Secretary of Labor, U.S. Department of Labor v. Wilmington Trust, N.A. et al

Filing 42

Opinion & Order signed by Judge James S. Gwin on 1/18/19. The Court, for the reasons set forth in this order, denies defendants' motion to exclude the Krillenberger reports and testimony and denies plaintiff's motion to exclude the Rule report and testimony. (Related Docs. 31 and 33 ) (D,MA)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
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R. ALEXANDER ACOSTA,
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U.S. SECRETARY OF LABOR,
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:
Plaintiff,
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vs.
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WILMINGTON TRUST, N.A., et al.,
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Defendants.
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CASE NO. 1:17-CV-1755
OPINION & ORDER
[Resolving Docs. 31, 33]

JAMES S. GWIN, UNITED STATES DISTRICT JUDGE:
In this case, Plaintiff Department of Labor alleges that Defendant Wilmington Trust
(“Wilmington”) violated the Employee Retirement Income Security Act.1 It argues that
Wilmington unlawfully caused Defendant Graphite Sales, Inc. Employee Stock Ownership
Plan to overpay for an employee stock ownership purchase of Graphite Sales, Inc.’s
outstanding stock.
Defendant Wilmington now moves under Federal Rule of Evidence 702 to exclude
the Plaintiff’s experts reports and testimony.2 Plaintiff likewise moves to partially exclude
the Defendant expert’s rebuttal report and testimony under Rules 403 and 702. 3
For the following reasons, the Court DENIES Defendant’s motion and DENIES
Plaintiff’s motion.

1

Codified in part at 29 U.S.C. ch. 18.
Doc. 33. Plaintiff opposes. Doc. 36. Defendant Wilmington Trust replies. Doc. 38.
3
Doc. 31. Defendant Wilmington Trust opposes. Doc. 35.
2

Case No. 1:17-cv-1755
Gwin, J.
I.

Background

Graphite Sales, Inc. (“Graphite”) is a graphite processing company. In 2011
Graphite engaged Defendant Wilmington as trustee for its newly-created Employee Stock
Ownership Plan (the “Plan”). On August 31, 2011, with Wilmington’s approval, the Plan
purchased all of Graphite’s stock for $16 million. As part of this deal, selling shareholders
received stock warrants for an 18% equity stake in Graphite. Also, two Graphite officers
received stock appreciation rights for a 10% Graphite equity interest, and Huntington
Capital Investment Company received rights to a 7% equity stake in the company.
This lawsuit turns on the proper valuation of Graphite. At the time of the sale, the
firm Stout, Risius and Ross (“Stout”) appraised the company. Plaintiff seeks to introduce
expert reports and testimony from James A. Krillenberger criticizing Stout’s appraisal.4
Defendant Wilmington seeks to introduce a rebuttal report and testimony from their own
expert Mark A. Rule.5
II.

Discussion

Both parties argue that the other side’s expert report should be (at least partially)
excluded under Federal Rule of Evidence 702, that provides in relevant part that
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
understand the evidence or to determine a fact in issue; (b) the testimony is the
based on sufficient facts or data; (c) the testimony is the product of reliable
principles and methods6

4

Doc. 31-2.
Doc. 31-1.
6
Fed. R. Evid. 702.
5

2

Case No. 1:17-cv-1755
Gwin, J.
In conducting its Rule 702 inquiry, the Court considers whether the expert’s testimony “has
been tested, is the subject of peer review and publication, has a permissible error rate,
follows established standards, and receives ‘general acceptance’ within a ‘relevant
scientific community.’”7 At this gatekeeping stage, the Court focuses “on principles and
methodology, not the conclusions that they generate.”8
A. The Court Will Not Exclude Krillenberger’s Expert Reports and Testimony
Defendant Wilmington broadly contends that Krillenberger's views are untethered
to accepted valuation methodology—that he is trying to pass off his individual say-so as
expert testimony. Defendant seizes Krillenberger’s deposition remarks that he "could not
speak for the entire [valuation] industry" on particular topics9 as evidence that his views are
pure speculation.
Of course, Krillenberger’s concession that other valuation experts might interpret
the same facts differently does not mean that his own interpretation is made up. And upon
closer scrutiny, Defendant’s motion simply quarrels with Krillinberger's conclusions—how
he chose between competing methodologically valid approaches and how he applied
those approaches to the facts—rather than showing that those conclusions are
unscientific.10
Defendant’s objections go to weight, rather than Rule 702 admissibility.11 Crossexamination at trial will afford Defendant ample opportunity to pick out purported

United States v. Mallory, 902 F.3d 584, 592 (6th Cir. 2018) (quoting Daubert v. Merrell Dow Pharm., Inc.,
509 U.S. 579, 593-4 (1993)).
8
Daubert, 509 U.S. at 594.
9
Doc. 33-2 at 24.
10
See In re Scrap Metal Antitrust Litig., 527 F.3d 517, 529 (6th Cir. 2008) (“The task for the district court in
deciding whether an expert's opinion is reliable is not to determine whether it is correct.”).
11
Id. at 530 (weaknesses in the factual bases of an expert witness’s opinion go to weight rather than
admissibility).
7

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Case No. 1:17-cv-1755
Gwin, J.
methodological errors and to present any evidence contrary to Krillenberger’s admissible
opinions.12
i)

