Estate of William R Cape et al v. United States of America
Filing
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ORDER Granting Motion in Limine to Exclude Expert Testimony of Szidon 37 , Granting Motion to Compel and Motion for Extension of Time to Conduct Certain Discovery 43 , and Denying Motion to Supplement Expert Report of Szidon or Extend Expert Discovery Deadlines. (cc: all counsel) ((cef), C. N. Clevert, Jr.)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
ESTATE OF WILLIAM R. CAPE,
JENNIFER L. FELDMAN,
Plaintiffs,
v.
Case No. 11-C-0357
UNITED STATES OF AMERICA,
Defendant.
ORDER GRANTING MOTION IN LIMINE TO EXCLUDE EXPERT TESTIMONY OF
SZIDON (DOC. 37), GRANTING MOTION TO COMPEL AND MOTION FOR
EXTENSION OF TIME TO CONDUCT CERTAIN DISCOVERY (DOC. 43), AND
DENYING MOTION TO SUPPLEMENT EXPERT REPORT OF SZIDON OR EXTEND
EXPERT DISCOVERY DEADLINES (DOC. 40)
Issues arose concerning the expert report and proposed testimony of plaintiffs’
expert, Daniel Szidon, and certain documents in the hands of defendant’s rebuttal expert,
Stephen VanderBloemen, resulting in various motions. The motions are related, and
arguments concerning one motion overlap with arguments concerning another.
Plaintiffs seek a refund of federal income taxes for certain years based on alleged
overpayments by William Cape, who is now deceased. Plaintiffs contend that James Cape
& Sons Company (“Cape & Sons”), an S corporation in which William Cape was a
shareholder, overstated its income, resulting in an overstatement of income passed
through to William Cape. (The parties call these the “Pass-Through Adjustments.”1)
Plaintiffs expect to establish that Cape & Sons made substantially less money during
calendar years 2001 and 2002 than it reported because its contract assets were overstated
while contract liabilities were understated. (Doc. 48 at 3.)
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Plaintiffs have additional claim s for refund based on alleged com putational errors.
The present case is not the first litigation related to the demise of Cape & Sons. Per
information from the parties, Cape & Sons was placed in receivership in Racine County in
April 2005. The company administratively dissolved in March 2010 and the receivership
terminated in August 2011. In addition, the issuer of surety bonds to Cape & Sons,
Federal Insurance Company, sued Cape and Sons’ auditor, Virchow Krause & Company,
in this district regarding Federal Insurance’s reliance on erroneous financial statements and
audit reports. See Fed. Ins. Co. v. Continental Cas. Co., No. 05-C-764 (E.D. Wis. filed
July 20, 2005). One of the issues in that case, whether Cape & Sons overstated its
contract income and related assets, appears to overlap with the issues in this case. (See
Doc. 42 at 2 n.1.) In that action, Federal Insurance hired Stephen Maggart as an expert,
and Maggart prepared a report (dated January 7, 2007) about Virchow Krause’s audits of
Cape & Sons for fiscal years 2002 and 2003. The defendants in the prior federal-court
action hired Stephen VanderBloemen as a rebuttal expert, and VanderBloemen prepared
a report in which he criticized portions of Maggart’s report.
SZIDON’S OCTOBER 11, 2012 REPORT AND TESTIMONY RELATING THERETO
Szidon issued an expert report dated October 11, 2012. In it he offers two opinions,
only one of which (Opinion 1) is presently at issue. Opinion 1 has three parts:
•
Overstatement A: Cape & Sons recorded a fraudulent receivable from Alby
Materials in the amount of $657,704 as of December 31, 2002, which
resulted in an overstatement of income of that amount.
•
Overstatement B: Cape & Sons failed to write off a worthless receivable due
from Bowles Construction Services, Inc. as of December 31, 2002; the
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company should have written off $1,262,959 for the year ended
December 31, 2002.
•
Overstatement C: Cape & Sons overstated its income by a cumulative
amount of $8,385,702 as of December 31, 2002, due to a failure to record
contract losses totaling $5,760,750 and overstated underbillings totaling
$2,624,952; the majority of the overstatement occurred from 1998 to 2002.
