Flagstone Development, LLC et al v. Joyner et al

Filing 269

ORDER granting 209 American Title & Escrow's Motion to Exclude Plaintiffs' Expert Dale Grabois; and granting 210 Motion for Partial Summary Judgment on Damages. Signed by Judge Richard F. Cebull on 10/24/2011. (EMA)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
BILLINGS DIVISION
FLAGSTONE DEVELOPMENT, LLC, an
Arizona limited liability company, and
LAWRENCE A. HEATH,

Cause No. CV-08-100-BLG-RFC

Plaintiffs,
-vsORDER
WAYNE JOYNER, JUSTIN JOYNER, as
individuals; ROCKY MOUNTAIN
TIMBERLANDS, LLC, a Montana limited
liability company, WAYNE
MARCHWICK, AMERICAN TITLE
AND ESCROW, a Montana corporation,
FIRST AMERICAN TITLE COMPANY,
a California corporation, DEVELOPER
FINANCE CORPORATION, a
Massachusetts corporation, NICHOLAS
POWERS, III, a/k/a NICHOLAS D.
POWERS, JAKE KORELL, LANDMARK
OF BILLINGS, INC., a Montana
corporation, JON USSIN, U BAR S REAL
ESTATE, a Montana corporation, and
JOHN DOES 11 through 30,
Defendants.
Currently pending before the Court Defendant American Title and Escrow’s
Motion for Partial Summary Judgment on Damages and Motion to Exclude
Plaintiffs’ Damages Expert Grabois. Defendants U Bar S Real Estate, Jon Ussin,
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Justin Joyner, Wayne Joyner, Rocky Mountain Timberlands, Nicholas Powers, III,
and Developer Finance Corporation.

UNDISPUTED MATERIAL FACTS
Plaintiffs have disclosed Dale Grabois as an expert on Plaintiffs’ damages.
Grabois has submitted his expert report and opines that Plaintiffs’ total damages
consist of lost development profits in the amount of $17,709,985.50. Grabois’
report states all of the alleged lost profits in one full page, but contains virtually no
calculations. Grabois states “the development would have brought in $40,150,000
in Gross Sales” and “[c]osts would have been $25,900,000.” However, Grabois
does not provide any basis, authority or support to demonstrate how he came up
with his Gross Sales or cost estimates.
It is readily apparent that the information upon which Grabois relied upon
for his expert opinion came directly out of the Investment Prospectus prepared by
Flagstone Development LLC and Lawrence Heath in late September to mid
October, 2007 (“Prospectus” herein). The Prospectus projected total gross sales of
$40,150,000. So did Grabois’ report. The Prospectus projected sales of 585 lots
in three phases, with escalating lot prices in each phase from $65,000 to $68,000
to $72,000. So did Grabois’ report.
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The Prospectus estimated development costs, including purchase costs,
commissions, operating expenses, marketing costs, and loan costs of $25,900,00.
So did Grabois’ report. The Prospectus estimated a gross profit of $14,250,000,
and so did Grabois’ report. The Prospectus deducted a projected $865,000 interest
payment, and split the remaining profit equally between the prospective investors
and the developer in order to come up with a projected sales profit of $6,692,500.
So did Grabois’ report.
The Prospectus estimated “post-development cash flows” for years four
through eighteen of $19,001,747. Most of this estimated cash flow came from
seller-financed lot sales, based on the Prospectus’ estimate that 60% of all lot sales
would be financed by Flagstone at 10.75% interest. The Prospectus further
estimated management fees in the amount of $660,000 which Flagstone could earn
during the first eighteen years of development. Grabois’ report adopted and
copied every one of these estimates. Grabois’ report also contains a 2%
commission on every lot sale for Flagstone, as reflected in the Prospectus.1

1

Grabois’ report appears to contain a mathematical mistake. The Prospectus, and
Grabois, project total lot sales for all 585 lots to be $40,150,100, so 2% of lot sales would be
$803,000. Grabois calculated the 2% commission at $856,612. Because the Grabois’ report
contains no exhibits, supporting calculations or other information supporting the commission
calculation, the Court can only surmise this is an error in the report.
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Grabois totaled up the six projections to come up with his “Total Lost
Profit” number of $17,709,985.50.
ANALYSIS
1.

