United States District Court, D. Idaho
STEWART TITLE INSURANCE COMPANY, a Texas corporation, Plaintiff,
CREDIT SUISSE, Cayman Islands Branch, Defendant.
MEMORANDUM DECISION & ORDER
B. LYNN WINMILL, Chief District Judge.
The Court has before it seven motions to exclude the testimony of experts. The Court heard oral argument on the motions on June 18, 2015. For the reasons explained below, the Court will (1) grant the motions to exclude the testimony of Jeffrey Thomson and Michael Mason, and (2) grant in part and deny in part the motions to exclude the testimony of Bushnell Nielsen, Robert Reilly, and Albert Rush, and (3) deny the motions to exclude Kenneth Franklin and Philip Cook.
On May 19, 2006, Tamarack and Credit Suisse signed a Credit Agreement setting forth the Loan of $250 million from Credit Suisse to Tamarack to build a ski resort. The Loan was secured by two mortgages on most of the 3, 608 acres on which the resort was to be built. On the same day the Loan was issued, Stewart Title, through its subsidiary, AmeriTitle, issued Credit Suisse a lender's title insurance policy ("the Policy") on the mortgaged land. The Policy was worth $227, 000, 000.00 and did not contain the standard exceptions for mechanics' liens and creditors' rights.
Before the Credit Agreement was signed, Credit Suisse and Stewart Title negotiated over the terms of the Policy. On April 20, 2006, Stewart issued a "Commitment to Provide Title Insurance, " which functioned as a draft of the Policy. Between issuing the Commitment and issuing the Policy, Stewart and Credit Suisse negotiated Schedule B, the list of specific exclusions to the Policy. Stewart also requested an appraisal of Tamarack from Credit Suisse and the list of accounts payable from the Loan documents. Credit Suisse gave Stewart an appraisal that another firm - Cushman & Wakefield - had prepared for financing purposes. Credit Suisse also directed Stewart to communicate with Tamarack to obtain the Schedules from the Loan documents.
Tamarack had contracted with multiple builders and architects to begin construction on portions of the resort prior to May 19, 2006. Notably, Banner/Sabey II, LLC, a general contractor, had begun construction of the Village Plaza in early April of 2006.
This becomes important because under Idaho law a contractor who has not been paid can file a mechanic's lien that attaches to the real property and takes priority over liens or mortgages that attached after the date the contractor began the work at issue. Thus, a company providing title insurance has a vested interest in knowing the date contractors began work on a project and whether that date is prior in time to any mortgages covered by the title insurance.
Stewart obtained lien waivers from some, but not all, of the contractors prior to issuing the Policy. Banner/Sabey II and MHTN, the architect of the Village Plaza project, did not sign waivers until several months after the Policy was issued. Banner/Sabey II had signed a contract with Tamarack in March of 2006, but had made the contract contingent on financing, which came in the form of Credit's Suisse's Loan. The Loan documents reflected this fact: at the time the Loan and Policy were issued Banner/Sabey II and MHTN were listed under Schedule 2.9, the accounts payable schedule, but were not listed under Schedule 1.1(e), the list of contractors, or Schedule 4.33, the list of material contracts.
The Loan was set to mature on May 19, 2011. Long before that date, however, Tamarack defaulted on the Loan. Credit Suisse filed a foreclosure action in Idaho state court and tendered to Stewart Title the defense against multiple competing liens.
Stewart Title accepted the tender and defended Credit Suisse in the state court foreclosure action. On May 1, 2009, the state court held that the lien waivers signed by Banner/Sabey II and other contractors only waived the right to a lien for work performed before the Loan documents were recorded, but not for later performed work.
On June 29, 2009, Stewart withdrew its defense of Credit Suisse against a vendee's lien held by BAG Property Holdings, LLC. On May 11, 2011, the state court entered findings concluding that certain mechanics' liens worth around $13 million were valid and had priority over Credit Suisse's mortgages. On May 17, 2011, Stewart withdrew its defense of Credit Suisse against these mechanics' liens and, on the next day (May 18, 2011), filed this lawsuit. Stewart generally seeks a declaration that it does not need to indemnify Credit Suisse for any loss due to these superior mechanics' and vendees' liens.
Credit Suisse responded with a motion for partial summary judgment, seeking to dismiss some of Stewart Title's claims, and a motion to amend its complaint to add a claim for punitive damages. The Court granted the motion to amend, finding that there was sufficient evidence to present to a jury Credit Suisse's claim that Stewart Title's denial of its claim for coverage was an extreme deviation from reasonable standards of conduct and was done with an extremely harmful state of mind.