Defendant challenges the reliability of Szidon’s report, citing Fed. R. Civ. P. 702 and
703. Federal Rule of Evidence 702 provides that a witness who is qualified as an expert
by knowledge, skill, experience, training or education may testify to an opinion if the
testimony will help the trier of fact to understand the evidence or to determine a fact in
issue, is based on sufficient facts or data, and is the product of reliable principles and
methods that are properly applied. Fed. R. Evid. 702; Stollings v. Ryobi Techs., Inc., ___
F.3d ___, ___, 2013 WL 3964477, at *9 (7th Cir. Aug. 2, 2013). The district court is
charged with responsibility to act as a gatekeeper to exclude unreliable expert testimony.
Fed. R. Evid. 702 advisory committee notes 2000 amendments; Daubert v. Merrill Dow
Pharmaceuticals, Inc., 509 U.S. 579 (1993); Stollings, ___ F.3d at ___, 2013 WL 3964477,
at *9.
The party providing the expert bears the burden of establishing that the pertinent
admissibility requirements are met by a preponderance of the evidence. Id. However,
rejection of expert testimony is the exception rather than the rule. Fed. R. Evid. 702
advisory committee notes 2000 amendments. “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.” Daubert, 509 U.S. at 595.
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The focus of inquiry should be on principles and methodology and whether they
have been properly applied to the facts. Fed. R. Evid. 702 advisory committee notes 2000
amendments; see Daubert, 509 U.S. at 595. The role of the judge is to ensure that the
expert is using a valid methodology, is using sufficient data, and is applying the
methodology appropriately. Stollings, ___ F.3d at ___, 2013 WL 3964477, at *10. The
expert’s opinion must amount to more than a mere bottom line. See Minix v. Canarecci,
597 F.3d 824, 835 (7th Cir. 2010); Quad/Graphics, Inc. v. One2One Commc’ns, LLC, No.
09-CV-99-JPS, 2011 WL 4478440, at *3 (E.D. Wis. Sept. 23, 2011) (Stadtmueller, J.).
Reliable opinions of other experts may be included as “data” on which an expert
bases his or her testimony.
Fed. R. Evid. 702 advisory committee notes 2000
amendments. Under Rule 703, “[a]n expert may base an opinion on facts or data 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.” Fed. R. Evid. 703. Although
an expert may rely on another expert’s report in arriving at an opinion, the expert cannot
vouch for the truth of what another expert told him. Loeffel Steel Prods., Inc. v. Delta
Brands, Inc., 387 F. Supp. 2d 794, 808 (N.D. Ill. 2005); Fisher v. Sellas (In re Lake States
Commodities, Inc.), 272 B.R. 233, 242 (Bankr. N.D. Ill. 2002), aff’d, Fisher v. Page, No. 01
C 1698, 2002 WL 31749262 (N.D. Ill. Dec. 3, 2002). While Rule 703 liberalizes the rules
on hearsay and expert testimony, “it was not intended to abolish the hearsay rule and to
allow a witness, under the guise of giving expert testimony, to in effect become the
mouthpiece of the witnesses on whose statements or opinions the expert purports to base
his opinion.” Loeffel Steel, 387 F. Supp. 2d at 808.
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If an expert intends to rely upon the expert report of another, he or she must
evaluate the methods used by the earlier expert and demonstrate familiarity with the
methods and reasoning used by the earlier expert. TK-7 Corp. v. Estate of Barbouti, 993
F.2d 722, 732 (10th Cir. 1993). In TK-7 Corp., for instance, the Tenth Circuit found that
an expert use of another’s projections to form his opinion was impermissible where the
expert had no familiarity with the methods or reasoning of the other person, the expert
knew little or nothing about the other person, the record showed no attempt by the expert
to corroborate the projections, and there was no evidence that other experts in the field
would rely on such projections. 993 F.2d at 732-33.
In Attachment D to the his report, Szidon said he considered three items of
information in forming his opinions: (1) Maggart’s report; (2) audit reports for Cape & Sons
and subsidiaries for the years ending December 31, 1999, through 2003; and (3) an
affidavit of Lance Evans dated July 27, 2006. (Doc. 39 Ex. 2 attach. D.) Evans’s affidavit
stated that Evans was the Information Systems Manager at Cape & Sons from December
1992 until the company’s receivership in 2005, that Evans had a comprehensive
understanding of “heavy highway construction accounting” as well as “the methodology
used to generate the Company’s accounting reports.” (Doc. 39 Ex. 6 at 1-2.) Evans
attached a spreadsheet to his affidavit, showing (he said) a job-by-job history of certain
construction accounts receivable that were on the books of Cape & Sons on December 31,
2001. (Id. at 2.)
