time to read through and find the basis for your exhibit.
3. Know How to Build A Foundation. By the time of trial most exhibits are stipulated to as to authenticity and foundation. If opposing counsel is not stipulating, that’s a red flag to make sure you have your foundational witnesses.
A. Valuation Hearings.
1. Real Property Valuations. See Presenting and Defending Real Property Valuation Evidence in Bankruptcy in materials.
B. Relief from Automatic Stay
1. Relief “For Cause” Under 11 U.S.C. Section 362 (d)(1)
a. Burden of Moving Forward. A party can bear the initial burden of going forward even if it does not bear the ultimate burden of persuasion. If a party fails to carry its initial burden, the court will dismiss its application without requiring the party that bears the ultimate burdenofpersuasiontoofferanyevidence. Forthecourttoshifttheburdentothedebtor,the creditor must make a showing that there is a lack of adequate protection, meaning there is insufficient equity for the benefit of the estate. See In re Anthem, 267 B.R. 867 (Bankr. D. Colo. 2001).
b. Adequate Protection Issues. The United States Supreme Court has defined the secured creditor’s right to adequate protection as including the right to have the security applied in payment of the debt upon completion of the reorganization; and that that interest is not adequately protected if the security is depreciating during the term of the stay. Evidence of the erosion of the creditor’s position or of a threatened erosion satisfies this initial burden. The erosion may be shown through evidence of declining property values, the increasing amount of the secured debt through interest accruals or otherwise, the non-payment of taxes or other senior liens, failure to insure the property, failure to maintain the property, or other factors that may jeopardize the creditor’s present position. It may be necessary to show a combination of these factors and/or to show that the circumstances are sufficient to jeopardize the creditor’s interest in the property. See In re Anthem Communities/RBG, LLC, 267 B.R. 867 (Bankr. D. Colo. 2001).
c. Post-Petition Default. An ongoing post-petition default in a debtor’s payment of the regular mortgage payments can constitute sufficient cause for relief from the automatic stay. See In re Binder, 224 B.R. 483 (Bankr. D. Colo. 1998); In re Ellis, 60 B.R. 432 at 435 (9th Cir. BAP 1985). However, generally, it is also necessary to show there is no equity in the property for the benefit of the estate. See 11 U.S.C. § 362(d).
2. Relief Under 11 U.S.C. Section 362 (d)(2)
a. Property Not Necessary for Reorganization. As opposed to there being no equity in the property for the benefit of the creditor, here, the court must find that the debtor has no equity in the property and/or the stay is contributing to a decline or erosion of the lien holder’s position.
In addition, the court must find that the property is not necessary for an effective reorganization. See In re Anthem, 267 B.R. 867 (Bankr. D. Colo. 2001).
b. Stipulations. Stipulation to Cure Arrearage or a Stipulation Granting Relief from Stay as to Property Alone may be the most economical to the debtor in certain circumstances. If it appears that there is no equity in the property for the benefit of the estate and the property is not necessary for an effective reorganization, then, a stipulation to cure the arrearages or a stipulation granting relief from stay to the creditor may be the most cost-effective legal option for the debtor.
C. Motion to Dismiss or Convert
1. Bad Faith—Any Chapter/Consumer Cases
a. 11 U.S.C. 707(b)(1)— court may dismiss a Chapter 7 case (or convert it with the debtor’s consent) if it finds that the “granting of relief would be an abuse of the provisions of this chapter…” must be filed within 60 days after the meeting of creditors.
b. 707(b)(2)(A)(i) Presumption of Abuse—if presumption arises, may only be rebutted by special circumstances such as serious medical condition… Note: Expert testimony may be required to show such circumstances.
c. 707(b)(3) Other Abuses: Bad Faith Filing & Totality of Circumstances
See Discussion below.
Fed. R. Bankr. Pro. 1017(e) requires 707(b)(1) Motions be pled with particularity, which
may give rise to an opportunity for judgment on the pleadings.
2. Chapter 13: 11 U.S.C. Section 1307(c).
a. Delay. Grounds 1307(c)(1): unreasonable delay by the debtor that is prejudicial to creditors; i.e. failure to commence making timely payments under 11 U.S.C. § 1326. If a plan is pre-confirmation or there is equity in a property, the creditor may find a request for dismissal a more economical approach as opposed to waiting until all equity is depleted for purposes of relief from stay. However, the likelihood of success should be considered considering the court’s inclination to provide the debtor with a meaningful opportunity to reorganize.
b. Default. Grounds 1307 (c)(6): material default by the debtor with respect to a term of a confirmed plan, including failure to make payments to a creditor. If a plan is post- confirmation, provides for the creditor, but there is sufficient equity in a property, the creditor may find a request for dismissal a more economical approach as opposed to waiting until all equity is depleted for purposes of relief from stay.
c. Cause; Good Faith/Bad Faith.
Good faith is a pre-requisite to plan confirmation. Bad faith is a basis for conversion. The “totality of the circumstances,” approach leads to an analysis of the same factors for both. Can be basis for finding bad faith. See Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007)(finding statutory support in 11 U.S.C. §105 for including review of prepetition bad-faith conduct in analysis.) See e.g., In re Little Creek Develop. Co., 779 F.2d 1068, 1071-72 (5th Cir. 1986). This good-faith requirement exists (1) to prevent the “abuse of the bankruptcy process by debtors whose overriding motive is to delay creditors without benefiting them in any way” and (2) as a means to protect “the jurisdictional integrity of the bankruptcy courts” by making the Code only available to debtors with “clean hands.” Id. at 1072. In determining whether to dismiss a bankruptcy for lack of good faith, most courts apply a totality-of-the-circumstances inquiry.
3. Litigating the Bad Faith Issues
The very nature of these allegations is so diverse and amorphous it is difficult to make any generalizations.
a. Burden of moving forward. Is on the party seeking to dismiss a Chapter 13 for lack of good faith. But then the burden shifts to the debtor to prove his or her good faith. In re Tameck, 229 F.3d 205, 207 (3d Cir. 2000).
b. Focus on Positive Aspects of the Case. Although the focus on the totality of the circumstances inquiry is fundamental fairness, Matter of Love, 957 F.2d 1350, 1355 (7th Cir. 1992), two inquiries are particularly relevant: whether there is a valid bankruptcy purpose such as maximizing value and whether the debtor seeks to obtain a tactical advantage. In re Integrated Telecom Express, Inc., 384 F.3d 108, 119-120 (3d Cir. 2004) (chapter 11 case). “Other factors may be considered relevant, and no one factor is controlling. Actual fraud is not necessary to support a determination of bad faith.” In re Roth, 2010 WL 2485951, 1 (Bankr. D.N.J. 2010).
D. 11 U.S.C. §523 Nondischargeability Trials
1. Hold Them to Their Proofs. Section 523(a) exceptions to discharge must be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor’s favor. Okla. Dep’t of Secs. ex rel. Faught v. Wilcox, 691 F.3d 1171, 1174 (10th Cir. 2012). The creditor bears the burden of proving nondischargeability under § 523(a) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 290-91 (1991). The issue of nondischargeability is a matter of federal law. Id. at 284. In addition to the allocation of the burden of proof being placed squarely on the creditor’s shoulders, the objecting party must overcome a presumption that all debts are dischargeable in bankruptcy unless specifically excepted by the Code. In re Portner, 109 B.R. 977, (Bankr. D. Colo. 1989) citing Brown v. Felson, 442 U.S. 127, 128, 99 S. Ct. 2205, 2207, 60 L.Ed.2d 767 (1979).
2. Focus on the Elements You Can Win. Intent will almost always be a factor and is fact-based, so work on that aspect. Reliance by a creditor is also an area of fruitful discovery and opportunity. Perhaps the case can be narrowed from a generalized fraud case pursuant to 523(a)(2)(A) if the allegations of falsity regard the “financial condition” of the debtor, to a claim pursuant to 523 (a)(2)(B), which has a higher standard of reliance. Whereas justifiable reliance is sufficient for (a)(2)(A), (a)(2)(B) requires “reasonable reliance”. 523(a)(2)(B) also requires that the misrepresentation be in writing; thus, an oral misrepresentation of financial condition is not sufficient to support a judgment of nondischargeablity. Cadwell v. Joelson (In re Joelson), 427 F.3d 700 (10th Cir. 2005).
3. Consider Settlement. If you can’t win, settle for payment terms your client can live with.
E. 11 U.S.C. §727—Challenges to Discharge
1. Was the 727 Claim Brought As Leverage? Often a creditor will throw in a 727 claim as leverage. This is a bad idea for several reasons. First, the claim cannot be settled and to dismiss it requires notice to creditors with an opportunity for the trustee or other creditors to step into the case. This can backfire on the single creditor trying to obtain nondischargeability of their own debt as a complete denial of discharge creates a larger creditor pool. Bringing such a case may even be an abuse of process.
2. Do Discovery on the UST. The U.S. Trustee’s office is just another litigant. Make sure you send document requests and perhaps even interrogatories out in these cases. You may find the reason an investigation was undertaken was a disgruntled partner, affiliate, spouse, etc. of the debtor’s whose credibility and bias can be attacked. Make the proponent prove their case.
V. Trial Tips
A. Witness Preparation
1. Cross Examination Preparation. First, you must tell the witness to answer Cross examination (or hostile direct examination of your witness) to limit their answers to yes and no. This requires an immense amount of trust in you, as counsel, to remember to rehabilitate the witness. You must be up to the task, keep good notes and not get sidetracked in coming back to give the witness their time to explain, but do not let them keep trying to get their word in edgewise on cross—it will irritate the judge and make the witness appear uncooperative. Just answer the question, please.
2. Evasive Witnesses. Achieving balance, relevance and consistency in witnesses’ verbal communication enhances the credibility of their testimony at trial. If your witness is evasive they will be perceived to be hiding something. Witnesses who are viewed as “evasive” lose credibility Work with your witness to 1) directly answer the question, not to “dance around” or avoid the question being asked 2) do not hesitate before answering; and 3) do not change responses or behavior from direct to cross-examination.
When preparing your witnesses for direct and cross-examination Q&A, identifying and eliminate the following “evasive” patterns of response.
a. The Verbose Answer. Makes the witness appear to have an agenda of their own as opposed to responding to the question. Keep answers short. One suggestion for witness preparation is to review the three main messages for the witness’s testimony. This will help to focus and limit the scope of the witness’s testimony to only the most necessary and/or relevant points. Further, witnesses who are aware of their three main points often feel that they have a “safe harbor” to return to in instances where opposing counsel tries to lead them astray.
b. Limit the Technical Jargon. While the use of industry terminology gives the impression the witness is knowledgeable, if used excessively and without proper explanation, it can alienate the fact finder. Yet Sometimes an expert witness “dumbs the message down” to a point that becomes condescending to the jurors. Therefore, it is a balancing act between being too technical, while at the same time not being too simple or demeaning.
c. Prepare to Answer the Tough Questions. A witness’s credibility is negatively affectedwhens/hefacesthetoughquestionsfromopposingcounsel. Ifawitnesseitherhesitates or “pushes back” on his/her answers ( “dances around the answer”), these behaviors draw undue attention to the issues in question and identify potential vulnerabilities for your case . When preparing your witnesses for deposition or trial, develop a continuing list of the very uncomfortable, difficult questions witnesses might face. The obvious next step would be to prepare the witnesses to answer these questions thematically and with little to no hesitation.
d. Lack of Internal Consistency among Witnesses’ Testimony. Consistency leads to credibility and believability.
e. Lack of Familiarity with Documents. A witness’s credibility is enhanced when they appearing knowledgeable on the topic and speak confidently. When a witness appears to be unfamiliar with some of the documents being reviewed, regardless of whether the opposing counsel is “fishing for information” or attempting to make the witness appear unknowledgeable, it is important for a witness to be familiar with the universe of documents they might see and to prepare him/her thematically, if appropriate, to state honestly if they are not familiar with the document.
f. Powerless Speech. Powerless speech is defined by the presence of linguistic speech markers such as hedges (e.g., “kinda,” “sort of”), vocal fillers/hesitations (e.g., “well,” “ah,” “um”), disclaimers (e.g., “this might be a bad idea…”) and tag questions (e.g., “…don’t you think?”). A witness who engages in powerless speech is perceived as “unsure,” which is translated into a perception that they are less believable. Scholarly communications literature informs us that women tend to engage in powerless speech more frequently than men, due in part to society’s socialization of women’s and men’s roles. Once ingrained as part of someone’s sensibility, these linguistic cues are difficult to overcome. However, once a witness is self-aware of these cues, this type of speech pattern can be reduced with practice.
g. Tag Phrases. When witnesses use phrases such as “to be honest” and “to be frank,” they beg the question of whether they were telling the truth or being frank prior to this statement being uttered. In addition, witnesses should avoid using phrases such as: “I think,” “I believe,” “maybe” and “perhaps.” This framing of a witness’s answer conveys uncertainty and a lack of command of the subject matter. Avoidance of these types of qualifying phrases is recommended.
h. Social Fillers. The use of “um” is a socialized vocal filler; that is, we have learned in conversation that when there is a silent pause when talking, it is an indication for someone to interrupt. Therefore, to ensure a person who is talking “keeps the floor” without interruption, that person engages vocal fillers (e.g., “um,” “ah”). This socialized habit can be reduced with self-awareness, practice and a strong command of the subject matter
i. Attitude. Arrogance, moral outrage, a dismissive attitude, a “victim” stance—being too defensive, even fearful—all of these can diminish your chances of proving a debtor was in good faith. You know if your client comes across this way. Confront them ahead of time, as unpleasant as that may be.
