In Re Perry H. Koplik & Sons, Inc.

382 B.R. 599 (2008)

In re PERRY H. KOPLIK & SONS, INC., Debtor.

Michael S. Fox, as Litigation Trustee of Perry H. Koplik & Sons, Inc., Plaintiff,

v.

Michael Koplik and Alvin Siegel, Defendants.

Bankruptcy No. 02-40648 (REG), Adversary No. 04-02490 (REG).

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

February 19, 2008.

Satterlee, Stephens, Burke & Burke LLP by Christopher R. Belmonte, Esq., *600 Pamela A. Bosswick, Esq., New York City, for Plaintiff.

Seward & Kissel LLP by Ronald L. Cohen, Esq., Walter A. Naeder, Esq., New York City, for Defendants.

Sanford P. Rosen & Associates, P.C. by Sanford P. Rosen, New York City, Esq., for Defendants.

BENCH DECISION ON MOTIONS TO STRIKE LAY WITNESS TRIAL TESTIMONY

ROBERT E. GERBER, Bankruptcy Judge.

In this adversary proceeding under the umbrella of the confirmed chapter 11 case of Debtor Perry Koplik & Sons, the plaintiff Litigation Trustee charges former insiders of the Debtor with breach of fiduciary duty. In the trial of the action, the Litigation Trustee has submitted the direct testimony affidavit [1] of Barry Kasoff, a Certified Turnaround Professional and Certified Public Accountant, who studied the Debtor's affairs, including, inter alia, the insiders' activities. In his direct affidavit, Mr. Kasoff has described his perceptions of the defendants' acts and, in more than a few instances, his subjective views with respect to those acts, based on a combination of his review of the acts and his training and experience in business and accounting matters. But he hasn't been offered as an expert under Fed.R.Evid. 702, nor has the plaintiff complied with Fed.R.Civ.P. 26 requirements for expert disclosures.

The defendants move to strike portions of the direct testimony as impermissible lay witness opinion testimony. Their motion is granted in part and denied in part, as described in the accompanying table. My conclusions of Jaw and bases for the exercise of my discretion follow.

Fed.R.Evid. 701(a) provides, in relevant part:

If the witness is not testifying as an expert, the witness' testimony in the form of opinions or inferences is limited to those opinions or Inferences which are (a) rationally based on the perception of the witness, (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.

As usual, I start with textual analysis. Under Fed.R.Evid. 701, lay opinion testimony is permissible if, but only if, the three subsections of Rule 701(a) are satisfied. I note in that connection, however, that while subsections (a) and (b) are stated affirmatively, subsection (c) is articulated in the negative [2] That means, as a practical matter, that lay opinion testimony is permissible if subsections (a) and (b) are satisfied, and if the testimony isn't then excluded by reason of the effect of subsection (c).

The Second Circuit has twice spoken to this issue, in Bank of Chinn v. NBM LLC, 359 F.3d 171 (2d Cir.2004), and United States v. Rigas, 490 F.3d 208 (2d Cir.2007), in each case involving a fact pattern similar to that here, where an individual conducted *601 an investigation of matters that preceded his arrival on the scene, and then testified about what he found.

In Bank of China, the Circuit held that the admission of lay opinion testimony that was based on a combination of a lay witness's observations and his knowledge of business custom and the business community's understanding of certain kinds of transactions and business concepts was an abuse of discretion. Admission of that testimony was held to be error because it wasn't based entirely on the witness's perceptions. The district court abused its discretion to the extent it admitted the testimony based on the witness's experience and specialized knowledge in international banking. See 359 F.3d at 181.

The Bank of China court explained that "Subsection (c) of Rule 701, which was amended in 2000, explicitly bars the admission of lay opinions that are `based on scientific, technical, or other specialized knowledge within the scope of Rule 702.'" Id., quoting Fed.R.Evid. 701(c). Testimony admitted pursuant to Rule 701 must be "rationally based on the perception of the witness." Id., quoting Fed.R.Evid. 701(a).

