Damage Models and Financial Experts


Palmer & Manuel, L.L.P.
8350 North Central Expressway, Suite 1111
Dallas, Texas 75206
Direct Line: 214-242-6454

Law Firm Website: http://www.pamlaw.com/Attorneys/Jeffrey-R-Sandberg.shtml
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My litigation clients have an advantage because I am a litigator with a background as a CPA.  In civil litigation matters, many attorneys do not give the damages model and the workproduct of the financial experts the attention they deserve, and some attorneys are not familiar with the accounting terms and valuation concepts that are used in complex damages models.  My pre-law school accounting/financial experience is an excellent foundation for attacking the workproduct of the other side’s valuation expert and working with our side’s valuation expert.  Attention to detail when examining the other side’s expert workproduct and supporting information leads to the identification of arguments for the exclusion of the opposing expert workproduct/opinion, cross-examination topics, and/or reasons why the opposing expert workproduct/opinion should be given little evidentiary weight.


For example, in an adversary proceeding* brought by a plaintiff/bankruptcy trustee that went to trial in 2012, the plaintiff/bankruptcy trustee claimed my client underpaid for assets purchased from a company that subsequently filed for bankruptcy protection.  The plaintiff/bankruptcy trustee hired two financial experts, David Duffus, who is a CPA and partner in the Pittsburgh, PA office of ParenteBeard, and Mike Hill, who is a founding partner in the Dallas and Houston offices of Hill Schwartz Spilker Keller LLC.  Their damages model/workproduct, in the form of a discounted cash flow analysis, stated that assets my client purchased for $40,000 in August of 2008 had a reasonably equivalent value, as of the August 2008 purchase/transfer date, of $11,000,000. Put another way, the Hill/Duffus damages model supported an $11,000,000 claim against my client.


As part of my legal defense work, I performed a detailed review of the Duffus/Hill damages model/discounted cash flow analysis, and was able to identify multiple errors in the Duffus/Hill damages model/discounted cash flow analysis so that I could argue to the judge, during the trial, that the Duffus/Hill expert opinions were inadmissible.  Some of these arguments were as follows:


       Revenues were overstated, largely because an unsupportable product mix was used that weighted sales volume towards one of the highest sales price products, and away from one of the lowest priced products.


       Costs of Good Sold were understated because this figure was based upon publicly traded companies’ financial data that included different business segments.  Further, the Duffus/Hill workproduct/discounted cash flow analysis used a percentage that was one-third the actual costs of the seller/bankrupt company – there was no support/evidence that a purchaser would be able to reduce this cost to one-third of the seller’s cost.


       Supporting information for portions of the Duffus/Hill damages model/discounted cash flow analysis was not provided in discovery.


During the trial, the trial court excluded Duffus’ “expert” testimony.  Following this ruling, the plaintiff/bankruptcy trustee’s counsel put Hill on the stand, and attempted to have Hill testify about a newly-revised valuation opinion. 


Realizing the judge was going to exclude Hill’s revised expert opinions, the plaintiff/bankruptcy trustee’s counsel rested his case before Hill concluded his testimony, ending the trustee's side of the case without any competent evidence of the purchased/transferred assets’ reasonably equivalent value.  Because the plaintiff/bankruptcy trustee had the burden of proof for damages (the amount underpaid based upon the reasonably equivalent value of the assets purchased), the plaintiff/bankruptcy trustee’s counsel informed the Court that he would not oppose a motion for judgment in favor of our client.  The Court entered a take-nothing judgment in favor of my client – my client had to pay nothing in a lawsuit seeking $11,000,000.
*    Essentially, the bankruptcy trustee is allowed, under the bankruptcy code, to file a suit claiming the purchaser did not pay “reasonably equivalent value”, and seeking to “clawback” the amount that the bankruptcy trustee alleges was underpaid by a purchaser to the bankrupt company.  This type of lawsuit is also sometimes filed when a company that purchased assets subsequently files for bankruptcy protection, and the bankruptcy trustee files a suit claiming the bankrupt company overpaid.  The bankruptcy trustee may file the lawsuit even if there is no traditional “fraud” – the transaction is at arm’s length between a buyer and seller with no improper actions; these types of claims are sometimes described as “constructive fraud” claims.
Dallas Litigation Attorney - Jeff Sandberg