Szidon described his use of Maggart’s report as follows:
The primary source for my opinions was the information contained in
the report of Maggart & Associates, P.C. . . . . Based on my review of the
Maggart Report it is clear to me that Stephen Maggart and his associates
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performed a detailed examination of source materials impacting the 2002
and 2003 audits of James Came and Sons Company and Subsidiaries. . . .
Specifically, the conclusions reached in his report are detailed and well
documented. Accordingly the report is deemed to be highly reliable and well
suited for the purpose of this report.
(Doc. 39 Ex. 2 attach. A Intro.) In discussing Overstatement C, Szidon wrote: “In
reviewing the Maggart Report and its supporting schedules and attachments, nothing came
to my attention that would cause me to conclude to the contrary regarding these amounts.
Specifically, it was clear that Cape & Sons supporting records were rigorously examined
and summarized by Stephen Maggart . . . .” (Doc. 39 Ex. 2 attach A Overstatement C.)
In addition, Szidon stated that the overstatements noted in the Maggart report were
supported by the Evans affidavit. However, in Szidon’s opinion, “the nature of Mr.
Evans[‘s] analysis precludes it from being used as a precise estimation of overstated
contract revenues as of December 31, 2001,” though Szidon thought Evans’s analysis “can
and should be used as supporting the overall conclusion of the Maggart Report.” (Doc. 39
Ex. 2 attach A Overstatement C.)
At deposition, defense counsel asked Szidon to describe his methodology in
reaching his opinions. Szidon testified:
Well, utilizing the information that I say I relied upon in Attachment D, clearly
the primary sources was looking at the report of Maggart & Associates,
which, as I’m sure you’re aware of, was extensive and very detailed.
Utilizing that and what I’ve understood to be the case – understood to
be the facts of what happened, you know, to the company subsequent, you
know, to 2001, 2002, taking all that information together and drawing
conclusions accordingly.
(Doc. 39 Ex. 5 at 49-50.) When asked about his process used to confirm Maggart’s
analysis Szidon stated:
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Given the nature of this exercise, there’s very little that you can do directly.
When the company is not in existence, it records, to the best of my
knowledge, are not available or certainly not easily available.
At the same time, based on the detail and the methodology laid out
in the report, you know, it was my professional judgment that I didn’t
necessarily need to validate what had been done. . . . I think it was a pretty
exhaustive examination of what occurred.
(Id. at 105.) He said that he deemed the Maggart report to be reliable, “much like an audit
report is generally deemed to be reliable. We have an independent CPA who conducted
an examination.” (Id. at 107.) According to Szidon, there was nothing in the Maggart
report or its attachments that contradicted the conclusion Maggart came to. (Id. at 121.)
Moreover, Szidon indicated that he did not review any of Maggart’s work papers, nor did
he ask for them. (Id. at 136-37.) He verified Maggart’s analysis of inappropriately
recognized revenue on jobs outstanding as of December 31, 2002, only by looking at
Maggart’s report and its exhibits. (Id. at 159.) Szidon added that he did not attempt to
repeat or verify Maggart’s methodology, saying that he did not have Maggart’s work papers
or the detail that Maggart looked at. (Doc. 49 Ex. F at 218.) Lastly, Szidon said he
believed that as of the time he wrote the October 2012 report he was unaware of any
rebuttal report to the Maggart report. (Doc. 39 Ex. 5 at 66.)
Szidon’s report and proposed testimony fail to meet Rule 702's requirement of a
valid methodology. His methodology appears to have been limited to reading the Maggart
report, audit reports, and Evans’s affidavit, and then “taking all that information together
and drawing conclusions accordingly.” (Doc. 39 Ex. 5 at 49-50.) That is not a principled
method at all.
Plaintiffs’ brief says Szidon “analyzed” the three items he listed on
Attachment D and also considered the history of Cape & Sons and its dissolution. (Doc.
48 at 10, 12-13.) Further, plaintiffs submit Szidon “reviewed” the Maggart report and
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“us[ed] his expertise in accounting” (Doc. 48 at 11), and “applied his extensive knowledge
of accounting practices” (Doc. 48 at 12). But such general descriptions do not describe
any methodology adequately. Plaintiffs and Szidon fail to identify how Szidon analyzed
information, what process he used, or what, if any, standards he referenced.
