600 Cleveland owned a commercial office building located at 600 Cleveland Street, Clearwater, Florida 33601 from September 9, 2013, to April 1, 2024. Bank of America, N.A. (BANA) and 600 Cleveland assumed a lease agreement originally entered into by other parties on December 1, 1986, and both were bound by the agreement. This lawsuit arises from purported violations of the parties’ lease agreement (“Lease”). BANA counterclaimed that 600 Cleveland overcharged BANA for its share of Common Area Maintenance (“CAM”) under the Lease.
600 Cleveland filed a motion to exclude the entire expert report of Tracy P. Chelepis (“Chelepis Report”) and to bar him from testifying at the upcoming bench trial. The Chelepis Report relates to an audit performed by Chelepis’ firm, which found that 600 Cleveland overcharged BANA for CAM fees under the Lease by $160,882.01.
Accounting Expert Witness
Tracy P. Chelepis holds a Bachelor of Science in accounting from the University of Kansas where he took multiple classes on auditing, a CPA license for which he attends 80 hours a year in continuing education, and a real estate license as both agent and broker for which he also attends mandatory continuing education.
Chelepis also worked as an accountant for a major accounting firm performing financial statement audits and then spent years as a construction accountant for AT&T.
600 Cleveland made three arguments: (1) Chelepis’ methodology is unreliable; (2) his opinion is ipse dixit; and (3) his testimony would not help the trier of fact.
Cleveland argued that Chelepis should be barred from testifying because “lease auditing” does not have “articulated industry standards,” “peer review processes,” or a “regulatory governing body to which his opinions can be tested.” Cleveland contended that Chelepis’ reliance on his knowledge and experience as a CPA, purportedly without further explanation, rendered his methodology unreliable.
BANA correctly identified that, for non-scientific expert testimony, there need not be articulated industry standards, peer review processes, or a regulatory governing body. Nor did the fact that Chelepis’ methodology required him to interpret terms in the lease to determine whether certain costs were properly included make his opinion inherently unreliable.
Chelepis’ deposition testimony also undermined 600 Cleveland’s argument that his opinion is ipse dixit. Chelepis explained at length the general process he used to audit leases. He then reviewed the lease’s provisions and amendments and explained how he interpreted and applied them to reach his opinion. Chelepis similarly explained his accounting calculations and his underlying reasonable assumptions.
The Court concluded that Chelepis’ testimony would be helpful in navigating the numerous financial records and reconciling them, using accounting principles, with the lease’s guidance for what could properly be charged as operating costs.
Held
The Court denied 600 Cleveland’s Daubert motion to exclude the testimony of Tracy Chelepis.
Key Takeaway
The standards of scientific reliability, such as testability and peer review, do not apply to all forms of expert testimony and a district court may decide that non-scientific expert testimony is reliable based upon personal knowledge or experience.
Plaintiff Pietoso, Inc. operates Café Napoli restaurant in Clayton, Missouri. It has a Service Agreement for waste removal from the restaurant with Defendant Allied Services, LLC—a subsidiary of Defendant Republic Services, Inc. The Service Agreement sets a basic-service rate of $323 per month, but it allows Allied to unilaterally increase this rate for certain enumerated reasons. All other rate increases require Pietoso’s consent.
Pietoso’s service rate increased incrementally from $323 per month in 2011 to $870.25 per month in 2018. Discovery revealed that Defendants increase their prices every 10-12 months through a Yield Management Process (YMP) whereby parent company RSI generates budget guidance for its subsidiaries using an algorithm that incorporates local division budgets, costs, and historical average price increases as well as individual customer histories, including prior increases, responses thereto, and profitability.
Plaintiff Pietoso centrally asserted that Defendants’ YMP price increase practice violated the Customer Service Agreement (CSA) Rate Adjustment clause. Pietoso engaged Patrick Kilbourne to calculate damages for the class.
Defendants filed a motion to exclude Kilbourne’s expert testimony because his methodology is insufficiently precise to satisfy the legal standards for admissibility of expert testimony.
Forensic Accounting Expert Witness
Patrick J. Kilbourne is a Managing Director at Berkeley Research Group, a business consulting firm. He has an MBA from the University of Pennsylvania Wharton School of Business.
Kilbourne is a Certified Public Accountant, Certified Management Accountant, and Certified Fraud Examiner. He is also Certified in Financial Forensics and Accredited in Business Valuation by the American Institute of Certified Public Accountants.
Accounting for YMP increases in excess of actual operating cost increases, plus the average fuel recovery fee (FRF) as a percentage of the service price, plus the average environmental recovery fee (ERF) as a percentage of both, Kilbourne estimated total damages for the class at $75.1 million. While his report provided averages beyond the class period, it demonstrated the feasibility of extracting more specific data for each year and customer.
Kilbourne indicated that he was able to calculate damages for each class member by site and service. His report shows several examples calculating damages for specific customers based on YMP price increases within a certain date range. Between 2017 and 2019, Pietoso paid $2,526 over the contractually permissible increases (i.e., operating costs plus CPI). Based on the service rate for each month during that period, Pietoso paid $2,546 in FRF and $3,240 in ERF.
Application of Contract Terms
Defendants challenged Kilbourne’s methodology in several respects. First, the CSA defined the “Company” as a specific local division, but Kilbourne didn’t analyze division-level costs, which vary widely between urban and rural areas. Instead, he combined statewide costs to yield an average.
Further, Kilbourne didn’t isolate disposal or transportation cost increases or those attributable to changes in the law, as the Rate Adjustment clause contemplates. He also didn’t isolate the additional category related to recyclable waste contained in some contracts. Rather, he combined all operating costs, thus diluting the contractual categories such that the result is inaccurate.
