Opinion
No. 2014-CV-18
02-03-2017
Woodsville Guaranty Savings Bank v. Passumpsic Savings Bank
ORDER
This case arises out of a 2008 loan made to Isaacson Structural Steel, Inc. ("Isaacson") by Woodsville Savings Bank ("Woodsville"), Passumpsic Savings Bank ("Passumpsic"), and Ledyard Savings Bank ("Ledyard"). This case is set for trial on February 6, 2017. Passumpsic has filed a number of Motions in Limine.
For the reasons set forth in this Order: (A) Passumpsic's Motion to Preclude Plaintiff from Soliciting Expert Testimony From Wayne Geher is DENIED; (B) Passumpsic's Motion in Limine to Preclude Woodsville from Soliciting Testimony or Offering Argument relating to Bishop Being a Certified Public Accountant ("CPA") is GRANTED; (C) Passumpsic's Motion to Preclude Woodsville from Arguing that the Passumpsic Board's Discussion About Whether to Approve the Loan Was Chilled Due to the Presence of David Driscoll is DENIED subject to reconsideration based upon the evidence introduced at trial; (D) Passumpsic's Motion in Limine to Preclude Plaintiffs' Expert Douglas Branson from Offering Opinions on Accounting Issues is DENIED; (E) Passumpsic's Motion in Limine to Preclude Evidence of Settlement Agreements Entered Into By David J. Driscoll is GRANTED; and (F) Passumpsic's Request for a Ruling That There Is No Per Se Rule that Driscoll's Actions as Isaacson's Accountant Can Be Imputed To Passumpsic Merely Because Driscoll Was Also On Passumpsic's Board of Directors is DENIED.
I
The following facts are taken from the parties summary judgment papers and are undisputed. Pursuant to the terms of a Loan Participation Agreement ("LPA"), Passumpsic, Woodsville, and Ledyard loaned Isaacson Structural Steel, Inc. ("Isaacson") $10 million. Passumpsic loaned $5 million, Woodsville loaned $3 million, and Ledyard loaned $2 million. Under the LPA, Passumpsic was the lead bank. Arnold Hanson and Steven Griffin, respectively the President and CFO of Isaacson, falsified Isaacson's financial data in order to obtain the loan. Isaacson subsequently defaulted on the loan. David J. Driscoll ("Driscoll"), the principal of Driscoll & Co., an accounting firm, was a member of Passumpsic's Board of Trustees and was also the outside accountant for Isaacson.
Woodsville sued Passumpsic, alleging that it is liable for its losses. Woodsville's Complaint contained seven counts: Count I alleges a Breach of Warranty; Count II alleges Gross Negligence in Passumpsic's execution of its duties under the LPA; Count III alleges Breach of Contract; Count V alleges Intentional or Negligent Misrepresentation by Passumpsic; Count VI alleges a breach of the Implied Covenant of Good Faith and Fair Dealing; and Count VII alleges Breach of Fiduciary duty owed to Woodsville by Passumpsic as a result of the LPA. The Court granted summary judgment to Passumpsic on Woodsville's breach of fiduciary duty claim and has held that this case will proceed to trial solely on the allegations of breach of contract and breach of warranty based upon the LPA.
Woodsville has voluntarily dismissed Count IV, which alleged violations of RSA 421-B.
The rights and obligations of the parties therefore flow solely from the LPA. The LPA is a contract and the interpretation of a contract is a question of law. Baker v. McCarthy, 122 N.H. 171, 174-75 (1982). The LPA provides for liability in the event that the lead bank acted with gross negligence or willful misconduct. This means that Woodsville agreed to exculpate Passumpsic from ordinary negligence but not from gross negligence or willful misconduct. See Official Comm. of Unsecured Creditors v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 00 Civ. 8688(WHP), 2002 WL 362794, at *15 (S.D.N.Y. Mar. 6, 2002).
