Case ID: br_382/html/0599-01.html
Source: Caselaw Access Project
Author: {"author": "ROBERT E. GERBER, Bankruptcy Judge.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

In re PERRY H. KOPLIK & SONS, INC., Debtor. Michael S. Fox, as Litigation Trustee of Perry H. Koplik & Sons, Inc., Plaintiff, v. Michael Koplik and Alvin Siegel, Defendants.
    Bankruptcy No. 02-40648 (REG).
    Adversary No. 04-02490 (REG).
    United States Bankruptcy Court, S.D. New York.
    Feb. 19, 2008.
    Satterlee, Stephens, Burke & Burke LLP by Christopher R. Belmonte, Esq., Pamela A. Bosswick, Esq., New York City, for Plaintiff.
    Seward & Kissel LLP by Ronald L. Cohen, Esq., Walter A. Naeder, Esq., New York City, for Defendants.
    Sanford P. Rosen & Associates, P.C. by Sanford P. Rosen, New York City, Esq., for Defendants.
   BENCH DECISION ON MOTIONS TO STRIKE LAY WITNESS TRIAL TESTIMONY

ROBERT E. GERBER, Bankruptcy Judge.

In this adversary proceeding under the umbrella of the confirmed chapter 11 case of Debtor Perry Koplik & Sons, the plaintiff Litigation Trustee charges former insiders of the Debtor with breach of fiduciary duty. In the trial of the action, the Litigation Trustee has submitted the direct testimony affidavit of Barry Kasoff, a Certified Turnaround Professional and Certified Public Accountant, who studied the Debtor’s affairs, including, inter alia, the insiders’ activities. In his direct affidavit, Mr. Kasoff has described his perceptions of the defendants’ acts and, in more than a few instances, his subjective views with respect to those acts, based on a combination of his review of the acts and his training and experience in business and accounting matters. But he hasn’t been offered as an expert under Fed.R.Evid. 702, nor has the plaintiff complied with Fed.R.Civ.P. 26 requirements for expert disclosures.

The defendants move to strike portions of the direct testimony as impermissible lay witness opinion testimony. Their motion is granted in part and denied in part, as described in the accompanying table. My conclusions of law and bases for the exercise of my discretion follow.

Fed.R.Evid. 701(a) provides, in relevant part:

If the witness is not testifying as an expert, the witness’ testimony in the form of opinions or inferences is limited to those opinions or inferences which are (a) rationally based on the perception of the witness, (b) helpful to a clear understanding of the witness’ testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.

As usual, I start with textual analysis. Under Fed.R.Evid. 701, lay opinion testimony is permissible if, but only if, the three subsections of Rule 701(a) are satisfied. I note in that connection, however, that while subsections (a) and (b) are stated affirmatively, subsection (c) is articulated in the negative. That means, as a practical matter, that lay opinion testimony is permissible if subsections (a) and (b) are satisfied, and if the testimony isn’t then excluded by reason of the effect of subsection (c).

The Second Circuit has twice spoken to this issue, in Bank of China v. NBM LLC, 359 F.3d 171 (2d Cir.2004), and United States v. Rigas, 490 F.3d 208 (2d Cir.2007), in each case involving a fact pattern similar to that here, where an individual conducted an investigation of matters that preceded his arrival on the scene, and then testified about what he found.

In Bank of China, the Circuit held that the admission of lay opinion testimony that was based on a combination of a lay witness’s observations and his knowledge of business custom and the business community’s understanding of certain kinds of transactions and business concepts was an abuse of discretion. Admission of that testimony was held to be error because it wasn’t based entirely on the witness’s perceptions. The district court abused its discretion to the extent it admitted the testimony based on the witness’s experience and specialized knowledge in international banking. See 359 F.3d at 181.

The Bank of China court explained that “Subsection (c) of Rule 701, which was amended in 2000, explicitly bars the admission of lay opinions that are ‘based on scientific, technical, or other specialized knowledge within the scope of Rule 702.’ ” Id., quoting Fed.R.Evid. 701(c). Testimony admitted pursuant to Rule 701 must be “rationally based on the perception of the witness.” Id., quoting Fed.R.Evid. 701(a).

Thus, to the extent that the testimony was based on the perceptions of the witness, it was admissible, but to the extent that it was based on specialized knowledge, as contrasted to personal observation, it was inadmissible. See id. The Circuit clarified:

To some extent, [the investigating witness] Huang’s testimony was based on his perceptions. As a Bank of China employee, Huang was assigned to investigate defendants’ activities at the tail-end of their scheme and after Bank of China stopped doing business with them. Huang’s senior role at the Bank and his years of experience in international banking made him particularly well-suited to undertake such an investigation and was likely a factor in the Bank’s decision to assign the task to him. The fact that Huang has specialized knowledge, or that he carried out the investigation because of that knowledge, did not preclude him from testifying pursuant to Rule 701, so long as the testimony was based on the investigation and reflected his investigatory findings and conclusions, and was not rooted exclusively in his expertise in international banking. “Such opinion testimony is admitted not because of experience, training or specialized knowledge within the realm of an expert, but because of the particularized knowledge that the witness has by virtue of his [ ] position in the business.”

Id., quoting Fed.R.Evid. 701 advisory committee’s note (emphasis added).

Thus, to the extent the investigating witness Huang’s testimony was grounded in the investigation he undertook in his role as a Bank of China employee, it was admissible pursuant to Rule 701 of the Federal Rules of Evidence because it was based on his perceptions. But to the extent that the testimony was not based on his perceptions, it was inadmissible.

