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December 17, 2014

Over the past 20 years, the real property valuation profession has reached a consensus regarding the appropriate framework and analytical methodologies for evaluating the potential effect of environmental contamination on the market value of real property.[1]Coincidentally, also during the last 20 years, through Daubert, et al. v. Merrell Dow Pharmaceuticals, Inc. (1993), the courts have established a more robust gatekeeping process to shield triers of fact and litigants from unreliable expert opinions and testimony.

As a measure of damage, property value diminution (PVD) is a market value question and, as such, credible expert opinions and testimony should follow generally accepted methodologies. Expert witnesses who fail to follow, or who misuse professionally accepted methodologies, may have their testimony rejected by the courts. Should the trial court’s application of Daubert or state court equivalents fail to provide a sufficiently fine screening mechanism, then the higher courts must be relied on for their further review and, if necessary, to institute any remedial measures they deem necessary. In several recent cases, real estate damages experts’ PVD opinions have failed to pass muster with trial courts, courts of appeals and at least one state supreme court.

PVD Methodology
Beginning in the early 1990s, several articles were published in the professional and academic real estate literature addressing methodologies for evaluating the effect of environmental contamination on the market value of real property. Eventually, in 2003, the Appraisal Standards Board authored and promulgated Advisory Opinion 9 (AO-9), The Appraisal of Real Property That May Be Impacted by Environmental Contamination. AO-9 provides the appropriate framework for evaluating potential PVD, with analysis performed using standard appraisal methodologies or applications based on standard methods. Reliable and credible PVD opinions must be founded on the analysis of appropriate market data following generally accepted methodologies.

Court Standards
The Supreme Court of the United States decided the Daubert, et al. v. Merrell Dow Pharmaceuticals, Inc. case in 1993, defining the standards for testimony in federal courts for scientific, technical, or other specialized knowledge. In Daubert, the Supreme Court ruled that under the Federal Rules of Evidence a trial judge must assess: "…whether the testimony’s underlying reasoning or methodology is scientifically valid and properly can be applied to the facts at issue. Many considerations will bear on the inquiry, including whether the theory or technique in question can be (and has been) tested, whether it has been subjected to peer review and publication, its known or potential error rate and the existence and maintenance of standards controlling its operation, and whether it has attracted widespread acceptance within a relevant scientific community."[2]

The Supreme Court’s decision in Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137,147 (1999), allowed courts to apply Daubert standards to other types of expert testimony and not confine their application strictly to scientific evidence. In addition, Kumho gave trial courts wide discretion to decide whether Daubert applies and whether to hold hearings to determine reliability of expert opinions. Real estate damages experts may improve their chances of avoiding the Daubert / Kumho spotlight by adhering to accepted professional standards in their PVD analyses.

Case Examples
In the following cases, PVD experts were not allowed to testify, or verdicts based on their testimony were reversed when the courts deemed their opinions unreliable. A few consistent themes emerge from these examples regarding the courts’ perspectives on what constitutes unacceptable deviation from generally accepted methodologies.

