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held to resolve several issues, including the debt- BY Christopher R. Harris ors’ total enterprise value. Confirmation of the plan and H. Gregory Baker was opposed by the Official Committee of Security Holders, primarily on the grounds that the ITIGATORS are called upon to participate plan undervalued the debtors, and that a global in bankruptcy proceedings in a variety of settlement—upon which the plan was based— L ways, including frequently to prepare for did likewise. Id. at 567. The determination of the and conduct hearings. As in any court, such hear- debtors’ total enterprise value came down to a ings provide parties the opportunity to introduce battle of the experts between the debtors’ , including expert , to enable and the equity holders, both of whom employed the court to resolve issues of . standard valuation methodologies (discounted While similar in many respects to any other cash flow, comparable companies, and litigation, there are some important nuances of comparable transactions). Following a detailed bankruptcy court practice to be mindful of, espe- review of the experts’ opinions, the bankruptcy cially when working with expert witnesses. A few court confirmed the plan, finding that it did not factors that may distinguish bankruptcy court violate 11 U.S.C. §1129(b)’s “fair and equitable” litigation are: requirement because the debtors’ total enterprise • the lack of —bankruptcy are the value did not exceed the total enterprise value sole fact finder, and tend to possess a great deal of underlying the proposed settlement. Id. at 579. BIGSTOCk experience and sophistication, particularly regard- Feasibility. Expert witnesses are also com- ing complex commercial and financial matters; This article provides some examples of how monly called to opine on the feasibility of • the speed of bankruptcy proceedings relative expert witnesses are used in bankruptcy court, proposed reorganizations in Chapter 11 bank- to disputes in many other ; and and an overview of some issues that practitioners ruptcies. Chapter 11 sets forth a list of require- • the fact that the customary federal should be mindful of when working with experts ments that must be met before a plan will be protections afforded to expert witness commu- in bankruptcy court. approved, including the so-called “feasibility” nications and work product may not always be Experts in Bankruptcy Litigation requirement, which requires that: “Confirma- available in bankruptcy court. tion of the plan is not likely to be followed by Experts are called upon to offer opinions in the liquidation, or the need for further financial myriad circumstances in bankruptcy court. Some reorganization, of the debtor or any successor common examples are: to the debtor under the plan, unless such liq- Valuation. Expert witnesses are frequently uidation or reorganization is proposed in the Christopher R. Harris is a partner at Latham & Wat- called upon to provide their opinion as to the plan.” 11 U.S.C. §1129(a)(11). The feasibility of kins in New York, where he is a member of the litigation value of property at issue in the bankruptcy. For the plan of reorganization was one of several department and the restructuring, insolvency and work- outs practice group. H. Gregory Baker is a litigation example, in In re Chemtura, 439 B.R. 561 (Bankr. issues that was the subject of a hearing on the associate at the firm. S.D.N.Y. 2010), a plan confirmation hearing was plan of reorganization in In re 20 Bayard Views, Monday, April 16, 2012

445 B.R. 83 (Bankr. E.D.N.Y. 2011). There, the Under Rule 702, the court serves the same—that is, the judge—the need to make debtor—a developer of a residential condomin- as “gatekeeper,” and excludes expert witnesses [gatekeeping] decisions prior to hearing the ium in Williamsburg, Brooklyn—offered a plan who are deemed not qualified, reliable, or able testimony is lessened”). Given the conflicting of reorganization that was objected to by the to provide relevant testimony. Daubert v. Merrell views among courts as to when the Rule 702 debtor’s largest secured creditor. At the hearing Dow Pharmaceuticals, 509 U.S. 579, 589 (1993). analysis will be applied, practitioners should on the plan, the bankruptcy court heard expert The gatekeeper’s duty, in essence, is to ensure review the practices of the bankruptcy court testimony by witnesses from both parties on that the fact finder is not tainted by evidence that in which they are appearing to determine feasibility, ultimately finding that the plan was does not meet “the same level of intellectual rigor whether the court will exercise its gatekeep- feasible. Id. at 103. that characterizes the practice of an expert in the ing duties before or after an expert witness Solvency/Fraudulent Transfers. Expert wit- relevant field.”Kumho Tire v. Carmicheal, 526 U.S. has testified. nesses can also be useful to help sort through sol- 137, 152 (1999). Privilege Concerns vency in the context of fraudulent transfer claims, Because the judge rather than a serves which can be one of the most contentious issues as fact finder in bankruptcy court, however, the Bankruptcy court practitioners working with in bankruptcy court. As one example, in In re Fidel- rationale for a bankruptcy judge to exercise expert witnesses should also be aware that the ity Bond and Mortgage, 340 B.R. 266 (Bankr. E.D. his or her gatekeeper duties before testimony generally-applicable federal rules of privilege apply Pa. 2006), the bankruptcy court heard competing occurs may be less compelling. While some in some, but not all, contexts. Under Rules 26(b) opinions from