Opinion ID: 2831421
Heading Depth: 2
Heading Rank: 2

Heading: McKinney’s Approach

Text: McKinney testified that she used a sales-comparison approach to determine Mel Acres’ damages. But McKinney’s determination of the ranch’s impaired market value was not actually based on the sales-comparison approach. Cf. Kraft, 77 S.W.3d at 808 (“While using comparable sales to find market value in condemnation proceedings is an approved methodology, Gholson’s ‘bald assurance’ that he was using that widely accepted approach was not sufficient to demonstrate that his opinion was reliable.”). She did not look to the sales prices of the Sebastian and Sheridan sites and then determine the ranch’s value by adjusting those prices upward or downward to account for differences between the properties. Cf. Sharboneau, 48 S.W.3d at 182 (describing the sales-comparison approach). Instead, she first attempted to identify losses in market value that the 10 The sales-comparison approach has also been used to determine the value of other commodities, such as gas, see Exxon Corp. v. Middleton, 613 S.W.2d 240, 246 (Tex. 1981) (using the approach to determine the value of gas in a condemnation proceeding), or to value land in other types of cases, see Land v. Palo Pinto Appraisal Dist., 321 S.W.3d 722, 726 (Tex. App.—Eastland 2010, no pet.) (holding that trial court could rely on sales-comparison approach to determine value of leasehold estates in tax protest and noting that the Tax Code recognized it as an appropriate methodology). 14 Sheridan and Sebastian sites suffered, calculated as percentages of the unimpaired value, and then opined that the ranch had likewise suffered a similar loss in its proportionate value. She calculated the ranch’s impaired value not by comparing it to the values of other similar properties but by reducing its unimpaired value by a percentage based on the diminution percentages she had found for the Sebastian and Sheridan sites. Although we have found no authorities involving the percentage-reduction approach that McKinney used here, we do not hold that it could never be used to reach a reliable opinion on diminution damages. But the manner in which McKinney used the approach here is fatally flawed for three reasons. First, the data McKinney relied on regarding the Sebastian and Sheridan sites do not support her opinion that those properties lost market value. Second, McKinney’s ultimate opinion is cause-dependent—her reasoning can be sound only if the losses she found for the Sebastian and Sheridan sites were, in fact, attributable to market stigma and no other market factors. Yet Mel Acres offered no evidence tending to establish the cause of the Sebastian and Sheridan sites’ diminutions in value. Instead, McKinney merely assumed that the diminution in market value she found was (wholly) attributable to the nearby contamination. Third, McKinney failed to account for any differences between the ranch and the Sebastian and Sheridan sites or any differences between the nature of the contamination of the three properties. We conclude that these material shortcomings render McKinney’s opinions incompetent to support the judgment.
This is not a case in which the expert failed to offer any basis for her opinion. McKinney identified the factual basis on which she relied to calculate the loss of the ranch’s market value. But the facts on which she relied to calculate the Sheridan site’s loss of 41% of its market value do not actually support her opinion. Likewise, the facts she relied on to calculate the Sebastian 15 site’s loss of 72% of its market value do not actually support that opinion. The view that courts should not look beyond an averment by the expert that the data underlying his or her opinion are the type of data on which experts reasonably rely has long been rejected by this Court and others. Merrell Dow Pharm., Inc. v. Havner, 953 S.W.2d 706, 713 (Tex. 1997). “The underlying data should be independently evaluated in determining if the opinion itself is reliable,” id., and “[i]t is incumbent on an expert to connect the data relied on and his or her opinion and to show how that data is valid support for the opinion reached.” Whirlpool Corp. v. Camacho, 298 S.W.3d 631, 642 (Tex. 2009).