Further, it appears Szidon’s reliance on the Maggart report is not based on reliable
methodology. Szidon said he reviewed Maggart’s report and saw no problems with it, yet
he set forth no procedure or method by which he came to that conclusion. He did not
review the work papers behind Maggart’s report, documentation from Cape & Sons other
than audit reports, or VanderBloemen’s rebuttal to the Maggart report. More importantly,
Szidon was unable to describe how he tested Maggart’s conclusions or even whether
Maggart’s methodology was valid. Szidon said he thought Maggart’s report was reliable
because a CPA was involved and the report was “extensive,” “exhaustive,” and “detailed.”
But length, completeness and detail of a report do not necessarily mean that the writer of
the report used reliable methods or principles in coming to conclusions. For example, in
In re Lake States Commodities the court found an expert’s sampling of a prior report’s data
to be insufficient testing of the prior report. 272 B.R. at 244-45.
Here there was no testing whatsoever of the Maggart report’s methodology or
conclusions. Moreover, Szidon’s report fails to meet the requirements of Rule 703. Szidon
says he is not vouching for the Maggart report, yet his opinion discloses that he merely
read the Maggart report and a few other documents and found nothing wrong with the
Maggart report’s conclusions. However, evidence in the record does not indicate that
experts in this particular field would reasonably rely on reports like the Maggart report.
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Hence, the court finds that the motion in limine to exclude Szidon’s October 2012
report and any testimony based on that report should be granted.
SZIDON’S DECEMBER 18, 2012 SUPPLEMENT TO HIS REPORT
AND TESTIMONY RELATING THERETO
After plaintiffs received the rebuttal report of VanderBloemen, Szidon reviewed
additional materials. Thereafter, on December 18, 2012, plaintiffs’ counsel forwarded to
defense counsel a revised Attachment D to Szidon’s expert report. (Doc. 39 Ex. 23.) The
revised Attachment D listed fifteen additional items as information considered by Szidon.
(Id.) No other portion of the October 2012 report was supplemented or revised.
Because the court finds that Szidon’s October 2012 report must be excluded there
is nothing for Szidon to supplement. See Brooks v. Gen. Cas. Co., No. 06-C-996, 2007
WL 7055475, at *4 (E.D. Wis. Dec. 12, 2007) (Griesbach, J.) (stating that the federal rules
contemplate supplementation “of an already sufficient report” and do not contemplate that
supplementation allows an initial deficient expert report). Instead, plaintiffs are left trying
to replace the October 2012 report with the December 2012 report.
But supplementation is not properly used to remedy defects in an expert’s report or
testimony after the weaknesses have been revealed. See Pluck v. BP Oil Pipeline Co.,
640 F.3d 671, 681 (6th Cir. 2011); Cohlmia v. Ardent Health Servs., LLC, 254 F.R.D. 426,
433 (N.D. Okla. 2008). Attempts to introduce a new methodology after the deadline for
expert disclosures may be rejected by the district court. See Pluck, 640 F.3d at 681. A
supplemental expert report that is used to strengthen the opinion of the original report is
beyond the bounds of permissible supplementation. Cohlmia, 254 F.R.D. at 433. Expert
testimony may not be presented at trial if it was not disclosed to the other side within the
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deadline unless the party was justified in missing the deadline or the untimeliness was
harmless (though the court may impose some other appropriate sanction instead). Dura
Auto. Sys. of Ind., Inc. v. CTS Corp., 285 F.3d 609, 615 (7th Cir. 2002).
To the extent that the revised Attachment D was meant to bolster Szidon’s report
through his review of additional materials, any attempt to remedy defects in Szidon’s report
is rejected. As discussed in Szidon’s deposition testimony, many of those items came to
his attention only after VanderBloemen’s rebuttal report came out and Szidon’s conclusions
were criticized.
Moreover, nothing in the revised Attachment D cures the reliability problem the court
has noted. Neither in his supplemental attachment nor at his deposition did Szidon set
forth reliable principles or methodology by which he reviewed the information or generated
his conclusions, before or after the review of the additional materials. Szidon’s latest
expert report is as faulty with the revised Attachment D as it was with the original
Attachment D. Consequently, the supplement is rejected and the motion in limine to
exclude any testimony by Szidon relating to an opinion including the December 2012
supplement should be granted.