Method Objections

Firstly, Defendant takes issue with Krillenberger’s view13 that Stout should have used
multiples of revenue and EBITDA14—not multiples of EBIT15 and EBITDA—to value
Graphite. Defendant argues that this contradicts a cited treatise, because the treatise says
that Krillenberger’s preferred approach is “applied most frequently to start-up companies
and to service businesses”16 and Graphite is neither. Defendant is wrong. The cited
treatise passage explicitly contemplates that Krillenberger’s approach might be used in
circumstances other than start-ups and service companies.
Krillenberger also opines that Stout erred by using the “exit method” instead of the
“Gordon Growth Method” under the Discounted Cash Flow valuation method.17
Defendant argues that Krillenberger’s criticism is wrong, because several treatises permit
either method. Even if true, this argument does not go to admissibility because it simply
takes issue with how Plaintiff’s expert chose among accepted valuation methodologies.
Finally, Defendant argues that Krillenberger was wrong to consider stock warrants
and stock appreciation rights in valuing Graphite.18 This was wrong, Defendant argues,
because Krillenberger admitted at his deposition that the warrants could be considered part

Daubert, 509 U.S. at 596 (“Vigorous cross-examination, presentation of contrary evidence, and careful
instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible
evidence.”).
13
Doc. 31-2 at 15.
14
“Earnings before interest, tax, depreciation and amortization.”
15
“Earnings before interest and tax.”
16
Doc. 33-10 at 9 (emphasis added).
17
Doc. 31-2 at 23.
18
Id. at 28.
12

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Case No. 1:17-cv-1755
Gwin, J.
of the transaction’s financing.19 However, in the same testimony Krillenberger insisted that
the “there is an additional motivation” for the warrants20—namely, that the warrants were
“a form of contingent consideration” and that they should have been included in the
purchase price.21 Defendants will have to chance to show that Krillenberger is wrong
about this at trial; here, they do not show that this view lacks sufficient facts or departs from
accepted principles and methodologies.
ii)

Application Objections

Defendant takes issue with Krillenberger’s critical assessment of Stout’s revenue
projections. It states that Krillenberger gave insufficient weight to the Graphite
management team’s projections and ignored three pieces of evidence: a 2011 sixth-month
“Quality of Earnings” report, a 2011 due diligence call with Graphite management, and
Graphite’s actual 2011 performance.22 Again, these purported errors would not show that
Krillenberger “made up” his own revenue projections or that his methods are not sound.
Defendants do not argue, much less demonstrate, that accepted valuation principles
compel Krillenberger to weigh the evidence differently or take this evidence into account.
Defendant further argues that Krillenberger was wrong to criticize Stout’s selection
of guideline companies and Stout’s use of the twenty-day average stock price for purposes
of the Guideline Company Method valuation method. Wilmington says that these
criticisms are contradicted by Krillenberger’s own analysis on other topics, and that there is
no reason to use his preferred method. However, these purported selection errors do not

19

Doc. 33-2 at 61.

20

Id.

21

Doc. 31-2 at 28.
Although it does not matter here, the Court notes that Graphite’s actual 2011 performance is irrelevant.
Krillenberger’s report criticizes Stout’s valuation on the facts known at the time of valuation.
22

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Case No. 1:17-cv-1755
Gwin, J.
even remotely suggest that Krillenberger’s opinion lacks a firm methodological basis.
Defendant simply quibbles with how he applied his methods to the facts at hand, a
complaint that goes to weight.
Finally, Defendant argues that Krillenberger erroneously criticized Stout’s
application of a 10% control premium to the guideline companies’ stock prices.
Krillenberger supposedly erred because he “only focus[ed] on one of the ten” control
factors identified in valuation literature.23 Again, this application error would not show that
Krillenberger’s views are inadmissible.
B. The Court Will Not Exclude Rule’s Expert Report and Testimony
Plaintiff moves under Rules 403 and 702 to exclude Wilmington expert Mark Rule’s
rebuttal report and testimony, to the extent that they relate to damages methodology.
Plaintiff argues that Rule’s proposed “but-for” damages methodology is inadmissible
because it usurps the Court’s role in determining the correct legal standard for damages.24
Plaintiff’s argument fails. Rule’s report assesses potential damages by comparing
what the Plan paid for Graphite stock with the fair market value of the stock on the date of
the transaction.25 This is the same methodology used by Plaintiff’s expert Krillenberger,26
and the same methodology endorsed by the Sixth Circuit in Chao v. Hall Holding Co.27

23

Doc. 34 at 13.

See CMI-Trading, Inc. v. Quantum Air, Inc., 98 F.3d 887, 890 (6th Cir. 1996) (holding that the Court, and
not an expert, has sole responsibility regarding legal issues), abrogation recognized on other grounds by
Morales v. Am. Honda Motor Co., Inc., 151 F.3d 500 (6th Cir. 1998).
25
See Doc. 31-1 at 8.
26
See Doc. 31-2 at 4 (comparing the fair market value of Graphite common stock to the purchase price).
27
285 F.3d 415, 423 (6th Cir. 2002) (calculating damages by taking “the difference between the amount paid
by the [employee stock plan] and the fair market value of the stock as determined by the district court”).
24

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Case No. 1:17-cv-1755
Gwin, J.
Plaintiff takes issue with Rule’s conclusion that the Krillenberger report failed to
correctly apply this accepted methodology to the facts at hand. This argument goes to
weight, not admissibility, and Plaintiff can explore it further at trial.
III.

Conclusion

For the foregoing reasons, the Court DENIES Defendant’s motion to exclude the
Krillenberger reports and testimony and DENIES Plaintiff’s motion to exclude the Rule
report and testimony.

s/

Dated: January 18, 2019

James S. Gwin

JAMES S. GWIN
UNITED STATES DISTRICT JUDGE
.

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