B. Effective Direct Examination
1. Know What Needs to Be Proven. Failing to present evidence on even one element may lose the case. Direct examination is like putting together a puzzle because you must use each witnesses completely before moving on to another despite the fact that several other witnesses may be needed to fill in the gaps.
2. Know What the Witness Can and Cannot Testify To. A witness will, from time to time, develop “amnesia” and you need a strategy (hopefully without leading too blatantly) to bring them back if they get off track. Remember your foundational questions to help you in such a case: who, what, where, when and why.
3. Ask the Right Questions. Remember the rule not to ask questions you don’t know the answer to, and use the open-ended question to allow the witness to tell their story. The temptation to lead, if one is not getting objections, is strong; however, leading questions solicit yes and no answers and do not give the factfinder much information about the witness. In many bankruptcy cases, the credibility of a witness is the core of the case regarding intent or bad faith, and your attempts to keep too much control can reveal a lack of confidence in your client.
4. Have a Plan. Are you telling your client’s story chronologically? Consider using charts, diagrams or graphs (demonstrative evidence) to clarify complex information.
5. Pay Attention on Cross (or Direct Examination of your Witness by the Other Side as a Hostile Witness). It is, of course, nerve-wracking to watch your witness be made to look like a lying moron, but that was the job of opposing counsel. The decision to re-direct should be based on an assessment of the severity of the damage inflicted by the cross-examination. If the witness’ testimony on key points remains intact, re-direct may not be wise. Other times, it may be essential to rehabilitate the witness.
1. Prepare Ahead. You should have your questions prepared ahead of time, if possible. Much bankruptcy work is shoot-from-the-hip, but you should be so aware of the elements of the issues that you can focus in on vulnerabilities. If you have a deposition—use it—cut and paste deposition questions and answers with the page number, so each question is ready to impeach if the answer is not as expected.
2. Look and Listen. You are listening for inconsistencies in the witnesses own testimony or with that of other witnesses, that contradicts documentary evidence, nervousness or uncertain responses that may be exploited, omissions of fact on important issues, or actual admissions.
3. Honey Gets More Bees. It is not lost on a judge when a witness has an entirely different demeanor on direct than on cross and is avoiding or being evasive; at such times it may be appropriate to start your questions, “Isn’t it true….” and take on an aggressive stance. But prior to that happening, by being polite, deferential and subtle at the beginning, you might elicit the contradictions and truth you need.
4. Know When To Sit Down. The longer the cross the more likely the opposing party will be able to rehabilitate on re-direct. First, re-direct is limited to the subject matter of cross, so you don’t want to afford the other side the opportunity to revisit their strong points. Second, if you are not getting anywhere with the witness, pounding on them only emphasizes your problem to the fact finder. Third, the examination is most effective when the impeachment is on a material point. Once this is accomplished, end on the high note.
5. Know When Not to Stand Up at All. If you can’t help your case by cross examination, leave it be. Don’t give the other side more time with the issue.
Presenting and Defending Real Property Valuation Evidence in Bankruptcy
“Value is a word of many meanings.” 1
Bankruptcy is all about value. Whether your case involves a 3600-acre ranch in a chapter 12, a high-rise or apartments, a single-family residence, a condominium, townhome or a time- share, valuations are central to many bankruptcy issues. Initially, we file schedules ascribing values that may be challenged later in §727 proceedings. When markets are down, we are stripping liens, when they are up, we are fighting trustee’s looking for equity above homestead. When we are claiming a creditor is adequately protected in a relief from stay hearing, we are seeking a high valuation, when stripping, a low one. A dollar difference in valuation can make or break such a case. We may be fighting an involuntary bankruptcy, engaging in a “best interest of creditors test” at confirmation, or prosecuting or defending a fraudulent transfer case. A preference case may bring up issues of insolvency with related valuation issues. Valuation enters into each one.
I. Preparing Your Direct Case
The purpose of your case is simple—to convince the fact finder to accept your valuation of the property. This is accomplished by making your direct testimony clear, memorable, credible and resistant to cross-examination.
A. Know Your Legal Standard: Valuation Date & Type
1. Know the Date of Valuation. I had an opposing parties’ entire appraisal testimony rejected by the court because they chose a date of value of four months from the bankruptcy filing in a very volatile market.
There has been considerable debate regarding the appropriate date for valuing the secured property and determining the unpaid balance due on senior liens in determining whether a secured claim should be bifurcated into secured and unsecured components pursuant to §506(a). Among the options are: (1) date of petition; (2) date of claim determination hearing; and (3) date of chapter 11 or chapter 13 confirmation. See Richard L. Ngo, The Proper Valuation Date of Residential Property for a § 506(a) Lien Strip, 29 Am. Bankr. Inst. J. 14 (Aug. 2010); 134 A.L.R. Fed. 439, Time and Method of Valuation under 11 U.S.C.A. § 506, of Security Held by Creditor of Bankruptcy Estate (West 2011).
Courts differ. If you are unsure, file a motion requesting clarification.
1 Justice Brandeis, “State of Missouri ex rel. Sw. Bell Tel. Co. v. Pub. Serv. Comm’n of Missouri, 262 U.S. 276, 310 (1923).
See e.g., In re Dean, 319 B.R. 474 (Bankr. E.D. Va. 2004) (Ch. 13 confirmation date); In re Wood, 190 B.R. 788 (Bankr. M.D. Pa 1996, Petition date for lien strip.); In re Hales, 493 B.R. 861 (Bankr. D. Utah 2013)(Ch. 11 confirmation date).
The argument for the petition date is well stated in In re Putnam, Putman v. AM Solutions, LLC, 519 B.R. 491 (Bkrtcy.N.D.Miss. 2014):
The Court’s independent review of relevant case law reveals that the majority of courts considering this issue have also settled on the petition date as the proper date for valuation in this and other contexts .See, e.g., Marsh v. U.S. Dep’t of Housing and Urban Dev. (In re Marsh), 929 F.Supp.2d 852, 855 (N.D.Ill. 2013); In re Gilpin, 479 B.R. 905, 908 (Bankr. M.D. Fla. 2011)(holding the petition date is the appropriate date to value the collateral when the debtors intend to remain in the home); In re Levitt & Sons, LLC, 384 B.R. 630, 644 (Bankr. S.D. Fla. 2008)(chapter 11 case); In re Sanders, 202 B.R. 986 (Bankr. D. Neb. 1996); In re Dinsmore, 141 B.R. 499 (Bankr. W.D. Mich. 1992);Riley v. Wisconsin Dep’t of Rev. (In re Riley), 88 B.R. 906, 912 (Bankr. W.D. Wis. 1987); In re Richardson, 82 B.R. 872, 873 n.1 (Bankr. S.D. Ohio 1987); and Brager v. Blumb (In re Brager), 39 B.R. 441, 443 (Bankr. E.D. Pa. 1984). The petition date is the ” watershed date of a bankruptcy proceeding.” In re Johnson, 165B.R. 524, 528(S.D. Ga. 1994). As of the petition date, a debtor starts receiving the benefits of the Bankruptcy Code, “creditors’ rights are fixed, the bankruptcy estate is created, and the value of the debtor’s exemptions is determined.” Id. (followed by Dean, 319 B.R. at 478; Ford Motor Credit Corp. v. Olson (In re Olson), 300 B.R. 96, 98 (Bankr. S.D. Ga. 2003); Western Interstate Bancorp v. Edwards (In re Edwards), 245 B.R. 917, 919 (Bankr. S.D. Ga. 2000); Norwest FinancialGeorgia, Inc. v. Thomas (In re Thomas), 177 B.R. 750, 751-52 (Bankr. S.D. Ga. 1995)). In addition, the petition date is less easily manipulated by the debtor or creditors than any postpetition date that could be used instead. For example, creditors could delay confirmation by filing objections to confirmation, or the valuation of claims could be inflated or deflated by the addition or subtraction of fees and charges, both valid and ultimately invalid. Intervening circumstances could also affect the appropriate valuation of the collateral. See, e.g., Marsh, 929 F.Supp.2d at 854-55 (junior lienor advocated a later date for valuation of the senior claim and the collateral in order to take advantage of post-petition appreciation of the collateral). This Court therefore concludes that the petition date is the proper date to value both the collateral and the claim of any senior lienholders for purposes of determining whether a junior lien may be stripped.
Accord, In re Rozinski, 487 B.R. 549 (Bankr. D. Colo. 2013) (accepting petition date without discussion).
2. Bankruptcy Valuations: Before you approach obtaining your own expert, know the standard of valuation. Market value, fair value, liquidation value, or ongoing concern value? Again, if unsure, better to file a motion requesting clarification with the judge before spending money on an appraisal of the wrong type.
a) Relevant Code and Rule Provisions i) 11 U.S.C. § 506.
(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, … and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.
ii) Bankruptcy Rule 3012. Valuation of Security.
The court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity as the court may direct.
Notes of Advisory Committee on Rules—1983
Pursuant to §506(a) of the Code, secured claims are to be valued and allowed as secured to the extent of the value of the collateral and unsecured, to the extent it is enforceable, for the excess over such value. The valuation of secured claims may become important in different contexts e.g., to determine the issue of adequate protection under §361, impairment under §1124, or treatment of the claim in a plan pursuant to §1129(b) of the Code. This rule permits the issue to be raised on motion by a party in interest. The secured creditor is entitled to notice of the hearing on the motion and the court may direct that others in the case also receive such notice.
b) Fair Market Value. “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” United States v. Cartwright, 411 U.S. 546 (1973), J. White.
The willing buyer-willing seller test of fair market value is nearly as old as federal income, estate, and gifts taxes…Id.
c) Ongoing Concern Value. In a reorganization (Chapters 11, 12 and 13) the value of some retained assets (such as a business) will be going concern value. Such a discussion is beyond the scope of this article, but one should be aware that real estate involved in an ongoing enterprise may be valued differently, particularly if it is income generating.
d) Surrender Value. A §506 valuation surrender (“dirt for debt”) is as much a “sale” as, for example, a foreclosure sale, a deed in lieu, or a cash sale. If Debtor had a cash buyer, the bank would have the ability to credit bid it’s allowed secured debt against the sale and take possession of the property. 11 U.S.C. §363(k) (“debt for dirt”). Surrender is nothing but a forced credit bid. The creditor is not prejudiced because (at least in Colorado) it would have to bid in the Fair Market Value of the property anyway at a foreclosure sale. See C.R.S. §38-38-106. Either way, the property has been transferred. It is the value as of the date of transfer that counts—the transfer to the creditor is the sale to be valued.
e) Liquidation Value—applicable in the “Best interest of Creditors Test” 11 USC §1325(a)(4).
f) Fair Valuation–the legal standard identified in §101(32) of the Bankruptcy Code for determining insolvency, that appears to be more process as opposed to results based, without consideration of unforeseeable subsequent events.
B. Know Your Property
1. Owner’s right to testify (Lay testimony under 701). If evidence is offered as lay testimony, FRE 701 permits property and business owners to testify about the value of their property under certain circumstances. See FRE 701, (advisory comments). One circuit acknowledged that a landowner’s testimony might be admissible because the Federal Rules “point to landowner testimony on value as being expert in nature, [but] with proper foundation, it may…be admitted as lay opinion under Rule 701.” See James River, Supra; See also Cunningham v. Masterwear Corp., 569 F.3d 673 (7th Cir. 2009) (landowners “can testify about [value]… as a matter within [their] personal knowledge.) One fairly common understanding of FRE 701 is that lay witnesses canofferopinionstodeterminethevalueoftheirownproperty. TheadvisorycommentstoRule 701 express that “the critical inquiry is whether a witness’s testimony is based upon ‘specialized knowledge.’”
