Kane et al v. PaCap Aviation Finance, LLC et al

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
ELIZABETH A. KANE,
BANKRUPTCY TRUSTEE; AIR LINE
PILOTS ASSOCIATION,
INTERNATIONAL, HAWAII
TEAMSTERS AND ALLIED
WORKERS, LOCAL 996,
Plaintiffs,
vs.
PACAP AVIATION FINANCE, LLC,
PACIFICCAP INVESTMENT
MANAGEMENT, LLC, MALAMA
INVESTMENTS, LLC, SNOWBIZ
VENTURES, LLC, PACAP
MANAGEMENT SOLUTIONS, LLC,
PACAP ADVISORS, LLC, JEFFREY
AU, JACK TSUI, JACK CHUCK SHE
TSUI TRUST, LAWRENCE
INVESTMENTS, LLC, LAWRENCE J.
ELLISON REVOCABLE TRUST,
OHANA AIRLINE HOLDINGS, LLC,
CARBONVIEW LIMITED, LLC,
PAUL MARINELLI, LAWRENCE J.
ELLISON, CATHERINE YANNONE,
CHRISTOPHER GOSSERT,
Defendants.
CIVIL NO. 19-00574 JAO-RT
CIVIL NO. 20-00246 JAO-RT
ORDER GRANTING IN PART AND
DENYING IN PART
DEFENDANTS’ MOTIONS TO
EXCLUDE VARIOUS EXPERT
TESTIMONY (ECF NOS. 59–62, 66),
AND GRANTING IN PART AND
DENYING IN PART PLAINTIFFS’
MOTION TO STRIKE (ECF NO.
102)
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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’
MOTIONS TO EXCLUDE VARIOUS EXPERT TESTIMONY (ECF NOS.
59–62, 66), AND GRANTING IN PART AND DENYING IN PART
PLAINTIFFS’ MOTION TO STRIKE (ECF NO. 102)
Plaintiffs Elizabeth A. Kane, the Chapter 7 trustee (“Trustee”) in the
underlying bankruptcy case commenced by Debtor Hawaii Island Air, Inc. (“Island
Air” or the “Debtor”); Air Line Pilots Association, International; and Hawaii
Teamsters and Allied Workers, Local 996 (collectively, the “Unions,” and with the
Trustee, “Plaintiffs”) initiated an adversary proceeding in the United States
Bankruptcy Court for the District of Hawaii on August 12, 2019. See Kane v.
PaCap Aviation Finance, LLC, AP No. 19-90027 (Bankr. D. Haw.) (“AP”), ECF
No. 1. The reference was withdrawn on November 20, 2019. ECF No. 6.
Before the Court are various motions seeking to exclude Plaintiffs’ experts’
testimonies and reports. Defendants PaCap Aviation Finance, LLC; PaCap
Management Holdings, LLC; PacifiCap Investment Management, LLC; Malama
Investments, LLC; SnowBiz Ventures, LLC; PaCap Management Solutions, LLC;
PaCap Advisors, LLC; PacifiCap Management, Inc.; Jeffrey Au (“Au”); Jack
Cheuk She Tsui Revocable Living Trust; and Jack Tsui (collectively, the
“Malama-Related Defendants”) move to exclude certain portions of the expert
report, rebuttal report, testimony, and opinions of James Duca (“Duca”); the expert
rebuttal report, testimony, and opinions of Mark Kahan (“Kahan”); certain portions
of the expert report, testimony, and opinions of Scott C. Gibson (“Gibson”); and
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the expert report, testimony, and opinions of Elizabeth Newlon (“Newlon”). See
ECF No. 66-1.
Defendants Lawrence Investments LLC; Paul Marinelli and Lawrence J.
Ellison, as co-trustees of the Lawrence J. Ellison Revocable Trust; Ohana Airline
Holdings, LLC; Carbonview Limited, LLC; Paul Marinelli (“Marinelli”); and
Lawrence J. Ellison (collectively, the “Ohana-Related Defendants”) move to
exclude certain portions of the expert report and the entirety of the supplemental
report of Daniel Bowen (“Bowen”), see ECF No. 59; the expert reports and
testimony of Gibson, see ECF No. 60; the expert reports and testimony of Duca,
see ECF No. 61; and the expert reports and testimony of Newlon, see ECF No. 62.
Plaintiffs move to strike certain portions of the Ohana-Related Defendants’
replies. See ECF No. 102.
For the following reasons, the Court grants in part and denies in part the
various motions to exclude expert testimony, and grants in part and denies in part
the motion to strike.
I. 	BACKGROUND
A. 	Facts
This is a complex case involving multiple parties and claims. The complaint
is over 100 pages long and the parties have vigorously litigated various issues.
Because the parties and the Court are familiar with the underlying facts and
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allegations, the Court only provides a brief and simplified overview of the relevant
background.
This case stems from the shutdown and bankruptcy of the now-defunct
Island Air, a Delaware corporation. See AP ECF No. 1 (Complaint). The Ohana-
Related Defendants were the sole owners of Island Air from 2013 to February
2016 when they sold a controlling two-thirds interest to the Malama-Related
Defendants. Id. at 7, 13. Marinelli was on the board of Island Air from the date of
the Ohana-Related Defendants’ purchase of the airline to July 2017. See id. at 8,
64; see also ECF No. 75-3 at 6–8 (describing Marinelli’s roles within the Ohana-
Related Defendant entities, including as a board member of Island Air). Though
Au could have appointed himself a director of Island Air through his alleged
control of the Malama-Related Defendants, he elected two other people for the
positions. See id. at 17.
The Trustee alleges that “the self-interested acts of its owners” are to blame
for Island Air’s bankruptcy and that if the owners had acted in the best interests of
the company, the bankruptcy “would not have occurred when it did (if it occurred
at all), the outstanding debts would not have been as substantial as they are, and
there would be additional assets to satisfy those debts.” Id. at 9. In essence, the
Trustee claims that Defendants violated their fiduciary duties to Island Air by
keeping it on life support for personal or other improper motives — thereby
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depleting its assets — rather than shutting it down. See id. at 9–12; see also id. at
88–103 (detailing the Trustee’s breach of fiduciary duty claims).
Island Air filed for Chapter 11 bankruptcy on October 16, 2017 and ceased
operations on November 10, 2017. See id. at 75–76. 1 It was only on November 9,
2017 that the employees of Island Air were informed that the next day would be
the company’s last. See id. at 78. From this, the Unions asserted three causes of
action pursuant to Hawaii’s Displaced Workers Act (“DWA”), Hawai‘i Revised
Statutes (“HRS”) ch. 394B, and the federal Worker Adjustment and Retraining
Notification Act (“WARN Act”), 29 U.S.C. § 2101. See id. at 81–94.
B. 	Procedural History
Defendants filed their instant motions to exclude on February 23, 2022. See
ECF Nos. 59–62, 66. Plaintiffs filed their oppositions on March 9, 2022, and
errata to the oppositions on March 10 and 16, 2022. See ECF Nos. 75, 77–80, 83,
88. The Court then set the motions for a hearing on July 8, 2022 and set a reply
deadline of May 13, 2022. Defendants filed their replies on that date. See ECF
Nos. 95–99.
