LEESE et al v. MARTIN et al
Filing
128
OPINION. Signed by Chief Judge Jerome B. Simandle on 3/17/2014. (tf, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
MICHAEL LEESE, et al.,
HONORABLE JEROME B. SIMANDLE
Plaintiffs,
v.
Civil Action
No. 11-5091 (JBS/AMD)
LOCKHEED MARTIN CORP.,
Defendant.
OPINION
APPEARANCES:
Julie A. LaVan, Esq.
Alaina A. Gregorio, Esq.
Drew Chigounic, Esq.
LAVAN LAW
11 East Maine Street, 2nd Floor
Moorestown NJ 08057
Attorneys for Plaintiffs
Robert L. Ebby, Esq.
Steven T. Miano, Esq.
Robert A. Wiygul, Esq.
HANGLEY ARONCHICK SEGAL PUDLIN & SCHILLER
One Logan Square, 27th Floor
Philadelphia PA 19103
Attorneys for Defendant
SIMANDLE, Chief Judge:
I. Introduction
Plaintiffs Michael and Ashley Leese and Jay and Racquel
Winkler allege that years of environmental contamination
attributable to Defendant Lockheed Martin Corp. has decreased
the value of their residential properties in Moorestown, New
Jersey. The question for the Court is whether Plaintiffs’ expert
valuation report is admissible evidence of loss of value, and,
if so, the remaining portion of Defendant’s pending motion for
partial summary judgment will be denied. [Docket Item 58.]
Defendant moves to preclude the testimony of Plaintiffs’
valuation expert, Jerome McHale [Docket Item 117], and seeks
summary judgment on Counts V through VIII of the Second Amended
Complaint, to the extent those tort claims derive from loss of
value to the residential properties. If McHale’s report and
testimony are excluded, Plaintiffs will have adduced no
admissible evidence on the loss of property values, and
Defendant is entitled to partial summary judgment.
Defendant challenges both the reliability of McHale’s
methodology and the fitness of the report. Because the
methodologies are based in part on arbitrary and unreliable
decisions by McHale without support in scientific literature or
practice, and because fitness problems may mislead or confuse a
jury, the Court will exclude McHale’s report from evidence and
grant partial summary judgment in favor of Defendant.
II. Background
The facts of this case were recited in the Court’s previous
Opinion and will not be repeated here. See Leese v. Lockheed
Martin Corp., No. 11-5091, 2013 WL 5476415, at *1-*3 (D.N.J.
Sept. 30, 2013).
2
Defendant moved for partial summary judgment on Plaintiffs’
tort claims. The Court granted Defendant’s motion as to personal
injury claims for the Leese children but deferred judgment on
Plaintiffs’ claims for loss of property value. Id. at *9, *14.
Pursuant to Fed. R. Civ. P. 56(e), the Court permitted
Plaintiffs to supply an expert report quantifying the diminished
property value for each residential property. Id. at *14.
Plaintiffs timely filed an expert report for each property
[Docket Item 111], the admissibility of which Defendant now
challenges.
A. McHale’s reports
Jerome J. McHale produced two valuation reports, one for
the Leese property (5 Victoria Court) and one for the Winkler
property (7 Victoria Court). The reports are nearly identical.
McHale concluded that each property is worth $295,000 “as is,”
and would be worth $600,000 “if clean,” meaning the loss in
value at each property is $305,000. [JEROME J. MCHALE, SELF-CONTAINED
APPRAISAL
OF
RESIDENTIAL DWELLING (5 VICTORIA COURT) at 2 (Oct. 11, 2013)
(hereinafter “McHale Rept.”).]1
1. “If clean” valuation
McHale arrived at his “if clean” valuation using a “sales
comparison” approach by averaging the sale prices of four
1
The Court will cite to the Leese report only, as the reports
are nearly identical.
3
comparable properties within the Plaintiffs’ residential
development. (Id. at 28-29.) The four properties, which sold
between April 2012 and October 2013, fetched prices between
$520,000 and $755,100. (Id. at 35.) McHale adjusted the sales
price for each comparator based on variations among the
properties (e.g., number of rooms, square footage, or other
amenities) and weighted each of the sales equally to arrive at
the “if clean” valuation of $600,000. (Id. at 36-37.)
2. “As is” valuation
McHale described the environmental issues on the properties
that contributed to a loss in value:
As a result of sampling showing levels above the State
standard in addition to the presence of monitoring
wells on the property, the known presence of a
contaminated site located across the street, the fact
that the subject is located hydrogeologically down
gradient from this area, the property sits above the
plume, the labeling of the subject being within the
CEA, and having to allow access for future testing
creates an inconvenience and stigma to the property.
(Id. at 38.) He then used three different techniques to estimate
the “as is” value of the properties, and calculated the weighted
average of the three valuations to arrive at the final “as is”
figure of $295,000. These three techniques that form the
methodology for his “as is” opinion of value are next described.
a. Technique 1: “cost to cure”
4
A “cost-to-cure” estimate subtracts from the “if clean”
valuation the amount of investment a homeowner would have to
make to mitigate the effects of contamination. (Id. at 44.)
