The Business Court addressed the appropriate bounds for expert testimony proposed to establish damages, and perhaps to provide editorial guideposts for the jury, in W. Avalon Potts v. KEL, LLC, et al, 2019 NCBC 60, 2019 WL 4744646 (N.C. Super. Ct. September 27, 2019). See Order and Opinion. We discussed the case in an earlier post, here, but it involves a fractious leadership transition in a nearly 30-year old company, that led to an un-transition and a fight about what happened to the company and its resources, during the period it was under new management.  Judge Conrad summarized the brass tacks of plaintiff’s lament of what the company’s former accountant wrought when he briefly controlled Steel Tube, Inc.:

“Put bluntly, Potts alleges that Rives spent most of that time plundering the company’s assets.

2019 NCBC 60, at ¶ 3.

Takeaways:

• The Business Court excluded accounting expert testimony that drifted too far from the wheelhouse of an accountant, finding opinions that strayed from damages linked to failures or omissions in accounting practice insufficiently supported.
• The Court addressed new claims first introduced in expert reports, and cautioned that “parties should introduce new issues through the amendment process, not through briefing, discovery responses, or expert reports.”

At trial, Plaintiff proposes to seek $2 million in damages from Rives related to alleged failures in tax planning and services, self-dealing behavior that favored his own interests and that of his family, as well as a variety of other damages associated with his brief leadership stint at Steel Tube. To support those damages, Plaintiff designated a certified public accountant, Gregory Reagan, who provided a detailed report on applicable accounting standards and his views on a variety of transactions and behaviors by Rives and his accounting firm. Id. at ¶ 6. The Court’s decision analyzed defendant’s efforts to exclude a significant portion of the 25 opinions contained in Reagan’s report.

In a Daubert-patterned “gatekeeping” analysis under North Carolina Rule of Evidence 702, the Court parsed the proposed accountant-on-accountant opinions through which the expert intended to define, and perhaps editorialize about, Rives’ alleged misdeeds. Defendants did not oppose the expert’s ability to testify about the relevant professional standards that apply to accountants – which occupied 15 pages of Reagan’s report – but balked when it came to applying those standards to Rives and his firm. Id. at ¶¶ 13, 15.

Grounded Opinions, not Editorials, pass Daubert Muster

The Court carefully analyzed the wide range of opinions plaintiff proposed that Reagan would offer, but adopted a familiar analytical construct that essentially sought to confine the expert’s testimony to the wheelhouse in which an accountant can reliably function. Thus, Reagan was on solid ground in opining about whether Rives “botched or falsified” Steel Tube’s tax forms; whether the conduct occasioned tax penalties; and the fees paid to prepare, and revise, inaccurate forms. Id. at ¶¶ 22-23, 26. At the opposite end of the spectrum, the Court narrowed Reagan’s testimony when it ventured toward legal conclusions and editorial judgment. There, the expert was barred from offering legal conclusions about what constituted gross negligence; characterizing Rives’ conduct as “dishonest [and] deceptive” or “shocking [and] disturbing;” and linking the alleged damages to Rives’ conduct as an officer and director of Steel Tube (which are judged by “statutory standards for corporate fiduciaries.”)  Id. at ¶¶ 16-17, 23.

The Court did afford the accounting expert some latitude in the area of Rives’ alleged self-dealing. For example, Reagan proposed to testify about the excessive nature of payments made to a former Steel Tube owner, and apparently unauthorized distributions to pay income taxes. The Court allowed the expert testimony as related to possible conflict-of-interest transactions because it was based on Reagan’s analysis of payments to Rives’ predecessor and Steel Tube’s general financial condition.  Id. at ¶ 30. Similarly, the Court green-lit Reagan’s proposed opinions about whether Rives directed Steel Tube to pay allegedly inflated transportation charges to a company owned by Rives’ brothers. It was sufficient grounding, the Court held, that the expert’s analysis compared and considered payments to the Rives-related entity in relation to Steel Tube data from when it handled its own shipping. Id. at ¶ 36.

No Eleventh-Hour Expert Opinions

The Court was less accommodating to expert testimony regarding approximately $400,000 in damages based on “brand new theories of liability” and transactions that appear to have been first disclosed in the expert’s report. The Business Court, in general, has a lenient view of notice pleading but even that has its limits when the Court’s own sleuthing of the pleadings bears no fruit. “After scouring the amended complaint,” Judge Conrad noted, “the Court finds no allegations that give fair notice to the Rives Defendants that these transactions are at issue.” Id. at ¶ 45. Noting that “the operative complaint” has to be the source of claim notice to defendants, the Court cited a string of North Carolina and federal decisions that “routinely caution that parties should introduce new issues through the amendment process, not through briefing, discovery responses, or expert reports.”  Id. at ¶ 46.

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