Plaintiffs then moved to strike portions of certain replies. See ECF No. 102.
The Court allowed a response, which the Ohana-Related Defendants filed on June
1 The Chapter 11 Bankruptcy was converted to a Chapter 7 proceeding on
November 15, 2017. AP ECF No. 1 at 26.
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30, 2022, see ECF No. 106, and Plaintiffs filed a reply in support of their motion to
strike on July 5, 2022, see ECF No. 107.
II. 	LEGAL STANDARD
Federal Rule of Evidence (“FRE”) 702 governs the admissibility of expert
evidence. See Clausen v. M/V New Carissa, 339 F.3d 1049, 1055 (9th Cir. 2003).
Experts may offer opinions based on their “knowledge, skill, experience, training,
or education” if these requirements are met: (1) “the expert’s scientific, technical,
or other specialized knowledge will help the trier of fact to understand the evidence
or to determine a fact in issue”; (2) “the testimony is based on sufficient facts or
data”; (3) “the testimony is the product of reliable principles and methods”; and (4)
“the expert has reliably applied the principles and methods to the facts of the case.”
Fed. R. Evid. 702.
The admissibility of expert reports is evaluated under Daubert v. Merrell
Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). “Under Daubert, ‘the district
court judge must ensure that all admitted expert testimony is both relevant and
reliable.’” Grodzitsky v. Am. Honda Motor Co., 957 F.3d 979, 984 (9th Cir. 2020)
(quoting Wendell v. GlaxoSmithKline LLC, 858 F.3d 1227, 1232 (9th Cir. 2017)).
“Expert opinion testimony is relevant if the knowledge underlying it has a valid
connection to the pertinent inquiry. And it is reliable if the knowledge underlying
it has a reliable basis in the knowledge and experience of the relevant discipline.”
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Primiano v. Cook, 598 F.3d 558, 565 (9th Cir. 2010) (internal quotation marks and
footnote omitted). The Court’s gatekeeping function extends to all expert
testimony. See Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999). “The
inquiry is flexible and Rule 702 should be applied with a liberal thrust favoring
admission.” Wendell, 858 F.3d at 1232 (internal quotation marks and citations
omitted).
A. 	Reliability
District courts have broad latitude in determining reliability and deciding
how to determine reliability. See Hangarter v. Provident Life & Acc. Ins. Co., 373
F.3d 998, 1017 (9th Cir. 2004). The following nonexclusive factors bear on the
reliability of a particular scientific theory or technique: “(1) whether the theory
can be and has been tested, (2) whether the theory has been peer reviewed and
published, (3) what the theory’s known or potential error rate is, and (4) whether
the theory enjoys general acceptance in the applicable scientific community.”
Murray v. S. Route Mar. SA, 870 F.3d 915, 922 (9th Cir. 2017) (citing Daubert,
509 U.S. at 593–94). District courts need not “examine factors that are not
‘reasonable measures of reliability in a particular case.’” Id. (citation omitted).
“‘The focus of the district court’s analysis must be solely on principles and
methodology, not on the conclusions that they generate,’ and ‘the court’s task is to
analyze not what the experts say, but what basis they have for saying it.’”
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Grodzitsky, 957 F.3d at 984–85 (citation omitted); see also Daubert, 509 U.S. at
592–93. The district court’s function is to “screen the jury from unreliable
nonsense opinions, but not exclude opinions merely because they are
impeachable.” Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 738 F.3d 960,
969 (9th Cir. 2013).
B. 	Relevance
“[R]elevance means that the evidence will assist the trier of fact to
understand or determine a fact in issue.” Cooper v. Brown, 510 F.3d 870, 942 (9th
Cir. 2007) (citing Daubert, 509 U.S. at 591–92). That is, “[t]he evidence must
logically advance a material aspect of the party’s case.” Id. (citing Daubert v.
Merrell Dow Pharms., Inc., 43 F.3d 1311, 1315 (9th Cir. 1995)). The district court
“is not tasked with deciding whether the expert is right or wrong, just whether his
testimony has substance such that it would be helpful to a jury.” Alaska Rent-A-
Car, 738 F.3d at 969–70. A court’s gatekeeping inquiry “must be tied to the facts
of a particular case.” Cooper, 510 F.3d at 942 (some internal quotation marks and
citations omitted).
III. 	DISCUSSION
A. 	Motion To Strike
Pursuant to Local Rule 7.2, Plaintiffs move to strike or disregard portions of
the Ohana-Related Defendants’ reply briefs in support of their motions to exclude
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Bowen, Duca, and Gibson. See ECF No. 102. Local Rule 7.2 provides that “[a]
reply must respond only to arguments raised in the opposition. Any argument
raised for the first time in the reply shall be disregarded.” LR7.2.
1. 	Section III Of The Bowen Reply Brief
Plaintiffs ask the Court to disregard Section III of the Ohana-Related
Defendants’ reply brief in support of their motion to exclude Bowen. See ECF No.
102 at 7–9; see also ECF No. 97 (Bowen Reply). Plaintiffs contend that the
arguments in that section are raised for the first time in reply and do not respond to
any arguments in their opposition. See ECF No. 102 at 7–9.
In Section III of the Bowen Reply, the Ohana-Related Defendants argue that
Bowen would not have approved of Duca’s use of his calculations of the decline in
net worth and increase in liabilities as reliable measures of damages. See ECF No.
97 at 13–16. They also argue that Bowen knew that his calculations were
unreliable because they were based on the “book value” of Island Air’s assets as
shown in its financial reports, as opposed to fair market value. Id. at 16–18.
The Court will not disregard the arguments in the Bowen Reply. Bowen’s
and Duca’s testimonies are related because Plaintiffs employ a dual experts
arrangement whereby Bowen and Duca take on different roles to expound on
damages. Duca is a bankruptcy attorney who seeks to “opine[] on the
methodology for calculating damages resulting from breaches of fiduciary duty,”
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ECF No. 88-4 at 10, while Bowen is an accountant that compiled the financial data
underlying Duca’s proposed theory of damages, see id.
Plaintiffs argued that decline in net value and increase in liabilities are
proper measures of damages in this case in their opposition to the Ohana-Related
Defendants’ motion to exclude Duca. See ECF No. 78 (Duca Opposition) at 18–
27. Because Duca relied on Bowen to provide the underlying numbers for his
assertion of the proper measure of damages, and because Plaintiffs argued that
point in the Duca Opposition, the Court concludes that the portion of Section III of
the Duca Reply, ECF No. 98, that discusses whether an increase in liabilities or
decline in net worth are reliable proxies for damages is sufficiently responsive to
Plaintiffs’ brief. In other words, Bowen’s views about whether decline in net
worth or increase in liabilities are reliable measures of damages is relevant to rebut
arguments in the Duca Opposition.