McHale based his estimation of mitigation costs on a
“Mitigation Work Plan and Budget Evaluation” created by Joel
Rogers of Impact Environmental (“the Rogers letter”). (Id. at
43-44, A81-A82.) The Rogers letter provided an estimate of
ongoing and one-time costs “required to mitigate effects of
contaminated groundwater and soil vapor intrusion on the subject
property at 5 Victoria Court in Moorestown, New Jersey.” (Id. at
A81.) Rogers wrote that his estimate was
designed considering the scenario in which the
upgradient source of contamination is not abated by
LMC,
and
therefore
the
proposed
measures
are
prophylactic as opposed to curative in nature. It is
considered the minimum requirement to intercept and
treat contaminated groundwater and soil vapor plumes
migrating towards the subject house, as well as to
provide protection within the house against soil vapor
intrusion from residual vapors or in the event of
failure of the extraction system.
(Id.) Rogers identified $272,799 in one-time costs, such as
pilot testing, permitting, and the installation of wells, piping
and treatment systems, among others. (Id. at 44, A82.) The
letter also described annual recurring costs of approximately
$51,100. (Id. at A82.) Plaintiffs did not qualify Rogers as an
expert in this case.
5
McHale projected the ongoing costs over 10 years, and added
that sum to the one-time costs. (Id. at 44.) He concluded that
the present value of mitigation expenditures was $720,000,
which, when subtracted from the $600,000 “if-clean” valuation,
resulted in a negative valuation of $120,000. (Id. at 45.)
McHale rounded up the cost-to-cure estimate to zero dollars for
his “as is” value. (Id.)
b. Technique 2: “paired sales analysis”
A paired sales analysis looks to sales of other stigmatized
properties, estimates “if clean” valuations for those
properties, and calculates a “percentage discount” for
environmental stigma for each property. (Id. at 45.) The average
percentage discount is applied to the “if clean” estimations of
Plaintiffs’ properties. (Id.)
McHale considered four other stigmatized properties that
had “if clean” values of $155,000 (206 Emerald Avenue); $165,000
(800 Greenwood Avenue); $200,000 (618 Charles Street); and
$285,000 (16 Greentree Way) -- each less than half of the “if
clean” value of Plaintiffs’ properties. These properties sold at
“stigma” discounts of 35 percent, 50 percent, 15 percent and 43
percent, respectively. (Id. at 46.) Three of the properties sold
within the last three years; the Charles Street property sold in
2005. (Id.) None of the properties were contaminated by
trichloroethylene (“TCE”) or tetrachloroethylene (also known as
6
perchloroethylene or “PCE”), the contaminants that had been
detected on Plaintiffs’ properties. Rather, three of the
comparator properties were contaminated with oil, and the
Emerald Avenue property had an unknown contaminant.2 (Id. at A92,
A94, A96, A98.)
In calculating a “weighted average diminution in value,”
McHale weighed the three highest stigma discounts equally, at 30
percent each, and the lowest discount at 10 percent. (McHale
Rept. at 46.) McHale said he weighted the Charles Street
discount the least because it came from the oldest sale, but he
admitted that he did not consult any authority to calculate the
weighted average discount; he described the process as “opinion
based” derived from his “experience.” (McHale dep. at 228:21299:11.) He testified that “it’s common practice to give your
sales weight,” and “[i]t’s something I decided to do. And I
believe you’ll find most other appraisers do it as well.” (Id.
at 229:10-21.) This process yielded a weighted average
diminution in value of 40 percent. (Id.)
McHale decided, however, that the discount applied to
Plaintiffs’ properties should be greater than 40 percent,
2
McHale describes the “stigma” of the Emerald Avenue property
as: “Underground contamination from off-site source, DEP
mitigation system installed.” (Id. at A96.) At his deposition,
McHale could not recall the contaminant at issue on the property
or the level of contamination. (McHale dep. at 217:16-24,
218:14-20.)
7
because three of the four comparators “primarily involve
underground oil tanks and contaminated soils” and “can be
remediated and will no longer suffer from a stigma, unlike the
subject property.” (Id. at 45-46; McHale Rept. at A92, A94, A96
& A98.) He concluded that an additional 10 percent discount was
appropriate, resulting in a 50 percent stigma discount he
applied to the Plaintiffs’ properties. (Id. at 46.) McHale
explained that he added 10 percent “based on the fact that we’re
located on a plume. We have continued contamination and
mitigation that the majority of matched pairs did not have.”
(McHale dep. at 233:7-13.) He selected the figure of 10 percent
because he “basically allocated 5 to the location on the plume
and continued stigma for the market. There’s something. It’s
there. . . . There is only a small portion of the market in my
opinion that would even look at this property.” (McHale dep. at
235:15-21.) However, McHale conceded at his deposition that one
of the stigmatized comparators was subject to continued
contamination and mitigation, and stigma attributable to ongoing
contamination already was factored into the percentage discount
for that property. (McHale dep. at 231:10-17.)
