Magnum Hunter Resources Corporation v. Hall, Kistler & Company, LLP

Filing 102

MEMORANDUM OPINION & ORDER: (1) GRANTING IN PART & DENYING IN PART dft's 72 MOTION in Limine to Exclude any Evidence of Hall Kistler's PCAOB Inspection Reports and Violations Contained Within; granted as the PCAOB reports relating to t he 2006 & 2010 inspections are excluded; denied as the PCAOB report relating to the 2012 inspection is admissible; (2) GRANTING IN PART & DENING IN PART dft's 73 MOTION in Limine to Limit Evidence of Gold Mine Asset Retirement Obligation Te stimony; granting as no evidence from a previously unnamed, unidentified party may be introduced; denied as Jim Tencza may be permitted to testify on the gold mine asset retirement obligation; (3) GRANTED IN PART & DENIED IN PART dft's 75 MOT ION in Limine to Preclude the Use of Magnum Hunter's ARO as Evidence of the Correct Value of NGAS' ARO; granting as Evans may not testify as to the exact amount less that Magnum Hunter would have paid for NGAS had the financial statements b een accurate or that Magnum Hunter would not have purchased NGAS; denied as Evans may testify that Magnum Hunter would have paid less for NGAS; (4) DENIED dft's 74 MOTION in Limine to Exclude Gary Evans' Speculative Damages Testimony. Signed by Judge Joseph M. Hood on 11/13/13.(KJR)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
MAGNUM HUNTER
RESOURCES CORPORATION,

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Plaintiff,
v.
HALL, KISTLER &
COMPANY, LLP,
Defendant.

Civil Case No.
5:12-cv-70-JMH-REW
MEMORANDUM OPINION
AND ORDER

***
This matter is before the Court upon Motions in Limine
filed by Defendant. Defendant has filed a Motion to Exclude any
Evidence of Defendant’s PCAOB Inspection Reports and Violations
Contained Within [D.E. 72], a Motion to Limit Evidence of Gold
Mine Asset Retirement Obligation (ARO) Testimony [D.E. 73], a
Motion

to

Exclude

Gary

Evans’

Speculative

Damages

Testimony

[D.E. 74], and a Motion to Preclude the Use of Magnum Hunter’s
ARO as Evidence of the Correct Value of NGAS’ ARO [D.E. 75].
Having

been

fully

briefed,

and

the

Court

being

otherwise

sufficiently advised, these motions are ripe for review.
A. Motion to Exclude any Evidence of Defendant’s PCAOB
Inspection Reports and Violations Contained Within
Defendant seeks to exclude reports issued by the Public
Company Accounting Oversight Board (PCAOB) as to Defendant Hall
Kistler & Company, LLP for inspections performed in the years

2006, 2010, and 2012. Defendant claims that the reports are not
relevant, the use of the reports would confuse and mislead the
jury,

the

reports

cannot

be

used

to

establish

general

negligence, the 2012 inspection is not yet complete, the 2012
inspection does not address any of the alleged instances of
negligence in this case, and, finally, that the probative value
of the reports is substantially outweighed by the danger of
unfair prejudice.
“Evidence is relevant if it has any tendency to make a fact
more or less probable than it would be without the evidence and
the fact is of consequence in determining the action.” Fed. R.
Evid. 401. The inspections performed by the PCAOB in 2006 and
2010 do not include a review of any work prepared by Defendant
that gives rise to this action, and do not include a review of
any

work

performed

by

Defendant

on

Plaintiff’s

behalf.