Should Grabois’ Expert Opinion be Excluded?

Rulings on the admissibility of expert testimony under Fed.R.Evid. 702 are
in the sound discretion of the trial court. General Elec. Co. v. Joiner, 522 U.S.
136, 118 S.Ct. 512, 517, 139 L.Ed.2d 508 (1997). The issue is whether the
expected testimony of Grabois has sufficient reliability to be admissible under the
standards for expert testimony set out in Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993).
Plaintiffs bear the burden of establishing the admissibility of Grabois’ proposed
expert opinion testimony on damages. See Daubert, supra, 509 U.S. at 592, n. 10.
If scientific, technical, or other specialized knowledge will assist the trier of
fact to understand the evidence or to determine a fact at issue, a witness qualified
as an expert by knowledge, skill, experience, training or education may testify
thereto in the form of an opinion or otherwise, if (1) the testimony is based upon
sufficient facts or data; (2) the testimony is the product of reliable principles and
methods; and (3) the witness has applied the principles and methods reliably to the
facts of the case. Fed.R.Evid. 702. The qualifications of an expert to be a witness
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and the grounds for establishing the admissibility of his testimony must be proven
by a preponderance of the evidence. Daubert, 509 U.S. at 592, n. 10. Some
factors that may be considered in order to determine the admissibility of an
expert’s testimony include: whether the expert’s theory or technique can be (and
has been) tested, whether the theory or technique has been subjected to peer
review and publication, the known or potential rate of error, and “general
acceptance.” Id. at 593-94.
The objective of Daubert’s “gatekeeping” requirement is to ensure the
reliability and relevancy of expert testimony; it 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 characterizes the
practice of an expert in the relevant field. Kumho Tire Co., Ltd. v. Carmichael,
527 U.S. 137, 152 (1999). The trial judge must make a reliability determination
on the record to fulfill the “gatekeeping” function. Mukhtar v. Cal. State Univ.,
Hayward, 299 F.3d 1053, 1066 (9th Cir.2002), amended by 319 F.3d 1073 (9th
Cir.2003) (distinguishing cases where the district court made “explicit findings of
reliability,” from cases where there was a “complete failure to make any reliability
finding”).

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The Supreme Court made it clear in Daubert that “[v]igorous crossexamination, presentation of contrary evidence, and careful instruction on the
burden of proof are the traditional and appropriate means of attacking shaky but
admissible evidence.” Daubert, 509 U.S. at 596. Further, the advisory notes to
the 2000 amendment make clear that, in accordance with the Supreme Court’s
directive in Kumho Tire Co. v. Carmichael, 527 U.S. 137 (1999), Rule 702 “is not
intended to provide an excuse for the automatic challenge to the testimony of
every expert.”
The Supreme Court, the Ninth Circuit, and this Court have all ruled that
admissible expert testimony does not include unsupported speculation and
subjective belief. See Guidroz-Brault v. Missouri Pac. R. Co., 254 F.3d 825, 829
(9th Cir. 2001), citing Daubert at 590; see also, Claar v. Burlington Northern R.R.
Co., 29 F.3d 499, 502 (9th Cir. 1994) (affirming exclusion of experts’ opinion
testimony because experts failed to demonstrate conclusions were based upon
anything more than “subjective beliefs and unsupported speculation”); United
States v. W.R. Grace, 455 F.Supp.2d 1181, 1187 (D.Mont. 2006). It is well-settled
that an expert’s testimony should be excluded where it is based on subjective
belief or unsupported speculation which amounts to no more than a bald
conclusion (sometimes called an “ipse dixit” opinion) or guesswork. See General
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Electric, 522 U.S. at 146 (holding that trial court may properly exclude ipse dixit
opinions).
Additionally, an expert’s opinion must be excluded if that expert is merely
“parroting” some other person’s opinion rather than formulating his own. See e.g.,
Dura Auto. Sys. of Indiana, Inc. v. CTS Corp., 285 F.3d 609, 612-614 (7th Cir.
2002) (expert not allowed to be “mouthpiece” of another person); Villagomes v.
Lab. Corp. of Am., 2010 WL 4628085 (D.Nev. Nov. 8, 2010) (expert witness
cannot simply parrot opinions of non-testifying experts).
Grabois’ proposed expert opinion on alleged damages incurred by Plaintiffs
is properly excluded. Grabois formed his expert opinion on Plaintiffs’ damages by
reviewing the Prospectus, copying down numbers from it, adding them up, and
stating they seemed “reasonable and supported” to him. The Court’s gatekeeping
function pursuant to Daubert prevents acceptance of Grabois’ bald assurance that
his opinion is reasonable and supported. See e.g., W.R. Grace, 455 F.Supp.2d at
1187.
Grabois duplicated his financial projections directly from the Prospectus
that Plaintiffs wrote. The Prospectus included the following financial projections
and speculations:

