Capitol Justice LLC v. Wachovia Corporation ( 2010 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
CAPITOL IUSTICE LLC, et al., §
Plaintiffs, §
v. § Civil Action No. 07-2095 (R*CL)
WACHOVIA BANK, N.A., §
Defendant. g
)
MEMORANDUM OPINION
This matter comes before the Court on Wachovia’s Motion [82] to Exclud,e the Experl:
Report and Testimony of Gregory H. Leisch. Wachovia puts forth two arguments to exclude
Leisch’s report. First, Wachovia contends that Leisch’s expert report should be excluded under
the Federal Rules of Civil Procedure because the report is untimely and fails to qualify as a
supplemental report. Second, even if the report is admissible under the Federal Rules of Civil
Procedure, Wachovia argues that Leisch’s report is in admissible under Daubert v. ]l:{errell Dr)w
Pharmaceuticals, 509 U.S. 579 (1993). For the reasons set forth below, the Court rejects
Wachovia’s arguments. Accordingly, the motion shall be denied.
I. BACKGROUND
A. Transaction
This is a breach of contract case brought by the American Association for Ju:z;tice ("AA..J"`V)
against Wachovia Bank, N.A. ("Wachovia"). In June 2007, AAJ entered into a loan commitment
agreement ("LCA") with Wachovia in which Wachovia agreed to provide financing for AAJ’ s1
purchase of 777 6th Street, N.W., Washington, D.C. The LCA contained a material adverse
change ("MAC") clause, which provided that "Lender may, at its option, terminate its agi.'een\_<;:nt
to make the Loan . . . in the event of any material adverse change in the financial, banking or
capital market conditions that could impair the sale of the Loan by Lender as contemplated in the
Terrn Sheet." (Pl.’s Ex. 33.)‘ Wachovia invoked the MAC clause to terminate the LCA o;n
October 22, 2007 because the "fixed income sector of the capital markets" had undergone "a
material and adverse change." (Pl.’s Ex. 36.)
Without the Wachovia loan, AAJ had to find alternative financing to purchase the
building, or risk losing its $5 million deposit. After soliciting alternative financing o»ptions, AAJ
purchased the building through a complex structure with the Multi-Employer Propert:y Trust
("MEPT")- (P1S-’EX-74-) I_|II
1I
1_|lll
_
On November 14, 2007, AAJ filed a complaint against Wachovia alleging, z`rcter alia, that
Wachovia breached its contract to provide financing. AAJ contends that it has suffered nione=tary'
damages as a result of the breach and its subsequent deal with MEPT. ln a motion for summary
judgment, Wachovia argues that AAJ has not suffered any damages as a result of the alleged
breach. Before the Court can rule on that motion, however, it must first decide W'achovizt’s
motion to exclude the expert report and testimony of AAJ’s damages expert, Gregory Leisch.
B. Leisch’s Damage Report
1 All citations to exhibits relate to the exhibits that the parties filed with respect to
Wachovia’s motion for summary judgment.
Gregory Leisch is the CEO of Delta Associates, a commercial real estate consulting
company located in the Washington, D.C. metropolitan area. (Pls.’ Ex. 79.) He h.as over 30
years of experience in commercial real estate and has advised investors for the past 28 years on
expected future returns from real estate over time through the use of complex econometric:
models. (Id.) ln addition, he is a frequent lecturer on real estate development opportunities acid
has authored numerous articles on books on real estate. (Id.)
On February 6, 2009, Leisch submitted his initial report, which he amended on March l 6,
2009. (Pls.’ Ex. 79A.) The initial report, as amended, estimated that AAJ suffered over
! in damages. (Mem. at 6.) On March 18, 2009, Wachovia deposed Leisch and challen;g;ed
his calculation of AAJ’s equity loss in the building and AAJ’s loss in tribute rights dt)nations.
(Opp’n at 10.)
