When a homeowner brings a multi-count toxic tort case alleging that a corporate defendant’s discharge of toxic substances from its facility contaminated his property, the diminution of property value claim is often the only element of damages subject to objective determination. Or is it?
In case after case, the testimony of plaintiff property valuation experts is being rejected for failing to comply with Federal Rule of Evidence 702. There is often little or no dispute that homeowners living adjacent to an area involved in ongoing remediation may have difficulty selling their homes at full market value. And yet, despite the apparent stigma, plaintiff experts in these matters often stumble on their way to the courthouse.
One recent such case is Michael Leese, et al. v. Lockheed Martin Corp., Civ. No. 11-5091, decided by the Hon. Jerome B. Simandle, Chief U.S. District Judge for the federal district court in New Jersey on March 18, 2014. In that case, Judge Simandle granted summary judgment to Lockheed Martin after concluding that the expert report and deposition testimony of plaintiffs’ valuation expert, Jerome McHale, should be excluded as unreliable.
The property valuation reports at issue concerned the Leese property at 5 Victoria Court and the Linkler property at 7 Victoria Court, in Moorestown, New Jersey. Both properties sit across the street from a Lockheed Martin’s research, development and manufacturing facility. When plaintiffs purchased their respective properties, they admittedly were aware that groundwater underneath their properties was contaminated with TCE, a volatile organic compound.
After several years, plaintiffs brought suit against Lockheed Martin alleging personal injury on behalf of the Leese children and diminution of property value. In late 2013, the court dismissed the personal injury claims due to lack of proof of causation, but permitted plaintiffs to furnish a new expert valuation report.
McHale’s valuation report concluded that each property was worth $295,000 “as is” and $600,000, “if clean.” Therefore, he calculated the loss of value for each property as $305,000. Yet, when Judge Simandle began to dig into McHale’s methodology and rationale, he discovered a jumble of unexplained arithmetic, unreliable methodology, and internal inconsistencies.
As is often the case, a valuation expert does not have difficulty establishing the “if clean” valuation. In this case, McHale used a “sales comparison” approach by averaging the sale prices of four comparable properties in the plaintiffs’ residential development to obtain the “if clean” valuation. It was when McHale attempted to analyze the “as is” value of the properties that he ran into serious difficulty.
McHale used three different techniques to estimate the “as is” value and took the averages of the three valuations to arrive at a final “as is” figure. The court evaluated each of these three techniques in turn.
The first technique, called “cost to cure,” subtracted from the “if clean” valuation the cost of environmental remediation. McHale obtained an estimate of remediation costs from a non-testifying expert. The problem was that NJDEP did not require or recommend that any of this non-testifying expert’s proposed remedial measures be implemented on plaintiffs’ properties.
The court analyzed the “cost to cure” approach this way:
“The most significant problem with McHale’s cost-to-cure analysis is that he may not reasonably rely on Rogers’ unsupported, subjective analysis of what remedial measures are “required” on the property. Rogers himself states that his estimate describes “measures [that] are prophylactic as opposed to curative in nature.” …In other words, Rogers, by his admission, does not intend his letter to address the costs to cure for a contamination on plaintiff’s property. Rather, Rogers expressed his opinions about what prophylactic measures are required without explaining the basis for such an opinion.”
Judge Simandle found that the “cost to cure” technique suffered from a Daubert “fitness” problem as well. Because plaintiffs admitted that they knew the groundwater under their properties was contaminated with TCE when they bought their homes, remediating the property to “if clean” levels would improve the property beyond what plaintiffs purchased and give them a windfall. According to the court, the proper valuation analysis should take into account what plaintiffs knew of the condition of the property at the time of purchase.
The second technique applied a “paired sales” analysis. A “paired sales” analysis looks to sales of other stigmatized properties, estimates “if clean” valuations for those properties, and calculates a “percentage discount” for the environmental stigma for each property. The average percentage discount is then applied to the “if clean” valuations of plaintiffs’ properties.
Two of the four comparative properties used by McHale were inappropriate because NJDEP required remediation on them, by contrast, but did not require remediation on plaintiffs’ properties. Moreover, the cost of remediation on those properties was modest as compared to the hundreds of thousands of dollars proposed for plaintiffs’ properties.
In evaluating the “paired sales” technique, the court found that McHale’s report had irreparable flaws. First, McHale could not articulate a reliable basis for weighting the comparator percentages, and he did not consult any authority to arrive at his average. More significantly, the court found that McHale had no reliable basis for adding 10% to the weighted average discount. In his deposition, when pressed, McHale admitted that he came up with an extra 10% derived from a “market based opinion from me” after gathering opinions from unspecified “other people in the market.”
The third technique employed by plaintiffs’ expert was “realtor and broker surveys.” McHale surveyed eleven area realtors to come up with an appropriate discount for residential property faced with a stigma. Although the plaintiffs’ homes did not have any operational remediation system on their premises, McHale asked the realtors to assume that the homes had a subsurface depressurized remediation system in the basement.
Based upon the realtors’ survey, he concluded that 20% would be an appropriate discount off the listing price. He then added another 5% because properties without stigma had sold for below 5% market over the past two years due to poor real estate conditions. He then added another 15% because of additional marketing time and effort, and the difficulty of a buyer finding financing. All of these calculations resulted in the final discount of 40%.
In examining the “interviews/surveys” approach, the court questioned why McHale doubled the discount from 20% to 40% without explaining why the realtors would not have taken into consideration the other factors McHale discussed when giving their responses. Presumably, the discounted selling price already took into consideration any difficulty in obtaining financing and any increased marketing costs. Therefore, these considerations should not be counted twice in coming up with a discount.
In addition, it made no sense why the realtors were asked to assume that they should expect to sell a house with a subsurface remediation system when the plaintiffs’ own homes did not have such a system. In summary, the court concluded:
“Although some methodological flaws go to weight, here the methodology is unreliable at each step: fact gathering, percentage averaging, percentage doubling. The entire formulation of the survey seems to invite unreliability…”
Leese is instructive for the toxic tort defense practitioner because it provides a primer on how to pick apart the opinions of a plaintiff property valuation expert in deposition and, later, in a Daubert motion. Opinions that at first glance might seem reasonable at first glance fail to hold up and careful analysis. In Leese, the plaintiff valuation expert utilized three separate techniques for determining plaintiffs' "as is" value and failed to pass Daubert scrutiny in every instance.