Protperty paperwork and door keysIntroduction:

For decades, debates have ensued as to who may give opinion-based testimony in civil litigation with respect to the value of real property.  Property valuation issues have created questions and problems for courts and rule-making bodies, particularly with respect to Federal Rules of Evidence (FRE), namely 701-702.  See, e.g., “Expert Testimony in the Guise of Lay Testimony: Property Valuation,” Federal Evidence Review (May 8, 2011).  A recurring issue in such cases hinges on whether the testimony proffered is lay or expert testimony, under FRE § 701-702.  Confusion has arisen because in certain circumstances, FRE 701 does permit lay witnesses to testify about the value of their property, but many courts have construed the Rules as narrowly as possible, often excluding lay testimony.  As recently as April of 2013, a court was forced to consider whether a debtor was a lay witness or expert, and based on that finding, what portions of the debtor’s statement were admissible versus which parts were barred by hearsay rules, under FRE 703.  Although the court ruled against the debtor, it stated that the matter would be heard at a later date and emphasized that its decision was a tentative ruling only.  See “Instructions For Pre-Hearing Dispositions,” Motion to Value Collateral of Valley First Credit Union, U.S. Bankruptcy Court (E.D. Cal.) (Apr. 2, 2013).

The Trends & Why Categorizing Testimony Appropriately in Property Cases Matters:

Regardless of whether a witness’s testimony as to real property values is proffered as lay or expert testimony, the stakes are high.  Expert witnesses must meet the Daubert test, as well as FRE 702.  However, if testimony is admitted as a lay opinion under Rule 701, it can “not be based on scientific, technical, or other specialized knowledge”.  FRE 701(c); See James. River Ins. Co. v. Rapid Funding, LLC, 658 F.3d 1207 (10th Cir. 2011).

Accordingly, for courts to allow property valuation evidence, one of two tests must be met.  First, attorneys can claim a witness’s statements fall within FRE 701’s definition of lay testimony.  Alternatively, attorneys can proffer a witness as an expert in property valuation cases under Rule 702.  However, in introducing opinions as expert testimony, attorneys must ensure that such views are “sufficiently reliable” and indicate specialized knowledge and expertise a lay witness does not possess.  See, e.g., Ryan Dev. Co., L.C. v. Indiana Lumber. Mut. Ins. Co., 2011 U.S. Dist. LEXIS 123524 (D. Kan. 2011).

Comparing the Methods: The Pitfalls of Classifying Property Valuation Testimony

(1). If evidence is offered as lay testimony, FRE 701 permits property and business owners to testify about the value of their property under certain circumstances.  See FRE 701, (advisory comments).  One circuit acknowledged that a landowner’s testimony might be admissible because the Federal Rules “point to landowner testimony on value as being expert in nature, [but] with proper foundation, it may…be admitted as lay opinion under Rule 701.”  See James River, Supra; See also Cunningham v. Masterwear Corp., 569 F.3d 673 (7th Cir. 2009) (landowners “can testify about [value]… as a matter within [their] personal knowledge.)  One fairly common understanding of FRE 701 is that lay witnesses can offer opinions to determine the value of their own property.  The advisory comments to Rule 701 express that “the critical inquiry is whether a witness’s testimony is based upon ‘specialized knowledge.’” James River, Supra.

However, Rule 701’s leeway for lay testimony regarding property values is extremely narrow, and many courts have moved away from letting property owners testify about their property’s worth, finding that such testimony relies upon the specialized knowledge FRE 701 expressly prohibits.  Several landowners have attempted to establish their property’s value based on what other parties have told them about the average worth of similar property, real-estate experts’ appraisals, and the like.  Such testimony is inadmissible as hearsay.

(2). On the other hand, evidence by a property owner under Rule 702 also has complications.  Such testimony must be reliable and meet all of the standards of Daubert and Rule 702.  Moreover, while certain hearsay exceptions exist for expert witnesses, in the case of property owners, courts often find that the exceptions pertain to documents prepared by other parties who are experts, but the testifying witness is not an expert and, accordingly cannot depend upon the expertise of others.  James River concluded, “The Federal Rules of Evidence generally consider landowner testimony about land value to be expert opinion.” Id. If this interpretation of the Rules applies, witnesses must clearly demonstrate their expertise and meet the rigorous standards of FRE 702.  A witness’s conclusions cannot be based on figures that they “feel” are accurate, nor can calculations be made because a witness took simple averages, based on what neighboring landowners claimed that their property was worth.  As James River noted, a key witness claimed to be a real-estate professional, and he “had a feeling” about property values in the case at hand.  Id. However, the Court emphasized, “Daubert and Rule 702 require more than a ‘feeling.’” Id. True expert witnesses must have highly specialized knowledge, as well as the ability to explain how certain conclusions were reached to qualify as experts under FRE 702.

Conclusion:

Attorneys dealing with property valuation issues face a true challenge: Can a witness’s testimony be simple enough to be admitted under Rule 701 and if so, will it carry any weight?  Courts may give limiting instructions to juries and because 701 opinions cannot be based on hearsay, juries may find such statements unfounded. Alternatively, if attorneys offer a witness’s opinions as expert testimony, will courts find it unreliable and inadmissible?

In cases like these, courts may exclude the testimony altogether, holding that such evidence is neither reliable enough to be admitted (under Rule 702) nor based upon the witness’s personal knowledge (under 701).  These circumstances are by no means hypothetical: Recent case law has found property owners’ testimony inadmissible under Rule 701 & 702, precisely for the aforementioned reasons. Nearly all civil litigation involves some aspect of property valuation, from bankruptcy cases, to mortgage foreclosures, to insurance claims, and more.  Attorneys should be aware of the dilemmas they face when introducing landowners’ testimony, whether they attempt for it to be considered expert or lay opinion.1

1Subsequent parts of this article will examine a clearer precedent for attorneys to understand in property valuation cases as well as strategies lawyers can utilize to ensure that the testimony they rely upon will be admitted and given the credibility weight they wish it to have on courts and juries.

By: Kat Hatziavramidis, Attorney-at-Law