The paired sales analysis yielded an “as is” valuation of
$300,000, which is 50 percent of the “if clean” $600,000
valuation.
c. Technique 3: “realtor and broker surveys”
8
McHale surveyed 11 area realtors to “ascertain what, if
any, would be an appropriate discount to a property that was
faced with a stigma . . . .” (Id. at 47.) McHale instructed
interviewers to determine (1) how long each respondent had been
a real estate agent, (2) whether the realtor had ever listed or
sold a house with stigma, (3) whether the stigma had an effect
on the sales price, and (4) whether the realtor was familiar
with Wexford Estates, the Plaintiffs’ development. (Def. Mot.
Br. Ex. 14 [Docket Item 1117-16].) McHale then instructed the
interviewers to ask: “If a home in Wexford Estates without any
contamination issues was worth $600,000, what would you expect
to sell the same model for that had a subsurface depressurized
remediation system in the basement?”3 (Id.)
Two of the 11 realtor respondents had never listed or sold
homes with stigma or environmental issues. Three declined to
3
McHale’s report notes that “ownership had a subsurface vapor
mitigation system installed in the spring of 2013 in the
basement.” (McHale Rept. at 39.) However, for some reason,
McHale’s valuation assumed that the properties did not have
these systems already installed. McHale’s report states that
“[i]t is a hypothetical condition of the appraisal that the
owner installed vapor recovery system does not exist at this
time.” (McHale Rept. at 2.) McHale made this assumption “because
the property owners incurred that cost on their own,” and he
didn’t want the appraisal to be off by $1,500 or $2,000, which
is the approximate cost of the system. (McHale dep. at 86:2488:8.) He stated he did not believe that the vapor intrusion
system actually addressed any environmental problem at the
property. (Id.at 87:19-22.) He also stated his assumption would
not have a material effect on the market valuation. (Id. at
89:10-12.)
9
offer an opinion as to a uniform percent discount that should be
applied to stigmatized property, and one realtor stated she
would not sell a home to any of her clients in a contaminated
development. (McHale Rept. at 47.) Three realtors thought the
stigma discount should be at least 10 percent, three thought the
discount should be 15 percent, and one thought the discount
should be 20 percent or more.4 (Id.) Five of these respondents
purported to suggest a percentage discount to the listing price,
without stating what the expected sale discount should be. (Id.)
McHale also surveyed nine mortgage professionals about issuing
loans on an environmentally compromised property. (Id. at 48.)
McHale concluded that “[b]ased on the realtor survey, a
discount on the listing price of the property is 20%.” (Id. at
49.) McHale added another 5 percent because “non-stigmatized
properties at Wexford Estates sold for 5% below their listing
prices over the past two years.” (Id.) He then added another 15
percent because of “additional marketing time and effort, the
difficulty in obtaining financing, and a discount for a cash
buyer,” resulting in a final discount of 40 percent. (Id.) Forty
percent of the $600,000 “if-clean” valuation yielded an “as is”
survey valuation of $360,000. (Id.)
4
Two of the three realtors who suggested a 15 percent discount
actually stated the discount should be at least “10% to 20%.”
(Id.) McHale quantified these responses, for purposes of his
report, as 15 percent. (Id.)
10
d. Reconciling the valuation estimates
In reconciling the three estimates, McHale gave the most
weight to the “paired sales” valuation of $300,000 (50 percent
weight), the second-highest weight to the survey valuation of
$360,000 (40 percent weight) and the least weight to the costto-cure valuation of zero dollars (10 percent weight). (Id. at
50.)
He explained:
the most weight has been given to Technique 2, the
paired sales analysis, as this is the most reflective
of the potential buyers’ market and mindset. The least
weight has been given to Technique 1 because it is
unlikely that a prospective buyer would agree to an
annual expense of more than $50,000.
(Id.) McHale calculated the “as is” valuation of the property to
be $295,000. (Id.)
3. Loss of value
McHale subtracted the “as is” valuation of $295,000 from
the “if clean” valuation of $600,000, and determined the loss in
value was $305,000 for each property. (Id.)
III. Standard of review
The admissibility of expert opinions is governed by Fed. R.
Evid. 702 & 703, and Daubert v. Merrell Dow Pharm., Inc., 509
U.S. 579 (1993), and its progeny. Rule 702 provides:
A witness who is qualified as an expert by knowledge,
skill, experience, training, or education may testify
in the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other
specialized knowledge will help the trier of fact to
11
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. Expert opinions may be based on
facts or data in the case that the expert has been
made aware of or personally observed. If experts in
the particular field would reasonably rely on those
kinds of facts or data in forming an opinion on the
subject, they need not be admissible for the opinion
to be admitted. But if the facts or data would
otherwise be inadmissible, the proponent of the
opinion may disclose them to the jury only if their
probative value in helping the jury evaluate the
opinion substantially outweighs their prejudicial
effect.
