Degirolamo v. Mcintosh Oil Co. (In re Laurel Valley Oil Co.)

IN RE: LAUREL VALLEY OIL CO., Debtor.

ANTHONY J. DEGIROLAMO, TRUSTEE, Plaintiff, v. MCINTOSH OIL CO., Defendant.

CASE NO. 05-64330

ADV. NO. 12-6014

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION

July 28, 2015

CHAPTER 7

JUDGE RUSS KENDIG

MEMORANDUM OF OPINION (NOT INTENDED FOR PUBLICATION)

Currently before the court is McIntosh Oil Co.'s ("McIntosh") motion seeking to exclude the testimony of Jarod L. Nottingham ("Nottingham"), a witness expected to be called in the forthcoming trial between Anthony J. DeGirolamo, the chapter 7 panel trustee ("Trustee") and McIntosh. McIntosh also filed a motion seeking to exclude the testimony of Doctor Anurag Gupta in the same trial, but Trustee's response indicates he no longer plans to call Dr. Gupta to testify, making McIntosh's motion regarding Dr. Gupta moot.

Nottingham is an individual with extensive experience buying diesel fuel in Northern Ohio, as well as a number of other locations across the United States. While McIntosh agreesNottingham has extensive fuel purchasing experience, it argues he does not have knowledge in the types of prepay contracts entered into between McIntosh and Laurel Valley Oil Co. ("Debtor"), and therefore does not meet the expert testimony requirements of Federal Rule of Evidence 702. In response, Trustee argues that McIntosh's prepay financial transaction are only one element of his complaint, leaving other areas within Nottingham's realm of expertise where he may validly testify.

The court has jurisdiction of this case under 28 U.S.C. § 1334 and the general order of reference dated April 4, 2012. In accordance with 28 U.S.C. § 1409, venue in this district and division is proper. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and/or (H).

This opinion is not intended for publication or citation. The availability of this opinion, in electronic or printed form, is not the result of a direct submission by the court.

Facts

Before bankruptcy, Debtor was in the business of buying and selling petroleum products, including diesel fuel. Debtor encountered cash flow problems, and in order to quickly raise money, began selling diesel fuel to McIntosh, as well as other customers, on pre-pay contracts at prices significantly lower than other suppliers in the area, and also below Debtor's cost to purchase the fuel. Debtor was losing money on every sale, and eventually was unable to afford the purchase of fuel it was planning to sell below cost. On July 27, 2005, Debtor was forced into bankruptcy via an involuntary chapter 11 bankruptcy petition. Debtor converted the case to a chapter 7 liquidation on September 15, 2005.

A number of years later, on January 31, 2012, Trustee brought the underlying adversary case seeking to recover allegedly preferential transfers between Debtor and McIntosh. Trustee's theory is as follows: McIntosh purchased diesel fuel from Debtor for $11,379,731.19 when the actual market price for the fuel was $15,050,917.68. Therefore, the $3,671,186.50 difference between McIntosh's diesel fuel purchase price and the prevailing market price amounts to a fraudulent or preferential transfer recoverable for the benefit of the bankruptcy estate.

Trustee's initial complaint leveled seven counts against McIntosh, but the court granted summary judgment in favor of McIntosh on counts II-VII in an opinion dated March 5, 2013 ("2013 Opinion"). The remaining count is for fraudulent transfers under § 548(a)(1)(A) of the United States Bankruptcy Code ("the Code"), which allows Trustee to avoid transfers of a debtor's interest in property made within two years of the petition date that occurred "with actual intent to hinder, delay, or defraud" creditors. However, § 548(c) provides a "safe harbor" against § 548(a) liability if the relevant transfers were made "for value and in good faith." In the 2013 Opinion, the court determined that McIntosh satisfied the "forward contract" requirements of § 546(e), establishing that McIntosh's purchase of diesel fuel from Debtor was for "value." DeGirolamo v. McIntosh Oil Co. (In re Laurel Valley Oil Co.), 2013 WL 832407 (Banrk. N.D. Ohio 2013). However, whether McIntosh's fuel purchases were in good faith, and therefore satisfy the other requirement of the § 548(c) safe harbor, remains in dispute. Additionally, if the § 548(c) safe harbor is unavailable, Trustee must satisfy each element of a § 548(a)(1)(A) fraudulent transfer claim.