The Court also granted in part Credit Suisse's motion for partial summary judgment, ruling as follows: (1) The Policy affords coverage for the mechanic's liens claimed by Banner/Sabey II and MHTN, and the statutory BAG vendee's liens; (2) Stewart Title may not claim that Credit Suisse committed fraud because the Cushman & Wakefield appraisal it provided was misleading; (3) Stewart Title may not claim that Credit Suisse committed fraud because Credit Suisse knew, but failed to reveal, facts that gave priority to mechanic's liens filed by contractors Banner/Sabey II and MHTN; (4) An exclusion (§ 3(a)) under the Policy is not applicable because Credit Suisse was not responsible for the mechanic's liens; (5) An exclusion (§ 3(b)) under the Policy, that applied if the insured knew of liens that the insurer was not aware of, did not apply because Stewart Title was at least on inquiry notice as to the mechanic's liens; and (6) Stewart Title cannot raise as a defense to coverage Credit Suisse's failure to pursue its remedies against Guarantors.
Both sides have now filed motions to exclude testimony from their opponent's experts. Credit Suisse has moved to exclude testimony from Bushnell Nielsen, Jeff Thompson, Michael Mason, and Robert Reilly. Stewart Title has moved to exclude testimony from Albert Rush, Philip Cook, and Kenneth Franklin. The Court will discuss each motion after reviewing the legal standards governing expert testimony.
Rule 702 should be applied with a "liberal thrust" favoring admission. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 588 (1993). At the same time, Rule 702 requires that "[e]xpert testimony... be both relevant and reliable." Estate of Barabin v. AstenJohnson, Inc., 740 F.3d 457, 463 (9th Cir.2014).
The relevancy bar is low, demanding only that the evidence "logically advances a material aspect of the proposing party's case." Daubert v. Merrell Dow Pharm., Inc., 43 F.3d 1311, 1315 (9th Cir.1995). Relevancy depends on the particular law at issue because "[e]xpert opinion testimony is relevant if the knowledge underlying it has a valid connection to the pertinent inquiry." Primiano v. Cook, 598 F.3d 558, 563 (9th Cir.2010). The reliability threshold requires that the expert's testimony have "a reliable basis in the knowledge and experience of the relevant discipline." Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 149 (1999).
Ultimate Issue vs. Legal Conclusion
Expert testimony may "embrace an ultimate issue to be decided by the trier of fact." See Fed.R.Evid. 704(a). At the same time, an expert witness "cannot give an opinion as to her legal conclusion, i.e., an opinion on an ultimate issue of law." Nationwide Transp. Fin. v. Cass Info. Sys., Inc., 523 F.3d 1051, 1058 (9th Cir.2008) (excluding expert testimony labeling conduct as "wrongful" or "intentional, " but allowing testimony on "industry standards" and "factual corporate norms"). Id.
Rule 704(a) must be read together with Rule 702. The reason that courts exclude opinions that merely tell the jury what result to reach - for example, that a testator did not have the capacity to make a will - is that the opinion is not helpful to the jury, as required by Rule 702. See 29 Wright & Gold, Federal Practice & Procedure § 6284 at p. 380-82. The opinion becomes helpful when it is linked to the facts of the case. See Advisory Committee Notes to Rule 704. An example used in the Advisory Committee Notes makes this plain:
Thus, the question "Did T have capacity to make a will?" would be excluded, while the question, "Did T have sufficient mental capacity to know the nature and extent of his property and the natural objects of his bounty to formulate a rational scheme of distribution?" would be allowed.
Expert Testimony in Bad Faith Litigation
Closer to the context of this case, an expert's testimony in a bad faith case that an insurer violated the standards of the insurance industry was allowed in Hangarter v. Provident Life, 373 F.3d 998 (9th Cir. 2004). In that case the plaintiff claimed his insurer committed bad faith in denying his claim for disability insurance benefits. His expert testified that the insurer (1) based its denial on "facts" it knew to be false, (2) relied on an examining physician it knew to be biased in its favor, and (3) targeted claims by professionals like plaintiff for denial. Id. at 1010-11. The expert testified that this conduct deviated from industry standards, but never said it constituted bad faith under the law. Id. at 1016. The district court allowed this testimony under Rules 702 and 704(a) and the Circuit affirmed that decision.
The expert complied with Rule 702 because he (1) identified specific conduct of the insurer, (2) explained its consequences for the insured, and (3) described how that conduct deviated from industry standards, all without rendering a conclusion on the legal significance of the conduct.
Describing Industry Standards By Referring to State Law
The insurer in Hangarter also challenged the expert for referring to state law while discussing industry standards. The Circuit rejected this challenge as well:
Although [the expert's] testimony that Defendants departed from insurance industry norms relied in part on his understanding of the requirements of state law, specifically California's Unfair Settlement Claims Practice § 2695, a witness may refer to the law in expressing an opinion without that reference rendering the testimony inadmissible. Indeed, a witness may properly be called upon to aid the jury in understanding the facts in evidence even though reference to those facts is couched in legal terms.
Id. at 1017 (internal quotations and citations omitted). This reference to state law, the Circuit held, was proper because it was helpful to the jury in understanding the industry standards and was "ancillary to the ultimate issue of bad faith." Id.