The Ohana-Related Defendants also discussed Bowen’s use of book value as
opposed to fair market value in Section III of the Bowen Reply. Notably, in
opposition to the Ohana-Related Defendants’ motion to exclude Bowen, Plaintiffs
argued that Bowen’s supplemental report was actually a rebuttal because:
Mr. Duca originally calculated damages, using accounting data
provided by Mr. Bowen, based on book value of assets. 	When
defense experts criticized that approach and said that fair market
value would need to be used, Mr. Duca had Mr. Bowen provide
him with information to attempt the calculations based on fair
market value.
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ECF No. 75 at 26 (citations omitted). Thus, Plaintiffs raised the issue of fair
market value versus book value in their opposition and the Ohana-Related
Defendants’ response in reply is acceptable.
The Court DENIES Plaintiffs’ motion to strike as to this section.
2. 	Section II Of The Duca Reply
Plaintiffs also move to strike Section II of the Ohana-Related Defendants’
reply in support of their motion to exclude Duca, again contending that it launches
new arguments that should have been raised in the motion itself. See ECF No. 102
at 10–12. In that section, the Ohana-Related Defendants argue that Duca’s
opinions about the proper measure of damages are inadmissible legal opinions.
See ECF No. 98 at 8–10. In Duca’s expert report, he stated that was “not offering
an opinion on what the law is” relating to damages. See ECF No. 61-2 at 2. But
Plaintiffs’ opposition to the Duca motion states that Duca would “opine on the
measure of damages for breach of fiduciary duty claims for a company that went
into bankruptcy and shut down.” ECF No. 88-4 at 7. Duca, Plaintiffs contend,
also has “specialized knowledge regarding the proper methodology for determining
damages for a breach of fiduciary duty claim, i.e., change in net worth or increase
in liabilities.” Id. at 8. Plaintiffs’ references to Duca testifying as to the correct
method or measure of calculating damages opens the door to the Ohana-Related
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Defendants’ argument that the opinions stray into legal opinions. The Court thus
DENIES Plaintiffs’ motion insofar it targets Section II of the Duca Reply.
3. 	Section III Of The Duca Reply
In Section III of their reply in support of their motion to exclude Duca, the
Ohana-Related Defendants argue that Duca’s opinions about the proper measure of
damages are inadmissible because they are based on the incorrect legal theory that
Marinelli had a fiduciary duty to shut down the Debtor. See ECF No. 98 at 10–13.
Plaintiffs contend that this argument was improperly raised for the first time in
reply. See ECF No. 102 at 12–15. But in their motion to exclude Duca, the
Ohana-Related Defendants argued that Duca’s proposed measure of damages was
unreliable because “courts frequently reject breach of fiduciary duty claims
premised on the notion that a director’s conduct led to an increase in outstanding
liabilities.” See ECF No. 61 at 14–15 (citations omitted). While the reply’s
discussion of whether a fiduciary may have a duty to shut down an insolvent
business is more robust, the Court views it as an extension of Ohana-Related
Defendants’ argument in their motion. The Court thus DENIES the motion to
strike as to the foregoing.
4. 	Section I.B.4 Of The Gibson Reply
In Section I.B.4 of their reply in support of their motion to exclude Gibson,
the Ohana-Related Defendants urge the Court to exclude Gibson’s opinions about
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events occurring after July 10, 2017 because Marinelli resigned on that date and no
longer owed any fiduciary duty to Island Air. See ECF No. 96 (Gibson Reply) at
15–17. The Court GRANTS Plaintiffs’ motion to strike as to this argument. The
Ohana-Related Defendants did not raise the issue in their motion or any other
related motion, and Plaintiffs’ oppositions only tangentially refer to events after
July 10, 2017.
B. 	Duca
Duca is Plaintiffs’ proffered expert on damages on the breach of fiduciary
duty claims. See ECF No. 61-2. Plaintiffs also assert that Duca is an expert
qualified to opine “on financial terms affecting corporations, particularly distressed
corporations.” ECF No. 88-4 at 10; see id. at 29. Both the Ohana-Related and the
Malama-Related Defendants challenge his reports and testimony as to damages on
various grounds.
As alluded to above, Plaintiffs employ a dual expert arrangement with Duca
and Bowen. Duca is a bankruptcy attorney offered to testify as to damages, while
Bowen is an accountant that compiled the financial data underlying Duca’s
proposed theory of damages. Although the Court ultimately GRANTS
Defendants’ motions as to Duca on the matter of damages, to help clarify its ruling,
the Court first addresses a few of the arguments it finds unpersuasive.
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1. 	Qualifications
The Ohana-Related Defendants argue that Duca lacks the necessary
knowledge, skill, experience, training, or education under FRE 702 to testify on
damages. They point out that Duca is not an accountant; has never testified as an
expert on damages, accounting issues, or the issue of adequate capitalization of a
business; only took a few college and law school accounting classes about fifty
years ago; and does not have any relevant degrees, licenses, or certifications in
accounting, damages, or the subject of capitalization of a business, and he has
never published any articles on any of these subjects. See ECF No. 61 at 8–10.
The Malama-Related Defendants also challenge Duca’s credentials or lack thereof.
See ECF No. 66-1 at 10–11.
Plaintiffs respond that Duca has over fifty years of experience as a business
and bankruptcy attorney and during that time reviewed financial statements and
bankruptcy schedules and developed general familiarity with failed businesses.
See ECF No. 88-4 at 12–13. Plaintiffs also argue that bankruptcy attorneys prepare
schedules that are then used to determine whether the company should proceed in
business under a plan or be liquidated, which is similar to what Duca did for his
damages analysis: he purportedly analyzed the damage inflicted on Debtor by
continuing to operate when it should have been liquidated. Id. at 13.
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The Court concludes that Duca’s purported lack of qualifications and prior
experience as an expert do not preclude him from testifying. “Expert testimony is
admitted liberally under the Federal Rules.” Hambrook v. Smith, Civ. No. 14-
00132 ACK-KJM, 2016 WL 4084110, at *6 (D. Haw. Aug. 1, 2016) (citing
Daubert, 509 U.S. at 593–95). FRE 702 “contemplates a broad conception of
expert qualifications.” Thomas v. Newton Int’l Enters., 42 F.3d 1266, 1269 (9th
Cir. 1994). Duca’s experience as a bankruptcy attorney gives him specialized
knowledge that the average layperson lacks. He is familiar with contemplating and
planning for bankruptcy and guiding a company through the process. From that
experience he has seemingly developed theories as to how a company may suffer
harm from waiting too long to declare bankruptcy.
2. 	Helpfulness To Jury
Duca proposes four different measures of damages. See ECF No. 78-5 at 8.
Two of the measures rely on the decrease of Island Air’s net worth from the time
Defendants’ duties allegedly obligated them to shut the company down to the time
when they actually closed the airline. See ECF No. 78-5 at 8. It is the jury’s
province to decide the date on which Defendants should have shut down the
company. See id.; ECF No. 78-3 at 11. The other two measures rely on the
increase in Island Air’s liabilities over that same period. See ECF No. 78-5 at 8.
