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La Playita Cicero, Inc. v. Town of Cicero

United States District Court, N.D. Illinois, Eastern Division

March 28, 2017

LA PLAYITA CICERO, INC., d/b/a Serenata Restaurant and Bar, and GERARDO MEZA, Plaintiffs,
TOWN OF CICERO, ILLINOIS, a municipal corporation, LARRY DOMINICK in his official and individual capacities, PAUL DEMBOWSKI, LARRY POLK, and SERGE ROCHER, Defendants. LA PLAYITA CICERO, INC., d/b/a Serenata Restaurant and Bar, and GERARDO MEZA, Plaintiffs,
TOWN OF CICERO, ILLINOIS, a municipal corporation, Defendant.


          John Z. Lee United States District Judge.

         From 2005 to 2009, Gerardo Meza owned La Playita Cicero, Inc., d/b/a Serenata Restaurant and Bar (“Serenata”), a restaurant in Cicero, Illinois, that is now closed. Beginning in 2006, municipal officials from the Town of Cicero cited, fined, and summarily closed Serenata numerous times. Meza and Serenata allege that these officials targeted them because Meza is Hispanic and was politically unsupportive of Larry Dominick, who was the Town President and Liquor Commissioner. By contrast, the Town of Cicero and its officials claim that the citations and fines were merely the legal consequences of local liquor code violations.

         Plaintiffs Meza and Serenata have sued the Town of Cicero under 42 U.S.C. § 1983, alleging violations of the First and Fourteenth Amendments of the federal Constitution (Case No. 11-cv-5561).[1] They have also brought these same constitutional claims against the Town of Cicero in a separate lawsuit in which they further allege several state law claims and add Larry Dominick, Paul Dembowski, Larry Polk, and Serge Rocher as individual defendants (Case No. 11-cv-1702).[2]

         In anticipation of trial, Plaintiffs have offered expert witnesses Dr. Gregory Green and Dr. Louise Fitzgerald, and Defendants have offered expert witness Dr. Alan Jaffe. The parties have filed motions in limine to bar or strike the opposition's expert testimony.[3] For the reasons set forth below, Defendants' motions to bar Green [123] [154] are denied. Plaintiffs' cross-filed motions to bar Jaffe in Case No. 11-cv-5561 [133] and Case No. 11-cv-1702 [399] are granted in part and denied in part. Defendants' motion to bar Fitzgerald [131] is also granted in part and denied in part.

         Legal Standard

         Although the Federal Rules of Evidence do not explicitly authorize the practice of making in limine rulings, “the practice has developed pursuant to the district court's inherent authority to manage the course of trials.” Luce v. United States, 469 U.S. 38, 41 n.4 (1984). Motions in limine allow courts to “ensure the expeditious and evenhanded management of the trial proceedings” by barring evidence that will be clearly inadmissible for any purpose. Jonasson v. Lutheran Child & Family Servs., 115 F.3d 436, 440 (7th Cir. 1997). Rulings on motions in limine are “subject to change when the case unfolds.” Luce, 469 U.S. at 41; see also Farfaras v. Citizens Bank & Trust of Chi., 433 F.3d 558, 565 (7th Cir. 2006). 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.” Luce, 469 U.S. at 41-42.

         The admissibility of expert testimony is governed by Federal Rule of Evidence (FRE) 702 and the Supreme Court's seminal decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). See United States v. Parra, 402 F.3d 752, 758 (7th Cir. 2005) (“At this point, Rule 702 has superseded Daubert, but the standard of review that was established for Daubert challenges is still appropriate.”). FRE 702 allows the admission of testimony by an expert-that is, someone with the requisite “knowledge, skill, experience, training, or education”- to help the trier of fact “understand the evidence or [ ] determine a fact in issue.” Fed.R.Evid. 702. An expert witness is permitted to testify when (1) the testimony is “based on sufficient facts or data, ” (2) the testimony is “the product of reliable principles and methods, ” and (3) the witness has “reliably applied the principles and methods to the facts of the case.” Id.

         Under Daubert, the district court must act as the evidentiary gatekeeper, ensuring that FRE 702's requirements of reliability and relevance are satisfied before allowing the finder of fact to hear the testimony of a proffered expert. See Daubert, 509 U.S. at 589; see also Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147- 49 (1999). District courts have broad discretion in determining the admissibility of expert testimony. See Gen. Elec. Co. v. Joiner, 522 U.S. 136, 142 (1997); Lapsley v. Xtek, Inc., 689 F.3d 802, 810 (7th Cir. 2012). In considering whether to admit expert testimony, district courts employ a three-part framework that inquires whether: (1) the expert is qualified by knowledge, skill, experience, training, or education; (2) the reasoning or methodology underlying the expert's testimony is reliable; and (3) the expert's testimony will assist the trier of fact in understanding the evidence or determining a factual issue. See Bielskis v. Louisville Ladder, Inc., 663 F.3d 887, 893-94 (7th Cir. 2011).