To find a diminution in the Sheridan site’s value, McKinney relied on: (1) the owner’s original offer to sell the property for $2,200,000, and (2) a subsequent verbal offer to purchase the property for $1,300,000. McKinney treated the owner’s list price as the property’s unimpaired market value and the verbal offer price as the property’s impaired market value, and opined that the site suffered a $900,000 (41%) diminution in value attributable to the nearby contamination. These facts do not support McKinney’s opinion for three reasons. First, the owner’s original asking price does not, alone, tend to establish the property’s market value at the time of listing. Market value is “what a willing buyer under no compulsion to buy will pay to a willing seller under no compulsion to sell.” Cf. French v. Occidental Permian Ltd., — S.W.3d —, — (Tex. June 27, 2014). An original list price is some evidence of what a willing seller will accept, but it is not evidence of what a willing buyer will pay. Sellers may list property at a price above the amount they actually expect to receive or may simply overestimate the property’s true market value. Second, the verbal offer price does not, alone, tend to establish the property’s market value at the time it was made. A verbal offer is some evidence of what a 16 willing buyer will pay, but it is not, alone, evidence of what a willing seller will accept. Cf. French, — S.W.3d at —. Buyers may offer less than the amount they are actually willing to pay, in hopes of acquiring the property for less than it is worth, or they may simply underestimate the value of the property. As a result, the fact that a verbal offer was made on the Sheridan site for less than the original asking price does not tend to prove that it suffered a diminution in market value. Third, the difference between the asking price and the offer price does not tend to establish a loss attributable to the nearby contamination because both the asking price and the verbal offer occurred after the land near the Sheridan site was contaminated. McKinney’s own report indicates that the contamination dates back to at least 1986, while the listing on which McKinney relied for the site’s “unimpaired” value was in 2006. Thus, even if the difference between the original list price and the verbal offer did reflect a diminution in value, the data on which this diminution is based are not temporally connected to the contamination some twenty years earlier. It is possible that the original list price reflected the property’s pre-contamination price, but there is no evidence that indicates that was the case. When the facts support several possible conclusions, only some of which support the expert’s conclusions, the expert must explain to the fact finder why those conclusions are superior based on verifiable evidence, not simply the expert’s opinion. Jelinek, 328 S.W.3d at 536.
McKinney acknowledged that sales of comparable properties are useful only if they result from an arm’s-length transaction, and she did not dispute that the Sebastian sale was a “sweetheart deal” intended to compensate Sebastian for early retirement. The evidence on this issue was uncontroverted. Instead, she argued that the sale could constitute an arm’s length transaction even 17 though it was a sweetheart deal. She testified, “If it was a sweetheart deal on the part of both parties, it was arm’s length.” We disagree. Generally, an arm’s-length transaction is one between two unrelated parties with generally equal bargaining power, each acting in its own interest. See BLACK’S LAW DICTIONARY 103 (10th ed. 2014) (defining “arm’s-length” as “[o]f, relating to, or involving dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship”); see also TEX. TAX CODE ANN. § 171.1012(m) (“In this section, ‘arm’s length’ means the standard of conduct under which entities that are not related parties and that have substantially equal bargaining power, each acting in its own interest, would negotiate or carry out a particular transaction.”); TEX. OCC. CODE ANN. § 2307.001(1) (“‘Arm’s length transaction’ means the standard of conduct under which two parties having substantially equal bargaining power, each acting in its own interest, would negotiate or carry out a particular transaction.”). Sebastian and International Paper were not entirely unrelated, as they shared an employeremployee (and later, independent contractor) relationship. While an employer and its employee can engage in arm’s-length transactions, there is no evidence that occurred here. To the contrary, the only evidence here is that the two parties were not acting solely in their own interests, but instead mutually intended the transaction to be more beneficial to Sebastian. This kind of “sweetheart deal” is not an arm’s-length transaction. See Cherokee Water Co. v. Gregg Cnty. Appraisal Dist., 801 S.W.2d 872, 874 (Tex. 1990) (“It is uncontroverted that these are not arm’s- length transactions and they have been characterized by the district as ‘sweetheart deals.’”); see also 389 S.W.3d at 604 (Boyce, J., dissenting) (“This testimony demonstrates that McKinney’s opinion is unreliable because she used a sales price produced by a ‘sweetheart deal’ involving the 18 Sebastian site to bolster her inclusion of the Sheridan Superfund site as a comparable sale.”). Thus, the Sebastian site’s 1997 sales price did not, alone, constitute evidence of its fair market value at the time of the sale. As a result, the fact that the Sebastian site sold for 72% less than the price paid for two comparable properties does not tend to prove that it suffered a diminution in market value.
