Reverse d and Render ed and Majority and Dissenting Opinion s filed May 9

,

2013.

In The



## Fourteenth Court of Appeals

NO. 14

- 11

- 00644

- CV

CITRIN HOLDINGS

, LLC AND JACOB CITRIN , Appellant s

V.

MATTHEW MINNIS AND C ULLEN 130, LLC , Appellee s

On Appe al from the 133rd District County

Harris County, Texas

Tri al Court Cause No. 2006

- 78939

D I S S E N T I N G O P I N I O N

I respectfully dissent.

In their second issue, appellants assert the trial court erred in overruling

appellants‘ reliability challenge to the testimony of appellees‘ damage expert.

Appellants filed a motion to exclude appellees‘ expert witness, and the trial court2

conducted a Da ubert 1 hearing, after which the trial court overruled appellants‘

motion to exclude and allowed the expert to testify. The issue be fore us is whether

the trial court

—

based on the motion, response, Daubert hearing evidence, and

argument of counsel

— abused i ts discretion when it overruled appellants‘ motion to

exclude. See Whirlpool Corp. v. Camacho, 298 S.W. 3d 631, 638 (Tex. 2009).

At the time of the trial court‘s ruling on the motion to exclude, the trial court

did not have the benefit of the full trial testimony or the post

- trial arguments of

counsel. In my opinion, based on the record before the trial court at the time of its

rul ing, the trial court did not abuse its discretion when it overruled appellants‘

motion to exclude appellees‘ expert. Therefore, I would o verrule appellants‘ issue

two.

It is important to keep in mind that, in issue two, appellants are not raising a

―no e vidence‖ challenge; rather, they are complaining that the trial court abused its

discretion in making an evidentiary ruling.

Appellants do not complain on appeal that appellees‘ expert is not qualified,

or that his testimony is irrelevant, or that the ―di rect capitalization‖ methodology

he relied upon is unreliable. The six non

- exclusive Robinson 2 factors that courts

may consider when determining whether expert testimony is reliable, all of which

deal with the theory or methodology utilized by the expert, are supported and

unchallenged in this case. See Robinson , 923 S.W.2d at 557

.

The Majority Opinion concludes that the trial court abused its discretion in

allowing appellees‘ expert witness to testify at trial because the expert witness‘s

1 Daubert v. Merrell Dow Parms., Inc ., 509 U.S. 578 (1993).

2 E.I. du Pont de Nemours & Co. v. Robinson , 923 S.W.2d 549 (Tex. 1995).3

application of the direct capitalization method was based on unreliable

foundational data.

Importantly, nowhere

— in the motion to exclude the expert, the response, or

the Daubert hearing

— did anyone, from either side, ever argue that the internal

projections or investor su mmary schedules prepared by appellants‘ employees

were incorrect or unreliable. The only arguments presented to the trial court dealt

with whether the projections and schedules reflected the present value, as of March

2007, of the stabilized values.

Appe llants‘ own expert, who testified at the Daubert hearing, relied on

a ppellants‘ internal projections and investor summary schedules as being accurate;

his testimony was that, taking the company‘s financial data as true, it did not

reflect March 2007 values , but rather reflected values as of 2009 or 2010.

Appellants‘ expert conceded at the Daubert hearing that he had never before

valued income producing real estate properties like those involved in this case as

an expert, and this was the first time he had t estified as an expert witness with

respect to any commercial real estate valuation. Further, he testified that he had

never done a ―direct capitalization method of valuation for a real estate project.‖

Appellees‘ expert, whose curriculum vitae is 18 pages long and reflects his

extensive experience as an expert in the valuation of income producing real estate

ventures, testified, in part, as follows:

Q.

. . . You heard Dr. Flores testify yesterday. You were

here for that?

A. Yes.

Q. Okay. Dr. Flores, one of the things he said was that you just took the values in the Millennium Investment Committee and you4

used those as your present value or your current value in March 2007.

Is that exactly an accurate statement?