Therefore, the reports issued by the PCAOB for the inspections
performed in 2006 and 2010 are not relevant to this suit.
However,

the

report

issued

pursuant

to

the

inspection

performed in 2012 deals with the particular audit at issue in
this case. This report details whether Defendant employed the
proper procedures when preparing the audit of NGAS’ financial
statements. Therefore, the report issued by the PCAOB pursuant
to the inspection performed in 2012 is relevant and does not go
to whether Defendant was “generally negligent,” but to whether
2

Defendant

maintained

the

proper

procedures

during

the

audit

giving rise to Plaintiff’s cause of action.
The probative value of the PCAOB report issued pursuant to
the 2012 inspection is not substantially outweighed by unfair
prejudice. See United States v. Sanders, 95 F.3d 449, 453 (6th
Cir. 1996) (citing United States v. Mullins, 22 F.3d 1365, 1373
(6th Cir. 1994)) (“Evidence that is prejudicial only in the
sense

that

it

paints

the

defendant

in

a

bad

light

is

not

unfairly prejudicial pursuant to Rule 403.”). This report is
highly probative as it describes whether Defendant employed the
proper accounting procedures in performing the audit of NGAS’
financial statements. Any unfair prejudice that may result from
the introduction of the report does not substantially outweigh
the highly probative nature of this evidence.
B. Motion to Limit Evidence of Gold Mine ARO Testimony
Defendant

moves

to

limit

the

evidence

of

the

cost

of

closing the gold mine to the testimony of David Krueger, Magnum
Hunter’s former Chief Accounting Officer. Defendant claims that
any evidence from an unnamed, previously unidentified Redstar
representative would constitute unfair surprise. Plaintiff does
not challenge this Motion, except that it asserts it should be
allowed

to

present

evidence

of

accounting expert, Jim Tencza.

3

the

damages

through

its

In its Motion for Summary Judgment, Defendant challenged
Plaintiff’s

damage

calculation

for

closing

the

gold

mine,

claiming it had no basis for its damages calculation. [D.E. 54
at 35]. Plaintiff responded by citing to its expert, Jim Tencza,
and his opinion that $2 million was a reasonable estimate of
liability. [D.E. 60 at 30]. The Court, in ruling on the summary
judgment motion, found that “[w]hile Hall Kistler disagrees with
Tencza’s opinion, this is ultimately an issue for the jury.”
[D.E. 64 at 15]. Thus, as Defendant is aware of this expert
opinion, Jim Tencza shall be permitted to testify as to the
damages

calculation

for

closing

the

gold

mine.

However,

Plaintiff is precluded from presenting previously undisclosed
testimony as to the damages for closing the gold mine, including
that

of

an

unnamed,

previously

unidentified

Redstar

representative.
C. Motion to Exclude Gary Evans’ Speculative Damages
Testimony
Defendant moves to prevent Gary Evans from testifying that
Plaintiff would not have purchased NGAS, or would have paid a
different amount for NGAS if the financial statements had been
accurate,

claiming

this

amounts

to

speculation.

Plaintiff

asserts that Evans’ testimony that Plaintiff would have paid $14
million less for NGAS is not speculation because it is dollar

4

for dollar the overstatement on NGAS’ financial statements, and
because this testimony goes to the element of reliance.
Any

testimony

by

Gary

Evans

as

to

the

exact

amount

Plaintiff would have paid to purchase NGAS had the financial
statement been accurate amounts to rank speculation. “Proof of
damages

must

be

based

on

factual

evidence,

not

on

mere

speculation.” Agacinski v. Zamborowski, 972 F.2d 346, 1992 WL
184580, at *4 (6th Cir. Aug. 4, 1992). Accordingly, Evans may
not testify as to the exact amount Magnum Hunter would have paid
for NGAS had the financial statements been accurate. See ElyriaLorain Broad. Co. v. Lorain J. Co., 298 F.2d 356, 360 (6th Cir.
1961) (“[A] witness may not testify to what he would have done
had the situation been different from what it actually was.”).
Evans may be permitted to testify that Plaintiff would have paid
a lower value for NGAS had it known its assets were not as great
as was represented in the financial statements. However, the
exact amount Plaintiff would have offered and the exact amount
the

Board

of

Magnum

Hunter

would

have

approved

had

the

circumstances been presented differently is pure speculation.
Testimony by Gary Evans that Magnum Hunter would not have
purchased NGAS had they known the true nature of NGAS’ financial
statements is not relevant to this action. Plaintiff, through a
claim of negligent misrepresentation, seeks recovery of damages
based upon the overstatement of NGAS’ assets in its financial
5

statements

that

Defendant

failed

to

discover

and

correct.