Courts must “rigorously examine the validity of the facts and assumptions on which [expert] testimony is based[.]”Camacho, 298 S.W.3d at 637. If an expert’s opinion is unreliable because it is “based on assumed facts that vary from the actual facts,” the opinion “is not probative evidence.” Id.; see also Burroughs Wellcome Co. v. Crye, 907 S.W.2d 497, 499–500 (Tex. 1995) (“When an expert’s opinion is based on assumed facts that vary materially from the actual, undisputed facts, the opinion is without probative value and cannot support a verdict or judgment.”). This does not mean that an expert’s factual assumptions11 must be uncontested or established as a matter of law. If the evidence conflicts, it is the province of the jury to determine which evidence to credit. See Cooper Tire & Rubber Co. v. Mendez, 204 S.W.3d 797, 804 (Tex. 2006). Nor does it mean that parties must prove up every inconsequential assumption on which their expert relies. But if the record contains no evidence supporting an expert’s material factual assumptions, or if such assumptions are contrary to conclusively proven facts, opinion testimony founded on those assumptions is not competent evidence. See TXI Transp. Co. v. Hughes, 306 S.W.3d 230, 237–40 (Tex. 2010) (distinguishing expert testimony in case from unsupported assumptions relied 11 We reference here “factual assumptions,” meaning assumptions about the facts of the case or the specific data on which the expert relies to reach an opinion in the case. We do not reference the kinds of scientific, mathematical, or other technical assumptions or presumptions that may be regularly and reliably employed in an expert’s area of expertise. 19 on by expert in Volkswagen, 159 S.W.3d at 904–06); Cooper Tire & Rubber, 204 S.W.3d at 804 (“[I]f an expert’s opinion is based on certain assumptions about the facts, we cannot disregard evidence showing those assumptions were unfounded.”) (quoting City of Keller v. Wilson, 168 S.W.3d 802, 813 (Tex. 2005)); see also Williams v. Ill., 132 S. Ct. 2221, 2241 (2012) (“[I]f the prosecution cannot muster any independent admissible evidence to prove the foundational facts that are essential to the relevance of the expert’s testimony, then the expert’s testimony cannot be given any weight by the trier of fact.”). A contrary approach would allow parties with the burden of proof on a particular fact (such as causation) to avoid the obligation to put forth evidence by simply instructing their expert to assume the fact in forming their opinions. McKinney’s damages opinion rests on several assumptions and leaps of logic. First, she assumes that the diminutions she found for the Sebastian and Sheridan sites were both 100% attributable to contamination that occurred and had been remediated on nearby land. She then reasons that because those two sites suffered diminutions as a result of remediated contamination, the ranch also suffered a diminution as a result of its remediated contamination and the proportionate amount of that diminution will be more than that suffered by the Sheridan site and less than that suffered by the Sebastian site. Even if we accept that the Sebastian and Sheridan sites suffered diminutions in their market value, those diminutions are relevant here only if they were attributable to the remediated contamination. But McKinney did not attempt to establish that the remediated contamination near the Sebastian and Sheridan sites caused some or all of the diminution in market value she found, nor did she attempt to rule out other plausible causes. Cf. Wal-Mart Stores, Inc. v. Merrell, 313 S.W.3d 837, 840 (Tex. 2010) (“An expert’s failure to explain or adequately disprove alternative theories of causation makes his or her own theory speculative and conclusory.”); General Motors 20 Corp. v. Iracheta, 161 S.W.3d 462, 470 (Tex. 2005) (“[The expert] eliminated the obvious possibility that fuel or vapors from the tank filler neck ignited only by saying so, offering no other basis for his opinion. Such a bare opinion was not enough.”). Instead, McKinney simply assumed that 100% of the asserted diminution in value in both sites was attributable to the remediated contamination. This kind of material assumption, entirely lacking evidentiary support, renders expert opinion testimony unreliable and incompetent to support a judgment. See TXI Transp., 306 S.W.3d at 239–40 (discussing the Volkswagen expert’s “assumption that the detached wheel remained pocketed in the wheel well throughout a turbulent and high-speed accident sequence,” which he failed to “connect his theory to any physical evidence in the case or to any tests or calculations prepared to substantiate his theory”); see also Sage Street Assocs. v. Northdale Constr. Co., 863 S.W.2d 438, 449 (Tex. 1993) (observing that an expert’s assumptions do not constitute evidence). McKinney seems to have operated under the assumption that all remediated property will suffer market stigma. While the parties agreed that environmental contamination can result in a diminution in property value that remains even after the contamination is remediated, the parties did not agree, and there was no evidence indicating, that this is always the case. Absent such evidence, we cannot assume, without evidence, that any (much less all) of the diminution McKinney found for the Sebastian and Sheridan sites was attributable to market stigma. And even if there were such evidence or evidence that contaminated properties always retain some diminution in market value even after remediation, Mel Acres offered no evidence tending to show that all of the Sebastian and Sheridan sites’ alleged diminutions in value were attributable to stigma or to apportion such diminution among stigma and other possible causes. 