On March 23, 2009, AAJ informed Wachovia that Leisch was revising his callculations
and would submit a revised report. (Pls.’ Ex. 132.) AAJ would make Leisch availa`t:»le to
Wachovia for deposition on the revised report and would extend the date for any rebuttal report
to Leisch for a reasonable time after the second deposition. (Id.) Wachovia agreed to AAJ ’s
request, but reserved the right to challenge the timeliness of Leisch’s new report. (Mlem. at 8.)
On April 13, 2009, Leisch submitted his revised report. AAJ provided Wachovia with a
redline comparing Leisch’s initial and revised reports and a transmittal letter from Leisch
explaining the changes. (Pls.’ Ex. l35.) Leisch used the same five-part structure, which
computes AAJ’s damages with respect to equity value, parking, occupancy costs, tril:>ute rights,
and the rate lock fee, in his initial and revised reports. ln the revised report, he made changes
only to the inputs and calculations within the damage model in order "to produce a more
complete and accurate report." (Opp’n at ll.) As a result of these changes, Leisch estimates that
AAJ suffered-in damages_a nearly_ adjustment in Vl/achovia":~;;
favor. (Id.)
On April 30, 2009, Wachovia deposed Leisch on his revised report. (Id. at lIE!.)
Wachovia then submitted the rebuttal report of its expert, J ames Walsh, on May 22, 2009. (la'.)
Walsh’s report criticizes Leisch’s initial and revised reports.
II. DISCUSSION
Wachovia argues that Leisch’s expert report should be excluded for two reasons: (a) the
revised report is inadmissible under the Federal Rules of Civil Procedure; and (b) the report is
inadmissable under Daubert. The Court disagrees and will deny Wachovia’s motion.
A. Leisch’s Revised Report ls Admissible Under the Federal Rules of Civil lProc»edulne
Wachovia contends that Leisch’s revised report is an improper supplementation under
Rule 26(e). As a result, Wachovia asserts that the revised report is untimely and should be
excluded under Rule 37(0). The Court is not persuaded by these contentions and finds that the
revised report is a proper supplementation and is therefore timely. The Court also finds that e:\\'en
if the report is not a proper supplementation, its untimely submission is harmless and exclusion is
not appropriate.
1. The Revised Report Qualifies as a Supplemental Report Under R.ule 2'.6(e]>
A party must supplement an expert report when required by Federal Rule of Civil
Procedure 26(e). FED. R. CIV. P. 26(a)(2)(B). Rule 26(e)(l) states that a party must supplement
a disclosure "in a timely manner if the party learns that in some material respect the tiisclosure or
response is incomplete or incorrect." With respect to experts, "the party’s duty to supplement
extends both to information included in the report and to information given during the experts
deposition." FED. R. CIV. P. 26(e)(2). In addition, "additions or changes . . . must be disclosed
by the time the party’s pretrial disclosures under Rule 26(a)(3) are due." Id.
Furthermore, the Rule anticipates that in complex litigation an expert witness may "refine
. . . his or her opinion as he or she prepares for trial." Nnadili v. Chevron, US.A., Im:., Civ. No.
02-1620, 2005 WL 627l043, at *1 (D.D.C. Aug. ll, 2005). Thus, the Court’s central inquiry is
"whether [a party’s] supplemental report comes so late in the game that [the opposing party] li::is
no meaningful opportunity to respond or prepare for deposition or trial." Id. Rule ZtS(e),
however, does not grant a party the right to supplementation when the party’s motive is to
"wholly ‘rework [a] damages claim’ or ‘change the substance of their contentions."’ Bell v.
Gonzales, Civ. No. 03-163, 2005 WL 3555490, at *l6 (quoting DAG Enterprises, Irtc. v. Exx»:')tn
M0bil Corp, 226 F.R.D. 95, 110 (D.D.C. 2005)).
