Expert Testimony In The Guise Of Lay Testimony: Property Valuation

In insurance contract breach/bad faith litigation, property valuation testimony improperly designated as FRE 701 lay testimony rather than FRE 702 expert testimony in light of (1) analogies from prior circuit precedent; (2) a party’s effective concession of the issue on appeal; (3) the witness’ dependence on technical analysis in the field of property valuation; and (4)the prevailing trend of FRE interpretation, in James River Ins. Co. v. Rapid Funding, LLC __ F.3d __ (10th Cir. July 29, 2011) (No. 10–1145)

The Advisory Committee Note for FRE 702 does not entirely dismiss the notion that a person may offer opinion testimony about the value of land. But as applied by the courts, this often does not provide much space for the admission of such lay testimony, particularly when the party who owns the property to valuated is not a natural person. The Tenth Circuit noted last week a variety of arguments it found persuasive in distilling when valuation testimony might be considered as lay testimony and when it may be considered expert testimony. The general trend, ventured the circuit, was that valuation testimony is normally expert testimony.

In the case, defendant Rapid Funding LLC., was involved in a diversity action regarding plaintiff James River Ins. Co, in the federal district court. The case involved allegations for breach of contract and insurance bad faith. Rapid Funding won $3 million in compensatory damages and $2.35 million in punitive damages. At trial, Rapid Funding sought to establish the proper valuation of the insured building. It presented valuation testimony by a witness (Miller) that the circuit concluded was “based on technical or specialized knowledge [that] ... should not, as expert testimony, have been admitted under Rule 701.” In deciding the Insurer’s appeal of the liability verdict for the land owner, the circuit determined that this testimony was not admissible and that the court’s erroneous admission of this testimony was reversible and not a harmless error. According to the circuit, the defendant’s expert, “Mr. Miller’s valuation testimony was expert opinion testimony based on technical or specialized knowledge and therefore inadmissible under Rule 701©. As we have said, Rule 701 ‘does not permit a lay witness to express an opinion as to matters which are beyond the realm of common experience and which require the special skill and knowledge of an expert witness.‘” James River, __ F.3d at __ (citing Randolph v. Collectramatic, Inc., 590 F.2d 844, 846 (10th Cir. 1979)).

In deciding this issue for the insurer, the circuit advanced four reasons that the the Miller testimony should not have been admitted. Ultimately, the circuit concluded the testimony was inadmissible as expert testimony on the basis of FRE notextile.. 702(c). These four reasons include:

1. Analogy From Circuit Precedent

The circuit examined two contrasting cases of the Tenth Circuit involving the difference between FRE 701 lay opinion testimony and FRE 702 expert testimony. Two cases noted in particular included:

  • Bryant v. Farmers Insurance Exchange, 432 F.3d 1114, 1124 (10th Cir.2005) (Witness should have been permitted to give FRE 701 testimony on “elementary mathematical operations: Taking a simple average of 103 numbers, though technically a statistical determination, is not so complex a task that litigants need to hire experts in order to deem the evidence trustworthy. A mathematical calculation well within the ability of anyone with a grade-school education is, in our opinion, more aptly characterized as a lay opinion under Fed.R.Evid. 701.”)
  • LifeWise Master Funding v. Telebank, 374 F.3d 917, 929 (10th Cir. 2004) (FRE 701 rendered inadmissible a CEO’s testimony about his business’s lost profits because his results were based on more sophisticated economic models, such as “The model concerned moving averages, compounded growth rates, and S-curves. [The witness] could not testify about these technical, specialized subjects under Rule 701.”; “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.”)

According to the Tenth Circuit, the Miller’s testimony “more closely resembled the testimony in LifeWise than in Bryant. As the circuit explained:

Unlike taking an average, calculating depreciation requires more than applying basic mathematics. Technical judgment is required in choosing among different types of depreciation. Moreover, Mr. Miller had to do more than calculate depreciation for a 39–year old building. He also needed to account for the deterioration and neglect that caused the North Building to be condemned. Accurately accounting for the interaction between depreciation and damage requires professional experience and is beyond the scope of lay opinion testimony.