Thus, to the extent that the testimony was based on the perceptions of the witness, it was admissible, but to the extent that it was based on specialized knowledge, as contrasted to personal observation, it was inadmissible. See id. The Circuit clarified:

To some extent, [the investigating witness] Huang's testimony was based on his perceptions. As a Bank of China employee, Huang was assigned to investigate defendants' activities at the tailend of their scheme and after Bank of China stopped doing business with them. Huang's senior role at the Bank and his years of experience in international banking made him particularly well-suited to undertake such an investigation and was likely a factor in the Bank's decision to assign the task to him. The fact that Huang has specialized knowledge, or that he carried out the investigation because of that knowledge, did not preclude him from testifying pursuant to Rule 701, so long as the testimony was based on the investigation and reflected his investigatory findings and conclusions, and was not rooted exclusively in his expertise in international banking. "Such opinion testimony is admitted not because of experience, training or specialized knowledge within the realm of an expert, but because of the particularized knowledge that the witness has by virtue of his [] position in the business."

Id., quoting Fed.R.Evid. 701 advisory committee's note (emphasis added). [3]

Thus, to the extent the investigating witness Huang's testimony was grounded in *602 the investigation he undertook in his role as a Bank of China employee, it was admissible pursuant to Rule 701 of the Federal Rules of Evidence because it was based on his perceptions. But to the extent that the testimony was not based on his perceptions, it was inadmissible.

Similarly, in Rigas , the Circuit affirmed criminal convictions after a trial in which Judge Sand of the district court had permitted the introduction of testimony by Robert DiBella, a forensic accountant retained by Adelphia's new management to examine Adelphia's books and records, and to investigate transactions that had been entered into while Adelphia was operating under the Rigases' watch. Citing Bank of China, the Rigas court found the testimony admissible, as it was based on witness perception, and did not materially involve specialized knowledge with respect to the particular issues on which he was testifying. That was so even though the Second Circuit's decision at least implied (and this Court from its firsthand knowledge knows) that Mr. DiBella's witness perception—i.e., his ability to observe—was materially assisted by his accounting expertise. [4]

Each of Bank of China and Rigas involved circumstances, like those here, where an individual wasn't personally involved in the events that were the principal focus of his testimony, and instead involved the testimony based on participation in an investigation of events that predated the witness's appearance on the scene. Rigas is particularly relevant, because it involved a situation, very similar to the one we have here, where a skilled accounting professional studied what happened before he arrived, and explained in testimony what he had discovered. That was permissible, as reflecting witness perception.

Significantly, however, in neither Bank of China nor Rigas did the Circuit endorse the admission of testimony as to the witness's views as to whether what the witness had perceived was wrongful, or as to what should have been done under the circumstances.

In support of contentions that all of the challenged testimony should be stricken, the defendants cite three other cases, all from outside the Second Circuit. See JGR, Inc. v. Thomasville Furniture Indus., 370 F.3d 519 (6th Cir.2004); DIJO, Inc. v. Hilton Hotels Corp., 351 F.3d 679 (5th Cir.2003); Autoforge, Inc. v. Am. Axle & Mfg., Inc., 2008 WL 65603 , 2008 U.S. Dist. LEXIS 755 (W.D.Pa. Jan. 4, 2008). None of these, of course, could trump a Second Circuit decision on point. And in any event, they are nowhere as closely similar to the facts we have here, and to the extent they are relevant at all, they support the nuanced standard articulated by the Second Circuit in Bank of China and Rigas . None involved the testimony of a trained financial professional who had studied financial transactions and reported on what he saw.