The Court finds that Leisch’s revised report is a proper supplementation u:nd<:=r Rule
26(e). Leisch did not wholly rework his damages claim. He used the same methodology in his
revised report as in his initial report. He only changed the inputs and calculations to produce :zi
more complete and accurate report. (Pls.’ Ex. 85) Furthermore, Wachovia had the opportuni'try
to depose Leisch on his supplemental report and submit a rebuttal report. See Nmzdii.li Civ. No.
02-1620, 2005 WL 6271043, at *1 (stating that a supplemental report should come in if the
opposing party is able prepare for t rial). lndeed, during his deposition, Leisch stattedl that his
initial report was incomplete (Def.’s Ex. 22), and thus demonstrated that supplementation was
proper. ln addition, the supplementation is timely because it occurred before the date of Rule
26(a)(3) pretrial disclosures, which has not yet been set.
Wachovia also contends that Leisch’s supplemental report is not a mere correction of hiis
initial report because a correction would have This argument, howev'c:=r,
is not relevant to the question of whether Leisch’s revised report was a proper supplementation o'l:`
his initial report. lndeed, the Court does not weigh an expert’s conclusions when determining
whether an expert report is admissible. See Ambrosini v. Labarraque, l0l F.3d 129, 133 (D.C.
Cir. 1996)
In addition, Wachovia argues that the revised report is not a supplementation because the
initial report would have failed a Daubert challenge. See Lippe v. Bairnco Corp., 249 F. Supp.
2d 357, 386 (S.D.N.Y. 2003) (stating that if an initial expert report fails a Daubert t<:st, the party
is not entitled to a do over). Wachovia, however, did not file a Daubert challenge to the first
report. Rather, it asserts that Leisch’s initial report would not have survived a Daubort motion
because the damage estimate of_demonstrates that the report contained "iegregious
flaws." With nothing more than speculation that the initial report would have failed a Dauber'i"
challenge, the Court will not reject Leisch’s revised report as an improper supplementation of a
failed report.
Accordingly, the Court concludes that Leisch’s revised reports qualifies as a proper
supplementation under Rule 26(e). Leisch made corrections to provide a more correct and
complete report, and Wachovia has had ample opportunity to prepare for trial. See Nnadili Cfiv.
No. 02-1620, 2005 WL 627l043, at *l.
2. The Revised Report ls Not Excludable Under Rule 37(c)
Because the Court finds that Leisch’s revised report is a proper supplementation,
Wachovia’s argument that the report must be excluded as untimely under Rule 37(c) fails. ln
addition, even if the report were not proper supplementation, the report would not be excluded
under Rule 37(c) because the untimely submission of the revised report is harrnless. See FED. _R.
CIV. P. 37(c) ("If a party fails to provide information . . . as required by Rule 26(a)i or (e), the
party is not allowed to use that information . . . to supply evidence on a motion, at a hearing, or at
a trial, unless the failure was substantially justified or is harmless."). As discussed al:)ove,
Wachovia had the opportunity to depose Leisch on his revised report and there was no disruption
in the trial schedule See DAG Enterprises, Inc. v. ExxonMobil Corp., No. 00-182, 2007 WL
4294317, at *l (D.D.C. Mar. 30, 2007) (admitting an untimely expert report where the opposing
party had the opportunity to depose the expert, the trial had not yet been scheduled, a:nd where
exclusion would be "too extreme" of a remedy).
B. Leisch’s Revised Report ls Admissible Under Daubert
The admissibility of expert testimony is governed by Federal Rule of Eviden563 F. Supp. 2d 54, 89 (D.D.C. 2008)
(citing Daubert, 509 U.S. at 592 & n.l0). Specifically, the party must convince the Court that
the expert is qualified "by knowledge, skill, experience, training , or education," and that his or
her testimony will be "helpful to the trier of fact" and is "‘the product of reliable principles and
methods,’ applied ‘reliably to the fact of the case."’ Ia'. (quoting FED. R. EVID. 702).