For all four measures, Duca relied on the financial data Bowen compiled. See id.
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In other words, he did not calculate any of the metrics upon which he bases his
opinion. Instead, he used those metrics and examined the difference in the values
between when the company shut down and when it should have shut down.
Simply put, he subtracted figures on a chart that Bowen created. See id.
The Ohana-Related Defendants argue that Duca’s testimony on the
difference in values should not be admitted because it does not represent
specialized knowledge that a jury would find helpful. See ECF No. 61 at 11–12.
They contend that to the extent the jury would need someone to testify about the
financial metrics chart, it should be Bowen (who created it) rather than Duca. Id.
at 12.
Plaintiffs respond that Duca’s testimony is “critical” because “[h]e uses his
specialized knowledge to help the jury understand what the measure of the
damages should be for a distressed company that is wrongfully allowed to stay in
business, i.e., the drop in net worth or the increase in liabilities, and how to
evaluate those damages.” See ECF No. 88-4 at 14. On the one hand, Plaintiffs’
contention could be describing an attorney’s job during closing argument or the
Court’s role in giving jury instructions. On the other hand, damages cases involve
“a hypothetical world that never existed, one in which other things remained the
same but the [alleged] breach had not occurred.” Alaska Rent-A-Car, 738 F.3d at
968. Perhaps Duca, having worked in the bankruptcy law sphere for a half
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century, is more qualified than an accountant to opine on a counterfactual world in
which Defendants shut the Debtor down at an earlier date. And while Duca’s
proposed testimony strays close to the Court’s role of saying what the law is, the
Court finds that his testimony about the chart could be helpful to the jury.
Although Duca cannot tell the jury what the proper measure of damages is as a
matter a law, he could theoretically testify as to why the numbers on the chart are
relevant to demonstrating the harm the Debtor allegedly suffered.
Nevertheless, as addressed below, the Court cannot find Duca to be a
reliable witness on damages based on the current record.
3. 	Reliability Of Methodology
The Ohana-Related Defendants challenge Duca’s testimony because Duca’s
proposed measures of damages — either a decrease in net value or increase in
liabilities from the date Island Air should have shut down — are unavailable under
Delaware law for breach of fiduciary duty claims, or because they are otherwise
unreliable. See ECF No. 61 at 13–15. The Plaintiffs respond that their proposed
measures of damages — which some courts have called “deepening insolvency” —
are proper under Delaware law. See ECF No. 88-4 at 19. While the question of
the proper scope and applicability of law is better suited to a motion for summary
judgment, which Defendants never sought, the Court briefly addresses the issues
here to help clarify its ruling on the instant motions and to shape the parties’
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preparations for trial. And although the Court need not decide the precise contours
of Delaware law at this stage, an analysis of the general principles reveals a
problem with Duca’s proposed testimony: he fails to explain why his methodology
yields a reliable measure of harm that Island Air purportedly suffered.
The Court’s role as a gatekeeper requires it to analyze whether Duca’s
proffered “testimony is the product of reliable principles and methods.” Fed. R.
Evid. 702(c). And Plaintiffs, as the proponents of Duca, bear the “burden of
establishing that the pertinent admissibility requirements are met by a
preponderance of the evidence.” Fed. R. Evid. 702 advisory committee’s note to
2000 Amendments (citing Bourjaily v. United States, 483 U.S. 171 (1987)). But,
on the instant record, the Court cannot discern whether Duca’s opinion is the
product of reliable principles because he fails to articulate why his proposed
measures of damages fairly assess the harm to the Debtor as opposed to its
creditors. As such, the motions are granted as to Duca’s testimony regarding
damages.
Turning first to the general state of Delaware law on the issue of deepening
insolvency. The Ohana-Related Defendants contend that Delaware “courts have
repeatedly, and consistently, rejected using a decline in net worth or an increase in
liabilities as an acceptable measure of damages for breach of fiduciary duty.” ECF
No. 98 at 18–19 (citations omitted). While certain courts have cast doubt on the
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so-called “deepening insolvency” theory of damages, others have acknowledged
the theory’s viability. As an initial matter, Delaware law does not include a
separate cause of action for deepening insolvency. See Trenwick Am. Litig. Tr. v.
Ernst & Young, L.L.P., 906 A.2d 168, 205 (Del. Ch. 2006), aff’d sub nom.,
Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (table), No. 495, 2006, 2007 WL
2317768 (Del. Aug. 14, 2007). Regardless, Plaintiffs are not asserting a deepening
insolvency cause of action and the bankruptcy court already denied a motion to
dismiss on that matter. See ECF No. 78-8 at 8.
Instead, Plaintiffs are trying to utilize a form of deepening insolvency as a
measure of damages. Some courts and commentators have criticized the approach.
See Seitz v. Detweiler, Hershey & Assocs., P.C. (In re CitX Corp.), 448 F.3d 672,
677–78 (3d Cir. 2006) (applying Pennsylvania law); In re Troll Commc’ns, LLC,
385 B.R. 110, 122 (Bankr. D. Del. 2008) (citing Trenwick, 906 A.2d at 204–05);
Off. Comm. of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum
Cap. Partners, LLC (In re Radnor Holdings Corp.), 353 B.R. 820, 849 (Bankr. D.
Del. 2006) (citing In re CitX Corp., 448 F.3d at 677–78); see also Sabin Willett,
The Shallows of Deepening Insolvency, 60 Bus. Law. 549, 575 (2005). While
others have allowed it in theory. See Miller v. McCown De Leeuw & Co. (In re
The Brown Schools), 386 B.R. 37, 48 (Bankr. D. Del. 2008); Alberts v. Tuft (In re
Greater Se. Cmty. Hosp. Corp. I), 353 B.R. 324, 335–38 (Bankr. D.D.C. 2006).
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Neither the Delaware Chancery nor Supreme Courts have definitively said that
deepening insolvency as a measure of damages is forbidden as a matter of law in
all circumstances. In Trenwick, for example, the Court of Chancery — which the
Delaware Supreme Court summarily affirmed — merely rejected a cause of action
for deepening insolvency. See Trenwick, 906 A.2d at 207. It did not preclude
deepening insolvency as a measure of damages for breaches of fiduciary duty. See
id.; see also Shandler v. DLJ Merch. Banking, Inc., C.A. No. 4797-VCS, 2010 WL
2929654, at *13 (Del. Ch. July 26, 2010) (granting motion to dismiss fiduciary
duty claim based on deepening insolvency because facts pled made no coherent
sense). In other words, the law is somewhat unsettled as to the viability of
deepening insolvency as a measure of damages. Thus, the Court assesses whether
Duca’s proposals could reliably capture the harm Defendants allegedly caused.
The Ohana-Related Defendants argue that an increase in liabilities is not a
proper measure of damages for breaches of fiduciary duty because the harm for
such claims is to the company and not to its creditors. See ECF No. 61 at 13.