Instead, each involved testimony on lost profits and/or the value of a business— areas where an outsider's personal perception would often be modest at best, and *603 that traditionally would involve testimony. of bona fide experts, except in cases where the actual owner of the business might have the requisite personal perception. See JGR, 370 F.3d at 524, 526 (CPA and lawyer testifying about lost profits and business value relied on information primarily obtained from plaintiff's principal); DIJO, 351 F.3d at 685 (testifying financial consultant "had little significant actual knowledge about DIJO and its operations;" contrasting ability of "business owners or officers to testify based on particularized knowledge derived from their position") (emphasis in original); Autoforge, 2008 WL 65603 , at *6-7, 2008 U.S. Dist. LEXIS 755 at *19-20 (relying on circuit court holdings that "persons outside of a business, including attorneys and financial consultants," who were not able to establish the requisite foundation of personal knowledge, "may not offer a lay opinion as to value or project lost profits of a business") (citing JGR and DIJO ).

With those principles in mind, the Court will permit lay opinion testimony that reflects the perceptions of the witness Mr. Kasoff as to what happened (including, inter alia, what the defendants did)—even if Mr. Kasoff was aided in forming his perceptions by an ability, aided by his training and experience, to understand what he saw. But to the extent Mr. Kasoff seeks to testify not with respect to his perceptions, but rather with respect to views as to (a) whether what he perceived was right or wrong; (b) what should have been done; (c) what is customary in business practice; or (d) what his training and experience tell him about appropriate conduct in these cases, the testimony will be excluded.

My rulings with respect to the particular aspects of the Kasoff testimony that were the subject of the lay opinion evidence objections appear on the attached Table A to this Decision.

SO ORDERED.

Table A

Rulings on Testimony In Issue

¶ # Testimony in Issue Ruling

9 "Debtor had serious issues relating to its equity and Objection sustained.

clearly was in the zone of insolvency,"

20 "Koplik and Siegel knew or should have known by First sentence: objection

virtue of their positions at the Debtor of the terms of sustained. Second sentence:

the RCF and the Trade Credit Insurance Policy. objection overruled.

Siegel was responsible to the Bank for reporting

about the Debtor's compliance with the various RCF

covenants, and Michael Kelly, who reported directly

to Siegel, was responsible for compliance with the

Trade Credit Insurance Policy."

21 "Beginning in 1997, the Debtor was experiencing First and third sentences:

financial difficulty and continued to do so through objection overruled. Second

2001. As the Debtor's financial situation began to sentence: objection

deteriorate, it inexplicably took on extraordinary sustained.

credit risks, in the form of advances, loans and other

unreasonable trade and non-trade extensions of credit,

that were disproportionate to its equity position.

Such problems began to appear after Perry H. Koplik,

the Debtor's founder, became less involved in the

management of the Debtor with the defendants taking

over more active roles."

*604

22 "In fact, one of the key factors contributing to the Objection overruled.

Debtor's financial breakdown was the absence of any

objective decision-making process. Any system of

internal controls employed by the Debtor was overridden

routinely by defendants as the key executives

involved in all key financial aspects of the Debtor.

Since the Debtor's internal control processes, if any,

were subject to defendants' override, an environment

existed that allowed transactions to occur without

sufficient regard for level of risk, having considerable

detrimental consequences to the Debtor's business.

. . .

I believe that the Debtor did not have, implement or

utilize any credit policy manuals as a guide to extend

credit, loans, advances and/or other financial accommodations

made to third-parties."

23 "Examples of transactions entered into by the Debtor Objection overruled.

under defendants' management in the absence of

any objective decision-making process include: the

extension of approximately $27 million of total debt

to ATC which included funding ATC's payroll on an

emergency basis, the extension of non-trade credit

that was not supported by proper loan documentation

and clearly in violation of the RCF, the reduction of

accounts receivable in exchange for uninspected, and

possibly nonexistent, inventory, the holding of postdated

checks, which bounced and were re-deposited

and bounced again, the extension of additional credit

to ATC when it was delinquent on existing receivables,

and the extension of non-trade credit and/or

investment in International Supply and Agency, Ltd.

and Samoa Pacific Cellulose, LLC. Thus, despite

having less than $10 million of equity a part of which

was illiquid, the Debtor entered into several transactions,

the majority of which were with ATC, which

put the Company's viability at severe risk."