In determining whether the testimony meets the requirements of Rule 702, the Court
undertakes the role of a gatekeeper. See Ambrosini, 101 F.3d at 133 (citing Daubert, 509 U.S. at
592-93). In performing this role, the Court assesses "whether the reasoning or methodology
underlying the testimony is scientifically valid and whether that reasoning or methoclology
properly can be applied to the facts in issue." Daubert, 509 U.S. at 592-93. The Court must
focus on the methodology employed by the expert, not his or her conclusions. See Ai“mbrosz`nz` v.
Labarraque, 101 F.3d at 133. Thus, as gatekeeper, the Court ensures the "reliabillity and
relevancy of expert testimony." Kumho Tire Co. v. Carmz'chael, 526 U.S. 137, 152 (1999).
Wachovia argues that Leisch’s supplemental report is inadmissible under Daoubert and
Rule 702 because (l) Leisch is not qualified to testify as an expert; (2) Leisch’s "equity value"
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calculation is unreliable; (3) Leisch’s tribute rights" assessment is unreliable; and (4) Leisch" s
opinion will not be helpful to the jury. The Court disagrees. ln performing its gatekeeper
function, the Court finds that is admissible because Leisch is qualified, his equity value
calculation is reliable, his tribute rights estimate is reliable, and his opinion will be hi_elpf`cil to the
jury.
1. Leisch ls Qualified to Testify as an Expert
An expert may be qualified "by knowledge, skill, experience, training, or education,"
FED. R. EVID. 702. Wachovia argues that Leisch is not qualified to testify as an expert because
he is not a qualified real estate appraiser. Wachovia, however, is unable to provide any
controlling case law for that proposition and relies heavily upon Hidden Oaks Ltd. v. City of
Austin, 138 F.3d 1036 (5th Cir. 1998). In Hida'en Oaks, the court noted that one factor the
district court considered in excluding the expert’s testimony was that he was not a lioensed
appraiser. la’. at 1350. The district court, however, did not rely solely on that factor and
considered the expert’s lack of knowledge of appraisal theory and his minimal contacts with
Austin. Id. lndeed, the court acknowledged that courts also must consider the expert’s
"knowledge of the property and of the real estate market in which it is situated." la’. (quoting
Unitea' States v. 60.14 Acres ofLand, 362 F.2d 660, 668 (3d Cir. l966)).
Here, the fact that Leisch is not a qualified appraiser does not prevent him from testifj,ring
as an expert. Leisch has 30 years of experience in commercial real estate and has advised
investors on the expected future retums from real estate for the past 28 years. In calculating
AAJ’s damages, he used the appraisals done by Wachovia and MEPT in addition to his
independent analysis. Furthermore, Leisch has extensive knowledge on the real estate market in
Washington, D.C. because his company provides services to real estate investors within the
Washington metropolitan area. He is also an author and lecturer on commercial real estate
investment. Accordingly, given Leisch’s education, skills, and experience, the Court finds that
Leisch is qualified to give his opinion on the value AAJ received from its deal with lvIEPT and
the value AAJ would have received in its deal with Wachovia. The fact that he is not a licensed
appraiser will properly go to the weight of his testimony, not its admissibility. See 29 Charle:z:
Alan Wright & Victor James Gold, Federal Practice & Procedure; Evidence § 62!65 (3d ed
1997).
Wachovia also argues that Leisch is not qualified to testify about the value o:t`AAJ’s lost
tribute rights. This argument also fails. Leisch has consulted on tribute rights in the past, and he
researched tribute rights for comparable buildings in Washington, D.C. The fact that Leisch l_'ias
not "valued" tribute rights before does not automatically disqualify him from offering his opinion
on their value, Rather, Leisch’s lack of direct experience will go to the weight of his testimonjjv,
not its admissibility. Accordingly, Leisch is qualified to testify about the value of`AAJ’s lost
tribute rights.
