VeroBlue Farms U.S. Inc. v. Wulf

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VEROBLUE FARMS USA INC., Plaintiff, v. LESLIE A. WULF, ET AL., Defendants.

No. 3:19-cv-764-X

United States District Court, N.D. Texas, Dallas Division

January 20, 2023

MEMORANDUM OPINION AND ORDER^[1]

DAVID L. HORAN UNITED STATES MAGISTRATE JUDGE

Defendants Leslie A. Wulf (“Wulf”), Bruce A. Hall (“Hall”), James Rea (“James”), and John E. Rea (“Ted”) (collectively, the “Founders”) have filed a Motion to Exclude the Expert Testimony of Brandi Kleinman, see Dkt. No 492 (the “Kleinman Motion”), whom Plaintiff VeroBlue Farms USA, Inc. has designated as a damages expert.

In the Kleinman Motion, the Founders assert that “the opinions, analysis, and testimony of Plaintiff VeroBlue Farms USA, Inc.'s (‘VBF') purported damages expert Kleinman, should be struck, limited, or excluded as unreliable and irrelevant under [Federal Rule of Evidence] 702 and Daubert,” where “[a]n expert's opinion is not admissible unless the expert is qualified, and the opinions offered are ‘relevant and reliable,'” and “[t]he party offering an expert's opinion has the burden to establish that: (1) the expert is qualified; (2) the testimony is based upon a reliable foundation; and (3) the testimony is relevant to the issues in the case.” Dkt. No. 492 at 2 (cleaned up).

According to the Founders, “Kleinman's opinions are flawed and contrary to governing law, and VBF cannot show that her opinions and testimony are either relevant or reliable, both of which are prerequisites to admissibility.” Id. The Founders argue:

Assume McDonald's Corporation has never had any value its assets have never had any value, and it has never been able to generate a profit. Assume further that all of McDonald's officers and directors allegedly failed to disclose certain information and made misstatements/faulty projections about its prospects for growth and profitability to third parties, who then through loans and investments contributed approximately $100 million to the company and affiliates. Now assume that McDonald's subsequently sues those officers and directors for their false statements and failure to disclose information to the investors and lenders. Finally, assume McDonald's seeks the entirety of the $100 million that the third parties invested in and loaned to the company as damages to the company. Sounds ridiculous? Indeed, but this hypothetical is exactly the opinion that Plaintiff VeroBlue Farms USA, Inc.'s (“VBF”) expert, Brandi Kleinman (“Kleinman”), offers here.

Kleinman claims that VBF was worthless and had no value from its inception. Kleinman next regurgitates VBF's allegations of fraud and concludes that this alleged fraud caused damages to VBF. She then adds up the total debt and equity invested in VBF (and its parent company, VeroBlue Farms, Inc. (“VBF Canada”) and subsidiary companies) since inception - nearly $93 million - and “opines” that VBF has been damaged in that amount, effectively lumping all of the alleged misrepresentations together, and lumping all of the Founders together. Worse yet, Kleinman simply repeats the allegations and evidence hand- selected by VBF and concludes - without any analysis - that every dollar that came into VBF or its affiliates was lost due to the Founders' misconduct (without tying any damages to any specific act or defendant). Texas law does not allow for experts to employ the “just trust me” method of calculating damages advanced by Kleinman. Her unsubstantiated damage model is replete with relevance and reliability issues. If Kleinman's reasoning is followed, a company that has been worthless since its inception is suddenly worth $93 million.

Continuing with her adding-machine methodology, Kleinman next adds up (1) every cent that the Founders or non-party related Entities received as compensation or expense reimbursement, and (2) amounts spent by VBF that Kleinman somehow concludes did not provide value to VBF (even where those amounts were not paid to the Founders). Kleinman characterizes the entirety of those funds -9,026,004 - as damages attributable to what she calls the “Founders' Misappropriations.” Having already concluded that every dollar invested in or loaned to VBF or its affiliates damaged VBF, Kleinman takes it one step further. She concludes that dollars out, to the extent those dollars directly or indirectly benefited the Founders or were arbitrarily determined by Kleinman to be “excessive and/or improper,” also damaged VBF. Kleinman then double counts when she adds her debt/equity calculation ($93,076,564) with her misappropriation calculation ($9,026,004) to come up with VBF's total damages = $102,102,568 (more money than the company ever received or brought in), which she then offsets by the $10 million VBF's assets sold for in its bankruptcy. This damage model does not even come close to passing muster.