Fed. R. Evid. 703. Daubert announced a nonexhaustive list of
factors that bear on the inquiry of reliability: (1) whether the
theory or technique can be and has been tested, (2) whether the
theory or technique has been subjected to peer review, (3) the
known or potential rate of error and the existence of and
maintenance of standards controlling the technique’s operation,
and (4) general acceptance of the practice. Oddi v. Ford Motor
Co., 234 F.3d 136, 144-45 (3d Cir. 2000) (quoting Daubert, 509
U.S. at 593-97). “[A]ny step that renders the analysis
unreliable under the Daubert factors renders the expert’s
testimony inadmissible. This is true whether the step completely
changes a reliable methodology or merely misapplies that
12
methodology.” In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 745
(3d Cir. 1994); see also In re TMI Litig., 193 F.3d 613, 695 (3d
Cir. 1999); In re Human Tissue Products Liab. Litig., 582 F.
Supp. 2d 644, 656 (D.N.J. 2008).
In general, the trial court has discretion to hold an
evidentiary hearing when a Daubert issue arises. See FEDERAL
JUDICIAL CENTER, REFERENCE MANUAL
ON
SCIENTIFIC EVIDENCE 35-36 (3d ed.
2011). In the Third Circuit, a hearing is typically required
where the court excludes an expert report on the grounds that
the opinions are “insufficiently explained and the reasons and
foundations for them inadequately and perhaps confusingly
explicated.” Player v. Motiva Enters. LLC, No. 02-3216, 2006 WL
166452, at *4 (D.N.J. Jan. 20, 2006), aff’d, 240 F. App’x 513
(3d Cir. 2007) (quoting Padillas v. Stork-Gamco, Inc., 186 F.3d
412 (3d Cir. 1999)). “Where the evidentiary record is
substantial, however, or the court has before it the information
necessary to determine that the expert lacks ‘good grounds’ for
his conclusions, an in limine hearing may be unnecessary.” Id.;
see also Oddi, 234 F.3d at 151-55 (stating that a hearing is
necessary “to determine how the expert reached his opinion”);
Elcock v. Kmart Corp., 233 F.3d 734, 745 (3d Cir. 2000) (“a
Daubert hearing would have permitted a fuller assessment of
Copemann’s [the expert] analytical processes and thus was a
necessary predicate for a proper determination as to the
13
reliability of Copemann’s methods”); Furlan v. Schindler
Elevator Corp., 516 F. App’x 201, 205 (3d Cir. 2013) (“A hearing
may not be required in all circumstances, particularly where the
depositions, affidavits, or briefing before the court are
sufficient to perform a proper analysis.”).
Pursuant to Fed. R. Civ. P. 56(a), the “court shall grant
summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.”
IV. Discussion
Defendant challenges the reliability of the three
techniques McHale used, as applied, and the fitness of the
opinions.5
A. Reliability and fitness of cost-to-cure analysis
(Technique 1)
Defendant argues the cost-to-cure methodology is unreliable
because it is based on the opinions about remediation costs by
Rogers, who is “an undisclosed, non-testifying expert,” and
therefore the opinion drawn from Technique 1 is inadmissible.
5
The record of this case includes a 283-page transcript of Mr.
McHale’s deposition, in which he was questioned at length about
his methodologies, his assumptions, and how he arrived at his
opinions. Because the record is sufficient to perform a proper
analysis, the Court did not hold an in limine hearing to take
additional testimony from McHale. No party requested the
opportunity to present live testimony or cross-examination of
Mr. McHale, so the Daubert hearing consisted of consideration of
the arguments of counsel and all proffered exhibits relevant to
this motion.
14
(Def. Mot. Br. at 23.) Defendant objects that Rogers’s letter
describes “proposed measures” to remediate the property that
“are prophylactic as opposed to curative in nature.” (Id. at 1011; McHale Rept. at A81.) Defendant also observes that
Plaintiffs did not designate Rogers as an expert and did not
provide proper disclosures for Rogers’s conclusions. (Def. Mot.
Br. at 11, 12 n.6.) Defendant reiterates, and McHale admitted at
his deposition, that the NJDEP does not require or recommend
that any of Rogers’s measures be implemented on Plaintiffs’
properties. (Id. at 12; McHale Dep. [Docket Item 117-9] at
156:10-15, 205:20-24.) Defendant argues that there is no basis
for Rogers’s conclusion that $720,000 of remedial measures are
“required” at each property. (Def. Mot. Br. at 24.) Because
Rogers’s conclusions are unsupported, Defendant argues that
McHale’s valuation using the cost-to-cure method is unreliable.
(Id. at 25.)
Defendant further argues that experts may not parrot or act
as a mouthpiece for other experts’ opinions, without independent
verification of those opinions. Muhsin v. Pac. Cycle, Inc., No.