Woodsville does not argue that the exculpatory agreement is unlawful.
The LPA provided that "Passumpsic, as Lead Bank, shall act for the benefit of Woodsville to the extent of Woodsville's undivided interest in the [loan]." (LPA ¶ 15.) Passumpsic was required to collect the payments, interest, and other charges and fees on the loans for the benefit of itself and the other lenders. (LPA ¶ 18.) In addition, the LPA contains what is known as an "antidiscrimination" provision:
Passumpsic shall . . . (ii) endeavor to exercise the same care as [it] exercises in the care of loans in which it alone is interested . . .(LPA ¶¶ 17, 33.)
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Passumpsic, in performing obligations hereunder, will endeavor to exercise the same care that it exercises in the making and handling of loans and security for its own account, but Passumpsic does not assume any further responsibility.
Passumpsic also affirmatively represented that as of the date of execution of the agreement there was no default existing under any of the loan documents or under the terms of any other credit relationship now existing between Passumpsic and the Borrower or the Guarantors, nor was Passumpsic aware of any facts or circumstances that constitute or would result in such a default. (LPA ¶ 14.) The LPA acknowledged that each participant "reasonably relied on information furnished to it by Passumpsic regarding the Borrower, the Guarantors and the collateral." (LPA ¶ 35.) Passumpsic expressly agreed to:
[I]ndemnify and hold harmless each of the Participants for any loss or damage, costs and expenses (including reasonable attorney's fees) resulting directly or indirectly from Passumpsic's gross negligence or willful misconduct in administering, servicing or enforcing the Participated Loan and Passumpsic agrees that in performing such duties it shall be acting on behalf of each of the Participants as well as itself. Passumpsic will use reasonable efforts to ascertain the occurrence of any default under the Loan Documents and will take such other actions as are reasonably necessary in order to monitor and administer the Participated Loan. (Emphasis supplied).(LPA ¶ 17.)
In April 2011, Passumpsic reported to Woodsville that there were significant and material irregularities and inconsistencies in Isaacson's financial statements. Isaacson's business was to fabricate steel commercial construction. This involved entering into construction contracts both to supply and to erect the steel. These contracts often involved changes. Change orders were a substantial portion of the value of Isaacson's business. Because change orders were eventually paid, they were accounted for as assets in Isaacson's financials. Traditionally, the change orders were listed as work in process ("WIP"). In 2006, however, Isaacson started to count change orders as inventory. The decision to account for change orders as inventory was made with the knowledge of Hanson, Griffin, and Driscoll. In 2007, Issacson started to use this accounting change as a way to falsely inflate Isaacson's financial data.
Isaacson regularly submitted the falsified financial records to Driscoll & Co. for review and audit, but neither Driscoll nor any other Driscoll & Co. employee noticed anything amiss. The fraud was discovered in the spring of 2011. Shortly thereafter, Isaacson declared bankruptcy. The issue in this case centers on Driscoll's role as outside accountant for Isaacson, and as a member of the Passumpsic Board of Directors. Jury selection in this case is set for February 6, 2017. Passumpsic has filed a number of Motions in Limine, and the Court addresses them seriatim.
II
A. Passumpsic's Motion to Preclude Plaintiff from Soliciting Expert Testimony From Wayne Geher
Passumpsic's first Motion in Limine seeks to exclude testimony of one Wayne Geher, a Certified Public Accountant who provided an expert opinion on behalf of Passumpsic and Ledyard in an action brought by Passumpsic and Ledyard against Isaacson, D. J. Driscoll & Co., the LLC & David Driscoll, CPA. (the "Passaumpsic v. Driscoll litigation") in the Cheshire County Superior Court. A January 16, 2012 expert report from Geher is appended as Exhibit B to Passaumpsic's Motion. Geher's report recites that he was retained to examine Isaacson's audited financial statements to identify the components of Isaacson's inventory for the fiscal years from October 31, 2005 through 2010. He concludes on page 10 of his report that "generally accepted auditing standards was [sic] not applied to the entire inventory balance and the financial statements fail to adequately disclose inventory in accordance with GAAP." (Mot., Ex. B, p. 10.) Geher was deposed during the Passumpsic v. Driscoll litigation, and Passumpsic's Motion in Limine attaches portions of his testimony. (Mot., Ex. C.)