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1.

The individual size of the lots (20 acres) and how many lots (585)
Flagstone would be able to develop on the raw land it was seeking to
acquire;

2.

How many of those lots Flagstone would be able to sell (all 585);

3.

What price those lots might bring in the open market ($65,000 in the
first year; $68,000 in the second year; and $72,000 in the third year);

4.

How many “phases” of sales it would take to sell all of the lots at the
prices projected (three) and how long each “phase” would last (one
year each);

5.

Realtors’ commissions and closing costs on all lot sales ($3,919,000);

6.

The amount of all costs of developing the property physically
($7,657,000);

7.

The amount of all operating costs for the projected development,
($5,756,000), including marketing, management, sales office,
accounting, travel, and insurance costs;

8.

Interest expenses and loan fees ($3,934,000);

9.

The amount of interest income from notes receivable Flagstone could
earn ($3,243,000);

10.

The percent of all lot sales which Flagstone would finance for the lot
buyers (60%);

11.

The terms Flagstone could obtain for its seller-financed lot sales,
including the interest rate it could successfully charge (10.75%) and
the minimum FICO score it would be able to get (580);

12.

The amount of its seller-financed lot sales it could finance in a
hypothecation loan (80% of all seller-financed lot sales); and

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13.

The management fee Flagstone could earn by managing the
development from year one through year 18 ($660,000).

Each one of these financial projections and speculations was adopted and
assumed by Grabois. Grabois did not calculate any of his own projections or
attempt to test, verify, cross-check, or compare Heath’s projections to other
similarly-situated projects. Grabois did not justify or support a single one of these
speculative assumptions, nor did he provide a basis for any of them. These are
significant financial projections that cannot be adopted by Grabois as his own
without research, support and justification.
Further, the information Grabois copied from the Prospectus proved
inaccurate and unreliable. Heath admitted in his deposition that his projections in
the Prospectus ended in “disarray” and were “completely undone” due to new
planning requirements from Musselshell County which drove up the costs
substantially and significantly reduced the number of lots Flagstone could sell.
(Doc. 212, ¶ 10-11). Heath admitted in an email that the County’s new planning
requirements rendered his projected development “economically unfeasible” (sic)
(Doc. 212, ¶ 12). Heath also admitted in an email the “numbers” no longer
worked for his cash flow model following the engineering and planning
requirement changes, and was due to few lots for sale, and lower sales values,
among other issues (Doc. 212, ¶ 13).
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Regardless of how many educated professionals assisted Heath in the
Prospectus, an investment prospectus is only a series of educated estimates at
future financial projections. Even the Prospectus cautioned:
Flagstone does not make any representations or warranties,
expressed or implied, as to the accuracy or completeness of any
of the information in their Investment Prospectus, or, in the
case of projections, as to their attainability or the accuracy or
completeness of the assumptions from which they are derived.