2010-060, 2012 WL 2062396, at *4, *8 (D.V.I. June 8, 2012)
(stating that experts may not rely “upon opinions developed by
another expert without independent verification or validation of
the underlying expert’s work,” because Fed. R. Evid. 703
“contemplates that a testifying expert can validate the facts,
15
data and opinions he relied upon . . . and be subject to crossexamination on them”); Dura Auto. Sys. of Ind., Inc. v. CTS
Corp., 285 F.3d 609, 612-14 (7th Cir. 2002) (stating that an
expert “is not permitted to be the mouthpiece of a scientist in
a different specialty”).
Plaintiffs deny that the Rogers letter contains opinions;
they insist that it presents “data.” (Pl. Opp’n at 21) (emphasis
in original). Plaintiffs also point to the “BNA Environmental
Due Diligence Guide,” which states that “[e]nvironmental
engineers generally provide these [remediation] costs, often in
the form of a competitive bid” to appraisers. (Id.) Plaintiffs
contend that McHale was entitled to rely on Rogers’s estimate of
remediation costs.
The Rogers letter contains a mix of data (costs of various
services or equipment) and subjective analysis (what
“prophylactic” measures are “required”). While experts may not
simply “parrot” ideas of other experts, they “are permitted to
rely on materials used by other experts in developing their own
opinions.” I.B.E.W. Local Union 380 Pension Fund v. Buck
Consultants, No. 03-4932, 2008 WL 2265269, at *3 (E.D. Pa. June
3, 2008). Experts “may use a mix of objective data and
subjective analysis from another expert to . . . create an
admissible report,” and the testifying expert’s knowledge
regarding the underlying facts “go[es] to the weight accorded to
16
[that expert’s] report and testimony, rather than its
admissibility.” Id. (quoting In re Wagner, No. 06-1026, 2007 WL
966010, at *4 (E.D. Pa. Mar. 29, 2007) (ellipsis and insertions
in I.B.E.W.). Finally, experts may rely on facts or data that an
expert “in the particular field would reasonably rely” upon,
even if the underlying facts are inadmissible. Fed. R. Evid.
703; In re TMI Litig., 193 F.3d at 664. However, here, Rogers is
not an expert, because Plaintiffs never so qualified him.
The most significant problem with McHale’s cost-to-cure
analysis is that he may not reasonably rely on Rogers’s
unsupported, subjective analysis of what remedial measures are
“required” on the property. Rogers himself states that his
estimate describes “measures [that] are prophylactic as opposed
to curative in nature.” (McHale Rept. at A81.) In other words,
Rogers, by his own admission, does not intend his letter to
address the cost to cure the contamination on Plaintiffs’
properties. Rather, Rogers expresses opinions about what
prophylactic measures are “required” without explaining the
basis for such an opinion. He does not reference, for example,
minimum state regulatory or other standards that the property
must meet. Because Plaintiffs did not qualify Rogers as an
expert, he would not be allowed to testify about how he reached
his opinions and could not be cross-examined on these questions.
Without an explanation for why these proposed costs would be
17
necessary to cure environmental problems, Rogers’s opinions are
not of a type reasonably relied upon by experts in McHale’s
field in forming their opinions. See In re TMI Litig., 193 F.3d
at 664. This renders McHale’s valuation opinion unreliable.
Technique 1 suffers from a fitness problem, as well. McHale
describes the cost-to-cure analysis as estimating what steps
would “further mitigate the effects of the contaminated
groundwater and soil vapor intrusion to the indicated value of
the subject property ‘As If Clean.’” (McHale Rept. at 43)
(emphasis added). However, Plaintiffs admit that, at the time of
purchase, they knew the groundwater under their properties
contained TCE. (See Def. Mot. for Partial Summary Judgment
[Docket Item 87-7] Ex. 4 ¶¶ 6-7).) Remediating the property to
“if clean” levels would improve the property beyond what
Plaintiffs purchased, bestowing upon them an impermissible
windfall. In that respect, Technique 1 does not fit the question
of what loss of value the Plaintiffs allegedly suffered; the
proper analysis must take into account what Plaintiffs knew of
the condition of the properties at the time of purchase. As
explained above, the Rogers letter does not purport to address
what costs are required to improve the properties to the known
condition they were in when Plaintiffs bought them. Therefore,
Technique 1 does not address the relevant question, namely what
18
is the appropriate measure of Plaintiffs’ diminished property
value.
Because Technique 1 does not fulfil the reliability factors
and does not fit the question before the Court, testimony about
Technique 1 would not aid, and might confuse, a jury about the
appropriate measure of damages. The Court will grant Defendant’s
motion and exclude those portions of McHale’s report, as well as
any testimony, about the cost-to-cure technique.
