Desmond v. Taxi Affiliation Services LLC et al

Filing 317

MEMORANDUM Opinion and Order: For the reasons set forth in this order, the Court grants in part and denies in part motion 303 . Motion hearing set for 10/13/22 is stricken. Status hearing set for 11/3/22 at 1:00 p.m. A joint status report shall be filed by 11/1/22 to report on the status of discovery. Parties shall dial in using the Court's conference call-in number. The conference call-in number is 1-877-411-9748 and the passcode is 1814539. Members of the public and media who wish t o listen to this hearing may call in. Persons granted remote access to proceedings are reminded of the general prohibition against photographing, recording, and rebroadcasting of court proceedings. Violation of these prohibitions may result in san ctions, including removal of court issued media credentials, restricted entry to future hearings, denial of entry to future hearings, or any other sanctions deemed necessary by the Court. (For further details see order.) Signed by the Honorable M. David Weisman on 10/12/2022. Mailed notice (ao, )

Case: 1:17-cv-08326 Document #: 317 Filed: 10/12/22 Page 1 of 6 PageID #:6657

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MICHAEL K. DESMOND, not
Individually but as Chapter 7 Trustee
For the Bankruptcy Estate of YELLOW
CAB AFFILIATION, INC.,

)
)
)
)
)
Plaintiff,
)
)
v.
)
)
TAXI AFFILIATION SERVICES LLC, )
MICHAEL LEVINE, PATTON R.
)
CORRIGAN, EVAN TESSLER, GARY )
SAKATA, JOHN MOBERG, YELLOW )
CAB ASSOCIATION, INC., and TAXI )
MEDALLION MANAGEMENT LLC, )
)
Defendants.
)

No. 17 C 8326
Magistrate Judge M. David Weisman

MEMORANDUM OPINION AND ORDER
Defendants have filed a motion in limine to exclude the opinions and testimony of
plaintiff’s expert Patrick O’Malley. For the reasons set forth below, the Court grants in part and
denies in part the motion. 1
Discussion
The admissibility of expert testimony is governed by Federal Rule of Evidence 702 and
Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). Kirk v. Clark Equip. Co.,
991 F.3d 865, 871 (7th Cir. 2021). Rule 702 permits a witness to testify as an expert if she has
specialized knowledge that will help the jury understand the evidence, her testimony is based on
sufficient facts or data and is the product of reliable principles and methods, and she has applied

The Court assumes readers are familiar with the complex factual background plaintiff alleges in the complaint
(ECF 1) and the district court summarized in its memorandum opinion and order on defendants’ motion to dismiss
(ECF 62).

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those principles and methods to the facts of the case. Daubert instructs a “trial judge [to] ensure
that any and all scientific testimony or evidence admitted is not only relevant, but reliable.”
Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589 (1993).
One of the opinions O’Malley offers is that Yellow Cab Affiliation, Inc. (“YCA”) was
insolvent beginning in 2007. (ECF 303-1 ¶¶ 42-45.) Under both the federal and state bankruptcy
codes, an entity is insolvent if “the sum of [the] entity’s debts is greater than all of [the] entity’s
property, at a fair valuation.” 11 U.S.C. § 101(32); 740 Ill. Comp. Stat. 160/3(a).

