Part I of this series discussed whether opinion testimony about property valuation should be considered lay testimony under FRE 701 or expert witness opinion, according to FRE 702.  This Part addresses a 10th Circuit case that established a test to help make this determination.

In 2011, the 10th Circuit attempted to reconcile what testimony should be admissible with respect to property valuation and what standards should be applied to testifying witnesses.  In James River v. Rapid Funding, property valuation testimony was the key issue, and the Court considered whether a vital witness’s testimony should have been excluded, under FRE 701.  See James. River Ins. Co. v. Rapid Funding, LLC, 658 F.3d 1207 (10th Cir. 2011).  The 10th Circuit provided a clear opinion on the matter, which several other courts have since adopted. See, e.g., Ryan Dev. Co., L.C. v. Indiana Lumber. Mut. Ins. Co., 2011 U.S. Dist. LEXIS 123524 (D. Kan. 2011).

The James River Case: Lay v. Expert Testimony:

James River concerned an apartment complex that burned down and the owner’s request for its insurer to pay for property damages. James River, Supra. The insurer denied the claim, finding the property worthless and, since the complex was never maintained, rehabilitated, or brought to code, the claimant was not entitled to compensation.  James River, id. The plaintiff-property owners prevailed in district court, with the damages verdict based on a witness’s statements as to the value of the destroyed property.  That testimony was initially admitted as a lay opinion under FRE 701.

Although the district court instructed the jury that the witness was not an expert, it permitted his testimony about the property’s value, based upon personal calculations concerning depreciation and replacement costs, as well as his reliance on the conclusions of a document prepared by outside property appraisal experts for the plaintiffs.  The document itself was never introduced into evidence, but the witness referred to it in testifying.  Id.

The 10th Circuit held that the witness was not credible enough to testify under FRE 702 and further, that the level and specificity of evidence was inadmissible as lay testimony under FRE 701. Id. The Court set up a test that consists of four components.

The James River Test:

(1). Lay Witness Testimony Cannot involve Technical or Specialized Knowledge: The witness’s testimony was admitted as lay evidence but “attempted to calculate a post-fire estimate of the pre-fire value of a dilapidated, condemned, 39–year old building” that went beyond elementary equations.  Id. The Court noted: “Unlike taking an average, calculating depreciation requires more than…basic mathematics… . Accurately accounting for the interaction between depreciation and damage requires professional experience and is beyond the scope of lay opinion testimony.” Id.

Simple calculations are often permitted as lay testimony, but the Court argued that:

Taking a simple average of 103 numbers, though technically a statistical determination, is not so complex a task that litigants need to hire experts in order to deem the evidence trustworthy. A mathematical calculation well within the ability of anyone with a grade-school education is…more aptly characterized as a lay opinion under [Rule] 701… .[However], … [a] person may testify as a lay witness only if opinions or inferences do not require any specialized knowledge and could be reached by any ordinary person.  Id.

(2).  Conclusions Reached through Specialized Knowledge are Expert Testimony and Inadmissible under FRE 701: The testifying witness was a professional real-estate broker and admitted his calculations and conclusions arose partly from that training.  Id. In contrast, typical lay testimony is based on what was seen or heard, what transpired during an incident, and first-hand knowledge.  As James River expressed, “knowledge derived from previous professional experience falls squarely within the scope of Rule 702 and thus by definition outside of Rule 701.” Id., quoting U.S. v. Smith, 640 F.3d 358, 365 (D.C. Cir. 2011).

(3). Testimony Relying on Outside Expertise is not Lay Testimony: The witness in James River cited a 1,525 page report that was prepared by professional appraisal experts.  Id.  That report, due to its length and scope, would rarely be something a jury could comprehend, absent personal examination and testimony from the experts who prepared it, explaining the complex statistics and methodology in the document.  Accordingly, a report, which has been prepared by experts and upon which a witness relies, is only admissible if a witness is giving testimony as an expert under Rule 702.  Id. Lay testimony, which relies upon outside expert conclusions, is inadmissible hearsay.  Under Rule 701(c), lay testimony, “in the form of opinions or inferences is limited to those [accounts]…which are… c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.”  FRE 701(c).

(4). Property Owners cannot generally give Opinion Evidence: FRE 701, as well as the advisory committee notes, points to a distinct trend.  Although some latitude exists for property owners to give lay opinions about the value of their real property, Rule 701(c) is extremely narrow.  James River, Supra.

There is, moreover, a crucial distinction between business value testimony and property value evidence, which the Rules recognize.  As James River explained, “the Federal Rules… generally consider landowner testimony about land value to be expert opinion. The …advisory committee’s note states that landowners testifying to land value are “skilled witnesses” under Rule 702… .Such testimony is…admissible as expert testimony.”  When evaluating a business’s worth, lay testimony can be admitted as to proofs of income and loss, using simple, commonly understood equations.  See Bryant v. Farmers Ins. Exchange, 432 F.3d 1114 (10th Cir. 2005). This is permissible because business owners are relying on personal observations, rather than outside opinions of a business’s value. However, property valuation testimony must generally be provided by experts (insurance experts, property appraisers, real-estate experts, accountants, etc.) under Rule 702.
James River’s main concern was that the plaintiff’s witness attempted to “circumvent Rule 702 by offering expert testimony as lay opinion,” and, more importantly, the very reason that Part (c) of FRE 701 exists is to prevent lay witnesses from offering opinions based on technical, scientific, or specialized knowledge.1 Id. The test it created has set quite a precedent and has been adopted by many courts that have grappled with similar issues.

By: Kat Hatziavramidis, Attorney-at-Law

1 This is Part II of a series of articles concerning property valuation testimony.  Strategies attorneys can use by applying the James River test will be addressed in subsequent articles.