B. Reliability and fitness of the “paired sales” analysis
(Technique 2)
Defendant argues that the paired sales analysis is flawed
because the “comparable” properties had “vastly different”
environmental conditions, none of which included contamination
by TCE or PCE. (Def. Mot. Br. at 12, 26, 31.) In addition,
Defendant argues that two of the four comparators are
inappropriate because the NJDEP required remediation on them,
whereas the NJDEP did not require remediation on Plaintiffs’
properties, and the cost of remediation on the two comparators
was estimated to be tens of thousands of dollars, not hundreds
of thousands as alleged for Plaintiffs’ properties. (Id. at 13,
32.) Defendant contends that McHale did not compare “apples to
apples,” as required by appraisal literature, because the
properties did not share conditions or severity of contamination
or similar costs of remediation. (Id. at 27-30.) Defendant
19
disagrees with McHale’s assumption that the market was not
sophisticated enough to distinguish between different
environmental conditions. (Id. at 29-30.)
Defendant also attacks McHale’s method of calculating a
percentage discount, arguing that he had no basis for according
the least weight to the least discounted property, or adding an
additional 10 percent to the weighted average discount. (Id. at
13-15.) At his deposition, McHale confirmed that he did not use
any literature or source or authority to come up with his
weighted average; rather, his weighted average was “opinion
based” and could not be tested for validity or accuracy. (McHale
dep. at 229:2-11.) McHale stated that “it’s common practice to
give your sales weight,” and he believes “most other appraisers
do it as well.” (McHale dep. at 229:10-21.) McHale also admitted
that he increased the percentage discount because Plaintiffs’
properties sit on a plume and have “the continued stigma of
ongoing contamination and mitigation, which you don’t have in
the matched pairs.” (McHale dep. at 230:20-231:4.) He later
conceded that one of the comparators also was subject to
continued contamination and mitigation and those factors were
already accounted for in the original percentage discount.
(McHale dep. at 231:10-17.)
Defendant relies primarily on Player, supra. In Player, the
district court found an expert valuation report unreliable
20
because the expert compared the property at issue with a site
much more profoundly contaminated and which had caused cancer in
“an inordinate number of children.” Player, 2006 WL 116452, at
*7. The expert did not select the comparator because of its
similarity to the plaintiff’s land, but because he did not know
of any other cases with readily available data, which was
improper. (Id.) The district court also faulted the expert for
extrapolating a discount percentage after receiving responses to
e-mailed questions from four financial lenders. (Id. at *8.) The
expert improperly concluded from these responses that buyers
would not be able to obtain loans and would have to buy in cash.
(Id.) The e-mail also improperly suggested much greater
contamination of the property than was actually present. (Id.)
The Third Circuit affirmed, noting that the district court
“certainly had the discretion to exclude ‘opinion evidence that
is connected to existing data only by the ipse dixit of the
expert.’” Player, 240 F. App’x at 520 (quoting Gen. Elec. Co. v.
Joiner, 522 U.S. 136, 146 (1997)). The Third Circuit ruled that
“there was no basis for saying the [comparator] contamination
site is similar to the properties involved in this litigation,”
and the method for determining that buyers could not receive
financing was unreliable. Id. at 520-21. Defendant urges the
same result here.
21
Plaintiffs counter that the comparators are similar enough
to avoid being misleading and that the literature does not
always require identical comparators. (Pl. Opp’n at 23.)
Plaintiffs suggest that disagreements about McHale’s assumptions
go to weight, not admissibility. (Id. at 23-24.) Plaintiffs also
reject the analogy to Player, arguing that Player did not
involve paired sales analysis, and the expert in Player could
not read relevant scientific charts. (Id. at 24.)
In reply, Defendant reiterates that the properties are not
similar in condition or “if clean” value, and that McHale did
not make adjustments to account for significant differences.
(Def. Reply at 6.) At McHale’s deposition, he testified that the
differences in the comparators’ percentage discounts were based
on differences in markets, not environmental factors. (Id. at 7
n.2; McHale dep. 225:3-5 (“It depends on the market and it
depends on the market participants.”).) Assuming this is true,
Defendant argues that McHale made no showing that the markets
for the comparators were in any way analogous to the market for
Plaintiffs’ properties, rendering the opinion unreliable. (Def.
Reply at 7 n.2.)
The comparators are not identical, but they are not nearly
as arbitrary as the one in Player, which the expert selected
only because he knew of no other options, and the difference in
22
contamination is not as severe as in Player. These differences
alone do not render this report inadmissible.
However, McHale’s report has irreparable flaws. McHale
could not articulate a reliable basis for weighting the
comparator percentages, and he did not consult any authority to
arrive at his average. The Court may “exclude ‘opinion evidence
that is connected to existing data only by the ipse dixit of the
expert.’” Player, 240 F. App’x at 520 (quoting Gen. Elec. Co.,
522 U.S. at 146).
More significantly, McHale had no reliable basis for adding
10 percent to the weighted average discount. Although McHale’s
report states that the need for ongoing contamination and
mitigation is a factor unique and “specific to the subject
property,” McHale admitted that one of this four comparators,
the Emerald Avenue property, also faced ongoing contamination
and mitigation:
Q. . . . At least one of these properties still has
continued contamination and mitigation, right?