Passumpsic moves to exclude Geher's testimony on the ground that he is an expert witness and was never properly disclosed by Woodsville. (Mot. ¶¶ 8-11.) Passaumpsic notes that the only expert disclosed by Woodsville was Douglas Branson. (Mot. ¶ 10.) Woodsville objects, arguing that Geher is a fact witness because "the jury is not being asked to accept any opinions that Mr. Geher may have reached in his role as expert as conclusive of material issues in this case." (Obj. ¶ 4.) Woodsville tacitly concedes, however, that it intends to call Geher to testify that Isaacson's financials did not comply with Generally Accepted Accounting Principles ("GAAP"). (Obj. ¶ 2-3.)
Passumpsic is correct; Geher has no percipient knowledge of the facts of this case and his opinion as to whether or not Isaacson's financials comply with GAAP can only be considered expert testimony.
There is no dispute that Woodsville listed Geher as a witness, but did not list him as an expert witness. Passumpsic relies on New Hampshire Superior Court Rule 27 which provides that parties must disclose experts and provide an expert report which conforms with RSA 516:29-b. That statute details the requirements of an expert report, and requires an expert to disclose all opinions to be expressed and the basis and reasons therefore, and the data and other information considered by the witness in forming his or her opinions. RSA 516:29-b, II (a)-(b). It argues that since Woodsville did not comply with the Rule and the statute, the testimony must be excluded.
However, as the New Hampshire Supreme Court noted in J & M Lumber and Constr. Co., Inc. v. Smyjunas, 161 N.H. 714, 723 (2011), the statute itself provides no sanction for failure to comply with its disclosure requirements. In J & M Lumber, the Court assumed that case law regarding the discovery obligations of civil litigants under the Superior Court Rules apply to the statute. Id. Under settled New Hampshire law, a party is entitled to disclosure of an opposing party's experts, the substance of the facts and opinions about which they are expected to testify and the basis of those opinions. Laramie v. Stone, 160 N.H. 419, 425 (2010). A party's failure to supply this information "should result in the exclusion of expert opinion testimony unless good cause is shown to excuse the failure to disclose." Id., quoted in J&M Lumber, 161 N.H. at 723. Whether to allow testimony despite failure to disclose in accordance with the Rules is said to be within the discretion of the trial court. Id.
Under the circumstances of this case, the Court believes that Woodsville should be permitted to call Geher as a witness and to elicit testimony he has already given in his deposition or provided in his expert report. Woodsville has represented that the only testimony it seeks to present is testimony he has already provided — that Isaacson's financials were not prepared in accordance with GAAP. Passumpsic cannot be surprised by the testimony its own expert has already produced, and it cannot claim that it "had no notice of the underlying opinions or substance of the expert testimony." Compare J & M Lumber, 161 N.H. at 723. Geher was its retained expert; it has the opportunity to meet with him to discuss any proposed testimony and there is virtually no chance that he will testify to information which will surprise it by being inconsistent with his prior testimony.
Moreover, there can be no serious dispute that the Issacson financials were not prepared in accordance with GAAP.
Moreover, the interests of justice support allowing the testimony. The case against Driscoll and D. J. Driscoll & Co., PLLC was settled by the defendants for $350,000. (Settlement Agreement, Ex. C to Passumpsic's Mot. in Limine to Exclude Evidence of Settlements.) While Driscoll and D.J. Driscoll & Co. PLLC did not admit liability in the Settlement Agreement, a review of the Complaint and Geher's expert report makes it clear that the basis of the claim and the settlement was Driscoll's failure to apply GAAP to the Issacson financials.