Defendants

argue that O’Malley’s insolvency opinion is infirm because he did not determine the fair market
value of YCA’s property in 2007 and beyond. (See ECF 303-2 at 53-54 (O’Malley testifying that
his report does not provide a fair market value for YCA’s assets).) Plaintiff counters that O’Malley
calculated YCA’s assets, liabilities, and stockholder equity every year from 2007 through 2015
using YCA’s financial statements, and each year YCA’s liabilities exceeded its assets. (See ECF
303-1 ¶ 42.) But YCA’s financial statements do not necessarily reflect the objective value of its
assets. In fact, plaintiff argues that the finances of YCA, TAS, and the other related entities were
purposefully commingled and their financial records deliberately muddled. (See, e.g., ECF 311 at
2-3.) Plaintiff cannot make that claim and simultaneously assume that YCA’s records have
integrity, as O’Malley does here. Because O’Malley accepted the value YCA assigned to its assets
rather than assessing their fair market value, the methodology O’Malley employed in reaching his
conclusion that YCA was insolvent as of 2007 was flawed. Further, O’Malley’s reliance on
financial statements that plaintiff claims are unreliable undermines the data relied upon in reaching
the conclusions. While the integrity of the data relied upon may become a jury issue, here, where
the plaintiff’s theory is that the underlying data is not reliable, this approach raises methodology
issues.

Plaintiff’s expert is relying on data that plaintiff asserts is unreliable to reach his

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conclusion. See Loeffel Steel Prod., Inc. v. Delta Brands, Inc., 372 F. Supp. 2d 1104, 1119 (N.D.
Ill. 2005) (“[A]an expert cannot rely on data of unknown reliability.”).
Defendants also contend that O’Malley’s damages opinion should be excluded because it
is premised on the assumption that TAS was not entitled to any compensation for the services it
provided to YCA. (ECF 303-2 at 79 (O’Malley testifying that his opinion that YCA paid TAS
$18.7 million from 2011 to 2014 and $37.4 million for the period 2007 to 2014 assumed that TAS
was not entitled to any compensation from YCA).) As plaintiff explains, however, O’Malley’s
opinions are based on the assumption that the transfers of money from YCA to TAS were actual
intent fraudulent transfers. See 11 U.S.C. § 548(a)(1)(A) (stating that the trustee may avoid any
transfer incurred by the debtor if the debtor voluntarily or involuntarily made such transfer or
incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the
debtor was or would became indebted); 740 Ill. Comp. Stat. 160/5(a)(1) (“A transfer made or
obligation incurred by a debtor is fraudulent as to a creditor . . . , if the debtor made the transfer or
incurred the obligation . . . with actual intent to hinder, delay, or defraud any creditor of the
debtor.”). Thus, O’Malley’s assumption that TAS was not entitled to compensation from YCA
for the years 2007-14 does not invalidate his opinions. As this underlying factual assumption is
one of the primary disputes in the matter, defendants are free to explore O’Malley’s reliance on it,
but the assumption itself does not invalidate the expert opinion. See Smith v. Ford Motor Co., 215
F.3d 713, 718 (7th Cir. 2000) (“The soundness of the factual underpinnings of the expert’s analysis
and the correctness of the expert's conclusions based on that analysis are factual matters to be
determined by the trier of fact.”).
Alternatively, defendants say O’Malley has no basis for opining that TAS used YCA’s
money to pay management fees and debt service because he did not trace YCA’s funds into or out

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of TAS’s account. 2 One of the accepted methods of tracing is the pro rata method in which
“restricted funds are presumed to comprise a fraction of every transfer out of the account equal to
the ratio of restricted to total funds in the account.” In re Poulos, 636 B.R. 535, 541 (Bankr. N.D.
Ill. 2022). This is the method O’Malley used. He analyzed TAS’s general ledger and concluded
that TAS commingled its funds with those of YCA, that all of the commingled funds in TAS’s
accounts were derived from taxicab operations, seventy-two percent of TAS’s revenue was
attributable to YCA’s taxicab operations, and thus seventy-two percent of the commingled funds
in TAS’s accounts were generated by YCA’s taxicab operations. 3 (Id. ¶¶ 10j, 19; ECF 303-2 at
74-75.) In short, O’Malley’s alleged failure to trace YCA’s funds to TAS is not a basis for barring
his testimony.
Defendants also argue that O’Malley’s damages opinion is flawed because it assumes that
all of TAS’s revenues were derived from servicing taxicabs and ignores revenues TAS received
from other operations. Plaintiff admits that O’Malley made this assumption but says it is not
disqualifying: “While Defendants may argue that the percentage should be different [than seventy
percent] because TAS collected amounts for other related companies, the jury is entitled to
consider O’Malley’s expert view that all amounts collected by TAS ultimately derived from cabs
on the road.” (ECF 311 at 12) (emphasis in original). The Court agrees that O’Malley’s
assumption regarding the source of TAS’s revenues goes to the weight of his opinion, not its
admissibility. Manpower, Inc. v. Ins. Co. of Pa., 732 F.3d 796, 809 (7th Cir. 2013) (“[A]n expert’s