They also claim that Duca’s proposed decrease in net worth is essentially the same
measure as his increase in liabilities. See id. at 19. The Ohana-Related Defendants
reach their conclusion that those measures of damages are improper in somewhat
circuitous fashion. First, they assert that breach of fiduciary claims entitle a
plaintiff to recover for harm to the corporation. See id. at 13. In other words,
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“[c]laims of this type are classically derivative, in the sense that they involve an
injury to the corporation as an entity and any harm to the stockholders and
creditors is purely derivative of the direct financial harm to the corporation itself.”
Prod. Res. Grp., L.L.C. v. NCT Grp., Inc. (PRG), 863 A.2d 772, 776 (Del. Ch.
2004). Next, they state that because breach of fiduciary duty claims are derivative,
a creditor who has been harmed may not assert them directly. See ECF No. 61 at
13–14 (citing PRG, 863 A.2d at 776). While the Ohana-Related Defendants are
not wrong that creditors cannot directly assert breach of fiduciary duty claims, that
is not what is happening here. The Trustee brought the breach of fiduciary duty
claims, not creditors. See generally AP ECF No. 1.
During the hearing, the Ohana-Related Defendants’ counsel raised another
red herring — that the Trustee lacks standing to assert claims on behalf of
creditors. But that isn’t happening here either. The Trustee brought the claims on
behalf of the Debtor. The PRG case favorably cited a federal bankruptcy court
case in which a bankruptcy judge explained the relationship between a trustee, the
creditors, and breach of fiduciary duty claims:
It is of course true a trustee in bankruptcy is unable to enforce a
claim belonging to a creditor. 	But the Trustee asserts a claim
which belonged to [the company] Healthco, not its creditors. The
Trustee 	contends 	the 	defendants 	breached 	their 	fiduciary
duties owed to Healthco. 	Any Healthco claim is an interest in
property which passed to the bankruptcy estate. The Trustee can
bring any suit Healthco could have brought, including suits
against directors and controlling shareholders for breach of
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fiduciary duty. 	In complaining that directors authorized a
transaction that unduly weakened Healthco, the Trustee is not
asserting the claim of creditors. 	He alleges Healthco was the
victim of poor management causing damage to the corporation
which 	necessarily 	resulted 	in 	damage 	to 	its 	creditors 	by
diminishing the value of its assets and increasing its liabilities.
PRG, 863 A.2d at 793 n.65 (quoting Brandt v. Hicks, Muse & Co. (In re Healthco
Int’l, Inc.), 208 B.R. 288, 300 (Bankr. D. Mass. 1997)) (internal quotation marks
omitted). Similarly, the Trustee here asserts claims on behalf of the Debtor for
harm that the company suffered.
Still, the Ohana-Related Defendants’ main point — that any damages must
measure harm to Island Air rather than harm to its creditors — is well taken. This
becomes confusing as a practical matter, however, because once a firm is insolvent
and eventually declares bankruptcy, what is the distinction between a company and
its creditors? That any benefit from prevailing on the Trustee’s claims may
eventually redound to the benefit of the Debtor’s creditors is unremarkable. This is
so because once a firm becomes insolvent its creditors become residual claimants.
See Quadrant Structured Prods. Co. v. Vertin, 115 A.3d 535, 547 n.13 (Del. Ch.
2015) (citing PRG, 863 A.2d at 791); see also PRG, 863 A.2d at 791 (“By
definition, the fact of insolvency places the creditors in the shoes normally
occupied by the shareholders — that of residual risk-bearers. Where the assets of
the company are insufficient to pay its debts, and the remaining equity is
underwater, whatever remains of the company’s assets will be used to pay
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creditors[.]”). The Court points this out not to suggest that the damages to the
creditors and the corporation are the same in this case, but merely to highlight that
the categories of harm are not so clear-cut. To that end, the need for an expert to
explain to a jury what harm Island Air suffered as distinct from any damage Island
Air’s creditors sustained seems crucial. Conversely, an expert could theoretically
explain why the harm to Island Air and its creditors is exactly the same in this
situation. But that potential difference or similarity is exactly what Duca and
Plaintiffs have failed to explain or account for here.
Duca’s proposed measures of damages based on the decline in net worth or
the increase in liabilities seem to overlap with harm that creditors might claim. In
any event, he does not explain why his proposed measures capture the harm
Defendants’ alleged breaches caused to Island Air as an entity. One of the cases
Plaintiffs cited in support of the availability of deepening insolvency explains the
problem. In In re Greater Southeast Community Hospital Corporation, the court
held under Delaware law that deepening insolvency was a theory of harm. See In
re Greater Se. Cmty. Hosp. Corp. I, 353 B.R. at 336–38. But the court also noted:
This is not to suggest that the damages sought by [the
bankruptcy trustee] Alberts are an accurate gauge of the injuries
suffered 	by 	the 	debtors 	due 	to 	their 	alleged 	deepening
insolvency. Alberts seeks to recover for “the increased amount
of insolvency suffered by the debtors.” 	This calculation might
have represented a fair valuation of the harm caused to the
creditors of DCHC (assuming that the debt was never repaid),
but 	Alberts 	has 	no 	standing 	to 	protect 	creditors’ 	interests.
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Instead, he will need to prove that DCHC and its subsidiary
corporations were actually harmed by the defendants’ allegedly
excessive borrowing habits, and then quantify that harm. 	The
damages arising from these injuries (if proven) may be larger or
smaller than the amount of excess debt acquired by the debtors,
but they will almost certainly not be the same.
Id. at 338 (brackets, footnotes, and citation omitted).
Duca’s reports fail to address the issue sufficiently, which gives the Court
pause as to the reliability of his methodology. In his report, for example, Duca
merely states that between Island Air’s decrease in net worth and its increase in
liabilities, he considers decrease in net worth “to be best reflective of the damages
sustained by [Island Air].” ECF No. 61-2 at 11. But why? The report fails to
explain. In fact, the report seems to assume that the harm to Island Air’s creditors
is equivalent to the harm to the company. Duca states:
[D]amages should be measured from the time when a reasonable
and 	objective 	person 	controlling 	the 	Company, 	whose
motivation was solely to promote the best interests of the
Company, would have determined that shutting down was
necessary to minimize further losses and to avoid incurring
obligations to creditors that the Company had no ability to pay.
Id. at 2–3 (emphasis added). Similarly, in his rebuttal report, Duca noted that “[b]y
the time bankruptcy commenced . . . the assets of the Company . . . were
insufficient to pay more than a small fraction of its debts. The losses are
undoubtedly relevant to the creditors who are owed the many millions of dollars of
debt that [Island Air] ran up.” See ECF No. 61-3 at 10 (emphasis added).