"Where a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, it may not thereafter, simply because its interests have changed, assume a contrary position." Kelleher v. Marvin Lumber & Cedar Co., 152 N.H. 813, 848 (2005). This doctrine, called judicial estoppel, exists to "prevent abuse of the judicial process, resulting in an affront to the integrity of the courts." Pike v. Mullikin, 158 N.H. 267, 270 (2009) (internal quotation omitted). In order for the doctrine to apply, three factors are generally considered:
(1)Whether the party's later position is clearly inconsistent with the party's earlier position; (2) whether the earlier position was accepted by the court; and (3) whether the party seeking to assert a later inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.Eby v. State, 166 N.H. 321, 338 (2014). The inconsistent position may have been taken in or related litigation, and not in the case sub judice. Kelleher, 152 N.H. at 848.
Barring Woodsville from presenting evidence, known to Passumpsic, and, in fact, relied upon by Passumpsic in other litigation, if not within the letter of the doctrine of judicial estoppel, involves the same principles. New Hampshire courts endeavor to see that cases are decided on the merits, rather than on mere technicalities. See, e.g., In re Proposed Rules of Civil Procedure, 139 N.H. 512, 516 (1995). Moreover, the concerns expressed by some courts that allowing a party to call an opponent's witness unfairly allows one party to benefit from the opposing party's trial preparation, see, e.g., Carroll v. Praxair, Inc., 2007 WL 437697 (W.D.La. Feb. 7, 2007) *2, are inapplicable here. Passumpsic has already produced a report by Geher to its adversaries in related litigation, therefore already providing them with its trial preparation. See Anderson v. Metro-North Commuter R.R. Co., 2016 WL 2755910 (D. Conn. May 11, 2016) *2-3. A trial is, after all, a search for truth. Passumpsic's Motion to Preclude Plaintiff from Soliciting Expert Testimony from Geher must be DENIED.
B. Passumpsic's Motion in Limine to Preclude Woodsville from Soliciting Testimony or Offering Argument relating to Bishop Being a CPA
Passumpsic seeks to prohibit Woodsville from presenting testimony that Bob Bishop ("Bishop"), its Manager of Commercial Lending is a CPA. Woodsville's senior commercial loan officer, August F. Stiegler, III ("Steigler") testified during his deposition that Woodsville relied upon Bishop's status as a CPA, and this affected the way Woodsville approached underwriting and monitoring the loan. (Mot.¶¶ 3-4.) Woodsville argues that "the issue is whether Mr. Bishop's CPA status had any impact upon or in any way played into the considerations of either the Passumpsic's Board of Directors or Woodsville in their various decisions regarding the loan". (Obj. ¶ 1.)
The rights and obligations of the parties therefore flow from the LPA. The LPA is a contract and the interpretation of a contract is a question of law. Baker v. McCarthy, 122 N.H. 171, 174-75 (1982). The LPA provides for liability in the event that the lead bank acted with gross negligence or willful misconduct. This means that Woodsville agreed to exculpate Passumpsic from ordinary negligence but not from gross negligence or willful misconduct. See Official Comm. of Unsecured Creditors v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 00 Civ. 8688(WHP), 2002 WL 362794, at *15 (S.D.N.Y. Mar. 6, 2002).