Caveat: Rule 701’s leeway for lay testimony regarding property values is extremely narrow, and
many courts have moved away from letting property owners testify about their property’s worth,
finding that such testimony relies upon the specialized knowledge FRE 701 expressly
prohibits. Several landowners have attempted to establish their property’s value based on what other parties have told them about the average worth of similar property, real-estate experts’ appraisals, and the like. Such testimony is inadmissible as hearsay unless an exception can be found. See Evidentiary Issues on Non-Expert testimony below.
2. Debtor as Lay “Expert.” On the other hand, evidence by a property owner under Rule 702 also has complications. Such testimony must be reliable and meet all of the standards of Daubert and Rule 702. And requires timely disclosure.
See Evidentiary Issues Below
3. Owner’s Particularized Knowledge. I once won a valuation case on a single question to the other’s side’s witness. “Would it devalue the property if my client were to testify it contained environmentally problematic areas, for example, a furniture stripping pit in the garage?” Not only did the lender back off, but they decided not to foreclose.
Your client knows if the sewer, roof, foundation needs replacing or if there is a meth house next door.
4. Public Sources of Information
It can be helpful to explore public records relating to the subject property.
a. Tax valuations. Even if tax valuations are not particularly reliable (this varies from county to county), the comps the assessors have chosen are often available on-line and may help you reject the opposing side’s comparables. This worked for me in a case where a condo on East Pearl in Boulder is in a whole different world than one right facing the mountains on the mall. The assessor’s comparables, although not recent sales, showed what neighborhoods were considered comparable.
b. Covenants—particularly in condominium complexes, can dictate which areas are common areas. Some areas can be “common” but dedicated to a specific unit (like a balcony) but not be considered “owned” for purposes of the appraisal. Reduced square footage = reduced value.
c. Laws Regarding Certain Property. Condominium laws for example, define common areas and allocate them to the HOA as property. I have had appraisers on the other side include elevators that access condos directly include the square footage in valuation.
5. Visit the Site. As bankruptcy lawyers we can’t always visit a site but talking to the owner about any unique issues can be helpful. For example, a slanting wall is considered only partially and can reduce square footage and valuation.
Consider a request for court site review if the property is unique enough. I have had appraisers tell me that drone coverage is the next step in appraisals. Video is a substitute and can be very helpful in proving condition of property or whether fixtures are attached or personal property. A picture is worth a thousand words.
C. Choosing Your Method of Valuation 1. Appraisal
a. Choose Your Expert. Know your expert. Is he/she familiar with the type of property being appraised? With the unique qualities (if any) of the area? Has your witness testified in 20 previous valuation hearings? Maybe that’s good—maybe it shows experience and expertise. But maybe it isn’t so good if the witness always testifies for the debtor and always gives a significantly different value than that given by the creditors’ or the committees’ expert. Maybe it isn’t good if the reason the expert keeps getting called as an expert is because he or she has some weird, novel valuation method . Has the witness been discredited by any courts in front of whom he or she has testified? Does the witness openly advertise himself or herself as a hired gun who will do whatever the client needs to be done? Is this the witness’s first time testifying? Before you go to the time and expense of bringing an expert into court, make sure you are comfortable with the answers to these questions.
b. Retain Your Expert. This may seem obvious, but twice in my career an attorney has attempted to simply subpoena an appraiser who did a valuation of the Property but was not hired for that purpose in the context of the proceeding. When the other side asked for them to be admitted as an expert, on voir dire, I asked them if they had been retained as an expert. You should see the other side scramble to offer them payment. Their testimony should be (and in my case was) entirely excluded.
c. Work with Your Expert. Communications with experts used to be discoverable, with lawyers going to all lengths to communicate with their experts without leaving a paper trail. The 2010 changes to the Federal Rules of Civil Procedure 26(b)(4)(B) and (C) included a privilege extending to shield draft reports and, with three exceptions, lawyer-expert communications from discovery by characterizing them as attorney work product. The added paragraphs provide:
(B) Trial Preparation Protection for Draft Reports or Disclosures. Rules 26(b)(3)(A) and (B)5 protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form of the draft.
(C) Trial Preparation Protection for Communications Between Party’s Attorney and Expert Witnesses. Rules 26(b)(3)(A) and (B) protect communications between the party’s attorney and any witness required to provide a report under Rule 26(a)(2)(B), regardless of the form of the communications, except to the extent that the communications:
(i) relate to compensation for the expert’s study or testimony;
(ii) identify facts or data that the party’s attorney provided and that the expert considered in forming the opinions to be expressed, or
(iii) identify assumptions that the party’s attorney provided, and that the expert relied upon in forming the opinions to be expressed.
The Committee Note emphasizes that the work product protection for draft reports applies “regardless of the form of the draft, whether oral, written, electronic, or otherwise.” The protection also applies to drafts of any supplements to a report.
Your careful reading and understanding of USPAP can prevent embarrassing cross- examinations questions. I once caught a typo where my appraiser’s definition of market value was incorrect, removing a “not” that was essential to the meaning. I’ve worked with them on some of the unique issues discussed throughout this article, including the value of water rights, impact of state law on common area ownership and valuation, sloping walls, etc.
d. Disclose Your Expert. Although most bankruptcy proceedings have truncated procedures, it is almost always required that the expert’s report (or basis for testimony) be disclosed beforehand. Watch your procedural rules.
Bankruptcy Rule 7026.
(a) Required Disclosures; General Provisions Governing Discovery…. (2) Disclosure of Expert Testimony.
(A) In General. … a party must disclose to the other parties the identity of any witness it may use at trial to present evidence under Federal Rule of Evidence
702, 703, or 705.
(B) Witnesses Who Must Provide a Written Report. Unless otherwise stipulated or ordered by the court, this disclosure must be accompanied by a written report— prepared and signed by the witness—if the witness is one retained or specially employed to provide expert testimony in the case or one whose duties as the party’s employee regularly involve giving expert testimony. The report must contain:
(i) a complete statement of all opinions the witness will express and the
basis and reasons for them;
(ii) the facts or data considered by the witness in forming them;
(iii) any exhibits that will be used to summarize or support them;
(iv) the witness’s qualifications, including a list of all publications
authored in the previous 10 years;
(v) a list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition; and
(vi) a statement of the compensation to be paid for the study and testimony
in the case.
(C) Witnesses Who Do Not Provide a Written Report. Unless otherwise stipulated or ordered by the court, if the witness is not required to provide a written report, this disclosure must state:
(i) the subject matter on which the witness is expected to present evidence
under Federal Rule of Evidence 702, 703, or 705; and
(ii) a summary of the facts and opinions to which the witness is expected to testify.
2. Comparative Market Analysis. When working with sellers to determine a listing price or with buyers to check the value before offers to purchase, real estate agents do what is known as a comparative market analysis, or CMA. By going to sold property records, the real estate professional selects recently sold properties that are similar to the subject property and in the same geographical area. By comparing these properties and adjusting for feature differences, an estimate of value is made for the subject real property.
Realtors may also rely on listings. It used to be a solid rule that a listing was not admissible for any purpose; however, in recessions, we found court’s looking to listings in a dearth of sales. Ask for a sales CMA.
When a client does not have the budget to hire an expert appraiser, the only option is to do the best you can without one. One option is to have a realtor do a CMA. The evidentiary issues for getting in the testimony would be similar to that of the owner himself. The realtor would have access to the Multiple Listing Service (MLS) and would describe the methods and procedures by which they chose the comparables and made any adjustments. Because the realtor is using his/her expertise and compiling information from other sources before expressing an opinion, and not testifying from personal knowledge —This is Expert Testimony requiring disclosure.
3. Realtor.com or Specific Realtor Sites. Not everyone has access to the MLS. Realtor.com is a good site to use if only the client is testifying. Avoid websites such as www.Zillow.com or www.Trulia.com. These sites are third-party listing portals. They are not members of the Multiple Listing Service. Zillow and Trulia do not get information directly from Realtors® or sellers, but piece together information from individual brokerages or real estate agents, resulting in incomplete or inaccurate listing data.
D. Know Your Standard for Expert Testimony
1. Federal Rule of Evidence 702. Testimony by Expert Witnesses Awitnesswhoisqualifiedasanexpertbyknowledge,skill,experience,training, or education may testify in the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case.
2. “Under Daubert, any step that renders the expert’s analysis unreliable . . . renders the expert’s testimony inadmissible. This is true whether the step completely changes a reliable methodology or merely misapplies that methodology.” Mitchell v. Gencorp Inc., 165 F.3d 778, 782 (10th Cir. 1999); Reliability questions may concern the expert’s data, method, or his application of the method to the data. Id. , 509 U.S. 579 (1993).
Daubert v. Merrell Dow Pharmaceuticals, Inc.
Objections prior to testimony: Because all bankruptcy matters are before a judge, I state to the court that I am not objecting to the witness’s credentials as an expert but have grave concerns over their methodology and/or data or application of the method to the data. With that reservation, I am free to ask post-trial that the testimony be entirely excluded.
3. Lay Opinion Witness—Rule 701
Federal Rule of Evidence 701.
If a witness is not testifying as an expert, testimony in the form of an opinion is limited to one that is:
(a) rationally based on the witness’s perception;
(b) helpful to clearly understanding the witness’s testimony or to determining a fact in issue; and
(c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.
E. Evidentiary Issues
1. The Appraisal Report as Hearsay or Demonstrative Evidence
Typically, valuation cases in bankruptcy are in front of a judge and both sides agree to let the judge have access to the appraisal report (as demonstrative evidence) or even to admit the reports into evidence. But you should know the rules and the difference so when you offer your appraisal and get an objection, you know what language to invoke. Most notably, if your cross is all about tearing apart the report analysis, it is very difficult without the report before the judge, to lead the judge through its annihilation.
a. Appraisal reports are hearsay, and therefore inadmissible absent some exception in the rules. There is a misconception that because the witness is qualified to give the opinion set forth in the expert report, that the expert’s written report is admissible. To the contrary, opposing counsel should object to the admission of the expert report on the following grounds:
(i) The facts or data contained in the expert’s written report need not be admissible in evidence in order for the expert’s opinion testimony to be admissible. Consequently, the expert’s written report will contain inadmissible evidence. If the written report is admitted into evidence without any reservations, then inadmissible evidence relied upon by the expert will then become part of the record.
(ii) As with self-serving letters, written reports prepared by experts fall within the definition of hearsay as written statements offered in evidence to prove the truth of the matter asserted. There is no exception to the hearsay rule contained in either Rule 803 or 804 for expert reports.
b. Scope of the Testimony. The opposing attorney should also be vigilant in objecting to the expert’s testimony to ensure that it does not go beyond the opinions set forth in the written report. In this respect, the written report must contain a complete statement of all opinions the witness will express, the basis for the reasons for the opinions, and the data or other information considered by the witness in forming them. Any testimony beyond the areas covered in the expert’s written report should be objected to.
c. Report as Demonstrative Evidence. Even though the expert written report should not be admitted into evidence, it is nevertheless useful to have the report marked as an exhibit and received as a demonstrative aid to assist in following the expert’s testimony. In this fashion, the inadmissible evidence contained in the report does not come into evidence. However, the report will be part of the record for reference purposes when considering the expert’s testimony.
d. Business Records Exception. Some courts are finding appraisal reports fall within the exception of Federal Rule of Evidence 803(6) for “business records,” i.e., documents kept in the course of regularly conducted business activities. Rule 803(6) explicitly states that such memoranda, reports and data compilations may contain “opinions.” Such documents are admissible if they are contemporaneous in time, made by a person with knowledge, and it was the regular practice of that business activity to make that type of report. To exclude such a document from evidence, pursuant to Rule 803(6), the opponent must show that the source of information or the circumstances of its preparation indicate a “lack of trustworthiness.” In United States v. Licavoli, 604 F.2d 613, 622 (9th Cir. 1979) (expert appraisal report admitted as business record), the Court explained that there are “circumstantial guarantees of trustworthiness in a record contemporaneously prepared by one who acts under a business duty of care and accuracy, particularly when the business entity for which the record is made relies on it.”
2. Lay Testimony Evidence Issues
a. Authentication. The first objection may be that the document has not been authenticated. Federal Rules of Evidence (FRE) 90 I and 902 govern authentication. FRE 90 I (a) states that evidence is authenticated if there is “evidence sufficient to support a finding that the matter in question is what its proponent claims.” FRE 901 (b) then provides a list of potential ways that a litigant can satisfy this standard. Perhaps the easiest way to authenticate a document or data is under FRE 901(b)(1), which simply stares that a witness with personal knowledge testifies that the document is what it is claimed to be.