expert witnesses on the debtor’s bankruptcy courts have consistently applied (4)(B) and 26(b)(4)(C) of the Federal Rules of Civil solvency at the time that certain transfers were the Rule 702 analysis before permitting experts Procedure, drafts of expert reports, and commu- made, ultimately concluding that the debtor was nications between and experts, are not solvent. Id. at 290. discoverable. Rule 26, however, only applies to Some other common examples include pro- adversary proceedings, not contested matters.1 viding testimony concerning the level of com- Chapter 11 sets forth a list of F.R.B.P. 7026. pensation of employees, e.g., In re Main, No. requirements that must be met So what happens in contested matters? Rule 00-cv-35, 2000 WL 1796417, at *6 (E.D. Pa. Nov. before a plan will be approved, 9014 of the Federal Bankruptcy Rules specifically 28, 2000) (noting that during inquiry into the including the so-called precludes application of Rule 26(a)(2) of the Fed- reasonableness of compensation, bankruptcy eral Rules of , which requires dis- court relied in part on testimony of expert wit- “feasibility” requirement. Expert closure of expert reports, to contested matters, ness), and testimony about industry standards witnesses are commonly called unless the bankruptcy court directs otherwise. In and , e.g., In re American Camshaft to opine on the feasibility of practice, this means that while there may be no Specialties, 444 B.R. 347, 364 (Bankr. E.D. Mich. proposed reorganizations in need to prepare an expert report in a contested 2011) (parties to proceeding used expert wit- mater, if one is in fact prepared and produced, it nesses to render opinions as to whether trans- Chapter 11 . may not receive Rule 26(b)’s protections afforded fers fell within industry standards). These are to drafts and communications with attorneys. One but a few of the many scenarios in which sci- to testify, other bankruptcy courts have permit- solution is to obtain a stipulation from the other entific, technical or specialized knowledge of ted the expert testimony in the first instance, parties or an order from the court explaining what an expert could help a bankruptcy court judge and later addressed whether the testimony privilege protections will apply. understand or issues in a given case. satisfied the Rule 702 standard. CompareIn re Expert Witnesses as Advisers Admissibility of Testimony Citadel Broadcasting, Case No. 09-17442 (BRL), 2010 Bankr. LEXIS 1606, at *17 (Bankr. S.D.N.Y. Another privilege concern arises from the Rule 702 of the Federal Rules of Evidence gov- 2010) (bankruptcy court exercised gatekeeping frequent practice of having a debtor’s advisers erns the admissibility of expert witness testimony role and barred testimony of expert witness serve as expert witnesses. Unlike in most litiga- in federal court, including in bankruptcy court, on valuation of radio broadcasting company), tions, in bankruptcy court litigation the subject and provides: and In re Med Diversified, 334 B.R. 89, 92 (Bankr. of testimony usually involves ongoing issues. As A witness who is qualified as an expert by E.D.N.Y. 2005) (exercising “role as the gate- a result, oftentimes a business adviser will be knowledge, skill, experience, training, or edu- keeper,” and determining that proposed wit- in the best position also to serve as an expert. cation may testify in the form of an opinion ness did not satisfy as to A common example of such an arrangement is or otherwise if: direct testimony, but could testify as a rebuttal having investment bankers, consultants, or other (a) the expert’s scientific, technical, or other specialized knowledge will help the trier of witness to plaintiffs’ proposed expert), with financial advisers provide expert testimony about fact to understand the evidence or to deter- Deal v. Hamilton Cty. Bd. of , 392 F. a company’s viability as an ongoing business. mine a fact in issue; 3d 840, 852 (6th Cir. 2004) (“The ‘gatekeeper’ In these circumstances, practitioners should (b) the testimony is based on sufficient facts doctrine was designed to protect juries and separate the two roles to the extent practical. Ide- or data; is largely irrelevant in the context of a ally, the testifying expert should be insulated by (c) the testimony is the product of reliable trial”), and In re Salem, 465 F. 3d 767, 777 (7th not serving in an advisory role, but instead have principles and methods; and Cir. 2006) (noting that “court’s gatekeeping role a separate person or team manage the advisory (d) the expert has reliably applied the prin- ciples and methods to the facts of the case. is necessarily different” during a bench trial; issues. This separation will minimize the privilege “[w]here gatekeeper and factfinder are one and concerns that may arise from having a testifying Monday, April 16, 2012