24 "Without a doubt, defendants knew that ATC was First sentence: objection

experiencing severe liquidity problems. ATC's grave was previously sustained

liquidity issues were largely the result of its funding for testifying as to another's

the acquisition of long term assets with short term state of mind, and is

liabilities." not saved by calling this lay

opinion. Second sentence:

objection overruled.

24 "Despite such knowledge," Objection was previously

sustained for testifying as

to another's state of mind,

and is not saved by calling

this lay opinion.

24 "Despite being aware of ATC's financial distress, First sentence portions

defendants had Debtor advance approximately $27 ("Despite being aware" and

million to the now bankrupt ATC with knowledge "with knowledge that"):

that a significant portion of those advances would be objections were previously

events of default under the RCF and not covered by sustained for testifying as

the Trade Credit Insurance Policy. To extend an to another's state of mind,

amount of trade and non-trade credit to one customer, and are not saved by calling

which amount was three times the Debtor's equity, this lay opinion. First

and which jeopardized its relationship with the sentence remainder: objection

Bank, exemplifies the defendants' complete lack of overruled. Second

*605

credit-risk assessment in connection with the sentence: objection

Debtor's business operations." sustained.

25 "These loans violated the terms of the RCF and were Objection overruled.

not covered by the Trade Credit Insurance Policy;

thereby endangering the Debtor's working capital.:'

27 "despite ATC's delinquent and/or nonexistent payments Objection overruled.

to the Debtor." The Debtor essentially served

as a financier for ATC, providing millions of dollars

of financing for ATC's production without any guarantee

of payment by Kimberly Clark who only

agreed to the arrangement for the month of March,

2001."

28 "Defendants heedlessly exposed the Debtor to unwarranted Objection to "heedlessly"

risk by continuing to finance production and "As defendants should

after the end, of March and by depending upon ATC's have expected" sustained.

relationship with Kimberly Clark to support the invoices. Remainder of quoted testi"mony:

As defendants should have expected, ATC objection overruled.

bounced checks that it issued to Kimberly Clark for

the pulp purchases, resulting in Kimberly Clark's

offsetting its pulp receivables against tissue payables

owed to ATC."

30 "Defendants provided ATC with the foregoing financing Objection to "in complete

in complete disregard that such actions with ATC disregard," "were well

and Kimberly Clark violated the RCF and were not aware," and "ignoring these

covered under the Trade Credit Insurance Policy. red flags" sustained.

Given the bounced checks and the continued requests Remainder of quoted

for advances, defendants by March of 2001 were well testimony: objection

aware of ATC's fiscal crisis. Yet, ignoring these red overruled.

flags, the Debtor continued to extend trade and nontrade

credit to ATC."

31 "[the Ponderosa advance constituted an event of default Objection overruled.

under the RCF,] endangering the Debtor's

entire business operations."

32 "The Ponderosa advance was made in the absence of Objection to "knowingly"

any objective decision making process on the part of sustained. Remainder of

defendants for the following reasons: (a) defendants quoted testimony: objection

knowingly engaged in the transaction without the overruled.

benefit of appropriate loan documentation; (b) defendants

extended to ATC an amount equal to approximately

one-quarter of its equity at a time when ATC

was long overdue on receivables; (c) defendants'

actions violated Bank covenants causing a breach

under the RCF, putting its working capital and the

Debtor as a going-concern at risk; and (d) defendants

did not seek advice from, or discuss with,

Debtor's counsel or accountants the consequences of

such actions."

36 "Since ATC had ongoing cash-flow difficulties and Objection to "defendants

defendants knew that the Debtor needed to keep knew" sustained. Remainder

ATC's trade accounts receivable balance below the of quoted testimony:

$15 million limit of the Trade Credit Insurance Policy, objection overruled.

defendants negotiated an arrangement to reduce

ATC's accounts receivable in exchange for approximately

$3,776,941 of inventory of finished goods from

Ampad, an ATC affiliate."