An alternative is 90l (b)(4), which refers to distinctive characteristics. This rule states that evidence may be authenticated by appearance, content, substance, internal patterns, or other distinctive characteristics, taken in conjunction with circumstances.
A website posting found at a distinctive Web address might be enough to satisfy the evidentiary burden of showing authenticity. The burden then shifts to the other side to challenge the authenticity. You may be able to forgo this examination of your client if the document you wish to admit is “self-authenticating” under FRE 902. Rule 902 says that extrinsic evidence of authenticity as a condition precedent to admissibility is not required with respect to the following:
(4) Certified copies of public records.
(5) Official publications. Books, pamphlets, or other publications purporting to be issued by public authority.
(6) Newspapers and periodicals. Printed materials purporting to be newspapers or periodicals.
You may also apply FRE 201 (b), Judicial Notice, to authenticate the kind of evidence discussed in this article. The rule allows a fact to be introduced into evidence if the truth of that fact is so notorious or well known, or so authoritatively arrested, that it cannot reasonably be doubted. The source does not necessarily have to be produced in court, but just identified by the witness as the website used to find the evidence of value for the property-although a printout of the website data is more helpful.
b. Hearsay. Most of the evidence presented on property will be based on out-of-court statements offered to prove value. There are some exceptions that will help get around the hearsay objection. FRE 803(8)8 addresses public records or reports: records, reports, statements or data compilations for a public office on matters as to which there was a duty to report. This rule could apply to tax assessor statements for real property or other government records.
FRE 803(17) is an exception for market reports (think MLS for realtors) and commercial publications. If the evidence you wish to present is a marker quotation, tabulation, directory, or other published compilation and is generally used or relied upon by the public or persons in particular professions, you will get by the hearsay objection. Many of the forms of data discussed below for real estate, automobiles, and stock fir nicely into the hearsay exception FRE 803(17).
c. Relevance FRE 401, 402. You will not draw an objection if you make sure the information in the documents you intend to use bears on the value of the property at issue.
d. Original document/best evidence FRE 1002. To prove the content of a writing, the original is required with some exceptions, most notably, duplicates (FRE 1003) and public records (FRE 1005). This rule applies most commonly to contracts, wills, leases, and things of that nature where the actual terms of the document itself are debated. You can expect that a copy of a buy-sell agreement for a business and a purchase agreement for an automobile or home may be objected to under FRE 1003. Have originals of those types of documents available.
e. Specific Document Types for Realtor or Owner Testimony
(i) Comps. FRE 803(17) or 701 and 704(a)2. Aside from paying for an appraisal, the best way to show the value of a residential property is to look at what similar homes have sold for in your client’s neighborhood during the previous six to eight months. Comparable home sales or “comps” are strong indicators of what the client’s home is likely worth on the marker. Comps are the basis for setting a listing price. Moreover, a large part of the appraisal process
2 F.R.E. 704 is the rule allowing an opinion on the ultimate issue, i.e., value. consists of looking at comps. Ultimately, there may not be a big difference between the values through an appraisal versus a comp.
Many websites provide sales data for residential housing. Two of the most reliable places to find home sales prices in your client’s community are Realtor.com, hosted by the National Association of Realtors (NAR), and any local real estate company website. Real estate brokerages and the NAR share property data through membership in a multiple listing service (MLS). The information provided through the MLS is submitted directly by Realtors®, is current and accurate, and is the primary means by which people research the real estate market today.
The client can pick our three comps from a website of choice and print out the results for use as an exhibit. Authenticating website data under 901(b)13 can be done by showing that (l) the witness typed in the Web address, (2) logged into the sire, (3) reviewed what was there, and (4) testified that the printout or other exhibit fairly and accurately reflects it.
Testimony by the client as to the characteristics of the home, the range of prices for comparable sold homes, and the client’s opinion as to estimated market price of the marital home, based on those sold properties, is reasonable proof of value of that property. A hearsay objection can be overcome with FRE 803(17) for market reports.
(ii) Property tax statements. FRE 901(7), 902(4), 803(8) and (14). Property tax statements sent out each year to homeowners state the fair market value (FMV) of a residential property. Assessors monitor local sales activity as a means to establish market values for neighborhood properties. Considerations include square footage, number of rooms, and the presence of any pools or garages. If your county uses FMV as the assessed value, a property tax statement will be solid evidence for your client.
The drawback with a tax assessor statement is that in some counties it can be very different from the market value. There may be no inspection made of the property to determine features of the home that may affect the market price up or down.
Also, exemptions can reduce the assessed value. Examples of exemptions include the homeowner’s being a widow or widower, senior citizen, handicapped, blind, a veteran, or that the property is homesteaded.
Use of a property tax statement as an exhibit would necessarily be accompanied by testimony from the client as to any exemptions that artificially reduce the market value or any improvement that increases the value above that assessed to the property. Though an appraisal is usually better, absent one, the assessment might be quite valuable. Use FRE 901(7), and 902(4), to authenticate, and FRE 803(8) and (14) as the exceptions to hearsay. An original won’t be necessary under FRE 1003 and 1005.
3 F.R.E. 901(a). In General. To satisfy the requirement of authenticating or identifying an item of evidence, the
proponent must produce evidence to support a finding that the item is what the proponent claims it is.
(b) Examples…(1) Testimony of a Witness with Knowledge. Testimony that the item is what it is claimed to be.
f. Timeshares. Applicable federal rules are FRE 803(17) and 902(8). Timeshares are notoriously difficult to value and even harder to sell. There are hundreds of websites that claim to be able to sell your timeshare for the highest price. For purposes of gathering admissible evidence of property value, there are a couple of popular websites that will provide information as to what a timeshare might be worth.
Timeshares are auctioned on eBay. Browse the site, www.ebay.com, for the category real estate. Then choose timeshares. On the timeshares page, there is a tab for sold listings. If your client can find two or three recently sold timeshares in the same resort, of comparable size, location on the resort, and week of availability, that would be akin to a residential home comp and would be decent evidence of value of the timeshare. Present the exhibits and testimony in the same manner as you would real estate comps. Also, most timeshare resorts have their own website with inventory for sale listed, or the timeshare resort resale office may be able to provide a market price estimate for the particular property.
FRE 902(8) may work to authenticate a letter from the timeshare resort if it is notarized and acknowledged. The eBay printouts may qualify as a market report under FRE 803(17) for the hearsay exception.
F. Presenting Your Case to the Court
The subject matter of the direct examination of a valuation witness should cover:
• The expert’s qualifications;
• A description of the appraisal process;
• A description of the specific work the appraiser undertook to value the subject property;
• A description of the property at issue;
• The highest and best use of the property;
• A discussion and explanation of each approach to value used by the appraiser (e.g. income approach, comparable sales approach, cost approach); and
• A final reconciliation of value. As each subject area is covered, the opportunity should be taken to educate the fact finder and convince them of the merits of your position.
II. Cross-Examination of the Opposing Expert
A. Preparing for the Opposing Side’s Expert
1. Watch Your Enemy. If possible, attend the opposing appraiser’s viewing. I have had occasion to notice they were measuring outside wall to outside wall in a condominium. In a condo, the owner doesn’t own the walls. This reduced square footage to bring the opposing side’s numbers in line with ours. You should be able to see from the opponent’s appraisal what methods they used.
2. Become an Expert on the Opposing Expert. One should learn everything one can about the other side’s expert. Perhaps they operate solely in one area and are out of their comfort zone in your neighborhood or city. Perhaps the Judge you are in front of has discounted their testimony before. Although it is typically better to attack the message rather than the messenger, there may be instances where a deposition has revealed that a successful attack can be made against the messenger. Thus, a witness can be shown to be biased, and therefore not credible, where he/she has worked for the same client numerous times in the past; he/she is regularly employed by opposing counsel; charges are excessive, suggesting this is a witness who can be bought; the expert earns a majority, or a substantial part, of his/her income through paid testimony; and the expert’s report was essentially prepared by counsel rather than the expert.
It is also quite effective to challenge the expert’s qualifications during voir dire, where a deposition has established that the expert is merely an accountant or real estate broker rather than a valuation expert, or where the expert’s experience in the real world is not extensive.
3. Apply Logic/ Bring in the People that Know. You know water rights are valuable. When the opposing side values property as dry land, bring in whomever you need to in order to prove the availability. In one case for me that was the Water Resources Engineer for the Colorado Division of Water Resources in Alamosa. Despite a seriously complicated situation involving the creation of water districts to govern well-use, I was able to prove that the land would maintain its value and water rights.
4. Check the Math4. You can’t believe how often appraiser’s math is off. They engage in fractional discounts and numbers move from chart to chart. A sloppy appraisal is easy to tear apart just on the inconsistencies. See sample cross below where appraiser deducted the outstanding taxes from market value, both showing he didn’t understand the concept of market value and showing his bias to the lender/client by valuing only the equity.
5. Knocking out the Comps/Adjustments. The more unique the property, the more the appraisal depends on “adjustments,” or taking sales that aren’t really comparable and discounting or crediting for differences. I have seen over 100% “adjustments” which, at some point, means the property used is simply not “comparable.” This is VERY fertile ground for second-guessing the appraiser’s biases. I had one appraiser give a $300,000 value to a mountain view on my client’s Boulder condominium. I had pictures to prove that the actual view was obstructed by angle and trees.
6. Depositions. Whether to take a deposition or not is dependent upon: (1) the amount at issue; (2) the ability of your client to bear the cost; and (3) how confident you are about being able to attack the appraisal with what you have. There are many times when taking a deposition will only alert the opposing side as to the weakness of their case, or overly educate them about your case.
4 The undersigned has seen appraisers before using their own “math” to lower numbers claiming that they can divide rather than figure a 10% deduction and then subtract. It is a USPAP fallacy. If they engage in this creative math, they must acknowledge in their report that they are not, for example, using 10% adjustment to mean 10%, but rather, a different number.
Your goals are: (a) To obtain information; (b) to learn the expert’s methodology, facts and basis for the opinion (Remember Daubert—if the methodology is not reliable the testimony may be excluded; (c) to attempt to limit the expert with respect to the opinions and basis for those opinion; (d) to elicit admissions, if possible with respect to unsupported assumptions, weaknesses, the lack of adequate factual basis and the like; (d) to find out about the expert’s background, training, qualifications and prior affiliations or retentions, and/or biases; and (e) to assess their demeanor.
If you do depose, require the deponent to bring their entire file, although the communications with the attorney are now out of bounds.
- Educational background, and any particular areas of academic concentration.
- Professional designations, awards or other indicia of standing in the field.
- Relevant post-college academic work.
- Initial general statement of subject matters in which the expert has been engaged to render opinion. Is the expert prepared to render an opinion in those subject matters?
- Has expert been engaged to render an opinion in any subject matter where the expert has not yet formed an opinion?
- Recitation of work experience generally, but with particular attention to subject matters of testimony.
- Professional society or industry association work in the relevant areas. Papers written, books published, articles, speeches, or other contribution to professional literature and/or programs.
- Chronological recitation of prior expert engagements (and testimony) as an appraiser. Other expert consultation or engagements that did not lead to testimony. Press for particulars regarding clients, subject matters, opinions, opposing counsel, etc.
- When engaged in this case? What were you asked to do? What documents were given to you? What subject matters were you asked to opine on?
- Have you brought all relevant documents and files with you as requested? Identify on record alldocumentsbroughtbyexperttoavoidconfusion. Ifexpertorcounselrefusestoproduce documents, develop sufficient record to take to the court.
- With respect to the documents brought to the deposition, how were they utilized? What has the expert read and not read? What was relied on and not relied on?
- Identify the specific documents that were relied on in forming opinions. Identify documents used as background or for informational purposes.
- Identify each opinion reached by the expert. Try to get as concise a statement as possible of each such opinion.
With respect to each opinion,
– On what professional standard is the opinion based?
– On what professional experience is the opinion based?
– On what professional literature is the expert relying in forming the opinion? – On what facts is expert relying in forming the opinion?
Having gathered the relevant materials, prepared as thoroughly as possible for trial, developed trial and cross examination themes, and hopefully having taken a useful deposition, it is time now to turn to cross examination at trial.
7. Talk to Your Own Appraiser. Hopefully you have a good appraiser, who can direct you to the infirmities in the other side’s approach. But do not rely entirely on them. Your own familiarity with USPAP may prevent serious problems with your own appraiser.