INFORMATION IN THE CUSTODY OF VanderBloemen
As stated above, VanderBloemen provided expertise in the Federal Insurance case
for Virchow Krause regarding Cape & Sons, and was designated a rebuttal expert in this
case by the defendant. In his deposition on January 4, 2013, the last day of the discovery
period, VanderBloemen referenced the need to look at his work papers from his expert
report in the Federal Insurance case. Following the deposition, the United States agreed
to produce any information and work papers considered by VanderBloemen in the Federal
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Insurance case. (Doc. 35 at 2.) Plaintiffs refer to such materials as the “Analyzed
Materials.”
In addition, plaintiffs learned at VanderBloemen’s deposition that he was in
possession of or had access to additional information and materials relating to contract
assets and liabilities of Cape & Sons, which he did not use for his report. Plaintiffs seek
production of those documents and materials, which it describes as the “Disputed
Materials.” (Doc. 35 at 2-3.) Defendant resists plaintiffs’ requests claiming that the
Disputed Materials are not covered by any document request propounded by plaintiffs, the
documents are not relevant, the documents were not considered by VanderBloemen, and
the request is untimely. (See Doc. 35 at 3.)
Plaintiffs move the court to compel the production of the Disputed Materials. Also,
they seek permission to further supplement Szidon’s expert report and amendment of the
scheduling order to extend the discovery deadline as to expert discovery so Szidon can
consider these documents and opine on them. Defendant opposes these motions, pointing
out that discovery has closed and that plaintiffs were not diligent, as they waited until the
very end of discovery to depose VanderBloemen and seek other discovery.2
The court has reviewed the parties briefs on the matter and will compel production
of the materials. Regardless of whether the documents were covered by prior discovery
requests, the court will order their production even after the discovery deadline. No
dispositive motion deadline or trial date is set in this case, and VanderBloemen’s expert
report was provided to plaintiffs on December 5, 2012, just one month before the
2
Defendant does not contend that the docum ents are in a third-party’s possession rather than its own,
conceding that it can produce the docum ents if ordered to do so.
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deposition. Even though VanderBloemen was deposed on the last day of discovery,
plaintiffs did not wait an extensive length of time before deposing him and learning of these
documents. The documents appear relevant to the operations and financial situation of
Cape & Sons. Moreover, with the receivership and dissolution of Cape & Sons and the
years that have elapsed since, company documents and information appear hard to come
by. Plaintiff may find documents that it has not seen.3 The court sees no prejudice to
defendant at this time. Thus, the motion to compel and for an extension of the discovery
deadline to engage in this discovery will be granted respecting the Disputed Materials only;
general discovery will not be extended.
However, Szidon’s report may not be supplemented following his review of the
Analyzed Materials and Disputed Materials. Any correction of Szidon’s methodology would
invite more discovery and a brand-new report by Szidon. That would cause prejudice to
defendant. Defendant has already deposed Szidon and incurred costs for VanderBloemen
to analyze his original report. To allow Szidon to provide another expert report, whether
deemed a replacement or supplement, would cause additional work and expert costs for
defendant.
CONCLUSION
For the above-stated reasons,
IT IS ORDERED that defendant’s motion in limine to exclude Szidon’s report,
supplemental report, and testimony (Doc. 37) is granted.
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Also, plaintiffs indicate that their efforts to obtain relevant inform ation have been hindered by the
“im plosion” of Arthur Anderson, the accounting firm that audited Cape & Sons from 1998 to 2001, the death
of W illiam Cape in 2002, and the unsuccessful attem pts to operate Cape & Sons’ servers. (Doc. 48 at 5-6.)
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IT IS FURTHER ORDERED that plaintiffs’ motion to compel and to extend the
discovery deadline (Doc. 43) is granted; discovery is extended for the sole purpose of
production of the Disputed Materials and not for general discovery.
IT IS ORDERED that defendant shall promptly produce the Disputed Materials.
IT IS FURTHER ORDERED that plaintiffs’ motion to allow supplementation of
Szidon’s expert report or to extend expert discovery deadlines (Doc. 40) is denied.
Dated at Milwaukee, Wisconsin, this 27th day of August, 2013.
BY THE COURT
/s/ C.N. Clevert, Jr.
C.N. CLEVERT, JR.
U.S. DISTRICT JUDGE
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