Plaintiff says O’Malley tried to analyze TAS’s bank records but could not complete the task because of “the state of
the records of YCA and TAS and the accounting . . . methodologies employed.” (ECF 303-2 at 89-91.)
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Defendants argue that O’Malley cannot opine that TAS “paid management fees and debt service using YCA
funds” because “he did not analyze the bank account.” (ECF 303 at 12.) As noted above, however, O’Malley said
such an analysis was impossible given the state of TAS’s bank records.
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reliance on faulty information is a matter to be explored on cross-examination; it does not go to
admissibility.”). 4
Defendants also contest O’Malley’s opinion that TAS/YCA funds were used to pay $15.3
million in debt service for a loan from the North Fork Bank, which refinanced a previous loan
other affiliated entities used to buy taxi medallions. (ECF 303-1 ¶ 10i.) Defendants say this
opinion has no basis in fact because O’Malley did not see the documents pertaining to the previous
loan. But O’Malley does not say that YCA funds were used to service the loan that preceded the
North Fork Bank loan. Thus, his failure to review the terms of the previous loan does not doom
his opinion.
Alternatively, defendants argue that there is no legal basis for O’Malley’s opinion that
YCA is entitled to a share of the profits that the affiliated entities made from selling medallions
they bought with the proceeds of the loan that was refinanced by the North Fork loan. (See ECF
303-1 ¶ 10k.) Plaintiff argues that O’Malley’s opinion is supported by Illinois fiduciary law,
specifically Ray v. Winter, 367 N.E.2d 678, 683 (Ill. 1977) In Ray, the Illinois Supreme Court
held that a fiduciary relationship arose when defendant agreed to buy land for plaintiff and a
constructive trust arose when he did so and then refused to convey the land to plaintiff. 367 N.E.2d
at 682-83. The appropriate measure of damages, the court said, was the profits plaintiff lost as a
result of defendant’s refusal to give him the property. Id. at 684.
Under the principles set forth in Ray and assuming the accuracy of plaintiff’s version of
the facts, YCA would be entitled to the profits it lost when TAS used YCA’s funds to service the
North Fork Bank loan. But YCA would not be entitled to profits from the sale of medallions that

The same is true for O’Malley’s alleged financial interest in the outcome of the trial. See Ameritox, Ltd. v. Millennium
Health, LLC, No. 13-CV-832-WMC, 2015 WL 1520821, at *11 n.14 (W.D. Wis. Apr. 3, 2015) (stating that evidence
of bias goes to the weight of an expert’s testimony not its admissibility).
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an affiliated entity bought with the proceeds of the loan that was refinanced by the North Fork
loan. Under Ray, YCA is entitled to its lost profits resulting from TAS’s use of YCA’s funds, but
Ray does not support the proposition that YCA is entitled to the gains achieved by the affiliated
entities as a measure of damages. Id. at 684 (“[P]laintiff is entitled to recover the loss of profits
resulting from [defendants’] failure to convey the property to [plaintiff]”). Because state fiduciary
law, which is all plaintiff offers, does not support O’Malley’s opinion that YCA is entitled to
profits from the sale of medallions, O’Malley cannot offer that opinion at trial.
SO ORDERED.

ENTERED: October 12, 2022

M. David Weisman
United States Magistrate Judge

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