8. Read USPAP5. Appraisers are supposed to follow guidelines in their valuations. These are promulgated as Uniform Standards of Professional Appraisal Practice. The appraisal will most likely state that it is USPAP compliant. If you can prove it is not, you have an excellent cross.
These are just a couple examples of looking to USPAP:
a. Market Value
“Value” itself is defined in USPAP as:
The monetary relationship between properties and those who buy, sell, or use those properties.
Comment: Value expresses an economic concept. As such, it is never a fact, but always an opinion of the worth of the property at a given time in accordance with a specific definition of value. In appraisal practice, value must always be qualified—for example, market value, liquidation value, or investment value.
“Market Value6” is defined as:
a type of value, stated as an opinion, that presumes the transfer of property (i.e. a right of ownership or a bundle of rights) as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable to the appraisal.
b. Marketing Time. One of my first Chapter 11s I lost a relief from stay hearing based on my appraiser using a six-month marketing time period. Another time I avoided the opposing experts 15% “discount” for imposing such a marketing time:
USPAP STATEMENT 6:
Reasonable exposure time is one of a series of conditions in most market value definitions. Exposure time is always presumed to precede the effective date of the appraisal.
5 The Standards are always changing. Make sure you are using the most recent. The 2018 edition
is available on line at https://nrpab-appraiserce.ne.gov/apparaser/public/USPAP_current.pdf.
6 Note Market Value is defined differently than the court definition, leaving you room to talk about the “date”, the “conditions” applicable to the particular appraisal and to emphasize the “opinion” nature of the expert’s conclusions.
Exposure time may be defined as: the estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal, a retrospective opinion based on an analysis of past events assuming a competitive and open market.
….it is not intended to be a prediction of a date of sale…
Applications to Client Uses of an Appraisal (AO-7)
Clients concerned with marketing real or personal properties who obtain a market value appraisal as part of their decision-making process should be aware that it may be inappropriate to assume that the value remains stable during the marketing period. Therefore, it is technically incorrect for the user of an appraisal to take a current value opinion, carry it forward to the end of a concluded marketing period, and then discount back to the present.
Some clients attempt to solve their problem by order a “120-day market value”, a “six- month market value,” or a “one-year market value from the appraiser. Unless the opinion of reasonable exposure time made by the appraiser in the course of such an assignment coincides with the precondition imposed by the client, the answer to this assignment cannot be stated as market value under a typical definition of the term. In such situations, the appraiser must clearly distinguish between a market value opinion allowing for reasonable exposure time and any alternative, appropriately defined, value opinion(s) subject to a special limiting condition resulting from the client-imposed marketing time.
Market time occurs after the effective date of the market value opinion and the marketing time opinion is related to, yet apart from the appraisal process. …The request to provide a reasonable market time opinion exceeds the information required for the appraisal process and should be treated separately from that process.
USPAP is full on interesting definitions and guides as to proper appraisal practice. Catching an opponent’s appraiser on just one or two can defeat their credibility and serve your purpose.
B. The Cross Examination
1. More is Not Always Better
If you have an effective way to destroy an expert’s position, don’t doddle around and hope that in the aftermath of a long cross the judge remembers the core issue. A short cross- examination can be very effective if it goes to the heart of the matter.
2. Start Strong. You can get into the details later. The expert is feeling good after their direct— feeling invincible. Your first question should call that invincibility into question. Practice pointer: An expert is not supposed to be an advocate. Just how much they are crossing this line can often be told by the manner in which their demeanor changes from friendly and complaint to hostile upon cross-examination. Don’t let it bother you that they are avoiding questions. Stick to your guns. Ask it seven ways until the judge makes them answer. Their change in attitude will not go unnoticed by the judge and will come across as bias.
3. Concessions Have the appraiser on the other side admit appraisal is an art, not a science, and that they are highly subjective and reasonable people can differ regarding valuation conclusions
4. The Property. Then get their concessions on the property itself. Did they go inside the
property? If not, how do they know there are not gold-handled fixtures? Or fixtures at all for that
5. Ask Only Questions That Will Elicit Yes or No Answers. This is always true in conducting cross examination, but it is particularly critical in the cross examination of an expert appraiser. No matter how well prepared or trained a lawyer is, the appraiser will necessarily know his/her subject matter better than the lawyer. Accordingly, one cannot ask open-ended questions that will permit the expert to essentially repeat his direct examination or otherwise demonstrate to the judge the depth and scope of his knowledge and expertise.
6. Ask Short and Simple Questions. Valuation cases are complicated and dry. There is no more lethal a combination than boring and hard. Questions must be short, simple, expressed in layman’s terms, and easy to follow and understand.
7. Know the Answer to Every Question You Ask. Only the most skilled (and lucky) trial lawyers can get away with “winging it” at trial. It is the far better practice to use the deposition that you have taken, or any other materials that you can use to lock the witness in and ask questions to which you know the answer. Judges can usually tell when a lawyer has been sand bagged by an answer that he/she did not expect
.8. Identify and Attack Only Areas of Vulnerability. You do not have to, nor should you, attack every aspect of an expert’s opinion. You must select those aspects that are most important and as to which you have a reasonable prospect of success. The case is not supposed to be won or lost through cross examination; rather, you will have your own expert and evidence, and should, within the overall context of your trial strategy, look to win your case there. Be conservative and concentrate on those areas where there are legitimate points that can be made quickly and effectively.
9. Go for the Jugular. It is important to get to the point as quickly as you can, while of course setting the proper background and laying whatever legal foundation is required. One must know where one is going in a cross examination and how one is going to get there.
10. Be Entertaining. Keep your pace at a crisp level, alternate your voice to the extent you can, move around a little bit if that is permitted, and make sure that no one can accuse you of speaking too softly for anyone to hear.
11. Use Exhibits. Again, the subject matter is difficult to understand and intrinsically not the most interesting. An expert can be cross examined most effectively with appropriate documents, maps, aerial photographs, tax map blow-ups, and other visibly interesting and irrefutable evidence. Abstract questioning, without props, is difficult to follow and typically boring.
12. End at the Right Time and End Big. Remind yourself over and over again that cross examinationisbutapiece,albeitanimportantone,oftheoverallmosaicoftrial. Thereisalot more to be done after cross examination is complete. Do not feel that you must continue to drone on after you have made the essential points. Do not ask one question too many. Finally, it is particularly effective to end on an important or big note, with an effective question and answer that scores one of your best points. When you do that, sit down and congratulate yourself.
13. Specific Strategies of Impeachment.
The following is an outline of impeachment points that trial counsel should strive for. This list is certainly not exhaustive:
- The expert is wrong about important facts.
- The expert does not know certain important facts.
- The expert’s valuation techniques and judgment are contrary to written authority or inconsistent with accepted theories and methodologies of valuation.
- The expert has relied on unreliable hearsay or assumptions that are invalid or subject to question.
- The expert’s opinion is contrary to his/her prior reports, testimony, speeches, articles or other writings.
- The expert has not seen important documents or exhibits.
- The opposing expert agrees with as much as possible of your expert’s methodology and approach; at a minimum, opposing expert acknowledges credibility of such approach.
- Opposing expert has not spent much time or effort on the engagement.
- Opposing expert has made mistakes in calculations (e.g., simple mathematical errors and/or errors based upon incorrect assumptions or forecasts).
- The expert’s conclusion is impractical or unbelievable, as it results in a value that makes no economic sense. III. Sample Questions on Direct
A. Expert Qualifications. In bankruptcy court one is almost always in front of a judge. You will usually be asked to truncate any qualifications arguments. Pick your battles. You may wish to ask one or two questions just to warm the judge up to the extent of your expert’s expertise:
Q: Please tell us your name.
Q: What is your profession?
Q: How long have you been engaged in that occupation?
Q: Please explain to us what the profession of real estate appraising entails.
Q: What is your educational background?
Q: What field was your undergraduate degree in?
Q: Did you work in that field before pursuing your profession in real estate?
Q: Is the profession licensed by any government body?
Q: What is entailed in achieving State certification and license as a professional real estate appraiser? : (Details, not just “education and pass test”)
Q: When did you become certified and licensed by the State?
Q: Did you practice in the field prior to becoming licensed, and, if so, in what capacity?
Q: What is the nature of your firm?
Q:Let me direct your attention again to the State certification and licensing process, does the State require any continuing professional education in order to retain your license?
Q: Are there any professional organizations or associations in the field?
Q: Are you a member of any of this organization (Am. Appraisal Inst.)?
Q: How long have you been a member? . . .
Q: Have you been an active member? . . .
Q: Does the Appraisal Institute provide continuing professional education and recognize
advanced study in the field?
Q: What additional courses have you taken through the Appraisal Institute?
Q: What has been the nature of your involvement in the Appraisal Institute?
Q: In addition to your study and membership and participation in the Appraisal Institute, and your teaching of appraisal principles…, what has been the nature of your professional practice? Q: Have you ever been offered as an expert in real estate appraisal in any court? Q: What other types of cases have you been retained to value real property in?
Q: Has your expertise ever been successfully challenged in any case?
Q: Has any court ever not accepted you as an expert in the appraisal of real property when you have been offered as such?
B. Developing the Opinion
Q: Let me direct your attention back to your earlier comment concerning what the profession of
appraising real property entails and ask if you may explain to us what the process of appraising
any particular piece of property requires.
A: Certainly. As you know every piece of real property is different and unique. Consequently, the market value of any piece of real property will depend on the unique characteristics of the property, its location, its zoning, its geography, potential yield and many other factors….
Q: You mentioned that location is important in a property’s value. Why is that so?
Q: What is the impact of zoning on a property’s value?
This portion of the testimony should address every characteristic of the subject property that the attorney knows will be relevant to determining its market value. By addressing each element initially with respect to the appraisal of real property generally, you will be able to capitalize on the importance of frequency to a jury by reviewing each of these characteristics again later in the witness’ direct testimony with respect to the specific property at issue in the case. For example:
Q: Mr. Expert, you mentioned earlier in your testimony that a property’s location is an important factor to consider in determining the market value of that property. Please explain to us how the location of X’s property impacts it’s value.
Q: You also explained that a property’s value is dependent on what the owner may do with the
property and that that is controlled by various zoning and land use regulations. What is the
zoning of X’s property and how does that affect its value?
A: . . .
C. The Specific Work Undertaken by the Appraiser in the Subject Case.
Have your witness explain just what he did to collect comparables, confirm property characteristics, measuring, visiting the site, etc.
D. The Particular Characteristics of the Subject Property.
After the witness has discussed everything that he did to perform his assignment and accurately appraise the market value of the property, you should have the witness discuss the subject property in detail. This is another opportunity for the attorney to emphasize and highlight the critical characteristics of the subject property that bear on its market value. And here again, detail is important.
Q: Mr. Expert, will you please describe Mr. and Mrs. X’s property for us.
What are the critical characteristics of the property that the jury must know to understand the basis of the expert’s opinion? The way to make sure critical information is not missed is to break it down into “bite-sized” morsels that may be easily absorbed. And then after you have elicited all of the details concerning the property through testimony, you may go over the details again through the use of a demonstrative exhibit such as a photograph.
Note how an attorney may emphasize whatever may be the particular critical characteristics or issues in the case by controlling the witness through skillful questioning. Each of the remaining subject areas for a valuation witness’ testimony (highest and best use, discussion and explanation of each valuation method applied, and a final reconciliation of value) provides a skillful trial attorney with additional opportunities to emphasize and discuss the critical factors enhancing the value of the subject property. For example, each adjustment to a comparable sale property provides the attorney and witness the opportunity not only to emphasize critical factors enhancing the value of the subject property, but also an opportunity to bolster the expert’s
credibility by demonstrating that the expert made both negative and positive adjustments and thoroughly considered every relevant factor, i.e. the witness was diligent. The attorney should take the time necessary to fully address each subject area and not rush through the testimony or allow it to be presented in a summary fashion.
E. Sample Cross Notes:
Sample of my notes on cross for vacant land zoned commercial:
DEFINITION OF MARKET VALUE
What is the definition of market value?
On page 6 of your report.
You agree the liens on a property don’t change its fair market value, don’t you?
Turn to page 42.
You say there that the appraised value would be FMV minus taxes due, that’s what it says, right? But that is not correct is it? Outstanding taxes do not change the fair market value.
They only change what might be available to, for example, a foreclosing lender.
So, your concern with the impact of taxes reflect your interest in determining, not FMV, but how much the Bank might get, correct?
Otherwise it is not relevant, is it?