2. Leisch’s "Equity Value" Calculation ls Sufficiently Reliable
Wachovia argues that Leisch’s equity value calculation is unreliable and produces
speculative results for six reasons: (a) Leisch calculates damages over a twenty-year period; (h)
Leisch uses a in his calculations; (c) Leisch uses a rent
increase in his calculations; (d) Leisch’s calculation of the twenty-year sale proceeds is
methodologically incorrect; (e) Leisch errs in his computation of the present value of AAJ ’s
initial equity contribution; and (f) Leisch’s conclusions are not shared by others appraisers 'l`lie
Court agrees with AAJ and finds that Wachovia’s criticisms go to the weight a jury should afiiord.
Leisch’s damage report, not its admissibility.
a. Leisch ’s Twenty- Year Dam age Period
Wachovia contends that Leisch’s use of a twenty-year damage period rend‘.ers his
calculations unreliable because standard appraisal practice is to use five or ten-year income
periods. AAJ agrees that most appraisals are for ten-year periods. There is no rule, however,
that states a damage period cannot be greater than ten years.z lndeed, the text relied upon by
Wachovia’s expert notes that projection periods will vary with different investments and
investors. (Opp’n at 30 (citing Appraisal lnstitute, T he Appraisal of Real Estate 522 (l3th ed.,
2008).)
Wachovia points out that a twenty-year projection increases the likelihood of
unforeseeable market events and assumes hard to predict factors such as interest rates and
financing structure. Leisch, however, frequently advises clients on projected interest rates and
2 Wachovia’s reliance on a case from the Court of Appeals of New York is rriispla.ced.
There the court found that a twenty-year damage projection was inherently speculative because
the damages concerned predicting profits in the entertainment field, which is much more
speculative than investment in an office building. Kenford Co. v. County of Erie, 67 N.Y.2d 257,,
263 (1986).
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has thirty years of experience monitoring interest rates and real estate market trends. He did riot
pick a random, arbitrary interest rate. In assuming an 8% interest rate, Leisch relied upon a
historical average of commercial mortgage commitments. (Pls.’ Ex. 84.) Furthermore, Leiscli’s
assumption of an interest-only loan does not render his opinion unreliable. Wachovia is free to
challenge his financing structure before the jury, which will then determine if Leiscli’s
calculation is credible.
Accordingly, the Court finds that Wachovia’s argument goes to weight, and not
admissibility. Wachovia’s contention fails to challenge the actual method used by Leisch, the
discount cash flow analysis, and focuses only on the time period used in that model. The
discount cash flow analysis is often used by investors, and Wachovia used this method when it
decided to loan AAJ the funds for the building. Thus, it is for the jury to decide whether Leisch’s
twenty-year time period is reliable when used in a discount cash flow analysis.
ll
c. Leisch ’. Rent Growth Projection
Wachovia argues that Leisch’s use of a -rent growth projection, instead of a
growth projection, renders his projection so speculative that it is unreliable as a matter of law.
Leisch used 1I
-_
_|III
esults in an estimate
that is necessarily speculative. (Pls.’ Ex. 89.) In addition, Leisch checked his projection against
the method that Wachovia’s expert would have used and found that the figures were similar.
(Pls.’ Ex. 85.) Accordingly, the Court finds that Leisch’s rent growth projection does not render
his analysis unreliable.
d. Leisch ’s Calculation of the 20-Year Sales Pr0ceeds
Wachovia next challenges Leisch’s use of data from year twenty-two to calculate the
12
sales proceeds in year twenty. Leisch used data from year twenty-two because significant lease
rollover projections in years twenty and twenty-one artificially deflated net operating income :l`or
those years. He explained that a real-world investor would use the next norrnalized year, 'whi<::l:i
is year twenty-two, and deflate and capitalize that year to calculate sale price. (Pls.’ Ex. 85.)
lndeed, in its reply, Wachovia concedes that appraisers often go to the next normalized year
when there is significant lease rollover at the end of a projection, (Reply at 22-23 .) "_l`hus,,
Leisch’s calculation of the 20-year sale proceeds does not render his report unreliable.
e. Leisch ’s Calculation of AAJ ’s Initial Equicfy Contributionr
Wachovia argues that "Leisch incorrectly accounts for the cost of AAJ’s initial equity
contribution by subtracting the cost from the building sale proceeds in year 20." (Mot. at 32.)