21 The evidence here, in fact, indicates other potential causes of the “diminution” McKinney found. With respect to the Sheridan site, the difference between the original list price and the verbal offer price may reflect the difference between what the seller hoped to get and what a buyer hoped to pay rather than any actual change in the property’s market value. And if there was a change in the property’s market value, because both the original listing (the “unimpaired” market value) and the verbal offer (the “impaired” market value”) occurred after the contamination and its remediation, the impairment of the property’s market value cannot, without more, be attributed to the contamination. With respect to the Sebastian site, the only evidence indicates that the difference between its sale price and two other comparable sales prices simply reflected the “sweetheart” nature of the deal. The record does not conclusively establish any of these alternative plausible causes as the actual cause. But Mel Acres offered no evidence tending to establish that the asserted diminutions were attributable, in whole or in part, to the contamination near the Sheridan and Sebastian properties. Absent any evidentiary basis, McKinney’s material assumptions that the diminutions she found were caused by contamination-related stigma that remained after remediation of the property are unsupported and render her opinion incompetent and no evidence. Cf. Wal-Mart Stores, 313 S.W.3d at 839–40 (holding that expert’s causation opinion lacked evidentiary value when factual basis for opinion was equally consistent with alternative cause); Volkswagen of Am., Inc. v. Ramirez, 159 S.W.3d 897, 911 (Tex. 2004) (noting that expert’s causation opinion was based on facts that were “just as consistent with” the expert’s opinion of what happened as they were with an alternative course of events). 22
Even assuming that the Sebastian site suffered a 72% diminution in value and the Sheridan site suffered a 41% diminution in value, and that the remediated contamination of nearby property caused those losses, McKinney did not show how that data offers valid support for her conclusion that Mel Acres’ ranch lost 60% ($1,397,500) of its value or that stigma resulting from Houston Unlimited’s conduct caused that loss. Expert testimony is unreliable if “there is simply too great an analytical gap between the data [relied upon] and the opinion proffered.” Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713, 726 (Tex. 1998) (quoting Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997)). An expert must “connect the data relied on and his or her opinion” and “show how that data is valid support for the opinion reached.” Camacho, 298 S.W.3d at 642 (citing Pollock, 284 S.W.3d at 819–20; Volkswagen, 159 S.W.3d at 906; Gammill, 972 S.W.2d at 726). “We are not required . . . to ignore fatal gaps in an expert’s analysis or assertions that are simply incorrect.” Volkswagen, 159 S.W.3d at 912; Cooper Tire & Rubber, 204 S.W.3d at 800–01. “A flaw in the expert’s reasoning from the data may render reliance on a study unreasonable and render the inferences drawn therefrom dubious. Under that circumstance, the expert’s scientific testimony is unreliable and, legally, no evidence.” Havner, 953 S.W.2d at 714. The foundation of the sales-comparison approach is that the appraised property is compared to comparable properties, which justifies an assumption of comparable values, and then adjusted for differences between the properties. See Sharboneau, 48 S.W.3d at 182–83. McKinney’s approach lacks this foundation. McKinney did not testify that the Sheridan or Sebastian sites were comparable to Mel Acres’ property in any aspect other than environmental 23 contamination of some kind that had been remediated.12 To the contrary, she testified that the properties did not need to be comparable under her approach because she calculated the lost value as a percentage. When Mel Acres’ attorney asked McKinney if there are “any similarities between Grimes County,” where the Sebastian site is located, “and Washington County,” where the ranch is located, that “make this a good comp,” McKinney responded, “What makes this a good comp is the fact that it is a contamination. There are differences in land value between Washington County and Grimes County, and that’s why we want to take