37 "It is my belief that this arrangement was, in fact, an Objection sustained.

illusory transaction, designed to keep the receivables

*606

below the Trade Credit Insurance Policy's limit. The

use of the Ampad inventory to reduce ATC's accounts

receivable balances is another example of

defendants embarking on a transaction without any

aforethought or regard for risk."

38 "Defendants improperly characterized APP's accounts First sentence: objection

receivable as eligible in the Debtor's borrowing sustained. Second sentence

base certificates for August and September of and third sentence

2001. The Debtor continued to extend credit to ATC fragment: objection overruled.

despite the latter's clearly demonstrated inability to

pay and questionable viability.

. . .

endangering the Debtor's own existence."

42 "Each of these unpaid, non-trade extensions of credit Objection overruled.

in its own right constitutes an event of default under

the RCF."

43 "In short, defendants caused the Debtor to engage in First and third sentences:

numerous high risk transactions by extending objection overruled. Second

approximately $8.5 million of non-trade credit to ATC sentence: objection

for the latter's purchase or funding of various under sustained.

performing mills without the benefit of obtaining any

supporting loan documentation or consulting with

Debtor's attorneys. If known by the Bank, such

breaches of the RCF would have resulted in the

acceleration or refinancing of the loan or the restructuring

and/or liquidation of the Debtor's business.

Thus, each and every non-trade extension of credit

put the Debtor's working capital and, consequently,

the Debtor's viability at risk."

44 "No reasonable person would believe that putting the First sentence: objection

Debtor's business at risk was worth the unlikely sustained. Second sentence,

benefit of transacting business with ATC. Indeed, it portion stating "and,

is questionable whether defendants conducted any to the best of my knowledge,

type of assessment of the high risks associated with no document exists

the non-trade credit transactions with ATC, and, to evidencing such assessment

the best of my knowledge, no document exists evidencing or analysis": objection

such assessment or analysis." overruled. Remainder of

sentence: objection

sustained.

45 "Likewise, defendants' reliance on ATC's proposed Third sentence: objection

bond offering was given without the benefit of any sustained. Remainder of

objective decision-making process or advice from testimony in this paragraph:

professionals. Defendants did not analyze the financial

statements supporting the bond issue. Instead, defendants

somehow claim to `have relied upon the

prospectus and alleged due diligence conducted by

UBS Warburg, despite knowing that ATC's true

financial condition was not accurately depicted therein,

in part, because defendants-failed to disclose the

extraordinary loan transactions outlined above. The

Debtor's history shows that, after ATC's prior bond

offering in 1999, the Debtor's business with ATC

declined even though ATC had the cash flow to

engage in such business."

46 "As the years progressed and the Debtor's financial Second sentence: objection

condition deteriorated, it became increasingly more sustained. Remainder of

reliant on ATC as a customer. Defendants' reliance, testimony in this paragraph:

*607

however, was disproportionate with the actual objection overruled.

amount of revenue produced by ATC; In 1998-1999,

the revenue generated by sales td ATC represented

approximately 13%-14% of the total revenue of the

Debtor. However, in 2000, theremenue generated by

sales to ATC dropped to approximately 7% of the

Debtor's total revenue, and, while sales to ATC

picked up in 2001, to equal approximately 10% of the

Debtor's total revenue, those sales were a function of

ATC's difficulty in obtaining credit from other companies.

Moreover, the Debtor, was not receiving the

cash generated from those sales in 2001 since almost

all of the sales in 2001 to ATC were on credit. The

Debtor sold approximately $28 million to ATC in

2001 but collected only a few million dollars for the

sales on a net basis during that same time period."

48 "The Debtor unnecessarily continued to enter into First and second sentences:

high risk transactions and to extend unjustifiable objection sustained.

amounts of credit to ATC despite defendants' knowledge Remainder of quoted language

of ATC's such illiquidity was clearly in this paragraph:

evident by February of 2001, objection overruled.

. . .