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Duca apparently either made no attempt to parse out the harm that Island Air
suffered because of Defendants’ alleged breaches, or neglected to explain how he
distinguished such damages or why doing so was unnecessary. Instead, as far as
the Court can tell, he just compared two figures on a balance sheet before and after
a supposed breach. As one court noted, in denying a motion to dismiss that
targeted a deepening insolvency theory of harm, “[a] theory of harm (or a damage
model) is different from a measure of damages.” Redmond v. Kutak Rock, LLP (In
re Brooke Corp.), 467 B.R. 492, 511 (Bankr. D. Kan. 2012). The court continued
that “[t]he well-reasoned cases allowing the damage model do not define the
damages in terms of a comparison of balance sheets before and after the alleged
wrongful act. They require proof of specific itemized damages, such as increased
liabilities and lost profits, proximately caused by a breach of a legally recognized
duty.” Id. (footnote omitted). So, while In re Brooke acknowledges the possibility
of using increased liabilities as a factor in a damages calculation, it also
emphasizes the shortcoming of the Duca report in that Duca seemingly just
compared the balance sheet figures before and after without tying any specific
harm to any specific action or stakeholder.
Duca’s lack of an explanation of his methodology renders the Court’s
gatekeeping role difficult because the Court’s task is to is focus on Duca’s
methodology rather than his conclusions, i.e., his basis for saying that his measure
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captures Island Air’s damages. See Grodzitsky, 957 F.3d at 984–85 (citation
omitted). In other words, the Court cannot assess the reliability of Duca’s
methodology because it is not sure what his methodology is. Most glaringly, the
Court cannot tell whether Duca even considered a possible distinction between
harm to the creditors and harm to the Debtor, let alone that he applied a reasonable
methodology to quantify such damages. In short, Plaintiffs provide no basis to
support whether Duca’s approach is reliable and the Court thus GRANTS
Defendants’ motions as to Duca testifying as to damages.
By doing so, the Court is not necessarily rejecting a form of deepening
insolvency as a potential measure of damages or necessarily precluding Plaintiffs
from arguing the point at trial. Rather, the Court is precluding the testimony of the
offered expert as an imprimatur as to the proper measure of damages where the
expert failed to explain why his damages measure was proper. And while the
decrease in net value or increase in liabilities may very well be proper measures of
damages to the Debtor, Plaintiffs have not met their burden of demonstrating that
their expert has a reliable method for calculating those damages at this stage.
Further, whether Plaintiffs can still move to admit Duca or another expert to testify
as to the measure of damages could be the subject of other motions but is not
presently before the Court. Similarly, whether and to what extent counsel could
argue that deepening insolvency is a measure of damages can be determined closer
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to or during the trial via motions in limine or discussions regarding jury
instructions.
C. 	Bowen
1. 	Schedule 9
The Ohana-Related Defendants move for an order excluding Schedule 9 of
Bowen’s report. See ECF No. 59 at 8–12. There being no objection, see ECF No.
65 at 3–4, the Court GRANTS the motion as to Schedule 9.
2. 	Supplemental/Rebuttal Report
The Ohana-Related Defendants’ challenge to what they dub as the “Second
Bowen Report” is really a discovery motion rather than a Daubert inquiry. They
argue that the Second Bowen Report was filed on the Court’s deadline for rebuttal
expert reports, but that the report does not contradict or rebut anything and
therefore represents a late supplemental report. See ECF No. 59 at 12–17. Their
primary evidence that the Second Bowen Report is not a proper rebuttal comes
from Bowen’s deposition when the accountant stated that his report was a
supplement and “not a rebuttal with anyone.” See ECF No. 75-45 at 8. Bowen
later clarified that he did not know whether his report was intended “to rebut any
opinion or evidence offered by an opposing expert.” Id. at 9. Regardless, the
Ohana-Related Defendants’ reliance on the purported concession of Bowen fails to
take into account the Plaintiffs’ arrangement of Duca and Bowen as purported dual
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experts. Even though the Court strikes Duca’s testimony as to damages, the
numbers he asked for from Bowen are still proper rebuttal to Defendants’ experts.
As Bowen noted in his deposition, he was a technical expert providing
information requested by the attorneys. Id. Plaintiffs explain that Bowen’s role
was to generate accounting schedules to be used by attorneys in argument or by
Duca in his damages analysis. See ECF No. 75 at 24. They contend that for the
Second Bowen Report, “everything [Bowen] did was in response to a request, and
every request was based on rebutting something from the defense experts.” Id. at
25. Specifically, Plaintiffs assert that Defendants’ experts had criticized Duca’s
use of book value from Bowen’s accounting data, rather than fair market value. Id.
at 26. So, in response to that criticism, Duca asked Bowen to provide him with
information to attempt the calculations based on fair market value. Id. Plaintiffs
then proceed to explain how Duca used each schedule in the Second Bowen
Report. Id. at 27–29.
The Ohana-Related Defendants respond that Duca’s switch to a damages
calculation using fair market value rather than book value is itself not a proper
rebuttal and that therefore Bowen’s data in support of that change is likewise not a
rebuttal. See ECF No. 97 at 11, 13. The Court is unpersuaded. To penalize
Plaintiffs for their expert’s response to criticism seems unreasonable and would
create disincentives to adopting valid suggestions proposed by the other side’s
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experts. Here, the evidence demonstrates that Duca refined his opinions to rebut
Defendants’ criticisms. In doing so, Duca asked Bowen for data. The Court
concludes that such data represents a proper rebuttal report.2
3. 	Reliability Of Net Worth, Liabilities, And Fair Market Value Figures
The Ohana-Related Defendants challenge Bowen’s reports to the extent they
include net worth, liabilities, and fair market value of assets figures. See id. at 13–
18. They argue that those figures do not reliably reflect an appropriate measure of
damages. But the Ohana-Related Defendants conflate two issues: the reliability of
Bowen’s figures and the appropriateness of using those figures as a measure of
damages. Bowen explained in his expert report that he simply compiled the
figures from the Debtor’s accounting software. See ECF No. 59-2 at 4. He did
“nothing to change or alter the data in the accounting system.” Id. Thus, the Court
DENIES the Ohana-Related Defendants’ challenge to the figures themselves. As
to the appropriateness of the figures as a measure of damages, Bowen was not
offered to testify to that matter — Duca was, and the Court addressed his testimony
above.
2 Alternatively, even if Bowen’s Second Report was a supplement instead of a
rebuttal, the Court would conclude that its late submission was harmless. The data
in the report is derived from Island Air’s accounting software such that it would
have been available to Defendants as well as Plaintiffs. Further, the switch from
book to fair value decreased Defendants’ potential damages.
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D. 	Newlon
Plaintiffs retained Newlon as their damages expert on the DWA and WARN
Act claims. See ECF No. 62-2 at 3. Both sets of Defendants seek her exclusion.
See ECF No. 62; ECF No. 66-1 at 29–32.
1. 	Qualifications
The Malama-Related Defendants contend that Newlon lacks sufficient
airline experience and knowledge to testify as an expert on the potential damages
from the WARN Act and DWA claims. See ECF No. 66-1 at 29. Specifically,
they highlight that she has never served as an expert in a WARN Act or DWA case
and has no previous commercial airline experience. See id. They also argue that
her unfamiliarity with certain airline terms — which they characterize as “basic”
— renders her incompetent to testify as an expert. Id. at 30–32. But the Malama-
Related Defendants’ view of her qualifications is too narrow.