percentages.” Later, Houston Unlimited’s attorney followed up: Q. [O]bviously, to make your analysis accurate, you want both your impaired and your unimpaired properties to be as comparable as possible to the property that’s the subject of your appraisal, right? A. It doesn’t necessarily — the unimpaired do — the impaired and the unimpaired do not — they have to have a similar highest and best use. Q. Right. A. But what you’re looking for is a percentage. So no, they don’t have to be. Q. They don’t have to be comparable? A. No. We have explained, however, that “[t]he comparable sales method fails when the comparison is made to sales that are not, in fact, comparable to the land condemned.” Kraft, 77 S.W.3d at 808. Nor did McKinney make adjustments for differences between the ranch and the Sebastian and Sheridan sites. McKinney did not explain whether or why the ranch and the contamination of the stock tank were similar to, or different from, the Sebastian or Sheridan properties and their 12 As noted below, there was some dispute over whether the Sheridan site had been fully remediated. 24 contamination in any way that would make it likely to suffer a greater or lesser diminution than either of the other two properties. She did not identify plausible causes for variations in the diminutions and explain how those causes did or did not impact her calculation for the ranch. Although she chose a percentage of loss that was less than the Sheridan site’s percentage and more than the Sebastian site’s, she did not in any way tie that number to differences between the properties. To the contrary, the record contains no analysis of how McKinney reached the 60% loss for the ranch. The record reveals only that 60% falls somewhere between 41% and 72%, a little above the average of the two (56.5%). McKinney’s failure to account for significant differences between the kind and degree of contamination that the three properties sustained or the nature of the remediation is also significant in the context of this record. The Sheridan site had been part of a federal Superfund site that required extensive remediation. Houston Unlimited presented evidence that the federal government monitored the Sheridan site and placed it on a “national priority list.” Robinson explained that the Sheridan site was monitored for thirty years at a cost of $16–17 million, and some constituents at that site were “off the Richter scale when compared to regulatory limits.” 389 S.W.3d 583, 599. There was also evidence that the Sheridan site had not been fully remediated and “still contains over 44,000 cubic yards of sludge and contaminated soil.”13 The metal compounds found at the ranch, by comparison, did not greatly exceed state action levels, and the only remediation the parties have identified are the measures Houston 13 In her deposition, McKinney agreed that the market would react “in varying degrees” to properties contaminated by different chemicals, depending on the nature of the chemicals, if the contamination had not been remediated. 25 Unlimited took on its own property to prevent constituents from continuing to migrate onto the ranch. The metal compounds appear to have naturally dissipated after the migration ceased. Finally, McKinney did not account for contamination that was not attributable to Houston Unlimited’s conduct. For example, Mel Acres’ own evidence showed iron in excess of state action levels on the ranch, yet there was no evidence linking iron contamination to Houston Unlimited. To the contrary, there was some evidence that other ponds on the ranch, which were beyond the reach of any discharge from Houston Unlimited’s facility, also tested positive for excessive iron levels. McKinney testified that she did not attempt to attribute any portion of the diminution in value she had calculated to any actions of Houston Unlimited and made no attempt to calculate the amount of the diminution in value that resulted from activities not related to Houston Unlimited. Nor did any other evidence address this issue. McKinney’s failure to account for differences between the three properties at issue, differences between the nature of the contamination and remediation of the properties, and contamination not attributable to Houston Unlimited, leaves analytical gaps in her reasoning. At least once Houston Unlimited raised these gaps in questioning her, it was necessary for McKinney to provide some logically valid explanation for why she did not need to consider these factors that, facially, appear relevant to her opinion. The only explanation she provided was that differences between the three properties did not matter because she found a “very similar decrease in market value” for the Sebastian and Sheridan sites. But 72% and 41% are not “very similar decrease[s] in market value.”14 14 McKinney’s calculation of the ranch’s decrease in market value was based on the Sebastian and Sheridan sites’ decreases, so any similarity between Mel Acres’ decrease and the other two is a necessary product of her approach, not independent evidence of any facts. 26