Participation Loan Expert Survives Most (But Not All) Daubert Challenges

By Joshua Fruchter, Esq
In a decision handed down earlier this year, FNB Bank v. Park National Corporation, 2014 WL 289184 (S.D. Ala. Jan. 27, 2014), an Alabama District Court addressed multiple Daubert challenges leveled by plaintiff against defendant’s participation loan expert.

By way of background, participation loans are loans made by multiple lenders to a single borrower. The arrangement is typically used where a corporate borrower requires a relatively large loan, and a single bank is reluctant to assume the entire risk. As such, one bank – generally known as the “lead bank” – will recruit other banks to contribute a portion of the loan, and therefore spread the risk of the loan across several banks. The lead bank deals directly with the borrower and typically takes responsibility for negotiating the terms of the participation loan and thereafter servicing the loan, including collecting payments on behalf of the other participating banks. In certain cases, a participation loan agreement may cover multiple loans to multiple borrowers.

The Court’s opinion is short on facts and thus it is difficult to understand precisely what occurred. What can be surmised is that plaintiff apparently participated in one or more construction loans originated by defendant that subsequently defaulted. Plaintiff sued defendant, and among defendant’s defenses appear to have been arguments that plaintiff did not perform adequate due diligence and waived certain financial conditions to its participation in certain loans.

In support of their positions, defendants introduced a participation loan expert, Donald Coker. Plaintiff responded with a host of Daubert challenges under Federal Rule of Evidence 702.

First, plaintiff contended that Coker was unqualified to render an expert opinion concerning participation loans since, among other things, he had not been employed as a banker since 1988, and had no experience with participation loans since the early 1990’s. Plaintiff also complained that Coker’s curriculum vita was insufficiently specific concerning his experience with participation loans. The Court rejected this challenge on the ground that plaintiff failed to demonstrate that “participation loan practices, standards and so forth changed at all in the 12-15 years between [Coker’s] last experience and the subject participation loan, much less that they changed so radically as to render his experience and training an unsuitable predicate for expert testimony.” Concerning the alleged lack of specificity in Coker’s curriculum vita, the Court ruled that there was no authority for requiring the detail demanded by plaintiff as a predicate to admissibility, and further observed that, in any event, plaintiff had failed to seek further details from Coker concerning his experience during his deposition.

Second, plaintiff argued that Coker’s opinions rested on assumed facts that were contradicted by the evidence. The Court conceded that to the extent an expert’s opinion rests on assumed facts that have been established as non-existent, there may be a basis for exclusion. However, the Court did not find that any of Coker’s factual assumptions involved such a situation.

Third, plaintiff criticized Coker’s opinions as having been improperly used a “vehicle for factual narrative.” The Court disagreed, characterizing the recitation of facts in Coker’s report as required to provide the necessary factual predicates for his opinions in accordance with Federal Rule of Civil Procedure 26(a)(2)(B) (governing written expert reports).

Fourth, plaintiff claimed that Coker improperly assumed plaintiff’s knowledge of certain facts, and testified concerning plaintiff’s intent. Once again, the Court demurred, finding that there was evidence in the record concerning plaintiff’s knowledge of certain facts, and thus such knowledge was properly assumed by Coker. Further, the Court found, there was no testimony concerning plaintiff’s intent.

Plaintiff was more successful with its final objection – that Coker had improperly offered legal conclusions (in particular, in the area of contract interpretation). Here, the Court ruled that Coker had improperly offered legal conclusions concerning whether: (i) a particular loan breached the underlying participation agreement, (ii) a particular construction loan agreement required the developer to bear an increase in construction costs, and (iii) plaintiff had breached its duty under the participation agreement to monitor loans. In short, the Court held, experts are not permitted to state an opinion regarding the duties of parties to a contract since such testimony represents legal conclusions. Therefore, the Court excluded Coker’s testimony constituting contractual interpretation (as well as testimony concerning whether two liens caused damage to the title to certain properties ultimately received by plaintiff).

The Court’s analysis in FNB Bank appears to have been fairly straightforward and uncontroversial. Do you disagree with any aspect of the opinion? Have any readers had experience working with participation loan experts? Feel free to share any relevant experiences.
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Joshua Fruchter, Esq

An NYU School of Law graduate, Joshua has been practicing as a litigator for over twenty five years. Joshua has published regularly on legal marketing topics in numerous law-related periodicals, and presented on legal marketing technologies to various bar and legal marketing associations.   Mr. Fruchter is a recognized voice in litigation commentary, who has discussed issues ranging from Daubert analyses and inventor testimony in patent litigation, to predictive coding in document reviews.

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