A. No, it ‘ s not.

Q. What ‘ s inaccurate about that?

A. Well, I think it ‘ s a lack of understanding of what I did. I

started with the stabilized values and then adjusted the stabilized

values. As is provided, as is used throughout the profession, I adjusted the stabilized values for those costs that would be incurred to
reach stabilization.

So we start with stabilized values, deduct tho se costs
that I was referring to and the result is the as

- is value, the value in its

current state if it ‘ s

-- it hasn ‘ t reached stabilization yet.

Q. And by doing that, is it your opinion that you calculated the value of those properties as of March 2007?

A. Yes.

Q. And another thing Mr. Flores criticized you for was, he said you didn ‘ t take into account time value of money. Do you agree

with that criticism?

A. I do not.

Q. Why not?

A. B ecause

-- well, first of all, the stabilized values are

– it ‘ s the present value of the stabilized value. So when those stabilized values are prepared, those are prepared as if the property were

stabilized in the first quarter of 2007. That‘s what those values

represent.

Now, it ‘ s recognized that they ‘ re not stabilized. So then we go through this adjustment process that I ‘ ve described and so we

calculate these costs that are incurred, be it a one

- year period or a two

year period and discount those costs to present value. So we ‘ re5

starting with a present value of a stabilized value, assuming it ‘ s stabilized and in making those adjustments taking into account the

time value of money, disco unting those costs to present value, subtracting the present value of those costs from the present value of the stabilized value which gives you the as

- is value for the first quarter of 2007.

Q. And is the time value of money component, then, in part,

at least, implicit in the capitalization rate itself?

A. It is.

Q. And then in the other pieces you ‘ ve talked about in making those deductions, is that how you took into account the issue of time value of money?

A. It is.

Q. Another criticism that we heard from Mr. Flores was that you didn ‘ t take into account the time it would take these properties to reach stabilization. Do you agree with that?

A. I do not.

Q. And what ‘ s

-- what do you disagree with on that?

A. I specifically identified based on th e information that I

had available to me what C argo Ventures thought or if

-- I didn ‘ t have it from Cargo Ventures directly, what the appraisers had in their appraisals about how much time was expected to reach stabilization. So in some cases it was a yea r or two years or three years. And so I took that time period into account, which was used for the discounting purposes, discounting those costs to present value.

Q. Now, another criticism from Dr. Flores is that his opinion

is the discount rate should b e then applied on top of

-- or in addition to the analysis that you did. Do you agree that you need to add a

discount rate into your analysis?

A. I disagree completely with that.6 Q. And why?

A. Well, first of all, that is to imply that

-- which is an incorrect implication that the values that have been prepared are a

future value. They ‘ re not a future value which is then discounted.

Q. So even though the stabilized net operating income is going to be achieved at some point in the future, is it your t estimony because of the way you did the analysis, the value you arrived at is not

a future value? Is that what you ‘ re saying?

A. That ‘ s right. The value I arrived at is the present value.

And it ‘ s incorrect to believe that the stabilized value is a val ue in the

future. It ‘ s a stabilized value as of the current time frame as if it was stabilized and then making the adjustments as I ‘ ve described.

Q. And is the income potential of properties like this that goes into the net operating income calculation a nd the direct capitalization analysis, is that the kind of thing that buyers and sellers

out there in the marketplace are interested in with these type of properties?

A. It is.

* * *

Q. Now you ‘ re aware that Mr. Citrin ‘ s employee, Ms.

Aboulhosn now has testified in her deposition in this case that those series of portfolio valuations she prepared back in 2007 were not actually values back in 2007. Are you aware of that testimony?

A. I am.

Q And does that change your analysis or your opinion as to
the value in March of 2007 at all?

A. No, sir.

Q. And why not?7 A. Because the values that were being computed were the

stabilized values as of 2007. And the difference between those

stabilized values and the fair value at that time would be adjus tments
that I have made.

* * *

Q. Anything that you ‘ ve heard from Ms. Aboulhosn or from Mr. Flores change any of your opinions in this case or make you think that your analysis is flawed or needs to be adjusted in any way?