Similarly, in Rigas, the Circuit affirmed criminal convictions after a trial in which Judge Sand of the district court had permitted the introduction of testimony by Robert DiBella, a forensic accountant retained by Adelphia’s new management to examine Adelphia’s books and records, and to investigate transactions that had been entered into while Adelphia was operating under the Rigases’ watch. Citing Bank of China, the Rigas court found the testimony admissible, as it was based on witness perception, and did not materially involve specialized knowledge with respect to the particular issues on which he was testifying. That was so even though the Second Circuit’s decision at least implied (and this Court from its firsthand knowledge knows) that Mr. DiBella’s witness perception—ie., his ability to observe—was materially assisted by his accounting expertise.

Each of Bank of China and Rigas involved circumstances, like those here, where an individual wasn’t personally involved in the events that were the principal focus of his testimony, and instead involved the testimony based on participation in an investigation of events that predated the witness’s appearance on the scene. Rigas is particularly relevant, because it involved a situation, very similar to the one we have here, where a skilled accounting professional studied what happened before he arrived, and explained in testimony what he had discovered. That was permissible, as reflecting witness perception.

Significantly, however, in neither Bank of China nor Rigas did the Circuit endorse the admission of testimony as to the witness’s views as to whether what the witness had perceived was wrongful, or as to what should have been done under the circumstances.

In support of contentions that all of the challenged testimony should be stricken, the defendants cite three other cases, all from outside the Second Circuit. See JGR, Inc. v. Thomasville Furniture Indus., 370 F.3d 519 (6th Cir.2004); DIJO, Inc. v. Hilton Hotels Corp., 351 F.3d 679 (5th Cir.2003); Autoforge, Inc. v. Am. Axle & Mfg., Inc., 2008 WL 65603, 2008 U.S. Dist. LEXIS 755 (W.D.Pa. Jan. 4, 2008). None of these, of course, could trump a Second Circuit decision on point. And in any event, they are nowhere as closely similar to the facts we have here, and to the extent they are relevant at all, they support the nuanced standard articulated by the Second Circuit in Bank of China and Rigas. None involved the testimony of a trained financial professional who had studied financial transactions and reported on what he saw.

Instead, each involved testimony on lost profits and/or the value of a business— areas where an outsider’s personal perception would often be modest at best, and that traditionally would involve testimony of bona fide experts, except in cases where the actual owner of the business might have the requisite personal perception. See JGR, 370 F.3d at 524, 526 (CPA and lawyer testifying about lost profits and business value relied on information primarily obtained from plaintiffs principal); DIJO, 351 F.3d at 685 (testifying financial consultant “had little significant actual knowledge about DUO and its operations;” contrasting ability of “business owners or officers to testify based on particularized knowledge derived from their position”) (emphasis in original); Autoforge, 2008 WL 65603, at *6-7, 2008 U.S. Dist. LEXIS 755 at *19-20 (relying on circuit court holdings that “persons outside of a business, including attorneys and financial consultants,” who were not able to establish the requisite foundation of personal knowledge, “may not offer a lay opinion as to value or project lost profits of a business”) (citing JGR and DUO).

With those principles in mind, the Court will permit lay opinion testimony that reflects the perceptions of the witness Mr. Kasoff as to what happened (including, inter alia, what the defendants did)—even if Mr. Kasoff was aided in forming his perceptions by an ability, aided by his training and experience, to understand what he saw. But to the extent Mr. Ka-soff seeks to testify not with respect to his perceptions, but rather with respect to views as to (a) whether what he perceived was right or wrong; (b) what should have been done; (c) what is customary in business practice; or (d) what his training and experience tell him about appropriate conduct in these cases, the testimony will be excluded.

My rulings with respect to the particular aspects of the Kasoff testimony that were the subject of the lay opinion evidence objections appear on the attached Table A to this Decision.

SO ORDERED.

Table A Rulings on Testimony In Issue 
      
      . Under the Court’s case management order, direct testimony in the trial has been submitted by affidavit, with cross-examination and subsequent testimony to proceed live.
     
      
      . Rule 701 was amended in 2000, at which time the original language was divided by the lettered subdivisions that now appear in the Rule, and the material that is now in subdivision (c) was added. See Mueller and Kirkpatrick, Federal Evidence, § 7:1 (2007). Thus it now explicitly bars the admission of lay opinions that are “based on scientific, technical, or other specialized knowledge within the scope of Rule 702.” Rule 701(c).
     
      
      . I'm aware that the Bank of China court stated that testimony involving personal perception with the benefit of professional expertise was permissible so long as it wasn't “rooted exclusively” in the witness’s professional expertise (there, in international banking). That could be read as suggesting that a peppercorn of personal perception would permit a great deal of lay opinion testimony, circumventing the safeguards of Fed.R.Evid. 702 and Fed.R.Civ.P. 26. I think it is truer to the language and spirit of Bank of China to try to separate the testimony based on perception from that based on opinion on an answer-by-answer basis (and individually within each answer, to the extent necessary), and in the exercise of my discretion, I will be permitting testimony only to the extent that any aspect of a larger body of testimony embodies, in material part, witness perception. See Bank of China, 359 F.3d at 181 (noting purpose of Rule 701(c) “to eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the simple expedient of proffering an expert in lay witness clothing”).
     
      
      . My understanding of the Second Circuit's ruling in Rigas is assisted by my personal knowledge, as a consequence of Adelphia's bankruptcy case having been before me, and matters as to which I can take judicial notice. I know that Mr. DiBella had accounting expertise, because I heard testimony by Mr. DiBella, on distinct, but related, issues, myself. But Mr. DiBella’s testimony in the criminal case was in material respects based on what he observed, and did not go to issues where his accounting expertise, other than his ability to explain what he saw, was material to the issues on which he was testifying. Mr. DiBella testified on matters invoking his accounting expertise to a considerably greater degree in the Adelphia bankruptcy case, without objection by any party.