Doc. 212, Ex. 10. Furthermore, the Prospectus warned it “is not intended to
provide the sole basis for any evaluation of Flagstone, the Transaction or the
interests offered in the Company.” Id.
If the Prospectus was not complete or accurate when it was prepared, and if
Heath never intended from the start for anyone to rely solely upon it to evaluate
Flagstone’s financial projections, the Prospectus does not later transform into a
sole and reasonable basis for Grabois’ lost profits opinion. Heath admitted the
Prospectus was not a reasonable basis to value Flagstone’s projected development
when it was authored, and it is not a reasonable basis to value the projected
development now.
Grabois’ proposed expert opinion on alleged damages incurred by Plaintiffs
must be excluded.

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2.

Is Partial Summary Judgment on Plaintiffs’ Lost Developmental
Profits Damages Claim Proper?

Summary judgment “should be rendered if the pleadings, the discovery and
disclosure materials on file, and any affidavits show that there is no genuine issue
as to any material fact and that the movant is entitled to judgment as a matter of
law.” Fed.R.Civ.P. 56(c)(2). An issue is “genuine” only if there is a sufficient
evidentiary basis on which a reasonable fact finder could find for the nonmoving
party and a dispute is “material” only if it could affect the outcome of the suit
under the governing law. Anderson, v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). The party moving for summary judgment has the initial burden of
showing the absence of a genuine issue of material fact. Anderson, 477 U.S. at
256-57. Once the moving party has done so, the burden shifts to the opposing
party to set forth specific facts showing there is a genuine issue for trial. In re
Barboza, 545 F.3d 702, 707 (9th Cir. 2008). The nonmoving party “may not rely
on denials in the pleadings but must produce specific evidence, through affidavits
or admissible discovery material, to show that the dispute exists.” Id.
On summary judgment, the evidence must be viewed in the light most
favorable to the non-moving party. Id. The court should not weigh the evidence

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and determine the truth of the matter, but determine whether there is a genuine
issue for trial. Anderson, 477 U.S. at 249.
A plaintiff cannot recover damages for alleged lost profits which are
speculative. See Stensvad v. Miners & Merchant Bank of Roundup, 196 Mont.
193, 640 P.2d 16303 (1982). Damages are only recoverable if they are “clearly
ascertainable both in nature and origin,” and alleged lost profit damages must be
“reasonably certain” to be awarded. See Id. at 206, 640 P.2d at 1310. When the
plaintiff has no record of past profits to cite to, the award of lost profits “may be
sustained only if we can say that the profits are not based on speculation.” See Id.
This case is analogous to Northwood Estates, LLC v. Wauer, 36
Mont.Fed.Rep. 235 (D.Mont. 2008) wherein Judge Molloy granted partial
summary judgment because Northwood did not have admissible evidence in the
record regarding the existence or amount of Northwood’s alleged lost
development profits. Id. at 246. Relying on Stensvad, supra, Judge Molloy ruled
the “more fundamental reason why Northwood’s claim for lost profits does not
survive summary judgment” was because the claim was “hopelessly speculative.”
Id. at 247.
Plaintiffs’ claim for alleged lost development profits is as hopelessly
speculative as the claim in Northwood. The lost profit claim fails as a matter of
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law. Plaintiffs rely entirely on Grabois’ opinion to support their claim of lost
development profits. Without Grabois, Plaintiffs’ lack of tangible evidence to
establish in the record a reasonably certainty that Plaintiffs would have derived a
profit at all, as required by Montana law, is fatal to their lost profits damages
claim.
Finally, and perhaps most difficult to overcome, is Heath’s own admission
that the new planning requirements from Musselshell County made his planned
development “economically unfeasible” (sic). This admission creates a problem
for Plaintiff in that he was not even reasonably certain about the status of the
development or its economic viability.
CONCLUSION
Therefore, IT IS HEREBY ORDERED that the Motion to Exclude
Plaintiffs’ Expert Dale Grabois (Doc. 209) and Motion for Partial Summary
Judgment on Damages (Doc. 210) are GRANTED.
DATED this 24th day of October, 2011.
/s/ Richard F. Cebull______________
RICHARD F. CEBULL
U.S. DISTRICT COURT JUDGE

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