The Debtor's receivables from ATC were not being

paid in a timely manner. Days-sales-outstanding skyrocketed

to 120 days in February of 2001 and were

not paid in cash. The Debtor chose to re-age or

extend the credit terms to ATC on those receivables

from 30 days to 60 days and then to 90 days all in

violation of the Trade Insurance Credit Policy. By

April, ATC could not even cover its own checks and

bounced approximately $4 million in checks to the

Debtor between May and June of 2001."

49 "In short, the Debtor was extending credit beyond First and second sentences:

that which a reasonable business person would extend objection sustained. Third

under terms that no reasonable business person sentence: objection overruled.

would have extended to ATC. To extend such an

extraordinary amount of trade and non-trade credit

to a customer while jeopardizing its banking relationship

is not prudent business.

. . .

As a result, Koplik, without the, benefit of any objective

analysis, outside legal or accounting advice, or

Board of Directors' input, extended additional credit

to ATC for trade and non-trade transactions until

ATC's bond offering could theoretically be

completed."

50 "In addition to the extraordinary transactions Objection overruled.

entered into with ATC,"

55 "The transaction with Samoa both violated the RCF Objection overruled.

and generated a significant loss to the Debtor.

Again, no legal advice was sought in connection with

the alleged loans, and, consequently, no rational

decision-making process was employed."

58 "Somewhat suspiciously, only after RST questioned First sentence: objection

the loan, sustained. Second and

. . . third sentences: objection

The memo written by Siegel is inconsistent with the overruled. Fourth sentence:

Debtor's audited financial statements for the years objection to portion

*608

1996 through 2000, for which Siegel was responsible, "It is my belief that such

since such documents show the loan as an asset salary was excessive"

without any offsetting liability. Notably, this loan Sustained, but objection

was in addition to the base salary paid to Siegel in to remainder overruled.

the amount of $300,000. It is my belief that such

salary was excessive given that the majority of Siegel's

services were performed from his home in Florida

away from the Debtor's actual daily business

operations."

59 "To the best of my knowledge and given the exorbitant Objection sustained.

salaries already received by defendants, the

Debtor did not receive fair consideration and/or

reasonably equivalent value in exchange for the

Transfers."

61 "The Debtor violated the RCF and/or entered into Objection overruled.

transactions not covered by the Trade Credit Insurance

Policy by, among other things, funding ATC's

various acquisitions of mills such as the Ponderosa,

Keiffer Paper and Shelby mills, funding the production

of goods for sale to Kimberly Clark, extending

certain working capital loans to ATC, providing

loans, advances and/or excessive compensation to the

Debtor's officers and employees and their relatives,

advancing funds with respect to Willendra and his

company and Samoa, borrowing against ineligible

accounts receivable and improperly applying payments

to reduce ATC's accounts receivable rather

than APP's accounts receivable."

66 "Since each of these transactions, in and of itself, Objection overruled.

violated the RCF and constituted events of default

thereunder, the Bank was entitled to accelerate the

indebtedness of the Debtor due under the RCF.

Accordingly, the Debtor essentially was rendered"

insolvent upon its first unauthorized transaction with

ATC. Simply put, without the ability to access funding

or working capital, the Debtor could not meet its

obligations to others."

67 "Moreover, it was completely irrational for the First sentence: objection

defendants to believe that the Debtor could recover sustained with respect to

under the Trade Credit Insurance Policy, when, in "it was completely irrational

violation of such policy, the Debtor allowed the for the defendants to believe

days-sales-outstanding to get inordinately high and that the Debtor could

then reached an agreement, without the insurance recover under the Trade

carrier's knowledge or consent, with ATC to re-age its Credit Insurance policy,"

receivables from 30 to 60 to 90 days. The Debtor also and overruled with respect

accepted payment for such receivables in inventory to "in violation of such policy,

without even inspecting the same solely for the purpose the Debtor allowed the

of reducing the ATC receivables to within the days-sales-outstanding to

policy's limits and improperly reduced ATC's receivables get inordinately high and

instead of those belonging to the true party in then reached an agreement,

interest." without the insurance

carrier's knowledge or

consent, with ATC to reage

its receivables from 30

to 60 to 90 days." Second

sentence: objection overruled.

