Denial of Daubert Motion and Dismissal of Fraudulent Transfer Claim Affirmed

In O’Halloran v. Harris Corp. (In re Teltronics, Inc.), 2018 WL 4700578 (11th Cir. Oct. 2, 2018), the Eleventh Circuit affirmed a district court judgment affirming a bankruptcy court order dismissing a fraudulent conveyance claim.  The alleged fraudulent conveyance was the debtor’s transfer of a “blocking right” and right of first refusal under a patent transfer agreement, but the narrow issue addressed on appeal was the bankruptcy court’s denial of the bankruptcy trustee’s Daubert motion to exclude certain expert testimony on the question whether the debtor was insolvent at the time the relevant transfer was made.

As an element of his fraudulent transfer claim, the trustee had to prove that Teltronics was insolvent at the time the challenged transfer was made.  To that end, he presented the testimony of an expert who had performed a solvency analysis and determined that the adjusted value of Teltronics’s liabilities exceeded the adjusted value of its assets by approximately $5.6 million at the time of the transfer.

The defendants’ expert testified that the trustee’s expert’s analysis was flawed because it failed to separately account for the value of three contracts to which Teltronics was a party.  The defendants’ expert also testified that Teltronics was solvent at the time the transfer was made—necessarily implying that the three contracts were worth at least $5.6 million—but did not offer any further opinion as to the amount by which the company’s assets exceeded its liabilities.  In rebuttal, the trustee’s expert disagreed with the opinion that the three contracts should be separately valued, but did not offer an opinion as to the value of the three contracts.

The trustee filed a Daubert motion, seeking to exclude the defendants’ expert’s opinion that Teltronics had been solvent at the time of the transfer.  In support of the motion, the trustee relied on the conceded fact that the defendants’ testifying expert had not analyzed the value of the three contracts or undertaken a solvency analysis.  But the trustee did not move to exclude the opinion that the three contracts should have been separately valued as company assets.  The bankruptcy court denied the Daubert motion, noting that the motions could be renewed after trial.

After trial, the bankruptcy court found the defendants’ expert more credible on the issue whether the three contracts should have been separately valued as company assets.  The bankruptcy court did not rely on the defendants’ expert’s opinion that the company was solvent.  As a result of its finding that the three contracts should have been valued as distinct assets, however, the bankruptcy court held that the trustee had failed to carry his burden to prove insolvency.  The district court affirmed the bankruptcy court’s ruling.

The Eleventh Circuit agreed, and therefore did not reach the other questions raised on appeal.  The Eleventh Circuit opinion, written by visiting Judge Lewis Kaplan from the Southern District of New York and joined by Judges Tjoflat and Julie Carnes, emphasized the deferential standard of review accorded evidentiary decisions, especially in the case of a bench trial, and the fact that the trustee had the burden of proving insolvency.  The court observed that the trustee never objected to the defendants’ expert’s opinion that the three contracts should have been separately valued, and that was the only one of that expert’s opinions on which the bankruptcy court relied.  When the bankruptcy court credited that opinion, as it was entitled to do, the trustee’s evidence—which did not value the contracts as distinct assets—failed to establish, by a preponderance of the evidence, that the company was insolvent when the transfers were made.

Posted by Valerie Sanders.

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