Woodsville does not argue that the exculpatory agreement is unlawful. --------
The LPA specifically required Passumpsic to exercise the same degree of care that it exercises with respect to the handling of its own loans that are not subject to a participation agreement. (LPA ¶¶ 17, 33.) This duty of care created by this antidiscrimination provision is not a negligence standard; it merely requires that Passumpsic act pursuant to its usual course of conduct, even if its usual course of conduct could be considered negligent in light of an industry standard. See In re Enron Corp., 292 B.R. 752, 766 (Bankr. S.D.N.Y. 2003). Evidence of the subjective beliefs of members of the Woodsville Board members on what they expected from the Passasumpsic Board is irrelevant. What the LPA meant, and what the obligations were between the parties is measured by an objective standard. Birch Broadcasting, Inc. v. Capitol Broadcasting Corporation, 161 N.H. 192, 196-97 (2010). Whether Passumpsic was grossly negligent is also measured by an objective standard. See, e.g. Bernard v. Russell, 103 N.H. 76, 77 (1960). Thus, testimony by Stiegler, or any other Woodsville Board member that they took comfort in the fact that Bishop was a CPA is irrelevant and inadmissible.
Passumpsic also provided express warranties as part of the LPA to Woodsville and Ledyard. Woodsville alleges that among the material terms of the LPA was Passumpsic's warranty that it was "not aware of any facts or circumstances indicating any deterioration in the financial condition" of Isaacson. (Compl. ¶ 26.) It alleges that this "warranty was made with the express intent (as stated in the LPA) of inducing Woodsville to enter into the LPA." (Compl. ¶ 26.) But Woodsville has not pled or alleged that the warranty was made by Bishop as a CPA or with reference to his professional expertise. The Motion is therefore GRANTED.
C. Passumpsic's Motion to Preclude Woodsville from Arguing that the Passumpsic Board's Discussion About Whether to Approve the Loan Was Chilled Due to the Presence of David Driscoll
Passumpsic argues that Woodsville should not be permitted to introduce testimony that discussion about the Isaacson loan was chilled by the presence of Board Member Driscoll, who did not vote on the loan, but did not leave the room. Passumpsic cites testimony by Woodsville Board who opined that, based on their experience in the banking industry, Driscoll's presence may have chilled the discussion about the loan.
Woodsville argues that its Board Members' testimony is directed to their experience at other banks that did not require directors to leave the room, and that the practice, in their experience, chilled debate on the loan. (Obj. ¶ 4.) It references testimony of its expert Branson who testified that "best practices would require, as I said, that the director has a conflict of interest—should recuse herself from the board meeting and allow unfettered discussion to take place." (Obj. ¶ 5.)
Under the LPA, Woodsville agreed to exculpate Passumpsic for ordinary negligence, but not from gross negligence or willful misconduct. (LPA ¶ 17.) It was required to treat the loan in question with the same degree of care it exercises with respect to handling of its own loans which were not subject to a participation agreement. (LPA ¶¶ 17, 34.) As previously noted, Passumpsic was required to act only pursuant to its usual course of conduct, even if its usual course of conduct could be considered negligent in light of an industry standard. In re Enron, 292 B.R. at 766. Passumpsic was plainly not held to a standard of best practices.
But Woodsville will presumably introduce evidence that Passumpsic brought an action against Driscoll, based on his conduct as a Board Member, by introducing testimony from Geher. Without hearing the evidence, the Court cannot rule in advance that Woodsville cannot argue that the presence of Driscoll had a chilling effect on the Board's decision. Accordingly, the Motion must be DENIED without prejudice to reconsideration based upon the evidence introduced at trial.
D. Passumpsic's Motion in Limine to Preclude Plaintiffs' Expert Douglas Branson from Offering Opinions on Accounting Issues
Passumpsic has moved to bar Plaintiffs' expert Douglas Branson from testifying that Isaacson's financials did not comply with GAAP. Branson has been the W. Edwards Sell Chair of Business Law at the University of Pittsburgh School of Law since 1996. While an undergraduate he took a year of accounting for non-accounting major. He took corporate finance as well as accounting for lawyers in law school, and on at least 12 occasions has taught courses in accounting for lawyers at the University of Pittsburgh School of Law. Mr. Branson is plainly qualified to testify that the Isaacson's financials did not comply with GAAP. Any challenge to his credentials goes to weight and not admissibility. See Laramie v. Stone, 160 N.H. 419, 427 (2010). The Motion is DENIED.
