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CDX Liquidating Trust v. Venrock Associates

July 23, 2009

CDX LIQUIDATING TRUST BY THE CDX LIQUIDATING TRUSTEE, PLAINTIFF,
v.
VENROCK ASSOCIATES, VENROCK ASSOCIATES II, L.P., VENROCK ENTREPRENEURS FUND L.P. HAMBRECHT & QUIST CALIFORNIA, H&Q EMPLOYEE VENTURE FUND 2000, L.P, ACCESS TECHNOLOGY PARTNERS, L.P., ACCESS TECHNOLOGY PARTNERS BROKERS FUND, L.P., H&Q CADANT INVESTORS, L.P., CHASE EQUITY ASSOCIATES, L.L.C., J.P. MORGAN PARTNERS (BHCA), L.L.C., ERIC COPELAND, C.H. RANDOLPH LYON, STEPHAN OPPENHEIMER, AND CHARLES WALKER, DEFENDANTS.



The opinion of the court was delivered by: Morton Denlow United States Magistrate Judge

Magistrate Judge Morton Denlow

MEMORANDUM OPINION AND ORDER

This case comes before the Court on six motions in limine filed by Plaintiff CDX Liquidating Trust by the CDX Liquidating Trustee ("Plaintiff" or "CDX" or "Trustee") and on eleven motions in limine filed by Venrock Associates ("Defendants" or "Venrock, et al."). In its sixth motion in limine, Plaintiff seeks to exclude the expert testimony of Gregory A. Kyle. In its eleventh motion in limine, Defendants seek to prevent Plaintiff's proffered expert, M. Todd Henderson, from testifying at trial. Both motions in limine are the subject of this memorandum opinion and order.

These motions were referred by District Court Judge Charles R. Norgle, Sr. for resolution pursuant to 28 U.S.C. § 636(b)(1). This Court held oral argument on June 24 and 29, 2009.

I. BACKGROUND FACTS

The factual and procedural history of this case is complex. Therefore, for purposes of this opinion, this Court sets forth only those details necessary to decide the motions presently pending before the Court.

CDX, formerly known as Cadant, filed this lawsuit on June 16, 2004.*fn1 This case originated in bankruptcy court. Cadant filed for bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois on June 17, 2002. Upon filing of the bankruptcy petition, all of Cadant's alleged derivative claims became part of the estate. In this lawsuit, CDX alleges: (1) from January 2000 through May 2001, all or most of the Defendants spurned legitimate third-party financing in order to engage in self-dealing bridge loans on terms highly unfavorable to Plaintiff; (2) the rejection of the third-party financing offers was predicated on continued assurances from certain Defendants they would support the company with fair and equitable financing; and (3) subsequent to gaining control through bridge loans, Defendants sold the company to Arris Group, Inc. ("Arris"), with Defendants-not shareholders-recovering funds through the sale.*fn2 Dkt. 17.

Former Defendant Venture Law Group was the debtor's general counsel. The remaining individual Defendants provided financing to the debtor. The Trustee alleges Defendants schemed to enrich themselves at the expense of the debtor and that Defendants' actions caused the debtor to take several short-term loans on terms ensuring it would default. From this default, the lender and board member Defendants would obtain the debtor's assets. Based on those allegations, the Trustee asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duties, negligence, fraud, conspiracy, and equitable subordination.

In June 2002, following the company's sale to Arris, CDX filed a petition under Chapter 11 of the Federal Bankruptcy Code. In the United States Bankruptcy Court for the Northern District of Illinois, Bankruptcy Judge Eugene R. Wedoff approved a reorganization plan and closed all bankruptcy proceedings related to CDX on November 1, 2004. The plan included provisions for the commencement of this action.

The complaint initially listed sixteen causes of action. Defendants moved to strike the entire complaint pursuant to Federal Rule of Bankruptcy Procedure 7012(b)(6). The motion was granted in part, but denied with respect to Plaintiff's claims for breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, civil conspiracy to breach fiduciary duties, and equitable subordination. Defendants filed a motion to withdraw the reference to the bankruptcy court before District Judge Ronald A. Guzman. On August 10, 2005, Judge Guzman issued a memorandum opinion and order denying Defendants' motion. Judge Guzman found, inter alia, that (1) although certain Defendants had waived their right to a jury trial by filing proofs of claim, they were entitled to rely on the Trustee's jury demand; (2) given Defendants' repeated refusal to consent to a jury trial in the bankruptcy court, any trial in this case must take place in the district court; (3) although a withdrawal of reference was not appropriate at that time, the court would reconsider the matter when the case was ready for trial; and (4) the bankruptcy judge should preside over all pre-trial matters through the close of discovery.

In October 2006, Plaintiff filed a motion to withdraw reference. On February 12, 2007, Judge Guzman recused himself. The case was reassigned to Judge Mark Filip, who struck the Plaintiff's motion without prejudice. Dkts. 33-34. On March 9, 2007, Judge Filip reinstated the case, deemed the Plaintiff's motion filed instanter, and ordered the parties stand on previously filed briefs. Dkt. 38. On May 23, 2007, Judge Filip recused himself. Dkt. 43. The case was reassigned to Judge Norgle. Dkt. 33. This case is set for trial before Judge Norgle in Februrary 2010. See Dkt. 145. The case was referred to this Court in accordance with Local Rule 72.1. Dkt. 73.