Newlon has a Ph.D in economics, has been a Director at NERA Economic
Consulting since 2018, and has served as a damages expert in dozens of cases
(including wage and hour cases). See ECF No. 66-11 at 18–26. As previously
stated, FRE 702 “contemplates a broad conception of expert qualifications.”
Thomas, 42 F.3d at 1269. That Newlon has not testified as an expert in a case with
the exact same claims and issues certainly does not disqualify her. See, e.g.,
United States v. Smith, 520 F.3d 1097, 1105 (9th Cir. 2008) (concluding district
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court did not abuse discretion in certifying medical expert at trial who had not
previously testified as a forensic expert), aff’d in part on reh’g, 561 F.3d 934, 937
n.1 (9th Cir. 2009) (en banc) (noting that the defendant did not raise the issue of
expert’s certification on petition for rehearing). The Court is satisfied that Newlon
possesses the requisite knowledge, skill, experience, training, or education to
testify as an expert on damages.
2. 	Methodology
a. 	Compliance With WARN Act Language
The Ohana-Related Defendants first challenge Newlon’s methodologies and
resulting opinions as inconsistent with the statutory language of the WARN Act.
See ECF No. 62 at 7–12.
Under the WARN Act, “[a]n employer shall not order a plant closing . . .
until the end of a 60-day period after the employer serves written notice of such an
order” to the affected employees or their representatives. See 29 U.S.C. §
2102(a)(1). An employer that violates the notice requirement
shall be liable to each aggrieved employee who suffers an
employment loss as a result of such closing or layoff for —
(A) 	back 	pay 	for 	each 	day 	of 	violation 	at 	a 	rate 	of
compensation not less than the higher of —
(i) the average regular rate received by such employee
during the last 3 years of the employee’s employment; or
(ii) the final regular rate received by such employee[.]
Id. § 2104(a)(1) (emphases added).
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The Ohana-Related Defendants argue that because Newlon did not use the
average regular rate or final regular rate to calculate back pay, her methodology
runs afoul of the statute. See ECF No. 62 at 7–9. Instead of using one of those two
rates to determine back pay, Newlon developed a different methodology for
calculating back pay. Newlon calculated a “weighted average share” of total or
compensable hours, see ECF No. 62-2 at 8; ECF No. 62-3 at 3, she then
“multiplied each employee’s estimated monthly compensable hours by their hourly
wage rate, as dictated by their CBA.” ECF No. 62-3 at 3. She generated the
weighted average share figure to estimate hours because if she simply used the
employees’ October 2017 hours (the month before the shutdown) it would not
account for the wide variance in hours worked per month. See ECF No. 62-2 at 8.
Thus, she developed the weighted average share of hours figure for the affected
employees. See ECF No. 62-3 at 2–3.
To arrive at the weighted average share, Newlon estimated how much each
employee worked on average relative to their colleagues by calculating the
employee’s proportion of the total hours worked across multiple months. See id.
Newlon calculated each employee’s proportion of the total number of hours by
adding up the hours each employee worked for the months of August, September,
and October, and then dividing by the total hours worked by all employees in the
same months. See id. She then used the October 2017 hours as a benchmark for
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the total number of available hours going forward because the October hours
accounted for the decrease in hours available after the reduction of planes in use.
See id. at 3; see also ECF No. 62-2 at 6 (describing the reduction of planes from
five to three in mid-September 2017). Using the October 2017 hours as a
benchmark, she multiplied that figure with the proportion of hours that each
employee had worked in August, September, and October to estimate each
individual employee’s share of hours over the 60-day period of violation. Newlon,
thankfully, provided charts to demonstrate her approach. See ECF No. 62-3 at 18–
19.
The chart above depicts how Newlon calculated three hypothetical employees’
estimated monthly hours based on their average proportion of total hours from the
previous three months and multiplied by the total amount of hours in October.
Newlon then multiplied the hypothetical employee’s estimated monthly hours by
that employee’s wage rate, as shown in the chart below. See id. at 3–4.
ll ypothe ti cal
E mp lo,·ee
( I )
I
2
3
Total
Aueust
(2)
0
70
75
225
alculation of E timated Month! II our
T hree Hypo th etical Empl oyee
Monthly Compensable Hours
Seete mb er 	Octob er 	Tot al
(J) 	(4) 	(S)
1: (2) : (4)
90 	0 	250
5 	75 	230
75 	0 	230
250 	235 	710
An •.n,:te Proportion 	Estimated
of Tot al Hours 	Montb l\• Hou rs
(6) 	(7)
(S) / 7 10 	(6) * 235
0.35 	82 .7
0.32 	76.1
0.32 	76.1
I 	235
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Id. at 19.
The question for the Court, therefore, is whether Newlon’s methodology to
estimate back pay is permitted under the WARN Act. First, contrary to the Ohana-
Related Defendants’ suggestion, the WARN Act does not require that an employer
pay either the average regular rate received by an employee over the previous three
years or the final regular rate received by an employee before the employer’s
violation. Instead, the plain language of the statute sets the higher of those two
figures as the floor for the calculation of back pay. See 29 U.S.C. § 2104(a)(1)(A)
(employer liable for “back pay for each day of violation at a rate of compensation
not less than the higher of” average regular rate or final regular rate (emphasis
added)). The Ninth Circuit has said as much:
The Act states that an employer is liable for back pay at a rate
not 	less 	than 	the 	higher 	of 	the 	calculations 	specified 	in
subsections (A)(i) and (A)(ii). These subsections do not define
“back pay”; rather, they establish a floor for WARN Act
damages, thereby preventing employers from lowering wages
shortly before closure in order to diminish their WARN Act
liability.
alculation of Estimated Monthl_ Damages
Three Hypothetical Employee
Hypo1be1:iul 	E~imate d 	Ho url y 	listimated
Em (!loyee 	Montblv H our 	Pa\' Rate 	Montbh• Dama &!:!
( I ) 	( 2) 	(J) 	(4)
l 	Jl ( W(J)
J
I 	82.7 	109 .2 1 	9.037
2 	76. 1 	69 .54 	5.294
3 	76. 1 	44 .09 	3.356
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Local Joint Exec. Bd. of Culinary/Bartender Tr. Fund v. Las Vegas Sands, Inc.,
244 F.3d 1152, 1158 (9th Cir. 2001). Thus, Newlon’s decision not to use one of
the two statutory floors to estimate damages is not contrary to law.