And then, again on p. 42, you offset the devaluation for taxes with a positive of $25,000 for the value of entitlements, correct?
And you talked to a Mr. Wolffath about that cost, correct? Have you ever developed commercial property?
Did you speak with the developer, Helman Group, LLC about what they actually spent to obtain the entitlements?
To obtain the entitlements, one must present the city with certain reports, designs, engineering studies, obtain zoning, etc., correct?
So, would it alter your opinion of value if you knew that between 3 and 400,000 was the actual cost of meeting the requirements for entitlements?
Isn’t it true that the $25,000 represents just the fees paid to the Town of Superior?
You do recognize that the highest and best use is for the property to make use of those entitlements and for its use as a medical building site, correct?
On Page 16 at the bottom and on page 17, you note that a major new interchange is to be built at Highway 36 and McCaslin Blvd, that Superior Market place is the premier retain power center in Boulder County, and that that Town of Superior has major future development plans. On Page 22 you indicate the subject front McCaslin Blvd, a major arterial street and the area is experiencing stable growth. These are all very positive characteristics.
Now, you don’t mention the contract prices on the property in late 2007 and early 2008 at $2 m and 2.49 million.
But the two comps you agree on are Sales 1 and 3 (within 1.6 and 2.2 miles). These two sales transacted at 9.00 and 9.96 per square foot.
You both agree there are 257,021 sq. feet here.
If you do the math, the higher contract price was 9.69 per square ft. So even if that didn’t sell, it was priced competitively with sales of the time, correct?
$1,070,000 is 42% of 2.49 M. It is your opinion that commercial property in Boulder County has fallen by 58%?
On page 42 you also take a 15% discount for “holding”.
Go back to page 6. Is not the definition of FMV include an assumption that the property has already had a reasonable exposure in the open market?
You are to determine the value of a sale today?
Sales 2,4 and 5 are between 5.5 to 8.2 miles from the site. None are in Broomfield.
Rooker-Feldman & Other Preclusion Doctrines
Issues of preclusion arise very often in bankruptcy proceedings in several contexts, most notably nondischargeability adversary proceedings, but also potentially in claims litigation, relief from stay motions, valuation hearings, etc. These matters may arise whenever a proceeding in State court, or even an administrative hearing of some type precedes the bankruptcy litigation. Bankruptcy courts are often anxious to employ any mechanism to avoid having to litigate matters and there has been a trend toward applying these doctrines liberally to avoid any re-litigation. One must be cognizant of the issues from the beginning of a case, because there is little point in litigating an issue that will later be found against you on one of these preclusion issues. While other preclusion doctrines are not jurisdictional, Rooker-Feldman is; therefore, it may not be waived and may be brought up, sua sponte, by a court.
A. What is Rooker-Feldman? In Rooker v. Fidelity Trust Company, 44 S.Ct. 149, 263 U.S. 413, 68 L.Ed. 362, (1923), the United States Supreme Court held that where a judgment has been rendered, after due hearing, by a state trial court, with jurisdiction of the subject matter and parties, and affirmed by the state supreme court, the only resort under the legislation of Congress for correction of errors in deciding questions involving the Constitution is to the appellate jurisdiction of this Court. District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) expanded the concept to any issue “inextricably entwined” with a State court determination. Thus, the Rooker-Feldman doctrine has been applied to prevent collateral attack of State court judgments in federal courts in many differing scenario. Since the issue goes to subject matter jurisdiction it may be raised at any time, by any party to the proceeding or sua sponte by the court. Ritter v. Ross, 922 F.2d 750, 752 (7th Cir. 1993) cert denied 510 U.S. 1. In Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284, 125 S. Ct. 1517, 161 L.Ed.2d 454 (2005), the Supreme Court, finding an excess of purported applications of the so called Rooker-Feldman doctrine, clarified its limits, noting that the doctrine is confined to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” In Great Western, 615 F.3d , the Third Circuit explained, a federal court can address the same issue “and reach a conclusion contrary to a judgment by the first court” as long as the federal court does not reconsider the legal conclusion reached by the state court. Id. at 169.
But other courts are more result-oriented. See In re Kline, 472 B.R. 98, (Cir. BAP 2012) “The relevant inquiry is ” whether the state-court judgment caused, actually and proximately, the injury for which the federal-court plaintiff seeks redress,” paying ” close attention to the relief sought.” citing Mo’s Express, LLC v. Sopkin, 441 F.3d 1229, 1233 (10th Cir.2006).If success on the claims alleged in federal court would necessarily require the federal court to review and reject the state court’s judgment, Rooker-Feldman applies.
B. Examples of Application/Non-Application of Preclusion Issues
1. Claims. The doctrine can be used as a shield by a creditor in the defense of objections to a claim, in attempts to estimate a claim, and in attempts to determine that the debt underlying a claim has been discharged. 2. Enforcement of State Court Judgments and Orders . It can be used as a sword by an attorney attempting to enforce a state court judgment in his/her clients favor and in efforts to seek an injunction. a) Divorce. Rooker-Feldman has been described as an “important jurisdictional tool in bankruptcy adversary practice to prevent parties from having to re-litigate dispute involving marital debts.” Alexander, Peter C. Bankruptcy, Divorce, and the Rooker- Feldman Doctrine: A Potential Marriage of Convenience, Journal of Law & Family Studies (2011).
b) Foreclosure. In re Hall, 497 B.R. 167, (Cir. BAP 2013)(“Although [Debtors] do not ask directly for reversal of the Judgment, they seek damages based on alleged injuries incurred as a result of the state foreclosure action. They repeat contentions and arguments rejected by the state court; specifically, whether their payments were misapplied, whether they defaulted on the Note, and whether State Street had standing to enforce the Note.”
c) Reasonableness of Attorney’s Fees. any liability resulting from a debt that is found to be nondischargeable is also nondischargeable. See In re Stokes, 150 B.R. 388 (W.D.Tex.1992) (all debts including punitive damages, legal fees and interest).
In re Smith, 321 B.R. 542, (Bankr. D. Colo. 2005)
3. Automatic Stay. Because state courts have concurrent jurisdiction to determine applicability of automatic stay, bankruptcy court did not have jurisdiction to invoke automatic stay determined to be inapplicable by state court in foreclosure proceedings. Singleton v. Fifth Third Bank of Western Ohio (In re Singleton), 230 B.R. 533 (Bankr. 6th Cir. 1999).
4. Violation of Discharge Proceedings. In re Kline, 472 B.R. 98, (Cir. BAP 2012). 5. 727 Discharge Adversaries. 6. Fraudulent Conveyances (548 and 544) PEDP paid $50 million fee to Commonwealth of Pennsylvania for a slot machine license but revoked the license for failure to maintain the machines. The revocation was appealed to the highest State court. PEDP commenced a bankruptcy and brought an adversary alleging that the license revocation should be avoided as a fraudulent transfer.
The bankruptcy court refused to hear the adversary on the basis of Rooker-Feldman. In re Phila. Entm’t & Dev. Partners, L.P., 549 B.R. 103 (Bankr. D. Pa, 2016), the District Court agreed. 569 B.R. 394 (E.D. Pa. 2017). The Third Circuit reversed in holding that the analysis of the fraudulent transfer claims did not require the bankruptcy court to “review or reject the Commonwealth Court’s judgment…” and thus, the claims were not barred. In doing so it held the license revocation itself could not be revisited; however, the rights transferred back to the State by the revocation, were in fact a transfer, which could be for “less than reasonably equivalent value.” Phila. Entm’t & Dev. Partners v. C’wealth of Penn., No. 17-1954 (Third Circuit Dec. 12, 2017).The court refused to accept the theory that just because a bankruptcy finding could “as a practical matter undermine the valid state court order” did not invoke the Rooker-Feldman bar. Allowing the revocation to stand did not mean that the State of Pennsylvania could not be found liable for the value of the license. Accord, In re Chinin, 327 B.R. ___, (Bankr. N.D. Ill 2005) (State court settlement could be challenged as fraudulent for less than adequate consideration despite approval by state court.) C. Inapplicability to Actions under 11 U.S.C. §523 for Nondischargeability of Debt.
Where the federal plaintiff was the plaintiff in the state court action, the doctrine is simply inapplicable. See In re Ryan, 408 B.R. 143 (Bankr. N.D. Ill. 2009) citing Kamilewicz v. Bank of Boston Corp., 92 F 3d 506, 510 (7th Cir. 1996). (“[Plaintiffs] are not “state-court losers” attempting to have this bankruptcy court reexamine the Illinois state court judgment. See Exxon, 544 U.S. at 284, 125 S. Ct. 1517. Rather, the Plaintiffs are presenting an independent claim-the § 523(a)(2)(A) claim-over which this Court has jurisdiction under 28 U.S.C. § 157(b)(2)(I). The Plaintiffs were not able to raise the §523(a)(2)(A) claim in the state court because such claim can only be raised in a bankruptcy case under 11 U.S.C. § 523(c)(1) and Bankruptcy Rule 4007(c). Thus, the invocation of the Rooker – Feldman doctrine is inappropriate…the doctrine the defendant must contend with is res judicata, not Rooker-Feldman.” In re Ryan, 408 B.R. 143 (Bankr. N.D. Ill. 2009).
D. Rooker-Feldman Does Not Apply to Judicial Review of State Agency Decisions
Many cases include debts for overpayment of benefits (Unemployment, Food Stamps, etc.) or other debts determined to be claim by administrative processes. The Supreme Court has held that the Rooker-Feldman doctrine “has no application to judicial review of executive action, including determinations made by a state administrative agency.” Verizon Md., Inc. v. Public Servs.’ Comm’n of Md., 535 U.S. 635 at 644 n. 3. (2002). Applying Verizon, the Tenth Circuit has held that the Rooker-Feldman doctrine does not apply to determinations made by a property valuations protest board, whose authority was defined under New Mexico statute. See Jicarilla Apache Nation v. Rio Arriba County, 440 F.3d 1202, 1206 (10th Cir. 2006). In so holding, the Tenth Circuit stated unequivocally that “Rooker-Feldman does not apply to judicial review of state agency decisions”. Id. at 1207-08.
In Simon v. Taylor, 981 F. Supp. 2d 1020 (D. N.M. 2013), the District Court for New Mexico held the New Mexico state Racing Commission’s (Agency) decision, could only be made “final” by a state district court’s decision. Rooker-Feldman did not apply to “matters only the Racing Commission decided.”
II. Res Judicata and Collateral Estoppel
Burden of proof is on the proponent of any doctrine of preclusion. In re Lopez, 367 B.R. 99 (9th Cir. BAP. 2007)(“It is consistent with the rule that preclusion is an affirmative matter as to which the proponent of preclusion has the burden of persuasion and bears the correlative risk of nonpersuasion.”) citing Exxon-Mobil, 544 U.S. at 293, 125 S.Ct. 1517; Christopher Klein et al., Principles of Preclusion & Estoppel in Bankruptcy Cases, 79 AM. BANKR. L.J. 839, 882-83 (2005).
A. Res Judicata
1. Full Faith & Credit
The Full Faith and Credit Act requires that the federal courts give state court judgments the same preclusive effect those judgments would enjoy under the law of the state in
which the judgment was rendered. 28 U.S.C § 1738; In re Lopez, 367 B.R. 99 (9th Cir. BAP. 2007).
2. Inapplicable to the Determination of Dischargeability
Res judicata cannot form the basis for a decision of non-dischargeability. Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205 (1979) (interpreting the Bankruptcy Act). Although Brown was a creditor who wished to litigate a claim of fraud despite not having done so at the state court level, the Supreme Court recognized the pendulum swings both ways, and neither the creditor nor the debtor had a “full incentive” to litigate the dischargeability issues. “Conditions material to discharge are irrelevant to the ordinary collection proceeding.” The Supreme Court reviewed the history of incorporating nondischargablility actions into the jurisdiction of the Bankruptcy Courts and stated, [I]t would be inconsistent with the philosophy of the 1970 amendments to adopt a policy of res judicata which takes these §17 [now 523] questions away from bankruptcy courts…”. In sum, the Supreme Court held, “[T]he bankruptcy court is not confined to a review of the judgment and record in the prior state court proceedings when considering the dischargeability of respondent’s debt.”
B. Collateral Estoppel
Grogan v. Garner, 498 U.S. 279, 290-91 (1991)(“We now clarify that collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a)”.
1. Application is Within the Court’s Discretion
While the availability of collateral estoppel in a particular case is a question of law, the decision to apply the doctrine is vested in the trial court’s discretion. Robi v. Five Platters, Inc., 838 F.2d 318, 321 (9th Cir. 1988).
