Using Lay Testimony To Establish Lost Profits

Tenth Circuit notes that lay testimony may be used to show lost profits under FRE 701, and expert testimony may not be required under FRE 702; in diversity insurance contract dispute involving fire coverage payments, admitting the plaintiff accountants' lay testimony about the covered losses that the defendant failed to pay as the testimony was based on the personal perception of the facts and well as on their “specialized knowledge of accountancy,” in Ryan Development Company v. Indiana Lumbermens Mutual Insurance Company, 711 F.3d 1165 (10th Cir. March 27, 2013) (No. 11-3356)

It has long been accepted that when founded upon personal knowledge, the president or owner of a company should be able to present evidence regarding the “lost profits” of the enterprise. Often the scope of possible witnesses can be drawn broader, so that testimony by chief financial officers of the enterprise or even of the relevant parent company could provide “lost profits” testimony. But what of testimony by an independent professional hired by the company to perform certain tasks? The Tenth circuit recently considered this question, finding that this imposed no barrier as long as the witness had sufficient personal knowledge under FRE 701.

In the case, Agriboard (Ryan Development) was a compressed straw building material maker. It insured its plant with defendant ILM Insurance for fire and “related losses.” This included lost income resulting from a fire. In repairing the plant, a fire broke out and destroyed it. Dissatisfied with the scope of defendant's insurance payments to the company, particularly with regard to the “lost profits” that the plaintiff had incurred and which were covered in the defendant's insurance policy, Agriboard brought a diversity action against the defendant for an amount that it claimed was still owed under the insurance. Ryan, 711 F.3d at 1167.

At trial, the plaintiff offered several witnesses who were accountants with an independent firm that handled the plaintiff's accounting (and that was run by one of the Agriboard managers). These witnesses were offered to establish the lost profit payments which were still owed by the defendant. One witness (Ms. Williams) testified, based on her handing of the plaintiff's tax returns and books. She noted her calculation of “the plaintiff's claim for lost income.” Another accountant witnesses (Rump) calculated “all claims relating to tangible personal property,” which were separately treated under the policy. Ryan, 711 F.3d at 1168.

Both witnesses had prepared lost profit calculations for the plaintiff as the foundation for the plaintiff's claim for insurance compensation from the defendant. The trial judge admitted the witness's testimony at trial, despite objections from the defendant. The defendant had filed a motion to preclude the witness's testimony, contending that as witnesses Williams and Rump had not been disclosed pretrial as expert witnesses, they should be precluded from testifying in that capacity at trial. Ryan, 711 F.3d at 1168.

The trial judge agreed, although probably not in the way the defendant contemplated. The judge found that the witness's testimony was in the nature of lay, not expert testimony, and that the witness's were qualified to provide lay testimony about the plaintiff's lost profits at trial under FRE 701. The jury's verdict in the case was for the plaintiff and the defendant appealed contending, in part, that the trial court erred in admitting the plaintiff accountants' testimony. The defendant argued that the testimony was in the nature of expert testimony under FRE 702, provided by witnesses who were clearly experts as they were accountants.

The Tenth Circuit rejected this contention, affirming the trial court's admission of the witness's testimony as lay testimony:

Though accountants often testify as expert witnesses, the trial court reasonably concluded that Ms. Williams and Mr. Rump offered lay testimony given their involvement in preparing Agriboard’s proofs of loss and the like. Distinguishing our recent decision in James River, the trial court observed that the accountants used basic arithmetic, personal experience, and no outside expert reports in calculating lost income and other claims for coverage. This finding is supported by the record. For example, Ms. Williams explained how she utilized numbers from Agriboard’s records and ILM’s formula to reach a value for lost income. Likewise, Mr. Rump explained his process for collecting documentation of Agriboard’s loss and submitting those records to ILM.
Ryan, 711 F.3d at 1170 (citations omitted).

According to the circuit, the “weight of the authority persuades us that the accountants’ testimony falls under Rule 701 as lay testimony.” In support, the circuit cited two cases:

  • First Annapolis Bancorp, Inc. v. United States, 72 Fed. Cl. 204, 207 (2006) (“[A] lay witness accountant may testify on the basis of facts or data perceived in his role as an accountant based on his personal knowledge of the company.”)
  • Teen-Ed, Inc. v. Kimball Int’l, Inc., 620 F.2d 399, 402–04 (3d Cir. 1980) (admitting lay opinion testimony by an accountant concerning lost profits)
Ryan, 711 F.3d at 1170-71.

The circuit affirmed the trial judge's conclusion that the two witnesses had “offered lay testimony given their involvement in preparing Agriboard’s proofs of loss and the like.... [T]he trial court observed that the accountants used basic arithmetic, personal experience, and no outside expert reports in calculating lost income and other claims for coverage. This finding is supported by the record. For example, Ms. Williams explained how she utilized numbers from Agriboard’s records and ILM’s formula to reach a value for lost income. Likewise, Mr. Rump explained his process for collecting documentation of Agriboard’s loss and submitting those records to ILM.” It was, concluded the circuit, all a question of “what type of testimony qualifies as expert testimony,” that was at root in the dispute. Ryan, 711 F.3d at 1170-71.

Although it was not emphasized in Ryan, probably another factor in recognizing the challenged witness's testimony as lay rather than expert testimony was that the “calculations” made by the witnesses were based on the model set by the defendant, rather than one of their own devising. The witnesses were simply explaining how they filled in the information that the defendant desired on its claim forms. They were merely reporting to the defendant the data the defendant requested and performing upon it the necessary arithmetic operations. They were not reporting a “lost profit” calculation of their own devising or different from that specified by the defendant.

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Photo Description: The Byron White United States Courthouse Building, Tenth Circuit Court of Appeals, Denver, CO. Learn more about the history of the courthouse or former Justice Byron R. White, including in a speech by retired Justice John Paul Stevens.

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