Feltman v. Culmin Staffing Grp., Inc. (In re Corporate Res. Servs., Inc.)

• Decision Date: 22 August 2019
• Docket Number: Adv. Pro. Case No. 18-01008 (MG),Case No. 15-12329 (MG) (Jointly Administered)
• Citation: 603 B.R. 888
• Parties: IN RE: CORPORATE RESOURCE SERVICES, INC., et al., Debtors. James S. Feltman, not individually but solely in his capacity as Chapter 11 Trustee of the Estate of Corporate Resource Services, Inc., et al., Plaintiff, v. Culmin Staffing Group, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

603 B.R. 888

IN RE: CORPORATE RESOURCE SERVICES, INC., et al., Debtors.James S. Feltman, not individually but solely in his capacity as Chapter 11 Trustee of the Estate of Corporate Resource Services, Inc., et al., Plaintiff,

v.Culmin Staffing Group, Inc., Defendant.

Case No. 15-12329 (MG) (Jointly Administered)

Adv. Pro. Case No. 18-01008 (MG)

United States Bankruptcy Court, S.D. New York.

Signed August 22, 2019

TOGUT, SEGAL & SEGAL LLP, Attorneys for James S. Feltman, Not Individually but Solely in His Capacity as Chapter 11 Trustee of Corporate Resource Services, Inc., et al., One Penn Plaza, Suite 3335, New York, New York 10119, (212) 594-5000 By: Neil Berger, Esq., Patrick Marecki. Esq.

GIORDANO, HALLERAN & CIESLA, Attorneys for Defendant Culmin Staffing Group, Inc., 125 Half Mile Road, Suite 300, Red Bank, N.J. 07701-6777, By: Donald F. Campbell, Jr., Esq., Christopher J Marino, Esq.

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION IN LIMINE TO STRIKE DEFENDANT'S EXPERT REPORT

MARTIN GLENN, United States Bankruptcy Judge

James S. Feltman, the Chapter 11 trustee (the "Plaintiff" or "Trustee") of the above-referenced debtors (the "Debtors"), moves to strike the opinions, testimony, and rebuttal report of James D. Gardner ("Gardner"), the sole purported expert proffered by defendant Culmin Staffing Group, Inc. ("Culmin"), from use at the trial in this adversary proceeding. ("Trustee's Motion to Strike," ECF Doc. # 42.) Culmin filed an opposition to the motion. (Culmin's Brief in Opposition to Trustee's Motion to Strike, "Culmin's Opposition," ECF Doc. # 52.) The Trustee filed a reply, largely reiterating the arguments made in the Trustee's Motion to Strike. ("Reply," ECF Doc. # 56.) Culmin has demanded a jury trial and has a motion to withdraw the reference pending in the district court. In considering this motion, the Court assumes that this case will be tried to a jury in the district court.

For the reasons explained below, the Court grants in part and denies in part the Trustee's pretrial Daubert motion.

I. BACKGROUND

A. Trustee's Motion to Strike

This case concerns the value of CRS's Florida business (the "Florida Business") which was transferred to Culmin pursuant to the prepetition Asset Purchase Agreement between CRS and Culmin, dated March 2, 2015 (the "APA"). On April 3, 2019, the Trustee's testifying expert in this case, Manish Kumar ("Kumar") of Goldin Associates, LLC, submitted a written report (the "Kumar Report" or "Goldin Report") detailing his opinions that, as of the March 16, 2015 APA closing date: (i) the going concern value of the CRS Florida Business acquired by Culmin was between $9.2 - $11.6 million and (ii) the orderly liquidation value of the CRS Florida Business acquired by Culmin was between $4.0 - $5.5 million. According to the Trustee, Culmin paid a total of $4,700 for the Florida Business plus a $25,000 escrow to Focus Management Group USA, Inc., which was never released to the Debtors.

On May 13, 2019, Gardner submitted the Gardner Report. The report really encompasses two separate parts—Gardner's criticism and attack on the Goldin Report, and Gardner's opinion that the "value for the assets contained in the APA is $113,000." The Trustee contends that Gardner's valuation is remarkably low for assets which in 2014 were allegedly responsible for approximately $38 million in revenue and $2 million in EBITDA. Kumar's June 3, 2019 rebuttal report (the "Kumar Rebuttal Report") challenges Gardner's valuation. But, for the most part, the Daubert motion and Culmin's opposition deal with Gardner's valuation conclusion rather than with Gardner's criticism of the analysis and conclusions in the Goldin Report.

As explained below, the Court grants the Daubert motion with respect to Gardner's opinion of value ($113,000) because Gardner's methodology—particularly his reliance on EBITDA figures taken from a publication with which he was unfamiliar and conducted no independent diligence—was unsupportable. On the other hand, the Court denies the Daubert motion with respect to Gardner's criticism of the analysis and conclusions in the Goldin Report.