Exxon Mobil Corp. v. Albright et al., Court of Appeals of Maryland, 2013

  • The expert testified that each of the plaintiffs’ residences sustained a 60 percent PVD due to a gasoline storage tank leak.
  • The trial jury returned verdicts of $496,210,570 for compensatory damages and $1,045,550,000 for punitive damages for 466 plaintiffs.[3]
  • The expert used three methods: (1) a meta-analysis[4] derived from an article published in 2006, (2) case studies of jury verdicts and settlements in other matters, and (3) a contingent valuation[5] telephone survey in which respondents were asked what they would be willing to pay for a hypothetical house with groundwater contamination.[6]
  • Focusing on the expert’s failure to analyze actual sales, the appeals court stated, “While Maryland law does not compel the use of comparable sales data, to the exclusion of all other methodologies, a real estate appraisal expert must proffer a reasonable justification for ignoring market data where it is available.”[7] The court also found “the level of speculation attendant to that conclusion is, as the United States District Court for the Northern District of California noted in reviewing [the same expert’s] proposed testimony in another case, ‘serious[ly] concern[ing].’" Palmisano et al. v. Olin Corp. et al., No. C-03-01607 RMW, 2005 WL 6777561, *5 (N.D. Cal. July 5, 2005).”[8]
  • The court was also concerned with the timing of the alleged diminution. The expert testified he did not know when, if ever, the “market price” would reflect his estimated 60 percent diminution in “market value.” That is, there was no estimate of when the plaintiffs would actually incur damages. Again referencing Palmisano, the court explained: Allowing the plaintiffs to recover damages for a hypothetical and speculative diminution in market value that may never materialize is to permit them a potential double recovery — “[i]f plaintiffs could recover for a decline in value that had not yet been reflected in prices, they could sell their homes immediately and receive a windfall: damages for as-yet unrealized diminution in value plus the full market price.” Palmisano, 2005 U.S. Dist. at *16 n.5. [The expert’s] disregard of the existence of an actual, functioning market — no matter how skewed — was clear error. Because the trial court’s admission of [the expert’s] testimony was clear error, we reverse the jury awards for diminution in value as to all Appellees and direct remand for a new trial."[9]

Patrick et al. v. FirstEnergy Generation Corp., U.S. District Court, Western District of Pennsylvania, 2014

  • This was a proposed class action in connection with various emissions from the defendant’s coal-fired generation facility.
  • The plaintiffs’ expert divided the allegedly affected region into three subclasses and developed a mass appraisal model to estimate damages. He opined that plaintiffs’ property values were diminished 12 percent or 45 percent depending on their location in one of the subclass areas and the nature of the emissions allegedly affecting their location.
  • The expert’s mass appraisal model was based on contingent valuation (i.e., hypothetical surveys), case studies, meta-analyses, and a regression model of a sample of actual sales. The expert aggregated the results from these four methods using an “implicit weighting process,”[10] with the contingent value surveys having the greatest weight. The expert put much less weight on any analysis of actual sales, stating the market was uninformed and non-efficient.
  • With respect to the expert’s case studies and meta-analyses, the court stated, “As with the case study evidence, the court will consider the metal-analyses only as support for [the expert’s] opinion about the usefulness of a mass appraisal methodology and not as evidence of actual diminution.”[11]
  • Regarding the contingent valuation survey, the court concluded in a Daubert ruling “that problems with the questions in the … survey render that survey fundamentally flawed and inadmissible.”[12] The court ruled that the expert’s opinions, which were based primarily on the contingent valuation surveys, were inadmissible with respect to over 98 percent of the class, i.e., for approximately 74,000 of the 75,000 class properties.
  • Referencing the Exxon Mobil Corp. v. Albright ruling discussed above, the court also stated that it was “troubled, however, by another aspect of [the expert’s] ‘uninformed market’ theory.”[13] According to the court, the expert’s “opinion about when the hypothetical ‘full knowledge’ diminution will occur is pure speculation. This sort of conjecture is unreliable.”[14]

Cannon et al. v. BP Products North America, Inc., U.S. District Court, Southern District of Texas, Galveston Division, 2013

  • This was a proposed class action concerning chemical releases from an oil refinery operated by the defendant. The class area included more than 14,000 residential properties.
  • The expert based his opinions on contingent valuation surveys, regression analysis, and sales trends. He testified that plaintiffs’ properties incurred permanent PVD of 5 to 20 percent of their property value.[15]
  • The court ruled that “there is simply too great an analytical gap between the data and the opinion proffered”[16] in the expert’s regression model and price trends analysis; the regression model was flawed because (among other things) “… it fails to reflect price differences between the class and control areas during the before period.”[17]
  • Regarding the expert’s contingent valuation method, the court stated, “As an initial matter, the Court notes its uncertainty that even Plaintiffs would argue that contingent valuation on its own — without the reinforcement of a regression or real estate trends analysis — would serve as a reliable calculation of damages.”[18] The court indicated that “[a] debate exists in the scientific community about the validity of contingent valuation as a methodology for assessing market discounts associated with real estate disamenities.”[19]
  • Accordingly, the court ruled that the expert’s “contingent valuation analysis, standing alone, is unable to serve as a reliable or formulaic causation and damages model in this case.”[20] The court found the expert’s opinions to be unreliable and his testimony was excluded. It stated that the expert’s “opinions fail to meet the standards set forth in Daubert and its progeny. ... [N]ot only are specific aspects of [the expert’s] methodologies flawed, but his overarching theory of damages is disconnected from Plaintiffs’ causes of action ...”.[21]