A. Correct.
Q. So, that’s already factored into your weighted
average, right?
A. Correct.
(McHale dep. at 231:12-17.) When pressed, McHale said the extra
10 percent derived from “a market based opinion from me.” (Id.
at 236:12.) He referred to gathering opinions from unspecified
“other people in the market.” (Id. at 235:15-16, 236:4-5.) He
23
also attempts to justify the figure by reiterating his
observations that the property is on a plume and subject to
ongoing contamination and mitigation. But these statements do
not constitute an explanation for selecting the figure of 10
percent. McHale does not provide a basis for finding that the
specific methodology he used in this case is reliable,
verifiable or common practice. He appears to have selected it
out of thin air.
By adding 10 percent to the weighted average discount,
McHale is saying, effectively, that the conditions on
Plaintiffs’ properties are less desired by the marketplace than
the comparators, necessitating an upward adjustment in the
discount percentage. However, Defendants are correct that McHale
does not discuss the marketplaces and, more importantly, McHale
admitted that he does not know the level of contamination on
Plaintiffs’ properties or whether the levels are above NJDEP
screening levels. (McHale dep. at 210:12-17.) This admission
casts doubt on McHale’s ability to reliably select and adjust
comparators for the paired sales analysis.
McHale denies that he double counts the discount for
ongoing contamination and mitigation when adding 10 percent to
the weighted average because “only one comparable had that, not
all four,” and he accounted for that fact “[i]n my weighting.”
(Id. at 231:22-23, 232:3.) But again, McHale cannot sufficiently
24
explain his weighting. McHale does not explain why the property
that had ongoing contamination was not weighted more heavily
than those that did not, or how the 10 percent figure
appropriately accounts for the similarities of the Emerald
Avenue property and the differences of the other comparators
with Plaintiffs’ properties.
The addition of an unjustifiable 10 percent discount
improperly inflates the loss of value estimate, rendering the
opinion unreliable. McHale’s paired sales analysis is
inadmissible.
The paired sales analysis also suffers from a problem of
fit, as the cost-to-cure analysis did. The measure of
Plaintiffs’ damages is the loss of value they sustained, which
must take into account, in some fashion, the condition of the
property Plaintiffs purchased, what knowledge they had of the
conditions at the time, and what appreciation or depreciation
occurred during the period of ownership. This figure is not
necessarily the same as the pure difference between the property
“as is” and “if clean,” as of the date McHale performed his
analysis. But McHale begins his report with a statement of
purpose, which is “to provide a market value estimate for the
fee simple interest of the property ‘As Is’ and ‘As If Clean.’”
(McHale Rept. at 1.) McHale’s report makes no reference to the
purchase price or knowledge Plaintiffs had of the property at
25
the time of purchase, which necessarily affects the injury.
McHale ignores the fact that Plaintiffs were advised, at the
time of purchase of these homes, of the fact that contamination
had been detected in groundwater. Plaintiffs admitted that they
were aware of the presence of TCE in the groundwater under their
properties before they purchased their homes. (Pl.’s Resp. to
Def.’s Requests for Admission [Docket Item 87-7] ¶¶ 6-76; see
also Def. Ex. 2 [Docket Item 87-5] at 12 & Def. Ex. 3 [Docket
Item 87-6] at 15 (Agreements of Sale disclosing TCE ground water
contamination in the “southeastern quarter of the Wexford at
Moorestown site,” the portion of the residential development
where Plaintiffs own property).) The Agreements of Sale also
alerted Plaintiffs to the fact that that the Lockheed Martin
facility across the street was contaminated and being
remediated. [Docket Items 87-5 at 12 & 87-6 at 15.] Despite
6
The admissions read:
6. Admit that Michael and Ashley Leese were aware by
no later than June 7, 2003, that the groundwater at 5
Victoria Court, Moorestown, New Jersey, contained TCE.
ANSWER
Admit.
7. Admit that Jay and Raquel Winkler were aware by no
later than November 24, 2003, that the groundwater at
7 Victoria Court, Moorestown, New Jersey, contained
TCE.
ANSWER
Admit.
[Docket Item 87-7 ¶¶ 6-7.]
26
Plaintiffs’ awareness of these facts at the time of purchase,
McHale considered these environmental factors as contributing to
the “as is” discount in his calculations. In short, McHale
ignores that these properties were not “clean” when purchased
and that the prices paid by the Leeses and Winklers necessarily
would have reflected some discount for the stigma of being downgradient from the Lockheed Martin facility. The methodology thus
creates a misleading result, because it does not purport to
measure the damages actually sustained by Plaintiffs. Because
the report would not necessarily help a jury determine the loss
of value Plaintiffs allegedly suffered, the paired sales portion
of the report is inadmissible.