         With regard to the reliability of an expert's methodology, courts consider factors such as whether the methodology can and has been tested, whether it has been subject to peer review, whether it has a known or potential rate of error, and whether it is generally accepted among the relevant community. See Smith v. Ford Motor Co., 215 F.3d 713, 719 (7th Cir. 2000) (citing Daubert, 509 U.S. at 593-94). Under this framework, “shaky expert testimony may be admissible, assailable by its opponents through cross-examination, ” and criticisms of the testimony's quality speak not to admissibility but to the weight that the testimony should be accorded by the trier of fact. Metavante Corp. v. Emigrant Savings Bank, 619 F.3d 748, 762 (7th Cir. 2010) (quoting Gayton v. McCoy, 593 F.3d 610, 616 (7th Cir. 2010)).

         The proponent of an expert witness bears the burden of demonstrating that the expert's testimony would satisfy the Daubert standard by a preponderance of the evidence. Lewis v. CITGO Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009).


         I. Defendants' First Motion to Bar Damages Expert Dr. Gregory Green

         Plaintiffs have offered economist Dr. Gregory Green to opine on the economic damages sustained by Serenata as a result of Defendants' conduct. In his Initial Report from September 2011, Green offers two principal opinions. First, he opines on Serenata's lost business profits from 2007 until 2009. Green's calculation of these lost profits is based on estimates of Serenata's expected revenues and costs, which in turn are based on Serenata's actual revenues and costs from 2005 to 2009 as well as comparisons to the revenues and costs of Dona Cuca, Inc., a similar restaurant owned by Meza's niece and located approximately 1.5 miles from Serenata. See Def.'s Mot. Bar Green, Ex. A (“Green Initial Report”), at 1, 6-8, ECF No. 123. Second, because Serenata ceased operations in December 2009, Green opines on the lost value of Serenata's business as a going concern from 2010 forward. This opinion is based on Green's use of the Capital Asset Pricing Model, which Green describes as “a method for determining the risk-adjusted discount rate to be used to reduce Serenata's estimated lost profits to their 2011 present value.” Id. at 1, 10-13.

         In response to Green's Initial Report, Defendants obtained rebuttal experts, who criticize Green's Initial Report. See Def.'s Mot. Bar Green, Ex. B. Green then prepared a second report, entitled “Rebuttal Report.” See id., Ex. C (“Green Rebuttal Report”). Green's Rebuttal Report is dated December 2011.

         Defendants' first motion in limine seeks to bar Green's Initial Report and Rebuttal Report. Primarily, Defendants challenge Green's use of the Capital Asset Pricing Model. They also argue that Green lacks qualifications to testify as an expert. Lastly, they contend that Green's Rebuttal Report should be barred because it is a sur-rebuttal report that is not permitted under the Federal Rules of Civil Procedure. For the reasons explained below, the Court rejects these arguments and denies Defendants' motion.

         A. Capital Asset Pricing Model

         In challenging Green's use of the Capital Asset Pricing Model (CAPM), Defendants first argue that the model is methodologically unsound. Relatedly, they challenge the factual assumptions underlying Green's application of the CAPM as unreliable. They also argue that Green's discussion of the CAPM reveals that his testimony will not assist the trier of fact as required by FRE 702. The Court finds none of these arguments persuasive.

         1. Reliability of the Methodology

         As explained in Green's Initial Report, the CAPM is an economic model that can be used to estimate a company's going-concern value.[4] The CAPM estimates this value as a function of (1) the rate of return on default-free assets, such as U.S. Treasury securities, (2) the risk measure of the company, (3) the expected risk premium on the overall market portfolio, and (4) the company's size premium. Green Initial Report at 11-13. Courts have long recognized the reliability of the CAPM as a valuation methodology and have routinely permitted expert witnesses to rely upon the CAPM. See, e.g., Fish v. Greatbanc Trust Co., No. 09 C 1668, 2016 WL 5923448, at *28, *35 (N.D. Ill. Sept. 1, 2016) (discussing expert witnesses' use of the CAPM); In re Bachrach Clothing, Inc., 480 B.R. 820, 869 (Bankr. N.D.Ill. 2012) (same); In re Pullman Constr. Indus. Inc., 107 B.R. 909, 921 (Bankr. N.D.Ill. 1989) (same); see also Buchwald v. Renco Grp., 539 B.R. 31, 44 (S.D.N.Y. 2015) (“[I]t is undisputed that the Capital Asset Pricing Model generally, and the use of company-specific risk premium in general, are part of accepted methodologies in corporate valuation.”). Tellingly, Defendants cite no case law to the contrary. The Court therefore finds that the CAPM is a sufficiently reliable and well-accepted methodology to form the basis of Green's opinions.