Abicht, et al. v. Republic Services, Inc. et al., Court of Common Pleas, Tuscarawas County, Ohio, 2013

  • In this case, the issue was alleged PVD from odors due to landfill proximity.
  • The plaintiffs’ expert testified that PVD was 5, 10 or 20 percent, depending on distance from the landfill. The expert reviewed trends in house prices, but did not perform any analysis of individual property damages.
  • The defendants contended that the plaintiffs’ expert’s methodologies based on contingent valuation, meta-analysis and case studies were speculative, biased, hearsay and too generalized to determine PVD for individual properties.
  • In a pretrial hearing, the judge stated that his “… concern with respect to this particular witness is the failure to in any manner whatsoever individualize the respective plaintiffs’ diminution in value[22].”
  • In the subsequent ruling to exclude the expert’s testimony, the court stated: "This witness is trying to broad brush a concept of damages into a case that’s designed to be specific for ten individual plaintiffs. And he’s doing so with a collection of methodologies, which by even the greatest stretch of the imagination don’t reach a level of reasonable scientific certainty, probability, if you will, for the purposes of admissibility in this case. The motion is granted. [The expert] will not testify."[23]

Houston Unlimited, Inc. v. Mel Acres Ranch, Supreme Court of Texas, 2014

  • In this case, the plaintiff ranch owner sought to recover an alleged 60 percent property value diminution remaining after the remediation of contamination from a neighboring property.
  • According to the court: “Evidence based on ‘conjecture, guess or speculation’ is inadequate to prove stigma damages, not only as to the amount of the lost value but also as to the portion of that amount caused by the defendant’s conduct.”[24]
  • Plaintiff’s expert applied a case study approach to develop the impaired value opinion (relying on two case studies). Referring to case study methodology, the court stated: "[W]e do not hold it could never be used to reach a reliable opinion on diminution damages. But the manner in which [the expert] used the approach here is fatally flawed for three reasons. First, the data [the expert] relied on regarding the [case study] sites do not support her opinion that these properties lost market value. Second, [the expert’s] ultimate opinion is cause-dependent — her reasoning can be sound only if the losses she found for the [case study] sites were, in fact, attributable to market stigma and no other market factors. Instead, [the expert] merely assumed that the diminution in market value she found was (wholly) attributable to the nearby contamination. Third, [the expert] failed to account for any differences between the ranch and the [case study] sites or any differences between the nature of the contamination of the three properties."[25]
  • Further, the court observed that “[the expert] did not attempt to establish that the remediated contamination near the [case study] sites caused some or all of the diminution in market value she found, nor did she attempt to rule out other plausible causes.”[26]
  • The court summarized by stating that “[the expert’s] reliance on insufficient data and unsupported assumptions and the analytical gaps in her analysis render her opinion conclusory and without evidentiary value.”[27]
  • Finally, the court concluded, “We therefore reverse the court of appeals’ judgment and render a take-nothing verdict in favor of Houston Unlimited.”[28]

In these recent cases, the principal reasons for the courts’ rejection of experts’ opinions and testimony included the failure to analyze actual sales of allegedly affected properties, sole reliance on speculative and hypothetical methods (especially, contingent valuation surveys), improper use of generally accepted methods, and speculation about damages yet to occur. In each instance, the weaknesses could be traced to real estate damages experts’ departures from the requirements of generally accepted methodologies.

