Citadel Broadcasting: Gatekeeping Expert Testimony in Bankruptcy Court

The Supreme Court’s seminal opinion in Daubert v. Merrell Dow Pharms.[2] established the basic precept that a federal court should serve as a “gatekeeper” to exclude expert testimony when such testimony would not assist the trier of fact or help determine a factual issue. Of course, Daubert and its progeny apply in the bankruptcy courts, but because evidentiary hearings in the bankruptcy courts are almost always held with the court serving as trier of fact, the rationale for excluding expert testimony is not as compelling as when a jury serves as fact-finder. Accordingly, bankruptcy judges are often amenable to allowing expert testimony to be presented in the first instance, knowing that the court has the opportunity and authority to evaluate such testimony and reject it should the expert be found to lack credibility or express suspect opinions.

However, in the recent case of Citadel Broadcasting Corp.,[3] Hon. Burton Lifland refused to permit expert valuation testimony to be presented by a group of disgruntled shareholders at the confirmation hearing, notwithstanding that the expert was plainly qualified to render an opinion on valuation methodology. The problem for the shareholders’ expert, though, was not his experience performing valuations, but his lack of any experience in the radio broadcasting business in which Citadel operates.

According to the Federal Rules of Evidence, expert testimony is appropriate if “scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue.”[4] A court may qualify a witness as an expert by “knowledge, skill, experience, training or education,” and such witness may testify in the form of an opinion.[5] Expert testimony is admissible if (1) the expert is qualified to testify competently regarding the matters he or she intends to address, (2) the expert’s methodology is sufficiently reliable and (3) the testimony will assist the trier of fact by bringing the expert’s knowledge to bear upon a fact in issue.[6] In applying the Daubert standard, a court’s goal is “to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.”[7]A court’s gatekeeping function with respect to expert opinions extends to economic analysis and an economic expert’s conclusions must be grounded in a methodologically reliable manner.[8] When the assumptions underlying an expert’s opinions are unsupported and speculative, the expert’s testimony may properly be excluded.[9]

The Citadel Broadcasting court relied on these principles in excluding the testimony of the shareholders’ valuation expert.[10] The expert witness, a professor of economics and finance for more than 25 years, previously served as a chief economist with the Securities and Exchange Commission. On at least 20 occasions prior to the Citadel proceeding, courts had qualified him as an expert witness on valuation issues involving industries other than the radio broadcasting industry and he had testified in court on corporate finance issues approximately 30 additional times. The objecting shareholders moved for the professor to be qualified as an expert to express his opinion on Citadel’s enterprise and total asset value. 

The debtors, seeking confirmation of their plan of reorganization, proceeded to voir dire the proposed expert as to his qualifications. The professor candidly admitted that he was not an expert in radio broadcasting and had never conducted a valuation of a business in the industry. The debtors’ counsel further demonstrated that the proposed expert had never analyzed radio broadcast industry statistics or projections prior to this case. Upon completion of the voir direexamination, the debtors objected to the professor’s qualifications to testify regarding Citadel’s value, arguing that he lacked any experience with the radio broadcasting industry, valuing radio broadcast companies or analyzing projections involving radio-broadcasting companies. Therefore, citing In re WorldCom Inc.,[11] the debtors argued that there was no nexus between the expert’s considerable general qualifications concerning valuation methodology and the specific subject matter for which he was offered to present expert testimony.

In WorldCom, the court refused to qualify an expert witness who would testify to the amount of damages incurred by a supplier, APG, when the debtor failed to honor a distributorship agreement related to prepaid telephone cards. The expert witness was offered previously in the proceedings to prove damages in connection with APG’s breach of contract claim. However, the district court rejected the expert’s methodology and dismissed the breach of contract claim. APG again proposed the same expert to assist the court in determining the extent of unjust enrichment. The court agreed with the debtor’s argument that the expert witness was not qualified to render an opinion as to the extent of damages related to a distributorship agreement for prepaid telephone cards.[12] APG’s expert’s sole basis to establish his qualification to testify under Rule 702 was that he was an “economist” for 30 years, which qualified him to “undertake and direct research into margin rates in the [prepaid telephone card] industry; that he conducted extensive research into the prepaid telephone card industry and is indisputably an expert in collecting, organizing, analyzing and presenting economic data.”[13]APG’s expert further testified that he “did some consulting for several towns who were looking for cable communications providers.”[14]

The WorldCom court disqualified APG’s witness, finding that the witness met none of the Daubert mandates. First, although possibly an expert in some matters, APG’s witness was not qualified to testify as to the specific issues presented by a breach of a distributorship agreement related to prepaid telephone cards. The witness was an economist and could provide expertise with respect to “simple commission rate analysis.”[15]The court found that there was no “nexus between his credentials and the subject matter of his testimony” since his area of knowledge did not extend to the realm of prepaid telephone card distributorship agreements.[16] Second, the court found that the expert’s “extensive background research” and expertise in “collecting, organizing and presenting economic data” failed because his opinion arose solely from a telephone survey “utterly lacking in reliability.”[17] Third, the court suggested that the witness’s testimony was not helpful to the court as required by Daubert and Rule 702.

In Citadel Broadcasting, Judge Lifland refused to allow the shareholders’ expert to testify as to the value of Citadel Broadcasting, relying on WorldCom, Daubert and Rule 702. Judge Lifland, noting his decades of bankruptcy experience, found that:

What’s being offered, as I understand it, from this expert, is a general idea of appropriate techniques for valuation. But we’re dealing in the radio industry sandbox and there are lots of nuances in that sandbox, that for me to get some background and expertise where I don’t have that particular knowledge, the kind of expert that I think is material here would be one who is familiar with all the nuances in this field of radio broadcasting, and has a more specialized basis.[18]

The bankruptcy court held that the shareholders’ expert was not qualified to testify because “there was no nexus between his credentials and the subject matter of his testimony” and his proposed testimony “would not have assisted the Court as the trier of fact to determine a fact in issue, as required by” Rule 702 and Daubert.[19] The shareholders were therefore without a credible basis to dispute the debtors’ valuation, leaving the court to find that Citadel’s enterprise value left the shareholders “out of the money” and that the plan of reorganization satisfied the absolute priority rule and should be confirmed.[20]

In In re Citadel Broadcasting, the bankruptcy court strictly engaged in its gatekeeping function, notwithstanding the absence of a jury. Although it could have permitted the shareholders’ expert to testify and then ruled that the expert’s testimony lacked any weight because of his lack of radio industry experience, the court’s decision to exclude the testimony resulted in a more efficient confirmation hearing. Consistent with Rule 102, this result avoids “unjustifiable expense and delay” in resolving disputes, which is also entirely in keeping with the principles of Daubert.