Unrelated to her damage model, Kleinman also compares a set of VBF 2016 financial projections that were not even part of any transaction with investors, delving into topics such as fish density and fish mortality rates, to information prepared by VBF's purported “aquaculture expert.” In doing so, she “opines” that VBF (via the Founders) unrealistically overstated its projected EBITDA. To whom? “[T]hose who became VBF shareholders and directors,” i.e., parties that later invested in or loaned money to VBF. Much like Kleinman's debt/equity damage number, she perpetuates the fallacy of a shareholder/investor lawsuit trying to wear the disguise of the company.

Id. at 1-3.

According to the Founders, Kleinman's October 2021 Expert Report (the “Report”) proffers three primary opinions:

• Her Debt Received + Equity Received = Damages Opinion: “I conclude to a reasonable degree of certainty that VBF's damages caused by the Founders' devaluation and waste of VBF's assets are at least $93,076,564, which represents what I have identified as the total debt and equity investment in VBF[.]”

• Her Every Penny to the Founders = VBF Damages Opinion: “Additionally, I conclude to a reasonable degree of certainty that the damages caused by the Founders relating to misappropriations are at least $9,026,004.”

• Her VBF Misrepresented EBITDA to Itself Opinion: “Based upon my investigation and based upon the Whitehair Report, the Founders misrepresented VBF's Metrics including Density, FCR and Mortality Rate, among others, in Marketing Decks and VBF Financial Models, which were presented or made available to those who became VBF shareholders and directors. The projected EBITDA in the 2016 Model, which was provided or made available to the Corporate Investors and Independent Board Members, was overstated by 96% as a result of the Founders misrepresentations just related to Density and FCR achieved from April 2015 through June 2016.”

Kleinman then purports to tie it all together with a damage model of over $102 million by adding her Debt Received + Equity Received = Damages Opinion to her Every Penny to the Founders = Damages Opinion, offset by the $10 million sale of VBF's assets in bankruptcy:

I conclude to a reasonable degree of certainty that VBF's total damages caused by the Founders are $102,102,568. Upon deducting the $10.0 million for the sale of VBF's assets to Natural Shrimp, I conclude to a reasonable degree of certainty that VBF's net damages are at least $92,102,568

Id. at 5-6 (cleaned up).

And, the Founders argue, “Kleinman produced an untimely supplemental report with an entirely new opinion on solvency six days before her deposition,” Dkt. No. 493 at 3, which “untimely opinion contains an entirely new solvency opinion despite not relying on any new information,” Id. at 23 - more specifically, the Founders assert, “[u]sing a discredited balance sheet method, Kleinman opined that VBF was always insolvent and then bootstraps that to her original opinion that every dollar VBF obtained or spent constituted waste,” Id. at 3. According to the Founders, “[a]lthough the deadline for VBF to serve its expert reports was October 18, 2021, the Supplemental Report was served five months late and added a completely new opinion that was not based on any new information [-] VBF Was Always Insolvent Opinion: Kleinman claims that ‘VBF was insolvent from at least August 2014 through June 2016....After that time, ... the consolidated balance sheet would likely show that VBF was insolvent for additional periods after July 2016.' The opinions in the Supplemental Report were (1) a summary of expenses incurred by VBF totaling $45 million and (2) a regurgitation of insolvency tests with conclusory statements that VBF met the ‘balance sheet test.' The only document that Kleinman cited for her opinions in the Supplemental Report was transaction details that she used for her original Report.” Id. at 6-7 (cleaned up).

The Founders assert that their Kleinman Motion

is not even a close call. Kleinman's opinions cannot sniff at relevance and reliability when they rely on a fatally flawed damage model. VBF's lawsuit in search of a theory has hit its breaking point with Kleinman's theory of damages.

The Court should grant this motion in its entirety. If the Court does as to the $93 million-damage claim, most of VBF's claims will lack evidence of damages. [As pleaded in VBF's Third Amended Complaint (“TAC”) (ECF No. 296), VBF attributes its $93 million allegedly obtained by the Founders' fraud as damages to support its claims for breach of fiduciary duty (¶ 824); fraudulent concealment (¶ 832); fraudulent misrepresentation (¶ 840); constructive fraud (¶ 844); civil conspiracy (¶ 883); aiding and abetting (¶ 887); and RICO (¶ 1,001).] If the Court grants this motion as to both the $93 million debt/equity damages and the $9,026,004 “misappropriation” damages, this case is over. If the Court leaves some or all of

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