Accounting for Damages for Dummies: Expert Opinion or Not?
Renee Choy Ohlendorf, Litigation News Associate Editor – January 20, 2012

In the post-Daubert world, a witness’s years of professional expertise does not necessarily transform the witness into an expert. Underscoring this point, the District Court of Kansas recently held that firsthand testimony about company financial records remains the province of lay witnesses—so long as the witness does not speak to topics requiring more than simple mathematics.

Ryan Development Company v. Indiana Lumbermens Mutual Insurance Company involved a lawsuit for breach of an insurance contract based on the insurer’s denial of coverage. The court concluded an accountant’s testimony did not constitute expert opinion under Federal Rule of Evidence 702.

The insurer moved to exclude testimony by the accountants regarding the proofs of loss the accountants prepared for the insured. The insurer contended it was improper expert testimony not previously disclosed by Ryan. The court barred the accountants from testifying as “experts,” but permitted the evidence and testimony from them as “lay witnesses.”

At trial, the accountants testified regarding their compilation of financial documents in support of the proofs of loss. After a jury entered a $2,261,166 verdict in favor of Ryan, the insurer renewed a prior motion for judgment as a matter of law relying upon the Tenth Circuit Court of Appeal’s decision in James River Insurance Company v. Rapid Funding, LLC.

The Tenth Circuit’s James River Factors
In James River, the Tenth Circuit relied upon four factors to find that the district court should have excluded a principal’s testimony regarding the pre-fire value of the company’s condemned apartment building as improper expert testimony under Rule 701. First, the testimony involved complex depreciation calculations, and thus went beyond the realm of basic mathematical computations that could be understood by a layperson. The calculations required professional judgment to not only choose between different types of depreciation, but also to calculate the effect of neglect on the building’s value. Second, the witness in James Riverpartially based the calculations on his professional experience as a licensed real estate broker.

Third, the principal based his valuation upon an outside expert’s report, which used specialized accounting methods to estimate property replacement costs. Fourth, the principal’s testimony was inherently expert in nature pursuant to the advisory committee notes to Rule 702, which states that “landowners testifying to land value” are the sort of “skilled witnesses” whose testimony is within the scope of Rule 702.

Ryan Accountants Not Deemed as Experts under James RiverAnalysis
The Ryan court distinguished James River and denied defendant’s motion, holding that plaintiff’s accountants did not provide expert testimony. The court found that the Ryan accountants’ loss calculations did not require any “technical judgment,” but used only “simple mathematical equations.” They did not rely on another’s calculations or reports.

The accountants did not testify based on their professional knowledge as accountants, but based on their personal knowledge of the plaintiff’s financial documents. Nor did their testimony involve the valuation of real property, which is traditionally the area of experts. Thus, the court concluded that the accountant’s testimony was lay testimony because it included no “expert” opinion.

Crossing the Line from Lay Opinion to Expert Opinion
Generally, courts determine whether witness testimony is expert or lay opinion on a case-by-case basis, notes Dori Ann Hanswirth, New York, cochair of the ABA Section of Litigation’s Commercial and Business Litigation Committee. “When you look at these two cases, it’s pretty clear that there is a line where, if someone is an eyewitness and is explaining things using concepts that most people know, [the court finds] the testimony is lay testimony. If somebody is using concepts that are not known to most people and are more sophisticated, then that would likely be considered expert testimony and would not be admissible unless it passed scrutiny under Daubert and the Federal Rules of Evidence,” explains Hanswirth.

“The [approach in Ryan is] the standard that courts have been applying for a long time,” agrees Kent Lambert, New Orleans, cochair of the Section of Litigation’s Business Torts Litigation Committee. “It’s not the profession of the witness per se that dictates the nature of the testimony that’s being offered. You have got to actually look at the testimony and the subject matter of the testimony to make that distinction. There is some subjectivity to the inquiry in terms of what the average layman is able to do, but I think that subjectivity is inherent in the distinction drawn in the Rules of Evidence,” he adds.

Practical Advice on Witness Disclosures
The distinction between lay and expert witness testimony is sometimes a fine line. Lambert recommends disclosing a witness as an expert if it is a close call. “The big danger here is that you don’t want courts to bypass the standards for evaluating technical or scientific knowledge under the Daubert test,” he says.

Keywords: Daubert, Rule 701, Rule 702, witness disclosure

 
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