*609

68 "In addition, the Debtor withheld information Objection sustained.

regarding ATC's true financial condition. ATC's

bounced checks, its inability to fund its own payroll,

and its wholesale dependence on ATC's bond offering

are huge red flags which should have put the defendants

on notice to take stepsto limit its exposure to

ATC in a proper fashion. The Trade Credit Insurance

Policy is not a guaranty for any loss irrespective

of defendants' actions. When defendants became

aware of these red flags, they had an obligation to

take steps to reduce the Debtor's exposure to ATC

or run the risk that the insurance company would not

cover such obligations. Defendants illogically chose

to accept that risk. Under these circumstances, no

rational person would believe that the Trade Credit

Insurance Policy would cover the extraordinary

amount of credit extended to ATC, and defendants'

reliance on the same as a safety net is completely

unjustifiable."

68 n. 1 "Similarly, defendants clearly could not rely on the Portion "defendants neither

guarantees issued by Mehdi Gabayzadeh, former evaluated the creditworthiness

CEO of ATC, and Super American Tissue, an ATC of the guarantors and

affiliate, to recover the sums owed by ATC since their respective assets nor

defendants neither evaluated the credit worthiness of requested any security with

the guarantors and their respective assets nor requested respect to same": objection

any security with respect to the same." overruled. Remainder of

quoted sentence: objection

sustained.

69 "Over the course of those three days, RSI reviewed Objection overruled.

the Debtor's assets, liabilities, and equity and concluded

by October 28, 2001, that the Debtor was in

the zone of insolvency"

70 "Based on this further analysis, it grew clear that the Objection overruled.

Debtor became insolvent between March and June, of

2001.

. . .

Moreover, the Debtor clearly was in violation of the

RCF at that time and, without the ability to have

funding from the Bank, would have no working

capital, rendering it insolvent."

NOTES

[1] Under the Court's case management order, direct testimony in the trial has been submitted by affidavit, with cross-examination and subsequent testimony to proceed live.

[2] Rule 701 was amended in 2000, at which time the original language was divided by the lettered subdivisions that now appear in the Rule, and the material that is now in subdivision (c) was added. See Mueller and Kirkpatrick, Federal Evidence, § 7:1 (2007). Thus it now explicitly bars the admission of lay opinions that are "based on scientific, technical, or other specialized knowledge within the scope of Rule 702." Rule 701(c).

[3] I'm aware that the Bank of China court stated that testimony involving personal perception with the benefit of professional expertise was permissible so long as it wasn't "rooted exclusively" in the witness's professional expertise (there, in international banking). That could be read as suggesting that a peppercorn of personal perception would permit a great deal of lay opinion testimony, circumventing the safeguards of Fed.R.Evid. 702 and Fed.R.Civ.P. 26. I think it is truer to the language and spirit of Bank of China to try to separate the testimony based on perception from that based on opinion on an answer-by-answer basis (and individually within each answer, to the extent necessary), and in the exercise of my discretion, I will be permitting testimony only to the extent that any aspect of a larger body of testimony embodies, in material part, witness perception. See Bank of China, 359 F.3d at 181 (noting purpose of Rule 701(c) "to eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the simple expedient of proffering an expert in lay witness clothing").

[4] My understanding of the Second Circuit's ruling in Rigas is assisted by my personal knowledge, as a consequence of Adelphia's bankruptcy case having been before me, and matters as to which I can take judicial notice. I know that Mr. DiBella had accounting expertise, because I heard testimony by Mr. DiBella, on distinct, but related, issues, Myself. But Mr. DiBella's testimony in the criminal case was in material respects based on what he observed, and did not go to issues where his accounting expertise, other than his ability to explain what he saw, was material to the issues on which he was testifying. Mr. DiBella testified on matters invoking his accounting expertise to a considerably greater degree in the Adelphia bankruptcy case, without objection by any party.