E. Passumpsic's Motion in Limine to Preclude Evidence of Settlement Agreements Entered into by David J. Driscoll
Passumpsic moves to preclude evidence that Driscoll settled civil and administrative actions against him. According to Passumpsic, as a result of the transaction which forms the basis for this lawsuit, Driscoll entered into settlement agreements with the New Hampshire Board of Accountancy, the United States Government, and the Federal Deposit Insurance Corporation ("FDIC"). In addition, Driscoll settled the action brought against him in the Cheshire County Superior Court by the Defendant, Passumpsic by paying $350,000. Passumpsic recites, and Woodsville does not dispute, that Driscoll did not admit liability in any of these settlements. (Mot. ¶ 3.) Passumpsic relies upon New Hampshire Rule of Evidence ("N.H. R. Ev.") 408 which provides in relevant part that:
In any [non-tort] case evidence (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount.
Rule 408 does provide that such evidence does not require exclusion when the evidence is offered for a purpose other than the proof of liability for or invalidity of the claim or its amount, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution. N.H. R. Ev. 408.
Woodsville does not claim it seeks to introduce the evidence for any of those reasons. Rather, it simply argues that:
[C]ontrary to Passumpsic's claim that such evidence should be precluded as unfairly prejudicial, this evidence is necessary to give the jury essential background information regarding Mr. Driscoll. If Woodsville is not permitted to enter the settlement agreements, then the jury is left with the notion that Mr. Driscoll has not done anything wrong—that the various conflicting roles were not problem—and that there were no consequences for him. This is clearly not accurate and could mislead the jury.(Obj. ¶ 5.) Woodsville cites no authority for this proposition, and the Court believes none exists. The language of N.H. R. Ev. 408 is clear and "states the basic proposition that evidence of compromise offers, compromise agreements, and conduct or statements made in compromise negotiations is inadmissible on questions of liability and damages." Reporter's Notes, N.H. R. Ev. 408. Indeed, the New Hampshire Supreme Court has held that the broad policy objectives of Rule 408 require exclusion of "internal memoranda prepared for the purpose of compromise negotiations, even if never communicated to the other party." Axenics, Inc. v. Turner Construction Co., 164 N.H. 659, 674-675 (2013). Woodsville has provided no basis for the admission of any of the settlement agreements. The Motion is GRANTED.
F. Passumpsic's Request for a Ruling That There Is No Per Se Rule that Driscoll's Actions as Isaacson's Accountant Can Be Imputed to Passumpsic Merely Because Driscoll Was also on Passumpsic's Board of Directors
Passumpsic has filed a motion in which it asks the Court "to clarify that there is no per se rule that Driscoll's actions and/or knowledge as [Isaacson's] accountant or as a Trustee of the Isaacson Family Trust will be imputed to Passumpsic merely by virtue of Driscoll's status as a member of Passumpsic's Board of Trustees." (Mot. ¶ 3.) As Woodsville points out in its Objection, this Court has twice ruled that the issue of whether Driscoll's knowledge may be imputed to the Passumpsic Board is a question of fact to be determined at trial. Order, November 1, 2016 at page 14, citing United States v. Josleyn, 206 F.3d 144, 159 (1st Cir. 2000); Order on Motion to Reconsider, December 13, 2016, p. 2. In denying Passumpsic's Motion for Reconsideration of the Order on Summary Judgment the Court stated "this is not a case in which a court can look at agreed facts and determine what consequences flow from those facts. The disputes over Driscoll's knowledge and action and how the Board reacted to his role as a trustee is essential to determining whether Passumpsic fulfilled its contractual obligations to Woodsville." Order on Motion to Reconsider, Dec. 13, 2016. There is nothing to reconsider and the Motion must be DENIED. 2 /3/17
DATE
s/Richard B . McNamara
Richard B. McNamara,
Presiding Justice