Defendants contended that they produced division-level financial data sufficiently specific to facilitate more accurate calculations.
Given the data available in the format produced, the Court held that Kilbourne’s inability to isolate costs corresponding to contractual categories is understandable. This is not a defect in methodology warranting exclusion but rather a limitation due to Defendants’ accounting – one that actually favors Defendants by overstating cost increases and potentially understating damages.
In related points, Defendants criticized Kilbourne’s calculations for failing to account for negotiated credits and rollbacks or customer consent. But whether customers consented to increases is a central fact issue beyond Kilbourne’s assignment here.
CAGR for Average Increase in Operating Costs
Because Defendants’ financial statements don’t separate costs categories as between commercial, industrial, and residential customers or between small and large containers, and also because multiple divisions were combined into one financial statement prior to 2018, Kilbourne examined Defendants’ total operating costs of $152.9 million in 2016 to $203.2 million in 2022 to arrive at an average annual cost increase rate, or compounded annual growth rate (CAGR), of 4.9%.
He compared this with the average annual price increases for customers to estimate damages as the difference between cost increases and price increases.
In their motion to exclude, Defendants argued that Kilbourne’s methodology is flawed in that the time period Kilbourne used (2016-2022) doesn’t match the class period, and the annual average of 4.9%, while perhaps useful to predict future growth, is imprecise and factually inaccurate to calculate damages from historical data.
The Court found Kilbourne’s general approach of calculating damages as the difference between customers’ actual rate hikes and contractually “allowable” increases as a percentage increase in annual operating costs plus CPI logical. While CAGR for 2016-2022 may not be the applicable variable if or when damages are calculated in this case, Kilbourne offered a feasible model using the data available, and his report demonstrates that operating cost increases are ascertainable for any given year and also by local division after 2017, as may be required.
YMP Recommendation
Next, Defendants argued that Kilbourne’s methodology is defective because he erroneously relied on “reason code 64” to identify YMP increases, when in reality local divisions use the code differently, according to some witness testimony. But that same evidence and other testimony in the record confirms that code 64 is indeed the correct code for YMP increases, and any other use of code 64 is viewed as misuse or unintended use.
The Court found Kilbourne’s reliance on Defendants’ own coding system entirely reasonable. Any margin of error in this respect is attributable to flaws in Defendants’ data, not in Kilbourne’s methodology.
Defendants also argued here that Kilbourne’s method is unreliable because he ignored the fact that local divisions often depart from YMP recommendations. But Kilbourne expressly acknowledged this fact and noted that it would be possible to exclude YMP increases that were different from the algorithm amount if needed. The data captured every invoice and corresponding payment. Again, the Court is not persuaded that Kilbourne’s model couldn’t accommodate those adjustments, and error-free perfection is not the standard.
SQL Qualifications
As the Court understands it, Kilbourne and his staff used a computer code called structured query language (SQL, or “sequel”) to identify the characteristics of the Plaintiff class and extract their invoicing and payment records from the voluminous data produced by Defendants. Kilbourne relied on technical staff to perform the query to identify class members, then he verified it for accuracy using a quality control test process. Defendants asserted that Kilbourne’s methodology is unreliable because he isn’t qualified in SQL; rather he adopted a methodology of non-experts that he can’t independently opine on because he lacks the necessary expertise.
Kilbourne is, however, an expert in accounting and financial analysis, not computer science. The Court finds it reasonable that his examination of voluminous financial data might require technical assistance to manipulate, sort, and extract the characteristics and figures relevant to this case.
Staff with SQL expertise assisted Kilbourne, and he tested the accuracy of SQL queries through quality control processes. The Court is satisfied that his method is reliable.
Moreover, even accepting Defendants’ tenuous premise here, expertise with SQL is collateral to Kilbourne’s essential qualifications as a CPA and financial analyst. The Court therefore finds that any arguable deficiency goes only to the weight of his testimony, not its admissibility.
Fuel and Environmental Recovery Fees
Defendants’ financial records showed that fuel and environmental costs are included in Defendants’ annual operating costs incorporated in their price increases under the Rate Adjustment clause. However, Defendants also charged additional fuel and environmental recovery fees (FRF and ERF, respectively) as a percentage of the amount invoiced for the underlying services. Kilbourne was asked to calculate the total amount of these surcharges for each class member during the class period. The data enabled him to isolate amounts specific to these fees and calculate average annual increases for each year.
Defendants asserted that Pietoso has failed to plead a viable theory of damages with respect to these fees, leading Kilbourne to merely perform simple math without any meaningful analysis.
The Court will not exclude Kilbourne’s testimony on these fees. Defendants offered no argument that Kilbourne’s methodology is unreliable; they only dispute the applicability of these fees to a damages calculation. Kilbourne has demonstrated his ability to isolate these fees in the data and calculate them in relation to underlying price increases. If the jury deems some portion of the fees recoverable, Kilbourne’s methodology is reliable, and his testimony is relevant and likely to assist the trier of fact
Held
The Court denied the Defendants’ motion to exclude the testimony of Plaintiff’s damages expert, Patrick Kilbourne.
Key Takeaway:
While individual credits and rollbacks may require further examination, the Court is not persuaded that Kilbourne’s model cannot accommodate such adjustments, as the data captures every customer transaction. In the Court’s view, this doesn’t render Kilbourne’s methodology preclusively unreliable. Nothing in Rule 702 “requires the court to nitpick an expert’s opinion in order to reach a perfect expression of what the basis and methodology can support.”
Even viewing Kilbourne’s technical staff as independent experts, the Court found no basis to exclude his opinions, as experts frequently rely on the expertise of others outside their field.