         Defendants nevertheless argue that even if the CAPM can reliably estimate the going-concern value of publicly held companies, it is an unreliable method of valuating privately held companies like Serenata because it is impossible to calculate precise risk measures for such companies. Indeed, Green's Initial Report acknowledges this weakness, explaining that “[b]ecause Serenata is not and never has been a publicly traded entity, no [ ] risk measure can be calculated directly for Serenata.” Green Initial Report at 11. To work around this issue, Green estimates Serenata's risk measure by averaging the risk measures of three publicly traded but otherwise comparable restaurant businesses: Chipotle Mexican Grill (whose risk measure is 0.95), Chili's Restaurants (whose risk measure is 1.25), and Texas Roadhouse, Inc. (whose risk measure is 1.00). The average of these businesses' risk measures is 1.07, which Green then rounds to 1.15 in order to make his final estimate more conservative. Id. at 11-13.

         Contrary to Defendants' assertion, Green's methodology appears to be an accepted means of using the CAPM to estimate a privately held company's going-concern value. See, e.g., Pullman, 107 B.R. at 921 (describing use of CAPM by expert witnesses and noting that, because it is impossible to obtain the risk measure of a privately held company, the risk measure must be estimated by way of comparison to publicly traded companies). To the extent Defendants believe that Green's estimate is unsound or contend that the three restaurants used by Green are not comparable to Serenata, they can explore these issues on cross-examination. Cf. LoggerHead Tools, LLC v. Sears Holdings Corp., No. 12-CV-9033, 2016 WL 5112025, at *4 (N.D. Ill. Sept. 20, 2016) (“[T]he fact that [an expert witness] cannot calculate the specific amount of lost profits goes to weight, not admissibility.”); Davis v. Duran, 277 F.R.D. 362, 366 (N.D. Ill. 2011) (“Vigorous cross examination, presentation of contrary evidence and careful jury instructions, Daubert stressed, are the traditional and appropriate means of attacking shaky but admissible evidence.”). Green is therefore permitted to give testimony based on his use of the CAPM.

         2. Reliability of Underlying Factual Assumptions

         Defendants also argue that Green's testimony regarding the CAPM should be barred as unreliable because his opinions are based on unsupported factual assumptions that constitute hearsay. For example, Defendants take issue with Green's assumption that Serenata's earnings would have grown by 30 percent per year until reaching normal operating capacity, as well as his assumption that normal operating capacity would have brought in $1.4 million to $1.5 million in annual revenues. See Reply Supp. Mot. Bar Green at 4-5, ECF No. 167 (citing Green Initial Report at 6).

         The reliability of such factual assumptions, however, is not to be weighed by the Court in limine, but rather is to be “tested by the adversarial process and determined by the jury.” Manpower, Inc. v. Ins. Co. of Pa., 732 F.3d 796, 808 (7th Cir. 2013); see also Wilbern v. Culver Franchising Sys., Inc., No. 13 C 3269, 2015 WL 5722825, at *11-12 (N.D. Ill. Sept. 29, 2015) (denying motion to strike damages expert and noting that “the validity of the expert's factual assumptions is not the focus under a pre-trial Daubert inquiry”). And it is well established that an expert witness may base an opinion on otherwise inadmissible facts, including hearsay. Fed.R.Evid. 703; Daubert, 509 U.S. at 595. As such, Defendants' challenges to Green's underlying assumptions are not a basis for barring Green's testimony.

         3. Assisting the Trier of Fact

         In addition, Defendants argue that Green's testimony is unnecessary to assist the trier of fact because his Initial Report demonstrates that damages can be calculated simply by plugging numbers into a formula using the CAPM. This argument is meritless. As explained above, the methodologies that Green employs to estimate Serenata's going-concern value from 2010 forward, as well as to calculate its lost profits from 2007 to 2009, require the use of numerous steps and the input of multiple variables. The Court thus finds that expert testimony explaining the application of these methodologies will clearly assist the jury in determining the issue of damages in this case.

         B. Green's Qualifications

         Next, Defendants challenge Green's qualifications to testify as an expert witness. Because Green's expertise focuses on macro-level economic analysis, Defendants argue, he is unqualified to conduct the type of micro-level analysis involved in valuating an individual business such as Serenata. In response, Plaintiffs assert that Green is indeed qualified, pointing out that he has provided consulting services as an economist and taught university courses in macro- and microeconomics since 1997. See Pls.' Resp. Mot. Bar Green, Ex. 3, ECF No. 140.

         As the Seventh Circuit has warned, “[t]he notion that Daubert . . . requires particular credentials for an expert witness is radically unsound.” Tuf Racing Prod., Inc. v. Am. Suzuki Motor Corp., 223 F.3d 585, 591 (7th Cir. 2000). A witness is qualified to testify as an expert as long as he has “relevant expertise enabling him to offer responsible opinion testimony helpful to the judge or jury.” Id. (citing Fed.R.Evid. 702). As such, an expert witness is not required to have an academic degree in economics, statistics, or mathematics-much less a specialization in a specific subfield of those areas-to be qualified to opine on the calculation of damages. See Id. Here, Green has relevant ...

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