Plaintiff is not attempting to rescind its purchase of NGAS, but
is seeking to recover for what it claims was an overpayment due
to

Defendant’s

breach

of

a

duty.

Therefore,

testimony

that

Plaintiff would not have agreed to purchase NGAS if it had known
the true nature of NGAS’ assets is not relevant to the issues
before this Court.
D. Motion to Preclude the Use of Magnum Hunter’s ARO
as Evidence of the Correct Value of NGAS’ ARO
Defendant moves to preclude the use of Magnum Hunter’s ARO
as evidence of the correct value of NGAS’ ARO. Plaintiff claims
damages, in part, because NGAS improperly calculated its ARO and
Defendant

failed

to

remedy

the

improper

calculation

when

performing the audit of NGAS’ financial statements.
According to Plaintiff’s expert, Jim Tencza, and cited by
Defendant’s memorandum in support of its motion, ARO is properly
calculated

by

using

a

formula

with

many

different

factors,

including the proper discount rate. [D.E. 60-2 at 12-13; 75-1 at
1]. Defendant claims that testimony about Plaintiff’s ARO should
be excluded because Plaintiff and NGAS would have had different
discount rates. Thus, the ARO that would have been carried on
the books of each company would have differed.
While

Defendant

may

be

correct

that

different

discount

rates would impact the ARO calculation, and, thereby, damages,

6

this is an issue best suited for cross-examination. Furthermore,
in

ruling

stated

on

that

Defendant’s

“Magnum

summary

Hunter

has

judgment

come

motion,

forward

with

the

Court

sufficient

evidence to present the issue of oil and gas well ARO damages to
the jury.” [D.E. 64 at 14]. Thus, Defendant is free to question
witnesses on the difference in the discount rate between the two
companies, but Plaintiff is also free to present evidence of
damages calculations as to the AROs, including Magnum Hunter’s
ARO for the oil and gas wells purchased from NGAS.
Accordingly, for the foregoing reasons, IT IS ORDERED:
(1)

that

Defendant’s

Motion

to

Exclude

any

Evidence

of

Defendant’s PCAOB Inspection Reports and Violations Contained
Within [D.E. 72] be, and the same hereby is, GRANTED IN PART, in
so

far

as

the

PCAOB

reports

relating

to

the

2006

and

2010

inspections are excluded, and DENIED IN PART, in so far as the
PCAOB report relating to the 2012 inspection is admissible;
(2)

that Defendant’s Motion to Limit Evidence of Gold Mine

Asset Retirement Obligation Testimony [D.E. 73] be, and the same
hereby is, GRANTED IN PART, in so far as no evidence from a
previously unnamed, unidentified party may be introduced, and
DENIED IN PART, in so far as Jim Tencza may be permitted to
testify on the gold mine asset retirement obligation;
(3)

that

Defendant’s

Motion

to

Exclude

Gary

Evans’

Speculative Damages Testimony [D.E. 74] be, and the same hereby
7

is, GRANTED IN PART, in so far as Evans may not testify as to
the exact amount less that Magnum Hunter would have paid for
NGAS had the financial statements been accurate or that Magnum
Hunter would not have purchased NGAS, and DENIED IN PART, in so
far as Evans may testify that Magnum Hunter would have paid less
for NGAS;
(4)

that Defendant’s Motion to Preclude the Use of Magnum

Hunter’s Asset Retirement Obligation as Evidence of the Correct
Value of NGAS’ Asset Retirement Obligation [D.E. 75] be, and the
same hereby is, DENIED.
This the 13th day of November, 2013.

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