A. No.

* * *

CROSS

- EXAMINATION

Q. (BY MR. VESELKA) All right. On what information in the record, in the sheets, portfolio value calculations, cash flow calculations, do you rely for basing your assumption that the portfolio

values of Ms. Aboulhosn ‘ s modeling represent stabilized values as of

March of  ̳ 07?

A. Well, a number of things, including the fact

-- I mean, primarily the fact that

-- first of all, I understand that Ms. Aboulhosn was provided with the capitalization rate by Mr. Citrin. That is a

current capitalization rate. It is understood that if you use the current capitalization rate you can only derive a current value.

We don ‘ t know what the cap rates are going to be in the

future. We don‘ t know what market conditions are goin g to be in the

future. So we can only determine what the present value is. In this

case the stabilized value can only be determined by using the current cap rate, the 6.5 percent that was provided by Mr. Citrin to Ms.

Aboulhosn.

* * *

Q. On what piece of evidence that you reviewed do you rely for rejecting Ms. Aboulhosn ‘ s statement, the author of those8

projections, that the stabilized values are not the present value of those projects that have not yet reached stabilization?

. . . You ‘ re rejecting

her statement of fact that her calculations do not provide a present
value for those

-- for the stabilized values she uses in those schedules for projects that have not yet been stabilized. You ‘ re rejecting that,

correct?

A. Well, I think that

-- I think she probably is a little

confused in her answer. She is saying that this is a future value because she recognizes that it ‘ s not stabilized, just as I recognize that

it ‘ s not currently stabilized. So she wants to say this is some value in

the future when it re aches stabilization. But you can't get there by using a current cap rate. We can ‘ t

– we can ‘ t project what the value is going to be in the future based on the application. So although she might think what she is doing is a future value, I think the most charitable way to describe is she might be a little confused about what

she ‘ s doing, because you can ‘ t project a value in the future by using a

current cap rate.

The trial court‘s ultimate task is not to determine whether the expert‘s

conclusions are cor rect, but rather whether the analysis the expert used to reach

those conclusions is reliable and therefore admissible. TXI Transp. Co. v. Hughes

, 306 S.W.3d 230, 239 (Tex. 2010). It is clear from the record that the trial court

carefully considered all the evidence and arguments of counsel in connection with

the motion to exclude. There was ample evidence to support a reasonable

conclusion that the projections and schedules, rel ied on by both sides, reflected the

March 2007 value of the stabilized values, from which the ―as is‖ or ―present‖

value could be determined, and that appellees‘ expert therefore had a valid

foundation for his opinion. In light of the evidence presented, I cannot say the trial

court abused its discretion in overruling appellants‘ motion to exclude appellees‘

expert in this case. 3 Accordingly, I would overrule appellants‘ issue two.

3 I note that the Majority Opinion addresses additional arguments raised by appellants on appeal, but not raised by appellants in t heir motion to exclude or the Daubert hearing (valuation9

We should address the remainder of appellants‘ issues attacking the

judgmen t against appellants for breach of fiduciary duty. 4

/s/ Margaret Garner Mirabal

Senior Justice

Panel consists of Justices Boyce, McCally, and Mirabal. 5 (McCally, J., Majority)

of MMT project; accrual of Millennium‘s preferred return after March 2007). We cannot fault a trial judge for not considering matters that were not raised for consideration in the trial court.

Addi tionally, I note the Majority Opinion discusses evidence ―independent of Bayley‘s analysis‖ (Morgan Stanley letter of intent, Opus‘s valuation); while this additional evidence introduced at trial may be relevant to the sufficiency of the evidence to suppor t the damage finding, appellants‘ issue two does not raise a sufficiency of the evidence complaint, but rather an evidentiary ruling complaint.

4 I do not express an opinion regarding the Majority Opinion‘s analysis under ―IV. Fraud‖; the alternative ju dgment for fraud does not come into play unless and until we reverse the judgment for breach of fiduciary duty, which we have not properly done at this point.

5 Senior Justice Margaret Garner Mirabal sitting by assignment.