SENIOR LIFESTYLE CORPORATION v. KEY BENEFITS ADMINISTRATORS, INC.

Filing 379

AMENDED ORDER - The Court finds that: (1) Ms. Smith's knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (2) her testimony is based on sufficient facts or data; (3) her opinion is based on reliable principles and methods; and (4) she has reliably applied the principles and methods to the facts of the case. See Fed R. Evid. 702. Accordingly, the Court DENIES SLC's Motion to Exclude the Testimony of Rebekah A. Smith, 357 . (See Order). Signed by Judge Jane Magnus-Stinson on 4/17/2020.(JDH) Modified on 4/17/2020 (JDH).

Case 1:17-cv-02457-JMS-MJD Document 379 Filed 04/17/20 Page 1 of 8 PageID #: 11706

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
SENIOR LIFESTYLE CORPORATION,

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Plaintiff,
vs.
KEY BENEFIT ADMINISTRATORS, INC.,
Defendant.

No. 1:17-cv-02457-JMS-MJD

AMENDED ORDER
Presently pending before the Court is Plaintiff Senior Lifestyle Corporation’s (“SLC”)
Motion to Exclude the Testimony of Rebekah A. Smith, one of Defendant Key Benefit
Administrators, Inc.’s (“KBA”) proposed witnesses. [Filing No. 357.] SLC seeks to exclude the
testimony of Rebekah A. Smith at trial, arguing that her testimony is “otherwise prejudicial and
unhelpful.” [Filing No. 363 at 1.] For the following reasons, the court DENIES the motion.
I.
LEGAL STANDARD
Federal Rule of Evidence 104 instructs that “[t]he court must decide any preliminary
question about whether a witness is qualified . . . or evidence is admissible.” Fed. R. Evid. 104(a).
Federal Rule of Evidence 702 provides that expert testimony is admissible if: “(a) the expert’s
scientific, technical, or other specialized knowledge will help the trier of fact to understand the
evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c)
the testimony is the product of reliable principles and methods; and (d) the expert has reliably
applied the principles and methods to the facts of the case.” Fed R. Evid. 702. A trial judge “must
determine at the outset . . . whether the expert is proposing to testify to (1) scientific knowledge

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that (2) will assist the trier of fact to understand or determine a fact in issue. This entails a
preliminary assessment of whether the reasoning or methodology underlying the testimony is
scientifically valid and of whether that reasoning or methodology properly can be applied to the
facts in issue. . . . Many factors will bear on the inquiry. . . .” Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579, 592-93 (1993).
The Court has a “gatekeeping obligation” under Rule 702, and “must engage in a threestep analysis before admitting expert testimony. It must determine whether the witness is
qualified; whether the expert’s methodology is scientifically reliable; and whether the testimony
will ‘assist the trier of fact to understand the evidence or to determine a fact in issue.’”
Gopalratnam v. Hewlett-Packard Co., 877 F.3d 771, 779 (7th Cir. 2017) (quoting Myers v. Ill.
Cent. RR. Co., 629 F.3d 639, 644 (7th Cir. 2010)). Put another way, the district court must
evaluate: “(1) the proffered expert’s qualifications; (2) the reliability of the expert’s methodology;
and (3) the relevance of the expert’s testimony.” Gopalratnam, 877 F.3d at 779 (emphasis
omitted). The Seventh Circuit Court of Appeals “give[s] the district court wide latitude in
performing its gate-keeping function and determining both how to measure the reliability of expert
testimony and whether the testimony itself is reliable.” Bielskis v. Louisville Ladder, Inc., 663
F.3d 887, 894 (7th Cir. 2011).
II.
BACKGROUND
Ms. Smith is a Certified Public Accountant with twenty-four years of professional
experience. [Filing No. 367 at 2.] She is also certified in Financial Forensics, and is a Certified
Valuation Analyst and a Master Analyst of Financial Forensics. [Filing No. 367 at 2.] KBA
provided Ms. Smith’s opinion to SLC during discovery disputes that arose from KBA’s requests
for SLC’s financial information, which KBA believed would show that SLC had cash flow issues,
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which led to SLC’s failure to pay its invoices in full and on time. 1 [Filing No. 363 at 3; Filing No.
367 at 5.] During the discovery disputes, Ms. Smith reviewed the 2014, 2015, and 2016 audited
financial statements and related financial data of SLC’s parent company, Senior Lifestyle
Holdings, LLC (“SLH”). [Filing No. 363 at 3; Filing No. 367 at 2.] Ms. Smith explained how to
read a company’s balance sheet and then she calculated SLH’s equity on a book value basis for
2014, 2015, and 2016. [Filing No. 367 at 6 (citing Filing No. 359 at 21.] She then explained the
concept of a ratio of current assets to current liabilities (known as a “current ratio”), and explained
that a company with a current ratio of less than 1.0 is at risk of not being able to meet its obligations
as they come due over the next year. [Filing No. 367 at 6-7 (citing Filing No. 359 at 22).] She
then calculated SLH’s current ratio at three different points in time and analyzed the trend in SLH’s
current ratios. [Filing No. 367 at 6-7 (citing Filing No. 359 at 22).] Ms. Smith then analyzed
SLH’s income statement. [Filing No. 367 at 7 (citing Filing No. 359 at 23).] She also analyzed
SLH’s Statement of Cash Flows and financial statements. [Filing No. 367 at 7-8 (citing Filing No.
359 at 24-25).] The conclusion Ms. Smith reached in her analysis of the financial statements was
also reached when she calculated the Days of Sales Outstanding metric and Days of Expenses
Outstanding metric. [Filing No. 367 at 8 (citing Filing No. 359 at 25-26).] Ms. Smith concluded,
in part, that SLC had cash flow problems and otherwise was not in good financial health during
2014, 2015, and 2016. [Filing No. 367 at 10 (quoting Filing No. 359 at 32); Filing No at 2.]
SLC retained a forensic accountant, Jack Schwager, who opined that “Ms. Smith’s
characterizations of SLC’s financial condition and performance ‘do not reflect an analysis of its