2. State Law Applies
Federal courts apply state law in determining the preclusive effect if the matter sought to be precluded arise under state law. 28 U.S.C. § 1738; In re Sutherland-Minor, 345 B.R. 348, (Bankr. D. Colo. 2006). Regarding application of issue preclusion, state law is to be applied. States differ in their definitions and applications of collateral estoppel. Things to look for to avoid application are whether the (1) parties were identical; (2) whether the issues are identical (particularly the scienter required for “intent” under 523); (3) whether the opportunity to litigate was “full and fair” and whether there is a requirement of “actually litigated.”
3. Under Federal and State Law, Issue Preclusion Is Waived if Not Timely Raised
Courts have found that the reasons for requiring a defendant to plead issue preclusion apply equally to a plaintiff seeking to use preclusion offensively. The case of Vanderpool v. Loftness, 300 P.3d 953 (Colo. App. 2012) is instructive and discusses waiver of offensive collateral estoppel under both Colorado and federal law. In relevant part it states:
A party entitled to assert issue preclusion may waive it. Harvey v. United Transp. Union, 878 P.2d 1235, 1243 (10th Cir. 1989) (offensive issue preclusion); Fischer v. City of Siouz City, 654 N.W.2d 544, 548-49 (Iowa 2002) (offensive issue preclusion); see generally 18 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure §4405, at 83-84 (2d ed. 2002). With respect to defensive issue preclusion, this is recognized by C.R.C.P. 8(c), which lists res judicata and estoppel among those affirmative defenses that must be raised in a responsive pleading.
The Vanderpool Court found that, by waiting until trial to raise the doctrine of collateral estoppel, plaintiff had waived that right. In an extremely articulate opinion, the court discussed the reasons supporting the trial court’s finding of waiver:
Offensive issue preclusion is not an affirmative defense. Nonetheless, “it is difficult to understand why plaintiffs should not be required to plead preclusion as clearly as defendants— the need for notice and an opportunity to respond seems the same.” 18 Federal Practice and Procedure § 4405, at 109. Therefore, courts have held that a party waives offensive issue preclusion unless he raises it timely. See, e.g., Harvey, 878 F.2d at 1243-44 (the plaintiffs waived issue preclusion where they raised it after trial but before the trial court issued its decision); Fischer, 654 N.W.2d at 546, 548-49 (issue preclusion waived where the plaintiff did not raise it until two months before trial); Julien v. City of Sherman, 1997 WL 714870, *1, 3 (Tex. App. No. 05-96-00013-CV, Nov. 18, 1997) (having litigated the previously decided issue, the plaintiff waived issue preclusion). Because the function of issue preclusion is to avoid relitigation of an issue, this ordinarily means that a party seeking to use issue preclusion offensively must raise it at the first reasonable opportunity after the decision having preclusive effect has been rendered. See Evans v. Syracuse City School Dist., 704 F.2d 44, 47 (2d Cir.1983); Fischer, 654 N.W.2d at 548; see also Gilbert v. Ferry, 413 F.3d 578, 580 (6th
Cir.2005) (if the parties relitigate the previously decided issue, ” then the party who failed to raise collateral estoppel should be deemed to have waived it since the purpose served by collateral estoppel (to prevent re-litigation of issues) has been fatally compromised” ; involving defensive 300 P.3d 959 issue preclusion); see generally 18 James Wm. Moore, Moore’s Federal Practice § 132.05, at 132- 181 (3d ed. 2011).
4. Effect of a Default Judgment/ Full and Fair Opportunity to Litigate
a. Federal law See, e.g., In re Tarango, 424 B.R. 479 (Bankr. E.D. Tenn. 2010) citing, In re Gordon, 303 B.R. 645, 654 (Bankr.D.Colo.2003) (stating that “[t]he general rule is that federal court default judgments have no collateral estoppel effect, because none of the issues is actually litigated.”
b. State Law May Vary Widely. Applying state law, courts vary on whether collateral estoppel may be based on a default judgment. See, In re Shiver, 396 B.R. 110, (2008)(applying Florida law applying collateral estoppel on default judgment for fraud; noting result would be different under New York law.)
5. Collateral Estoppel May Be Applicable to Dischargeability Proceedings
a. Willful and Malicious. See e.g., In re Lopez, 367 B.R. 99 (9th Cir. BAP. 2007); In re Shiver, 396 B.R. 110, (2008)
b. Amount of Debt But Not Intent (523(a)(2)(B). In Adams County Dept. of Social Services v. Sutherland-Minor (In re Sutherland-Minor), 345 B.R. 348 at 354 (Bankr. D. Colo. 2006)
c. Administrative Proceedings for Benefits
1. Colorado Example— an analysis.
Colorado uses the term “issue preclusion” rather than “collateral estoppel”, and has recently revisited its doctrine and clarified it in Foster v. Plock, 2017 CO 39, 394 P.3d 1119 (2017):
We have previously determined that issue preclusion prohibits litigation of the issue in the second proceeding if four elements are met: (1) the prior proceeding was decided on a final judgment on the merits; (2) the issue in the current proceeding is identical to the issue actually adjudicated in a prior proceeding; (3) the party against whom issue preclusion is asserted had a full and fair opportunity
to litigate the issue in the prior proceeding; and (4) the party against whom issue preclusion is asserted is a party or in privity with a party in the prior proceeding.
The findings of fact and conclusions of law of an administrative agency, acting in a judicial capacity, may be binding on the parties in a subsequent proceeding if the agency resolved disputed issues of fact which the parties had an adequate opportunity to litigate. Maryland Cas. Co. v. Messina, 874 P.2d 1058 (Colo. 1994) citing Industrial Comm’n v. Moffat County Sch. Dist. RE No. 1, 732 P.2d 616 (Colo.1987). However, Colorado has adopted Section 28(3) of the Restatement (Second) of Judgments (1982) stating that relitigation of an issue in a subsequent action is not precluded when a “new determination of the issue is warranted by differences in the quality or extensiveness of the procedures followed in the two courts.” Maryland Cas. Co. v. Messina, 874 P.2d 1058 (Colo. 1994).
Additionally, Colorado refuses the “cloak of collateral estoppel” in circumstances where an agency determination does not consider all the factors that would be necessary to find the issues “identical.” Id. citing several cases where findings in unemployment compensation hearings were not binding on subsequent litigation. See also In re Sutherland-Minor, 345 B.R. 348, (2006) citing Grynberg v. Arkansas Oklahoma Gas Corp., 116 P.3d 1260, 1265 (Colo.App.2005). Court looks to “whether the remedies and procedures of the first proceeding are substantially different from the proceeding in which collateral estoppel is asserted, whether the party against whom collateral estoppel is asserted had sufficient incentive to litigate vigorously, and the extent to which the issues are identical.”) 2. Argue An Agency Determination is Not an Adjudicatory Proceeding Collateral estoppel will not apply where remedies and procedures of the first proceeding are substantially different from the proceeding in which collateral estoppel is asserted. Adams County Dept. of Social Services v. Sutherland-Minor (.In re Sutherland-Minor), 345 B.R. 348, (Bankr. D. Colo. 2006) citing, Grynberg v. Arkansas
Oklahoma Gas Corp., 116 P.3d 1260, 1265 (Colo.App.2005). ” See e.g., Michigan Unemployment Insurance Agency v. Nemes, No. 15-20332 (Bankr. E.D. Mich. 2015). In this case the Bankruptcy Court for the Eastern District of Michigan held that an intra- agency determination is not a full adjudicatory proceeding and that the agency was not acting in a judicial capacity in determining unemployment benefits overpayment.
The defendant in that case, Nemes, collected unemployment benefits from the State of Michigan which issued (just as in this case) a “determination” to the defendant it had made a finding of fraud and imposed restitution and penalties Defendant had 30 days to appeal the Agency’s determination procedures. She failed to do so. The agency filed a §523 complaint. The Michigan court cited another unpublished Michigan case, Michigan Unemployment Insurance Agency v. Turner (In re Turner) Adv. P. NO. 09-53722, Case
No. 09-53772 (Bankr. E.D. Mich. 2010) finding that “an intra-agency administrative determination; [the debtor’s] sole right with regard to which was to appeal it within 30 days…of receiving notice,” was not entitled to preclusive effect. As in this case, debtor was not “given an opportunity to appear and contest the Agency’s findings prior to the issuance of the determination.”
CONSIDERATIONS AS A BANKRUPTCY LITIGATOR
A VIEW FROM THE TRENCHES Expert Witness. Do I need one? What will the testimony be? How much will it cost? Who do I know who can help on the cheap? Deposition. Is it necessary? Is it worth showing the other side where I am going with the case, or should I just surprise them at trial? Deposition of the corporate representative (i.e., Rule 30.b.6.) Button down the corporate folly with the deposition, or surprise the witness at trial? Fact Witness who is also an Expert. Better than hired gun. And cheaper. Disclose per Rule 26, but not needed. Draft closing argument on a laptop—easy to edit as trial proceeds. Out of time to disclose a witness? Argue no prejudice, offer to extend discovery. File the List of Witnesses and Exhibits early if you are worried about missing a deadline. If there is a mutual deadline, like the List of Witnesses and Exhibits, and the other side is not competent, consider filing at 11:55 PM the evening it is due. Read all state court pleadings and orders prior to filing a bankruptcy, especially those dealing with divorce or a potentially non-dischargeable debt (i.e., fraud, conversion). Get a sense, a prediction, of where the bankruptcy case is going. Send letter to client with a predication of possible litigation. Not easy to win with motions for judgment on the pleadings, or failure to state without specificity the fraud elements. It’s more a way of wearing down the other side, pointing out amateur status. Questionable debtors with questionable facts and questionable conduct belong in Chapter 13—not Chapter 7. In discovery, get the documents. Maybe ask for admissions. Interrogatories are a waste of time. When ferreting out the truth, ask your client “what is the worst the other side will say about you?” The best cross-examination asks only short questions that call for a “yes” response, breaks out topics like chapters, and avoids asking anything you don’t know the answer to.
15. Frame your own issues. Read the statute and the case law and that becomes your road map. Do not go down the other side’s rabbit hole.
Two schools of thought with depositions—going in strong to prove your case and facilitate settlement or play the “curious friend” of the deponent so that we can all discover the truth together. I prefer the latter. During cross-examination, listen to the answers. It’s okay to go off script. Ask follow ups when the witness opens an unexpected door. Ask opposing counsel to stipulate to exhibits before trial. Judges like that, and it makes the case go a bit smoother. Acknowledge the rough facts of your case during opening and minimize them.
Tell the story in chapter format, one topic at a time, chronologically. Draft Closing Argument on your laptop—easy to edit as trial proceeds.
- While you should always argue the equities, some judges are more swayed than others by passionate arguments. Some prefer just the numbers. Thus, know your audience.
- During cross-examination, avoid the “so” question. Save it for closing argument.
- Judges are busy. They do not have time to sift through adverbs, adjectives and purple prose. We call them legal “briefs” for good reason. When drafting any motion or pleading, imagine yourself composing a telegraph, not describing the flower arrangement at your cousin’s wedding. Do not be the airline pilot who announces that he “ is presently anticipating the possibility of considerable precipitation.” Be the co-pilot who says, “it may rain.”
- If the facts are complicated, or there are mathematical calculations involved, use demonstrative evidence. Make the task of understanding the facts as easy as possible for the court.
Final word–it’s a hard thing we do. Our clients have few resources to pay counsel. Matters are often not worth the expense of fighting, given what is at stake. And only other attorneys know and appreciate the stress.
“We, the unwilling, led by the unknowing, are doing the impossible for the ungrateful. We have done so much, for so long, with so little, we are now qualified to do anything with nothing.” Konstantin Jireček
SAMPLE OPENING STATEMENT CHAPTER 13 CONFIRMATION
This matter comes before the court on the chapter 13 plan that was filed on January 15, 2018, and the objection to confirmation filed by the chapter 13 trustee. The trustee has raised three concerns in his objection. Those are:
1. the debtor is not committing all his disposable income to the chapter 13 plan, and specifically, that disposable income based on form 22 requires the debtor to pay a minimum of $30,000 to class IV unsecured creditors;
2. that the debtor’s proposal to maintain payments on two vehicles outside the plan is excessive, that he should surrender one of the vehicles, and commit that money to plan payments;
3. that part of the debtor’s disposable income, and specifically, the calculation of “projected disposable income” he should include monies received by his non- filing spouse from the Social Security Administration.