II. LEGAL STANDARDS

This Court will discuss the applicable motion in limine and Daubert legal standards, and will then apply them to the two motions in limine.

A. Motions in Limine

A motion in limine is a request for the court's guidance concerning an evidentiary question. Wilson v. Williams, 182 F.3d 562, 570 (7th Cir. 1999); Kiswani v. Phoenix Security Agency, Inc., 247 F.R.D. 554, 557 (N.D. Ill. 2008). The Court may give such guidance by issuing a preliminary ruling regarding admissibility. Wilson, 182 F.3d at 570-71. Trial judges are authorized to rule on motions in limine pursuant to their authority to manage trials, even though such rulings are not explicitly authorized by the Federal Rules of Evidence. Luce v. United States, 469 U.S. 38, 41 n. 4 (1984). While judges have broad discretion when ruling on motions in limine, evidence may be excluded only when it is inadmissible on all potential grounds. Jenkins v. Chrysler Motors Corp., 316 F.3d 663, 664 (7th Cir. 2002); Townsend v. Benya, 287 F. Supp. 2d 868, 872 (N.D. Ill. 2003). "Unless evidence meets this high standard, evidentiary rulings should be deferred until trial so that questions of foundation, relevancy and potential prejudice may be resolved in proper context." Hawthorne Partners v. AT&T Techs., Inc., 831 F. Supp. 1398, 1400 (N.D. Ill. 1993). Thus, the party moving to exclude evidence in limine has the burden of establishing the evidence is not admissible for any purpose. Robenhorst v. Dematic Corp., 2008 WL 1821519, at *3 (N.D. Ill. April 22, 2008).

Denial of a motion in limine does not mean all evidence contemplated by the motion will be admitted at trial. Hawthorne, 831 F. Supp. at 1401. Rather, denial means the court cannot determine whether the evidence in question should be excluded outside of the trial context. United States v. Connelly, 874 F.2d 412, 416 (7th Cir. 1989). A ruling is not necessarily final. Townsend, 287 F. Supp. 2d at 872. "The ruling is subject to change when the case unfolds," particularly if the actual testimony differs from what was proffered. Luce, 469 U.S. at 41. "Indeed even if nothing unexpected happens at trial, the district judge is free, in the exercise of sound judicial discretion, to alter a previous in limine ruling." Id. at 41-42.

B. Admissibility of Expert Testimony

The legal standard for the admission of expert testimony is well-established. In Daubert v. Merrell Dow Pharmaceuticals, Inc., the Supreme Court stated a district court has a "gatekeeping role" of ensuring an expert's testimony is both reliable and relevant. 509 U.S. 579, 597 (1993). In the Seventh Circuit, the principles set forth in Daubert and Rule 702 of the Federal Rules of Evidence ("Rule 702") govern the admission of expert testimony,which must satisfy the following standard:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.

Fed. R. Evid. 702; Ervin v. Johnson & Johnson, Inc., 492 F.3d 901, 904 (7th Cir. 2007). Preliminary questions concerning the qualifications of an expert witness or the admissibility of evidence are determined by the court. Fed. R. Evid. 104(a).

In applying Rule 702, courts undertake a three-step analysis: the witness must be qualified "as an expert by knowledge, skill, experience, training, or education," Fed. R. Evid. 702; the expert's reasoning or methodology must be scientifically reliable, Daubert, 509 U.S. at 592-93; and the testimony must assist the trier of fact to understand the evidence or to determine a fact in issue. Fed. R. Evid. 702; Ervin, 492 F.3d at 904. The party that proffers an expert's testimony bears the burden, by a preponderance of the evidence, of establishing its admissibility. Dukes v. Illinois Cent. R. Co., 934 F. Supp. 939, 946 (N.D. Ill. 1996). "The focus of the district court's Daubert inquiry must be solely on principles and methodology, not on the conclusions they generate." Winters v. Fru-Con Inc., 498 F.3d 734, 742 (7th Cir. 2007).

Daubert sets forth the following non-exhaustive list of guideposts to determine reliability: (1) whether the proffered theory can be and has been tested; (2) whether the theory has been subjected to peer review and publication; (3) whether the theory has been evaluated in light of potential rates of error; and (4) whether the theory has been accepted in the relevant scientific community. Ervin, 492 F.3d at 904; Dhillon v. Crown Controls Corp., 269 F.3d 865, 869 (7th Cir. 2001). "[A] court should consider a proposed expert's full range of practical experience as well as academic or technical training when determining whether that expert is qualified to render an opinion in a given area." United States v. Parra, 402 F.3d 752, 758 (7th Cir. 2005). The inquiry envisioned by Rule 702 is a flexible one. Daubert, 509 U.S. at 594; Winters, 498 F.3d at 742.

III. DISCUSSION

A. Plaintiff's Motion in Limine Number 6-Motion Pursuant to Daubert to Exclude the Expert Testimony of Gregory A. Kyle

Plaintiff seeks to preclude Defendants' expert, Gregory A. Kyle ("Kyle"), from testifying. Defendants proffer Kyle as an expert on the internet infrastructure market to opine on four areas: (1) the risk factors for CDX's investors compared to investors in other high-tech companies; (2) the state of the public equity and capital markets in 1999 through 2001 and the markets' effect on CDX's ability to raise financing; (3) the state of the public equity markets in terms of mergers and acquisitions and initial public offering ("IPO") valuations and their relation to CDX; and (4) ...


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