expert involved in strategic decisions or reviewing professional under §327 of the Bankruptcy Code, sion of evidence, such criticisms are generally not successful. See, e.g., Ball v. Interoceania, 71 F. 3d 73, 77 (2d Cir. preliminary plans or documents—especially in thus requiring court approval. 11 U.S.C. §327(a). 1995) (approving “procedure allowing [] parties to produce di- rect evidence from their witnesses in writing while permitting contested matters, where the protections of Rule Most courts have held that expert witnesses are subsequent oral cross-examination—particularly when the 26 may not apply. See In re Tri State Outdoor Media not professionals within the meaning of §327. See, parties agree to that procedure in advance”). 3. If a debtor chooses to engage an expert witness who is Group, 283 B.R. 358, 365 (Bankr. M.D. Ga. 2002) e.g., In re Napoleon, 233 B.R. 910, 913-14 & n.1 not a professional person, retention of the expert pursuant to §327 is not necessary. Similarly, such an expert’s compensa- (creditor waived much of the work product protec- (Bankr. D.N.J. 1999) (noting that “most courts have tion is subject to §503(b) rather than §330. However, the dis- tion and attorney client privilege it had to docu- come to the conclusion that there is no require- tinction between which experts require approval under §327, and which do not, is not always clear. Unless the practitioner ments and information in possession of its financial ment of prior court authorization for retention is certain that approval is not required, the prudent practice is consultant by offering consultant as expert on of an expert witness because an expert is not a to seek court approval under §327. disputed issues in Chapter 11 case). It may also ‘professional person’ within the meaning of §327,” reduce the credibility concerns that could arise and listing cases in accord). However, the issue if advisers’ fee arrangements are contingent upon becomes more complicated where an expert is particular outcomes. See, e.g., In re Chemtura, 439 also the debtor’s adviser. In such circumstances, B.R. at 588-90 (finding that incentives in engage- bankruptcy courts are more likely to treat the ment agreements of expert witnesses “materially expert as professionals within the meaning of and adversely” affected their credibility); In re §327. See, e.g., In re Acands, 297 B.R. 395, 402-03 Granite Broadcasting, 369 B.R. 120, 142 (Bankr. (Bankr. D. Del. 2003) (finding that expert was a S.D.N.Y. 2007) (expert’s testimony “was seriously professional within the meaning of §327 given its undermined by the fact that his compensation extensive involvement as an adviser). from the Preferred Holders is contingent on the Reimbursement of fees for expert witnesses total consideration to be received by the Preferred retained under §327 is subject to court approval Holders under a confirmed plan”). pursuant to §330, and is generally considered In addition, because the subject of the expert within the context of §330(a)(1)(B), which governs witness’ testimony is often current and potentially “reimbursement for actual, necessary expenses.”3 in a state of flux, practitioners must ensure that the 11 U.S.C. §330(a)(1)(B). When making determi- testimony is kept up to date, including updating nations about reimbursement of expert witness the expert’s knowledge and opinions between the fees, many bankruptcy courts will not rule on the preparation of an initial report or affidavit (if any), amount owed to each expert—“[t]hat is a contrac- deposition testimony, and hearing testimony. tual matter between [counsel] and each expert Speed of Proceedings over which this court has no . [The] court will merely decide how much the will Bankruptcy issues are often litigated much more be permitted to pay to [counsel] by way of reim- quickly than counterpart matters in state or federal bursement.” In re Napoleon, Case No. 89-30612, courts. In many instances, particularly in contested 1999 Bankr. LEXIS 816, at *2 (Bankr. D.N.J. May matters (as opposed to adversary proceedings), 26, 1999). parties will not have the luxury of a leisurely dis- Conclusion covery schedule with months of fact , followed by months of expert witness discovery, As in any court, the key to working with expert followed by a month of depositions. In bankruptcy witnesses in bankruptcy court is proper prepa- court, it is not uncommon to see an expert report ration within the limited time available. Beyond comprised of a short affidavit prepared in a matter developing a substantive plan as to how their of days (if one is prepared at all),2 followed by a experts will advance their case—and how to mini- deposition several days thereafter, and a hearing mize the impact of others’ experts—practitioners a few days after that. Given the short time frame, a must also avoid potential pitfalls by considering practitioner in bankruptcy court should, before the the particular privilege, timing, and fee issues that other parties identify their experts, consider what arise in bankruptcy litigation, as guided by the kinds of experts other parties might offer, assemble rules of the specific bankruptcy court in which responsive material, and locate possible rebuttal they appear. experts; and once they are identified, a practitioner should focus any research and deposition outlines ••••••••••••••••••••••••••••• on only the key issues, as there may not be time 1. A contested matter is a disputed matter filed within the main bankruptcy case, such as an objection to a , and for the broad-ranging preparation normally done is governed by Rule 9014 of the Federal Rules of Bankruptcy Procedure, while an adversary proceeding is a separate law- in other contexts. suit filed in bankruptcy court that arises out of the main bank- ruptcy case, and is governed by Part VII of the Federal Rules of Approval of Retention and Fees Bankruptcy Procedure. 2. Declarations and affidavits are frequently used in lieu of Reprinted with permission from the April 16, 2012 edition of the NEW YORK Finally, an interesting question for practitio- of witnesses in bankruptcy court, particu- LAW JOURNAL © 2012 ALM Media Properties, LLC. All rights reserved. larly in less contentious matters. While some commentators Further duplication without permission is prohibited. For information, contact 877- ners to consider is whether an expert witness is a have criticized the practice for essentially permitting admis- 257-3382 or [email protected]. # 070-05-12-21