In response, the evidence will show:
1. debtor’s circumstances have changed since the filing of the case. Within the six months prior to the filing of the bankruptcy case, the debtor’s well-paying job was lost. He remains in the same industry, however with a decrease of approximately five dollars per hour, or approximately $866 gross less per month. In that regard, Debtor maintains that the Supreme Court case of Hamilton v. Lanning offers direction, specifically, that the debtor’s changed circumstances should move our focus from Form 22 to schedules I and J;
2. the debtor maintains that the two vehicles are necessary for reorganization in that the debtor operates the 2014 Ford pick-up truck to commute to work and to perform tasks related to his maintaining the home, which is presently in disrepair. The 2013 Harley-Davidson motorcycle is also used by the debtor to save gas when the truck is not needed. The debtor would also point out that the total monthly payments for the two vehicles equals $950 per month, and would argue that for a family of two, these amounts are reasonable and are contemplated by the IRS standards as to average monthly vehicle loan payments.
3. With regard to social security benefits, debtor relies upon the 10th circuit opinion of In re Cranmer. In that case, the 10th circuit concluded that social security income need not be included in the calculation of projected disposable income. Admittedly, Cranmer was focused on the debtor receiving Social Security benefits. However, the reasoning contained in Cranmer—that is, Social Security benefits are not available for collection by third-party creditors — should also apply in this case.
The evidence will also show that the debtor is a full-time electrician with Piper Electric. His take-home income is approximately $4100 per month. His wife has been disabled since 2012 with rheumatoid arthritis and heart disease. The budget, the evidence will show, is about as frugal as people can live when half the income goes to housing. There is no entry for recreation. The debtor’s wife, while covered by Medicare, spends an additional $245 a month for over-the-counter medicine which is not covered by Medicare. The couple has no pets, has not had a vacation in four years. If the focus today is on Schedules I and J, the court will conclude that this is hardly a couple which deserves excessive scrutiny with what they earn and get by on.
The parties have exchanged exhibits. Some of the exhibits are duplicates. If it would assist the court, I can go over those duplicates at this time. Otherwise, we have two witnesses and are ready to proceed.
CROSS EXAMINATION OF LOAN OFFICER IN A “CRAM DOWN”
Background: Debtor financed expensive pickup truck for use in his business. Debtor crammed down truck in plan. Credit Union objected, arguing had Debtor been honest and told creditor that the truck would be used for business, the loan would not have been made.
In discovery, creditor did not produce the loan application that was completed at the dealership. Only the loan application that was completed on-line was produced. Although the debtor did not “check the box” on the on-line application that the truck was for business purposes, he did check that box at the dealership with that second loan application.
Whether the dealership sent the second loan application to the credit union is unclear.
The loan nevertheless was made.
Cross examination on Credit Union’s representative
Counsel: Good morning Mr. Hamlin, my name is Steve Berken and I represent the debtor.
You are familiar with this loan?
Counsel: But you were not the loan officer responsible for making a loan? The loan was made by a Mr. Mark Cousins with the credit union.
Counsel: Why is he not here?
Hamlin: I don’t know.
Counsel: Mr. Cousins is not your attorney? [Asked to establish no privilege between Hamlin and Cousins].
Counsel: Doesn’t it make sense that the person who made the loan would be more helpful to the court to understand why the loan was made?
Hamlin: I don’t know.
Counsel: Does Mr. Cousins have a conflict today?
Hamlin: I don’t know.
Counsel: Did you talk to Mr. Cousins about your appearance today?
Counsel: Tell me in detail, what did Mr. Cousins tell you and what did you tell him? Hamlin: We discussed that your client did not tell us he was going to use the truck for business. We talked about some family matters involving his son.
Counsel: In the loan making process for the credit union, is it fair to say that your company has an application to fill out by the potential customer?
Counsel: The customer typically fills out the loan application at the dealership? Hamlin: We have an application that can be filled in on-line.
Counsel: Yes, but a loan application can also be filled out at the dealership correct? Hamlin: Yes.
Counsel: And that loan application is sent to the credit union for review?
Hamlin: Yes, but in this case, your client filled out a loan application out on-line. Counsel: The credit union relies on the accuracy of the information provided on the loan application?
Counsel: Additionally, in connection with the loan making process, the credit union
does the standard checking on credit worthiness? It pulls a credit report?
Counsel: It may ask for additional documents, such as tax returns? Recent wage statements? Maybe bank statements?
And the decision to make loan is based on that information?
Counsel: And the credit union relies on the information it receives from the dealership, usually the finance manager?
Counsel: Okay, and all these factors are considered in making a loan.
Counsel: Turn to exhibit book please. Turn to Exhibit G.
Let me know when you are there?
Hamlin: Yes, I’m there.
Counsel: Do you recognize that document?
What is it?
Hamlin: it’s an application for credit.
Counsel: that is the form that you typically use and rely upon in making a loan? Hamlin: Yes.
Counsel: On the application, there’s a question that asks the primary purpose of the vehicle? What it will be used for? Do you see that?
Counsel: in the box asking whether the primary purpose would be for “personal or family use,” that box has been checked.
Counsel: the credit union was not present for the closing of the loan? In other words, all the paperwork was signed at the dealership.
Counsel: please turn to Exhibit H. Let me know when you’re there?
Hamlin: Yes, I’m there.
Counsel: Do you recognize that document?
Hamlin: It is the credit application your client filled out.
Counsel: And he filled that out at the dealership?
Hamlin: It appears so.
Counsel: And we know that because it has the dealership’s name at the top of the application.
There are then two applications, one on-line and one at the dealership?
Counsel: I will represent to you that we asked for discovery in this case. And that the credit union did not produce this second credit application. That I had to go to the dealer with a subpoena to get these documents.
From a high level, yes.
I don’t know what that means? What have I missed.
we also look at “loan to value,” the conditions of the vehicle, what it will be
The credit union regularly finances cars from this dealership? Yes.
Mr. Hamlin, please note that Exhibit H has a similar question to Exhibit G. That asks
about whether the vehicle to be financed will be used for personal or business use.
Counsel: Please read that question and how the debtor responded.
Hamlin: It says, “are you using the vehicle for personal/family use or for business use?”
Counsel: There are boxes next to that question. Which box is checked?
Counsel: We know in the normal course that the dealership sends you the application. Did the dealer not send you this application, the one where my client says the truck was to be used for business?
Hamlin: I do not see that application in the file I brought today. It may be in the file at
Counsel: And for reasons that are unclear to me, that exhibit was not disclosed for today’s hearing.
Hamlin: I don’t know.
Counsel: Pass the witness Your Honor.
CLOSING ARGUMENT Have in mind your closing when writing your opening. You want to be able to say in closing all the things you promise to deliver in opening. Writing your closing will give case its “theme.” Be mindful of “conclusory” statements such as “there was no fraud because they did not prove fraud.” Prepare the outline of your closing argument before trial begins. Keep it on your laptop during trial, which makes it easy to edit instead of lines and arrows on a legal pad. Break the elements into “prongs” and argue each prong if appropriate. When defending, if you can kill one prong (i.e., no provable damages, lack of intent), you win.
Humanize the clients but always stick to the facts.
Go through the salient exhibits and explain their importance. (“Exhibit C is the contract between
the parties. Nowhere does it prohibit the debtor from taking a draw.”)
Cast yourself as the court’s helper. You are there to help guide the court to the right conclusion. Do not read your closing. Write it with bullet points, not long sentences. Take your time. No need to rush. A pause will seem much longer to you than to the court.
Finish with something punching, but no humor. (“The debtor in this case took on a project most sane contractors would have run from. Instead of being commended for doing what he did, with what he had to work with, he was sued.)
Spend time hitting your strongest arguments. Skip the insignificant. Acknowledge the weaknesses in the case, but do not spend much time doing so.
SAMPLE CLOSING ARGUMENT This matter came before the court on the plaintiff’s complaint, in which she alleged that her debt should be excluded from discharge per sections 523(a)(2) and 523(a)(4). As we know, the plaintiff bears the burden of proof of each required element and that exceptions to discharge are to be narrowly construed, says the case law. The objectives of bankruptcy to give a debtor a fresh start, according to the 10th circuit, says that “doubt should be resolved in the debtor’s favor.” Section 523(a)(2)(A) provides that exception to discharge for debts obtained by false pretenses false representation or actual fraud, has varying elements of proof which overlap one another.
False representation has five elements: the creditor must establish all these elements by a preponderance of evidence to prevail.
One. That the debtors made a false representation
Two. representation was made with the intent to deceive the plaintiff Three. the plaintiff relied on the representation
Four. her reliance on the representation was justifiable
Five. that she was damaged. The court has before it evidence that there were communications between the parties over approximately 6 months. However, in the context of false representation, the court is limited to focusing on the representations that were made prior to or in conjunction with the execution of the contract. The back and forth between the parties after the money was paid cannot be the basis of a false representation. And what of that contract? There was no evidence presented that the debtor did not intend to complete and deliver the promised goods for the bargain for amount when the agreement was consummated. Just the opposite. The evidence shows that the debtor, upon receiving payment, immediately ordered supplies and materials to start the project. Someone intending to not deliver on a promise does not immediately incur expenses in connection with the project. Plaintiff argues that the defendant was prohibited from taking a draw as the project progressed. However, there’s nothing in the contract that prohibits the debtor from reimbursing himself for costs incurred or the labor that he provided. And what of that draw? He took $2500 for himself of the $60,000 paid for the project. 523(a)(4) excludes from the order of discharge debts incurred by “fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.” The curve ball in this equation comes from the Colorado Trust Fund statute. It imposes a fiduciary obligation upon contractors. Formerly in Colorado, it was not particularly difficult to find a contractor had breached his fiduciary duty under the trust fund statute when any funds were taken as a “draw” prior to full payment to any material suppliers, laborers or subcontractors. But the landscape changed with the Supreme Court’s rulings in Storie and Bullock v. BankChampaign. With those decisions, we now have direction, and specifically, a definition, of the word defalcation. Defalcation is defined as a “reckless conduct of the kind of the criminal law often treats as the equivalent” or a conscious disregard or willful blindness to a substantial and unjustifiable risk.
A tough standard indeed for a creditor to prove. And this creditor did not prove defalcation within the meaning of section 523(a)(4) for two principal reasons.
The debtor testified he was unaware of the existence of the trust fund statute and the various duties placed upon him. The plaintiff offered no evidence, credible or otherwise, that the debtor was aware of the trust fund statute. As Judge Brown held in In re Cupit, “a debtor cannot consciously disregard or risk of violating a fiduciary duty if he or she is wholly unaware of that duty. There must be some evidence that the debtor was aware of the fiduciary duty and of the risk that his conduct would violate that duty.” Second, plaintiff put on no evidence that the debtor was “willfully blind to the possibility” that there would be delays in the project due to weather, unforeseen expenses and the like. Indeed, the evidence was that the skid steer broke during excavation, replacement was not readily available, the complications of obtaining several permits, additional engineering work and the attendant cost.
Although it is not quite clear from the arguments presented during trial that the plaintiff seeks a judgment for embezzlement, we will address it in this closing. The 10th Circuit has defined embezzlement as the “fraudulent appropriation of property by person to whom such property has been entrusted or into whose hands it has lawfully come.” A claim for embezzlement under 523(a)(4) has five elements:
- entrustment (of property lawfully obtained originally)
- of property
- of another
- that is misappropriated or used or consumed for a purpose other than that for which it was entrusted
- with fraudulent intent.
Plaintiff offered no evidence to contradict debtor’s testimony that he intended to complete the project. As the saying goes, “actions speak louder than words.” Here, his actions included payment of materials, renting equipment, hiring and paying subcontractors. The evidence the court does have before it is an unmistakable intention to complete this project. As the pictures established, this project had one calamity after another befall it. Broken equipment, 6 inches of rain within one week, concrete that would not cure, inability to get concrete because of competing road projects. As the 4th Circuit held, “a defendant who exercises dominion over property in the good-faith belief that the property is his own, or that the appropriation is otherwise authorized, is not guilty of embezzlement.” Plaintiff offered no evidence that the monies Debtor received were spent on anything but what was related to the project. While she second-guessed virtually everything he did and everything he bought and everyone he employed, there was no evidence the money was spent on anything but the project.
Other than the Plaintiff, I suspect there is no one in this courtroom who thinks the Debtor did not do the best he or anyone could give under these circumstances. He took on a project most sane contractors would have run from. Instead of being commended for doing what he did, with what he had to work with, he was sued. He asks that the court put an end to this three-year nightmare and find for the defendant, so he can move on with his life.
We thank the court for its attention.