C. Reliability of interviews/surveys
Defendant contends that McHale’s survey method is
unreliable because the interviewers did not follow “proper,
reliable survey” methods, which Defendant draws from trademark
law. (Def. Mot. Br. at 35-37) (citing J&J Snack Foods, Corp. v.
Earthgrains Co., 220 F. Supp. 2d 358, 369 (D.N.J. 2002).)
Defendant further argues that the discount value derived is
arbitrary. (Id. at 38.) Only one of seven realtors who offered
an opinion on the percent discount said the discount should be
20 percent or more (others mentioned the listing price should be
discounted “at least by 10% to 20%”), but McHale concluded that
the discount is at least 20 percent. (Id.) Then McHale doubled
27
the discount to 40 percent for “additional marketing time and
effort, the difficulty in obtaining financing, and a discount
for a cash buyer,” without explaining why the realtors did not
take those factors into account when giving their answers. (Id.)
Presumably, the discount of the selling price already includes
these very considerations and they should not be counted twice.
Plaintiffs respond that the standards of trademark surveys
do not apply here and that methodological deficiencies go to
weight of the survey, not the admissibility. (Pl. Opp’n at 2526) (quoting J&J Snack Foods, 220 F. Supp. 2d at 369).)
Plaintiff also argues that the most important quality of a
survey is that it fits the issue and that the findings do not
inject confusion into the record. (Id. at 26.) Plaintiffs assert
that Defendant has not challenged the fit of the survey. (Id. at
26.)
Defendant replies that it does challenge the fit and that
McHale’s method, in any event, was unreliable. Defendant further
quotes J&J Snack Foods, which stated: “[W]hen the deficiencies
are so substantial that they render the survey’s conclusions
untrustworthy, the court should exclude the survey from
evidence.” (Def. Reply at 11; J&J Snack Foods, 220 F. Supp. 3d
at 369.) Defendant observes that Plaintiffs did not attempt to
defend the flaws in the methodology, or argue that the survey is
nonetheless reliable. (Def. Reply at 11-12.)
28
McHale’s survey technique is similar to that rejected in
Player. In Player, the expert received survey responses from
only four financial lenders, and the process was unreliable for
three reasons: (1) the number of responses (four) was small; (2)
lenders were given the impression by the questions that the
property had much greater contamination that it actually did,
and (3) it was unclear how the expert calculated his final
percentage discount. Player, 2006 WL 166452, at *8.
Similarly here, McHale based his discount on only seven or
eight responses from realtors (seven offered a percentage
discount, one said that she would not sell a home in that
development). (McHale Rept. at 47.) Next, those realtors were
not informed of the kind or level of contamination on
Plaintiffs’ properties, or whether that the contamination
exceeded regulatory screening levels. (McHale dep. at 151:16-19,
240:1-10, 261:12-17, 262:1-4.) Realtors were asked for how much
they would “expect to sell” a house with a subsurface
remediation system. (Def. Mot. Br. Ex. 14.) But, while the
realtors were asked to assume that the house had a subsurface
mitigation system, McHale’s report, counterfactually, assumed
Plaintiffs did not have these systems in their homes. McHale
does not reconcile these inconsistencies. Finally, it is unclear
how McHale arrived at his final percentage discount. First, he
determined that “a discount on the listing price of the property
29
is at least 20%,” (McHale Rept. at 49), without explaining how,
mathematically, his average discount could be equal the highest
discount offered by one respondent. Then McHale doubled that
figure to arrive at an estimated sale price. The doubling
included a 5 percent discount for the fact that properties in
the development sold for that amount below the listing price,
and 15 percent for “additional marketing time and effort, the
difficulty in obtaining financing, and a discount for a cash
buyer . . . .” (Id.) McHale could not explain why these
“additional” factors were not adequately considered by the
realtors when they suggested discounts to the listing price.
Although some methodological flaws go to weight, here the
methodology is unreliable at each step: fact gathering,
percentage averaging, percentage doubling. The entire
formulation of the survey seems to invite unreliability, asking
the realtors for their listing price (rather than at what price,
in their experience, a property like this might sell), and then
adding additional discounts without any basis to support such a
figure. Like the report in Player, McHale’s survey valuation
must be excluded as unreliable.
D. Summary judgment
Because each of McHale’s methodologies is unreliable, the
entirety of his report must be excluded. The methodologies
contain arbitrary or unreliable factors that inflate the loss of
30
value and might mislead a jury. As a result, Plaintiffs have not
adduced any admissible evidence of diminished property value in
opposing Defendant’s summary judgment motion. Therefore, the
Court will grant the remaining portion of Defendant’s motion for
partial summary judgment on Plaintiff’s tort claims.
V. Conclusion
For the reasons explained above, the Court will exclude
Plaintiffs’ expert valuation report and expert testimony as it
is unreliable and suffers from fitness problems. Defendant is
entitled to partial summary judgment on Plaintiffs’ diminished
property value claims.
March 17, 2014
DATE
s/ Jerome B. Simandle
JEROME B. SIMANDLE
Chief U.S. District Judge
31
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