James River, __ F.3d at __ (citing E.I. DuPont de Nemours & Co, Inc. v. Robin Hood Shifting & Fleeting Serv., Inc., 899 F.2d 377, 381–82 (5th Cir. 1990) (explaining “straight-line” and “progressive” depreciation); Dickler v. CIGNA Prop. and Cas. Co., 957 F.2d 1088, 1099 (3d Cir. 1992) (explaining that “a dispute exists over whether the term depreciation implies only physical depreciation or includes a broader concept including obsolescence and economic and functional depreciation.” (quotation omitted)).

2. A Party Effectively Conceded That It Presented Expert Testimony

The circuit noted that Rapid Funding made “no argument on appeal that Mr. Miller’s valuation testimony was properly admitted.” The circuit explained why such an argument could not prevail in the case:

Mr. Miller’s calculations were based in part on his professional experience in real estate. Rapid Funding argues that, as “a licensed real estate broker,” Mr. Miller was better situated than most owners to make this determination. Instead of supporting the admissibility of Mr. Miller’s testimony as lay opinion, Rapid Funding’s argument places Mr. Miller’s testimony into the category of expert opinion.

James River, __ F.3d at __ (citing United States v. Smith, 640 F.3d 358, 365 (D.C.Cir. 2011) (“[K]nowledge derived from previous professional experience falls squarely within the scope of Rule 702 and thus by definition outside of Rule 701.”) (quotation omitted).

3. Witness’s Dependence On Technical Analysis In The Field

The basis of the witness’s opinion was technical in its foundation, as:

Mr. Miller relied on a technical report by an outside expert. Rapid Funding hired the Anderson Group to estimate the replacement value of the North Building. At trial, Mr. Miller stated that his valuation relied on the conclusions of the Anderson Group report. The report runs 1,525 pages and uses specialized accounting calculations. Mr. Miller based his testimony not only on his own professional experience, he also relied on the extensive technical analysis and conclusions of a professional appraisal company. Such testimony should only be admitted under Rule 702, not Rule 701.

James River, __ F.3d at __ (citing FRE 703 (“The facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing.”).

4. General Trend Of FRE Interpretation

The final reason advanced by the circuit for deciding Miller was an expert testifying in a lay person’s clothing was that the FRE “generally consider landowner testimony about land value to be expert opinion. The Rule 702 advisory committee’s note states that landowners testifying to land value are “skilled witnesses” under Rule 702.

See FRE 702, ; see also LaCombe v. A–T–O, Inc., 679 F.2d 431, 434 n. 4 (5th Cir. 1982) (“Although both sides in this appeal have argued in terms of the general principles applicable to [Rule 701], the testimony of an owner as to the value of his property is admitted under the Federal Rules of Evidence under [Rule 702]”); Turner v. Murphy Oil USA, 759 F.Supp.2d 854, 857–58 (E.D.La. 2011) (“[T]he owner of real property may testify as to the value of her property…. Such testimony is to be deemed admissible as expert testimony under Rule 702.” (quotation omitted)). In noting this, however, the circuit acknowledged that occasionally such testimony could be admitted under FRE 701 because the relevant interpretation of the rule “point[s] to landowner testimony on value as being expert in nature, with proper foundation, it may in the appropriate case be admitted as lay opinion under Rule 701.”

James River, __ F.3d at __ (citing Cunningham v. Masterwear Corp., 569 F.3d 673, 676 (7th Cir. 2009) (landowner “can testify about [value] either as a matter within his personal knowledge … or, if he is an expert on property values, as an expert witness”).

In short, the testimony fell far short of an opinion by the land owner. Rather, Rapid Funding utilized a professional in the field, who proffered an "opinion was based on technical or specialized knowledge. He attempted to calculate a post-fire estimate of the pre-fire value of a dilapidated, condemned, 39–year old building." Testimony of this sort "was expert opinion" which "may not be admitted under Rule 701 by virtue of Rule 701(c)." James River, __ F.3d at __.

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