Interpreting the Title Insurance Policy
In general, the interpretation of a contract or insurance policy is a matter of law for the Court. See PMI Mortgage v. American, 2008 WL 3838297 (9th Cir. 2008) (unpublished disposition) (excluding expert's legal interpretation of policy term). However, an expert is permitted to testify about how certain terms in the policy are commonly interpreted in the title insurance industry. Manhattan Re-Ins. Co. v. Safety Nat'l Cas. Corp., 2003 WL 22718008 (9th Cir. 2003) (unpublished disposition) (allowing expert to testify about industry understanding of common terms in insurance policy).
The title insurance industry's interpretation of common terms in policies is relevant here because Credit Suisse claims Stewart Title's acted in bad faith and is liable for punitive damages because its conduct was an extreme deviation from reasonable standards of conduct. Industry standards are relevant in determining whether the "extreme deviation" test for punitive damages is satisfied. Weinstein v. Prudential Property and Cas. Ins. Co., 233 P.3d 1221, 1235 (Id.Sup.Ct. 2010).
Thus, an expert on the standards and practices in the title insurance industry may testify that (1) certain terms in a title insurance policy are standard in the industry; (2) title insurance companies typically interpret those provisions in certain ways; and (3) the conduct of an insurer or insured was in accord with, or deviated from, those industry practices. Such testimony in this case would be relevant under Rule 702 to either prove or rebut the claim that Stewart Title's conduct constituted bad faith or was an extreme deviation from reasonable standards of conduct.
The expert may not testify about what a certain term in the policy means and whether the insured or insurer "violated" or "complied with" that term. Embedded in such testimony are legal conclusions about contract interpretation and breach.
Motion to Exclude Albert Rush
Stewart Title moves to exclude certain parts of the testimony of Credit Suisse's expert Albert Rush, a licensed attorney with long experience in the title insurance industry. Rush's basic opinion is that Stewart Title's conduct violated Idaho law and was an extreme deviation from industry standards of conduct.
In response to the motion, Credit Suisse argues first that the Court has previously held that Rush's testimony is admissible. The Court disagrees. While Judge Benson in 2014 did deny Stewart Title's motion to strike Rush's report, the only briefed issue was whether the unsworn signature of Rush was sufficient. See Stewart Title Briefs (Dkt. Nos. 185-1 & 194). While Judge Benson went further in his written opinion and held that Rush was qualified and that his opinions would aid the jury, that finding was not based on any arguments made in the briefing, and was not the product of extensive argument. See Order (Dkt. No. 213). Recognizing this, Judge Benson held that Stewart Title retained the right to renew their motion during trial. Id. Stewart Title is renewing the motion now, and the Court finds it was not resolved by Judge Benson.
Turning to the admissibility of Rush's opinions under Rule 702, the Court finds that while portions of his testimony are subject to exclusion, most of his testimony satisfies the "liberal thrust" of Daubert in favor of admission, discussed above. The objectionable portions of Rush's testimony come largely in the form of legal conclusions. He frequently opines on Idaho law and concludes that Stewart violated that law, as shown by the following examples: (1) "Stewart had an affirmative duty to settle claims for which liability was reasonably clear. See e.g. IC section 41-1329(6) and (13)." See Rush Report (Dkt. No. 291-2) at 6; (2) "Stewart breached this duty [to timely assert any reservation of rights]"; (3) In failing to notify Credit Suisse of its intent to deny coverage, Stewart's conduct was "intentional" and "in bad faith"; and (4) Stewart Title's conduct in this case "demonstrates bad faith, " id. at p. 9, and (at two later points in his report) that its conduct "demonstrates bad faith handling of these claims." Id. at pp. 12 & 13; (5) that Stewart Title's acts were "intentional, malicious, fraudulent, oppressive, and outrageous, and that Stewart's conduct in this case was undertaken in bad faith." Id at p. 19.
This is not an exhaustive list, but the examples serve to demonstrate the type of testimony that will not be allowed at trial. In these examples, Rush is not using Idaho law to explain industry standards, as was the case in Hangarter, discussed above. Instead, Rush is testifying that Idaho law imposes certain duties on Stewart and that Stewart violated those duties. That testimony must be excluded under the legal standards quoted above.
Rush is on solid ground, however, when he explains industry standards, identifies how Stewart Title's conduct fell short of those standards, and describes the consequences of that conduct for Credit Suisse. For example, Rush opines that Stewart Title's conduct in withdrawing its defense even though nothing had changed from its earlier acceptance was a "substantial departure from normal title insurance claims handling procedures and practices, " and left Credit Suisse "in a worse position than [it] would have encountered had it not purchased title insurance at all." Id. at p. 11. He goes on to opine that "the better decision would have been for the insurer to file an action for a judicial declaration regarding coverage, and obtain judgment, before either denying coverage or withdrawing from the defense." Id. This testimony describing ...