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KBA explains that “[a] central theme of [its] defense has been that SLC failed to pay its KBA
invoices on time, as billed[,] not for any of the post hoc rationalizations SLC has presented in this
lawsuit, but because SLC was experiencing financial difficulties—and, specifically cash flow
problems—throughout 2015.” [Filing No. 367 at 5.]
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solvency, the adequacy of its capital, or its ability to pay its debts (including those purportedly
owed to KBA) as they became due,’” and her opinions “lack sufficient basis, are based on
incomplete analysis, and distort or exaggerate [SLC]’s financial condition and SLC’s ability to
pay any amounts allegedly due to KBA.” [Filing No. 363 at 4 (quoting Filing No. 325-1 at 5).]
Mr. Schwager concluded that Ms. Smith’s analysis “failed to show SLC’s financial condition
caused non-payment of the billed amounts within KBA’s invoices.” [Filing No. 363 at 4 (quoting
Filing No. 325-1 at 5).]
Ms. Smith rebutted Mr. Schwager’s opinions in Part III of her Expert Report, explaining
that: (1) “Mr. Schwager misrepresents the conclusions in the Smith Declaration;” (2) “[a]t no point
in the Smith Declaration do[es] [she] state that [she was] performing a solvency analysis nor does
the Smith Declaration include any opinions that SLC is insolvent, lacked access to adequate capital
to pay purported obligations to KBA as allegedly billed, or was otherwise unable to pay any
amount purportedly due to KBA as they allegedly became due;” and (3) “Mr. Schwager’s opinion
that [her] analyses failed to show that SLC was insolvent, etc. refutes an opinion that [she] did not
offer, based on analyses [she] did not perform and did not claim to be performing.” [Filing No.
367 at 11 (quoting Filing No. 359 at 7-8).]
III.
DISCUSSION
SLC argues that Ms. Smith’s proposed testimony does not satisfy Federal Rule of Evidence
702(a) because it “will not help the trier of fact evaluate the evidence or in determining a fact in
issue.” [Filing No. 363 at 6.] SLC argues that Ms. Smith’s declaration appears to be an attempt
to support KBA’s theory that SLC did not pay KBA’s invoices on time and as billed because it did
not have the money to do so, but it does not come close to making such a conclusion. [Filing No.
363 at 7.] SLC notes that Ms. Smith testified that she was not opining on whether any party
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performed or did not perform their obligations under the Agreement, nor would she opine “as to
the merit of any defenses asserted by KBA. . . .” [Filing No. 363 at 7 (quoting Filing No. 359-2 at
18).]

Further, SLC argues, Ms. Smith even admitted that “there was cash on hand on a

consolidated basis to pay KBA.” [Filing No. 363 at 7 (quoting Filing No. 359-2 at 32).] SLC
contends that this demonstrates that Ms. Smith’s opinion will not be helpful at trial, will only
confuse and unduly prejudice the jury, and should be excluded. [Filing No. 363 at 7.] SLC further
argues that Ms. Smith’s methodology is not reliable because she “did not use the principles and
methods necessary to ‘show that SLC was insolvent, lacked access to adequate capital to pay
purported obligations to KBA as allegedly billed, or was otherwise unable to pay any amount due
to KBA as they became due.’” [Filing No. 363 at 9 (quoting Filing No. 359-1 at 8).] SLC argues
that Ms. Smith’s methodology is unclear and her prospective testimony “fails to meet multiple
prongs of Rule 702.” [Filing No. 363 at 11.]
In response, KBA argues that Ms. Smith’s proposed testimony will provide context and a
view of SLC’s financial position and cash flow in 2015 that can help the trier of fact evaluate
SLC’s stated reasons for why it failed to pay KBA’s invoice on time and as billed. [Filing No.
367 at 13.] KBA notes that SLC’s complaint is that Ms. Smith’s opinion does not go far enough;
she “did not need to conclude that SLC was insolvent,” etc. for her testimony to be helpful to give
context to the trier of fact. [Filing No. 367 at 13-14.] KBA argues that Ms. Smith’s opinion does
not have to be dispositive on an ultimate issue for it to be helpful to the trier of fact. [Filing No.
367 at 14.] KBA further argues that SLC has not disputed that Ms. Smith’s calculations, metrics,
trends, ratios, or industry comparisons are accurate and reliable. [Filing No. 367 at 16.] KBA
notes that Ms. Smith explained that her methodology was “reflected in . . . basic accounting books
that talk about financial analysis.” [Filing No. 367 at 16 n. 8.] KBA argues that SLC’s complaints

