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Beware the Gatekeeper

By David S. Kupetz
December 22, 2006

Last month, we explained that valuation issues come into play throughout Chapter 11 business reorganization cases. We discussed how to recognize the uncertainties underlying expert valuation conclusions; enterprise/going concern value; and the fact that the goal of any valuation is to make an estimate based on an informed judgment that embraces all facts relevant to future earning capacity and hence to present worth, including, of course, the nature and conditions of the properties, the past earnings record, and all circumstances that indicate whether or not the record is reliable criterion of future performance. We conclude this month with a discussion of expert evidence.

Admissibility of Expert Evidence and Disqualification Of Experts

The admissibility of expert testimony is a preliminary question of law for the court to determine. [Fed. R. Evid. 104(a); see also Celebrity Cruises, Inc., v. Essef Corp., 434 F. Supp. 2d 169, 175 (S.D.N.Y. 2006), citing Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 592, 113 S. Ct. 2786, 125 L. Ed. 2d 469 (1993)]. The proponent of the testimony bears the burden of demonstrating its admissibility by a preponderance of the evidence. Id. In order to be admissible, expert testimony must be relevant and based on a reliable foundation (Chartwell Liti-gation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 2006 Bankr. LEXIS 1677, 10 (Bankr. E.D.N.Y. 2006). Further, an expert must also be qualified as an expert in order for his or her testimony to be admissible as expert testimony. Id.). Expert evidence is relevant if it 'has any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable then it would be without the evidence.' (Fed. R. Evid. 401). Under Rule 702 of the Federal Rules of Evidence, expert testimony is reliable if: '(1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.' Fed. R. Evid. 702; see also (In re Med Diversified, Inc) 2006 Bankr. LEXIS 1677, 10 (Bankr. E.D.N.Y. 2006).

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