The Trustee argues that Gardner is unqualified to provide expert valuation testimony. It is undisputed that Gardner has no experience relating to the staffing industry in which CRS operated and in which Culmin operates. The Trustee also contends that Gardner has "no professional, industry or academic credentials" relevant to the task undertaken. The Trustee alleges that Gardner's sole qualification is his "decades-long close friendship with Jeff Raymond (‘Raymond’), Culmin's CEO, and the deep financial interests shared between them – indeed, in the last few years Gardner has earned hundreds of thousands of dollars in compensation from his work for Raymond's affiliated companies." (Trustee's Motion to Strike at 2-3.) The Trustee argues that Gardner's connection to Raymond disqualifies him from acting as an expert in this case.

The Trustee also challenges Gardner's methodology. According to the Motion:

the Gardner Report: (i) valued only those customers actually retained by Culmin, instead of valuing the assets acquired by Culmin pursuant to the APA; (ii) uses a mix of valuation dates for different purposes to artificially manufacture as low a valuation as possible; (iii) provides knowingly false opinions concerning termination letters allegedly sent to APA customers; and (iv) omits a host of critical information and disclosures that are required by applicable valuation standards and the Federal Rules of Civil Procedure (the "Federal Rules").

(Trustee's Motion to Strike at 3.)

Gardner admitted in his deposition that in arriving at his opinion of value, he used the exact EBITDA range taken from the article and that neither he nor anyone else attempted to verify the authors' methodology.¹

B. Culmin's Opposition to Motion to Strike

Culmin's Brief in Opposition to Trustee's Motion to Strike (Culmin's Opposition) argues that Gardner prepared his report based on his decades of experience in evaluating companies. Gardner testified in his deposition that his area of expertise is "corporate finance, financial management, cash forecasting, assisting companies with obtaining financing, valuation and other chief financial operating activities."

Gardner testified that he graduated with a bachelor's degree in Arts from Wartburg College in Waverly, Iowa in 1974, obtained a Master's degree in Business Administration from Fairleigh Dickinson University in 1988, and Masters of Science in Management from Stanford University in 1988. Currently, Gardner is the President of Gardner Consulting, a consulting company that advises small to medium sized businesses on obtaining financing, management reporting, accounting and valuation.

Gardner testified that he has over 45 years of work experience, 20 of which is with companies where he was required to perform valuation work. He asserts that he has performed approximately 75 valuations for a venture capital firm. He also asserts that he has reviewed and analyzed hundreds of business plans, prepared discounted cash flow analyses, and performed at least annual valuations of the companies in which the venture capital firm for whom he did his work invested during the periods from 2010-2013 and 2016 to present. He also testified that he performed 50 to 100 analyses of business plans where companies were seeking investments, including his work reviewing business plans, assessing financial forecasts, creating valuation models, making adjustments based on experience, reviewing margins, capital intensity and working capital requirements, and developing cost of capital based on cost of equity, determining after-tax costs of debt, free cash flows, and discounted cash flows.

Gardner's criticism and analysis of the Goldin Report is, in the Court's view, "fair game." The trier of fact may credit or reject the criticism. It reflects Culmin's theory of the case, what it bought from CRS, and what reasonable assumptions could be made about future cash flows from the acquired business. Gardner criticizes the assumptions and data that Kumar used in arriving at his opinion. To that extent, the Daubert motion is denied. But, to the extent the Gardner purports to express his own opinion on value, the Gardner report and his testimony fail to satisfy the standards required for permissible expert testimony under Daubert and its progeny, and to that extent, the Daubert motion is granted.

II. LEGAL STANDARD

A. Motions in Limine

"The purpose of an in limine motion is to aid the trial process by enabling the Court to rule in advance of trial on the relevance of certain forecasted evidence, as to issues that are definitely set for trial, without lengthy argument at, or interruption of, the trial." Highland Capital Mgmt., L.P. v. Schneider , 379 F. Supp. 2d 461, 467 (S.D.N.Y. 2005) (quoting Palmieri v. Defaria, 88 F.3d 136, 141 (2d Cir.1996) ). "However, evidence should be excluded on a motion in limine only when the evidence is clearly inadmissible on all potential grounds." MBIA Ins. Corp. v. Patriarch Partners VIII, LLC , No. 09 CIV. 3255, 2012 WL 2568972, at *2 (S.D.N.Y. July 3, 2012) (internal quotation marks and citations omitted). Further, the Court may reserve judgment on the motion until the appropriate factual context is developed at trial. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. L.E. Myers Co. Grp. , 937 F. Supp. 276, 287 (S.D.N.Y. 1996).

B. Relevance Under Rules 401 and 402

Federal Rule of Evidence ("Rule") 402 provides that relevant evidence is admissible. Rule 401 provides that "[e]vidence is relevant if: (a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of consequence in determining the action." FED. R. EVID. 401. Rule 401's bar is fairly low, and an "incremental effect" is "sufficient" to clear it. See, e.g. , United States v. Certified Envtl. Servs., Inc ., ...