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go to the weight of Ms. Smith’s opinion, not to the admissibility of her testimony. [Filing No. 367
at 16-17.] KBA also notes that Ms. Smith’s proposed testimony is broader than just her opinions
regarding SLC’s financial health and cash flow situation. [Filing No. 367 at 17.]
In reply, SLC argues that “KBA cannot avoid the following critical concession [that] . . .
there was enough cash on hand on a consolidated basis to pay KBA.” [Filling No. 371 at 1 (internal
quotations omitted).] SLC argues that Ms. Smith’s testimony is neither relevant nor useful to the
trier of fact because it does not “connect the dots” to demonstrate causation. [Filing No. 371 at 4.]
SLC notes Mr. Schwager’s position that Ms. Smith’s opinion has several material deficiencies,
although SLC does not specify exactly what those problems are. [Filing No. 371 at 7.] SLC argues
that “there is not a single aspect of Ms. Smith’s opinion that passes muster under Rule 702.” [Filing
No. 371 at 7.]
Federal Rule of Evidence 702 allows the opinions of witnesses who have the requisite
“knowledge, skill, experience, training, or education.” The Court finds that Ms. Smith is qualified
to provide an expert opinion regarding the financial position and cash flow situation of SLH and
SLC. She is a Certified Public Account with over twenty-four years of professional experience,
and she has additional certifications in Financial Forensics and Valuation Analysis. She has both
the knowledge and the experience to form an opinion as to the financial condition of SLH and
SLC, and the Court finds that she is qualified to testify as an expert in this case.
As for reliability of methodology, the Supreme Court in Daubert set forth four factors a
court may consider when determining an expert witness’s methodology is reliable, including: (1)
whether the methodology “can be (and has been) tested”; (2) whether the methodology “has been
subjected to peer review and publication”; (3) the “known or potential rate of error”; and (4)
whether the methodology is generally accepted. Daubert, 509 U.S. at 593-94. These factors are

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not a “definitive checklist or test,” id. at 593, and the weight of the factors is dependent on “the
particular circumstances of the particular case at issue,” Kumho Tire Co., Ltd. v. Carmichael, 526
U.S. 137, 150 (1999). The key focus “is to make certain that an expert, whether basing testimony
upon professional studies or personal experience, employs in the courtroom the same level of
intellectual rigor that characterized the practice of an expert in the relevant field.” Id. at 152.
Ms. Smith explained that her opinion was formed using a basic financial analysis method
that appears to be commonly used in the field. Although Mr. Schwager asserts that Ms. Smith’s
observations and conclusions are “flawed,” “incomplete,” “misleading,” or “unreliable,” he does
not claim that any of Ms. Smith’s calculations or methods were generally unaccepted in the field,
could not be tested, had a known rate of error, or have not been subjected to peer review. Mr.
Schwager only asserts that certain facts should or should not have been included in Ms. Smith’s
calculations or observations, or that certain factors should have been given more or less weight.
Accordingly, the Court finds that the steps Ms. Smith took in reaching her opinion are in line with
the general practice in the field and her methodology was sound.
Finally, even though Ms. Smith stated that “there was cash on hand on a consolidated basis
to pay KBA,” [Filing No. 359-2 at 32], that does not completely foreclose the theory that SLC was
having financial difficulties and chose to short-pay KBA’s invoices to save money. Mrs. Smith is
not required to definitively state that SLC’s financial issues were the sole reason why SLC failed
to pay in full and on time for her opinion to be helpful to the trier of fact. Mrs. Smith’s proposed
testimony helps provide context of what SLC’s financial position was at the time and is relevant
to the case. Mr. Schwager’s critiques of Ms. Smith’s opinion can be raised at trial to challenge the
weight of her opinion, but his critiques do not make Ms. Smith’s opinion unreliable or irrelevant.
Accordingly, SLC’s Motion to Exclude Testimony of Rebekah A. Smith is DENIED.

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IV.
CONCLUSION
The Court finds that: (1) Ms. Smith’s knowledge will help the trier of fact to understand
the evidence or to determine a fact in issue; (2) her testimony is based on sufficient facts or data;
(3) her opinion is based on reliable principles and methods; and (4) she has reliably applied the
principles and methods to the facts of the case. See Fed R. Evid. 702. Accordingly, the Court
DENIES SLC’s Motion to Exclude the Testimony of Rebekah A. Smith, [357].

Date: 4/17/2020

Distribution via ECF only to all counsel of record

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