Importantly, when generally accepted methods are utilized they must be applied competently. Although a breach of contract matter, ATA Airlines, Inc. v. Federal Express Corp. featured an expert’s application of regression analysis, a methodology widely used to evaluate PVD claims. The expert’s application of regression analysis moved the U.S. Court of Appeals for the Seventh Circuit to offer the colorful critique that “[the expert’s] regression had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman Senators led by Brutus.”[29]

In Houston Unlimited, Inc. v. Mel Acres Ranch, the Supreme Court of Texas cautions that “… the evidentiary value of expert testimony is derived from its basis, not from the mere fact that the expert has said it.”[30] The above case examples illustrate the scant attention paid by some experts to developing a sound basis for their opinions. In fact, some are all too aware that “the courtroom itself may afford experts a veneer of credibility not present in other contexts.”[31] Irrespective of Daubert, courts of appeals, and supreme courts await unwary and ill-prepared experts, some of whom may eventually learn just how thin the “veneer of credibility” can be.

[1] The Appraisal Standards Board’s Advisory Opinion 9, The Appraisal of Real Property That May Be Impacted by Environmental Contamination; the Appraisal Institute’s Guide Note 6, Consideration of Hazardous Substances in the Appraisal Process; the Appraisal Institute’s The Appraisal of Real Estate (14th Edition); the Appraisal Institute’s The Dictionary of Real Estate Appraisal (Fifth Edition); the Appraisal Institute’s Seminar, Analyzing the Effects of Environmental Contamination on Real Property (2010); and, since the early 1990s, numerous articles in the professional literature (e.g., The Appraisal Journal) with more recent articles referencing Advisory Opinion 9.

[2] Daubert, et al. v. Merrell Dow Pharmaceuticals, Inc.; October Term, 1992, Syllabus, Supreme Court of the United States, 509 U.S. 579, 580 (1993).

[3] Allison v. Exxon Mobil Corp., Case No. 03-C-07-003809, Circuit Court for Baltimore County.

[4] Meta-analysis is a technique which attempts to aggregate and quantify results from previous studies.

[5] Contingent valuation in this context is a survey-based technique based entirely on hypothetical scenarios.

[6] Exxon Mobile Corp. v. Albright, et al., No. 15, September Term 2012, Court of Appeals of Maryland, Feb. 26, 2013, p. 122.

[7] Ibid., 123

[8] Ibid., 125.

[9] Ibid., 126.

[10] Hartle et al. v. FirstEnergy Generation Corp., C 2:08-CV-01019-JFC, U.S. District Court, Western District of Pennsylvania, March 31, 2014, Memorandum Opinion, p. 7. Note: Patrick et al. v. FirstEnergy Generation Corp., Civil Action 08-1025, was consolidated with Hartleand another case in this decision.

[11] Ibid., 13.

[12] Ibid., 10.

[13] Ibid., 20.

[14] Ibid., 22.

[15] Cannon et al. v. BP Products North America, Inc., C 3: 10-CV-00622, U.S. District Court, Southern District of Texas, Memorandum and Order, Document 97, p. 2.

[16] Ibid., 20.

[17] Ibid., 22.

[18] Ibid., 30.

[19] Ibid.

[20] Ibid., 31.

[21] Ibid., 15.

[22] Abicht, et al. v. Republic Services, Inc. et al., C 2008 CT 100741, Court of Common Pleas, Tuscarawas County, Ohio, Hearing Transcript, pp. 223, 224.

[23] Ibid., 227.

[24] Houston Unlimited, Inc. v. Mel Acres Ranch, No. 13-0084, Supreme Court of Texas, August 22, 2014, p. 9.

[25] Ibid., 15.

[26] Ibid., 20.

[27] Ibid., 28.

[28] Ibid., 29.

[29] ATA Airlines, Inc. v. Federal Express Corp., Nos. 11-1382, 11-1492, U.S. Court of Appeals for the Seventh Circuit, 665 F. 3d 882, 896 (2011).

[30]Houston Unlimited,13.

[31] Ibid., 28.

This article was originally published on the ABA Expert Witness Committee’s web site.This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association (ABA).