The current opinion deals only with McIntosh's motion to exclude testimony under Federal Rule of Evidence 702. Nottingham is the fuel procurement manager for Kenan Advantage Group ("Kenan"), a petroleum distribution company based in Northern Ohio. Nottingham is responsible for purchasing diesel fuel to supply Kenan's bulk fuel tank facilities, which Kenan uses to fuel a fleet of approximately six thousand vehicles. Nottingham has been involved in the purchase of diesel fuel for over ten years, and in the most recent year was responsible for the purchase of approximately fifty-five million gallons of diesel fuel. Nottingham is also active in the diesel fuel community, regularly discussing pricing trends and other market changes with industry peers. Nottingham holds an undergraduate degree in business administration from Malone University in Canton, Ohio. In association with Nottingham's testimony, he submitted an expert report including the following observations and opinions: (1) Debtor's diesel fuel pricing was always significantly below the widely used Oil Price Information Service ("OPIS") benchmark; (2) Debtor's diesel fuel pricing averaged $0.44 per gallon below the prevailing average price and were unreasonable by industry standards;¹ (3) Debtor's diesel fuel pricing did not react to market trends, such as following fluctuations in the relevant commodities markets; (4) Debtor was not involved in a hedging contract that would justify the low prices; (5) prepayment contracts are very unusual in the diesel market; and (6) prepayment contracts do not justify Debtor's low prices. According to Trustee, Nottingham's testimony at trial will not cover every portion of his expert report, but will be limited to the following areas: (1) Debtor's diesel fuel pricing was always substantially below OPIS and other market participants; (2) Debtor's pricing did not follow general market trends; and (3) Debtor's prepayment contracts and other transaction terms were very unusual by industry standards. Importantly, Nottingham will not testify regarding the proper prepayment discount, if any, associated with Debtor and McIntosh's prepayment fuel contracts or with Debtor's potential hedging or futures contracts.

On June 29, 2015, McIntosh filed a motion requesting leave to file a reply brief to Trustee's response to McIntosh's motion seeing to exclude Nottingham's testimony under Federal Rule of Evidence 702. Under Local Bankruptcy Rule 9013-1(c), "a reply may be filed within 7 days after the date of service . . . of the response." McIntosh's request for leave to file a reply was not filed until eleven days after Trustee's response. See Fed. R. Bankr. P. 9006(a). However, based on the broad discretion granted to trial courts in scheduling matters, the court accepts McIntosh's late filed motion. United States v. Reynolds, 543 Fed. App'x 347, 356 (6th Cir. 2013). The court gave McIntosh until July 24, 2015 to file a reply brief, but McIntosh did not file its reply brief until July 27, 2015. While the court could refuse to evaluate McIntosh's additional arguments based on multiple late filings, the court will not do so. The arguments discussed in McIntosh's reply brief are incorporated into the court's analysis.

Law and Analysis

A lay witness is generally prohibited from giving opinion testimony and is limited to matters where he has personal knowledge. Fed. R. Evid. 602, 702. However, an expert witness may present opinion testimony if grounded in his expertise and a proper evidentiary basis. Fed.R. Evid. 702-03. Under Federal Rule of Evidence 702, an expert's opinion is admissible if: "(1) the expert is qualified as such by knowledge, skill, experience, training, or education; (2) the testimony is relevant, meaning it will assist the trier of fact to understand the evidence or to determine a fact in issue; and (3) the testimony is reliable, meaning it is based on sufficient facts or data, is the product of reliable principles and methods, and the witness has applied the principles and methods reliably to the facts of the case." Great N. Ins. Co. v. BMW of N. Am. LLC, 2015 WL 3936229, at *2 (S.D. Ohio 2015) (citing In re Scrap Metal Antitrust Litig., 527 F.3d 517, 528-29 (6th Cir. 2008)); see also Fed. R. Evid. 702.

Prior to the adoption of Rule 702, courts in the United States applied a "generally accepted" principle to determine whether an expert was qualified to give opinion testimony. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 585 (1993). However, in the oft cited Daubert decision, the United States Supreme Court jettisoned the "general acceptance" standard in favor of Federal Rule of Evidence 702. Id. at 586-87. Under the Supreme Court's interpretation, expert testimony needs to be both relevant and reliable before admitted at trial. Id. at 589. Information is relevant if it will "assist the trier of fact to understand the evidence or determine a fact at issue." Id. at 591. Information is reliable if it is based on "scientific knowledge," which requires "a grounding in the methods and procedures of science." Id. at 589-90. To help courts determine the reliability of expert testimony, the Supreme Court outlined a number of relevant factors, such as whether the underlying methodology has been subject to peer review, has been independently tested, and is "generally accepted." Id. at 593-94. However, the Supreme Court stressed that each admissibility inquiry is fact intensive, and many other factors may be relevant in differing circumstances. Id. at 593; ...