The Court finds that this argument is without merit because Leisch subtracted the cost from the
building sale proceeds in year 20 of both the AAJ-owned scenario and the MEPT-»ovmed
scenario. Because he did the same calculation in both models and because his darna;ge model
represents the difference between the two scenarios, it is irrelevant at what point in time he
subtracted AAJ’s initial equity contribution.
f Leisch ’s Calculations Are Comparable to the Calculations aigfApjorai.ir.izrs
Wachovia’s final argument with respect to Leisch’s equity value method is that his model
differs from the models used by other appraisers of the building. Because Leisch used a clifferent
method than Wachovia’s expert does not mean that Leisch’s method is unreliable. Leisch
primarily used the same inputs as other appraisers, but assigned different values to some of those
inputs based on his experience and research. Accordingly, the Court finds that Leis114 F.3d 1227 (D.C. Cir. 1997)." (Mot. at 34.)
There, the court stated that one way in which "Samaritan lnns could have demonstrated
permanent losses [was] by presenting evidence that particular contributors who might otherwise
have made contributions." Samaritan Inns, 114 F.3d at 1237. AAJ has not produice-tl a list of
contributors who might otherwise have made contributions. The court in Samaritan Inns,
however, was only making a suggestion of one way to prove lost contribution damages. ljn
addition, Samaritan lnns did not involve naming rights donations. Thus, the lack of a list of
potential donors goes to the weight of Leisch’s calculation, not its admissibility.
Wachovia also argues that Leisch’s tribute rights calculation is inadmissible because he
relied npen » In Snpi>eit nf thin
argument, Wachovia relies upon cases in which courts excluded projections of lost j:irofits. See
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Celebrz`ly Cruz`ses v. EssefCorp., 434 F. Supp. 2d 169, 183-84 (S.D.N.Y. 2006). In Celebrily
Cruises, the expert’s lost profit estimate was excluded because it was based solely on the
company’s profit projection. Id. at 184. Here, Leisch relied not only upon information from
,t>ute1ne upon
his study of comparable naming rights. As a result, Leisch had information from enough sources
to make a reliable estimate of AAJ’s lost tribute rights.
Wachovia next contends that there is evidence in the record that demonstrates that-|Iil
. This evidence has no bearing on the admissibility of
Leisch’s report. Rather, it goes to the weight the jury should afford to his report. Siinilarly,
Wachovia’s final contention tha -goes to
the weight of Leisch’s estimate. The fact
_does not mean that others would not have been willing to make a naming rights
donation. Accordingly, the Court concludes that Leisch’s tribute rights estimate is si.ifficientljy
reliable to be before a jury.
4. Leisch’s Opinions Will Be Helpful to the Jury
The last inquiry the Court must make as gatekeeper is whether Leisch’s report will be
helpful to the jury. FED. R. EvID. 702. Having found that Leisch is a qualified expert and that
his opinions are reliable, the Court concludes that Leisch’s report will be helpful to tlhe jury iri its
determination of AAJ’s damages. Wachovia’s arguments that Leisch’s damages are barred by
law will be addressed when the Court rules on Wachovia’s motion for summary jud_gment, which
raises the same issues.
III. CONCLUSION
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For the reasons set forth above, Wachovia’s motion to exclude the expert report and
testimony of Gregory Leisch shall be denied. A separate order shall issue this date.
12/8/09 /s/
DATE ROYCE C. LAMBERTH
CHIEF JUDGE