Next, the Ohana-Related Defendants contend that Newlon did not attempt to
determine the number of hours that the employees would have worked during the
60 days after the shutdown. See ECF No. 62 at 10–12. They argue that Newlon’s
estimates ignore that the work available for the 60 days after the alleged violation
would have declined further because the remaining planes went out of service in
mid-November. See id. at 10. But the Ohana-Related Defendants distort Newlon’s
so-called acknowledgment that additional planes went out of service in mid-
November. Newlon was clearly discussing the reduction of planes from five to
three in mid-September. See ECF No. 62-2 at 6. In fact, Newlon was actually
commenting that if those planes went out of service in relation to the shutdown, the
employees could argue that their estimates “should be based on higher average
work hours from months that were unaffected by the shutdown.” Id. In reply, the
Ohana-Defendants do not give up the point. They press ahead that at some
unspecified date in mid-November, the remaining planes were grounded. See ECF
No. 95 at 9. But they do not provide evidence about the grounding of the planes in
mid-November, let alone whether it was planned and unrelated to the closure of the
airline. Of course, the Court cannot help but wonder whether the Ohana-Related
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Defendants are being intentionally vague about the date because those planes were
grounded as part of the allegedly unannounced shutdown. The Ohana-Related
Defendants’ attacks do not convince the Court that Newlon’s process by which she
arrived at the estimates was somehow contrary to the WARN Act or otherwise
unreliable. Regardless, the Ohana-Related Defendants can challenge Newlon’s
calculations on cross-examination.
The Ohana-Related Defendants’ reliance on United Mine Workers Int’l
Union v. Martinka Coal Co., 45 F. Supp. 2d 521, 527 (N.D.W. Va. 1999), aff’d,
202 F.3d 717 (4th Cir. 2000), is unpersuasive. In that case the coal mine continued
employing 211 people after 82 were laid off in October 1995 in violation of the
WARN Act. See id. The district court — in ruling on damages after a bench trial
— factored a mining roof collapse into its decision to reduce the amount of
Saturday and Sunday overtime pay that the aggrieved employees could receive.
See id. The roof collapse occurred in August 1995 and the mine closure was
announced in October 1995. See id. During the 60 days after the announced
closure, Saturday and Sunday work was still available but “it was at a much
diminished rate as a consequence of the roof fall and planned mine closing.” Id.
The aggrieved employees argued that they should receive damages for their
regularly scheduled overtime from prior to the roof collapse and planned closing.
See id. The court concluded that the aggrieved employees were entitled to
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damages for the overtime pay, but at a lower rate than what they had argued
because there was less Saturday and Sunday work available in the sixty days after
the closing. See id. at 527–28.
The Court finds Martinka Coal distinguishable on both its facts and
procedural posture. On its facts, Martinka Coal is inapposite to the situation here
because the mine kept employing certain workers in the sixty days after the
WARN Act violation. There was thus direct evidence regarding how much
overtime would have been available had they not been laid off. Here, the airline
ceased all operations basically simultaneous with the alleged WARN Act violation.
Similarly, the district court in Martinka Coal was ruling on damages after a bench
trial based on evidence; not determining whether an expert could propose a
different estimate of damages. In essence, all the district court did was conclude
that the aggrieved employees had not proven that they were entitled to the damages
figure they sought for overtime pay. Martinka Coal, thus, does not stand for the
principle that Newlon’s methodology for estimating the hours the employees
would have worked renders her opinions excludable.
b. 	Challenges To Specific Categories Of Employees
The Ohana-Related Defendants further attack Newlon’s estimates for
including certain categories of employees that they claim are excluded from the
purview of the WARN Act. See ECF No. 62 at 12–16. The Court concludes that
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such challenges are more appropriate topics for motions in limine, or during trial.
Ultimately, Plaintiffs will have to prove damages. If certain employees are not
entitled to collect damages, that should be dealt with outside the context of a
Daubert motion. Similarly, if Newlon included in her estimates some employees
who are eventually found to be ineligible to recover, that can be addressed at trial
and does not render her overall methodology unreliable. These types of arguments
“go to the weight of the testimony and its credibility, not its admissibility.” See
Alaska Rent-A-Car, 738 F.3d at 970. As such, they may “be attacked by cross
examination, contrary evidence, and attention to the burden of proof, not
exclusion.” See id. at 969 (quoting Primiano, 598 F.3d at 564). The Court will
nevertheless briefly address each of Defendants’ arguments.
First, the Ohana-Related Defendants point out that Newlon’s estimates
included employees who worked off-island at locations other than Island Air’s
Honolulu headquarters. See ECF No. 62 at 12–13. In effect, they are arguing that
those employees in Kona, Lihue, or Kahului did not suffer a plant closing because
they worked at “separate sites of employment.” See id. at 12. However, there has
been no determination whether those off-island employees work at a separate or a
single site of employment, and there may be factual disputes which preclude ruling
on the matter now. Defendants could have, but did not, seek summary judgment
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on the issue. The Court will not accept a backdoor motion for summary judgment
ruling on the matter now.
Second, the Ohana-Related Defendants challenge Newlon’s inclusion in her
estimates of employees on leaves of absence. See id. at 13–14. Under the WARN
Act, “[w]orkers on temporary layoff or on leave who have a reasonable expectation
of recall are counted as employees.” See 20 C.F.R. § 639.3(a)(1)). At this point,
there appears to be a factual dispute as to whether any employees on leave would
have a reasonable expectation of recall. Including such employees in her damages
calculation does not render Newlon’s estimates unreliable. The Ohana-Related
Defendants may cross-examine her on such issues.
Third, the Ohana-Related Defendants assert that Newlon incorrectly
included vacation pay for employees who were not eligible for it. See ECF No. 62
at 14–15. Again, this is an issue that requires the weighing of evidence and is
better suited to determination outside of the Daubert context.
Fourth, the Ohana-Related Defendants claim that many of the employees
included in the damages estimate are no longer union members and that the Unions
therefore cannot represent them. See id. at 15–16. The Court will not rule as a
matter of law in the forum of a Daubert motion, and Newlon’s potential inclusion
of such employees does not render her unsuitable to testify as to damages.
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Thus, the Court DENIES the Ohana-Related Defendants’ motion as to
Newlon.
c. 	Duplicative Recovery
The Ohana-Related Defendants briefly argue that Newlon’s calculations
may allow for double recovery under the DWA and WARN Act Claims. See id. at
16–17. Whether such a recovery is permissible is a question of law that is ill-
suited to the instant motion. The Court DENIES the Ohana-Related Defendants’
motion insofar as they seek to exclude Newlon on this duplicative recovery basis,
but the Court takes no position at the moment as to whether such damages would
be available if Plaintiffs prevail on their WARN Act and DWA claims.
d. 	The Malama-Related Defendants Reliability Challenges
The Malama-Related Defendants argue that Newlon should be excluded
because she did not consider the Unions’ administrative expense claims. See ECF
No. 66-1 at 22–26. They neither provide any support for why such a lack of
consideration would render her opinions excludable under FRE 702 nor explain
how her opinions or methodology are unreliable.
The Malama-Related Defendants also argue that Newlon should be excluded
because she did not verify which employees had designated the Unions as their
representatives. See id. at 27–28. Again, the Malama-Related Defendants provide
no support for why Newlon’s reliance on counsel’s lists render her opinions
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unreliable. In fact, they do not even contest the accuracy of the lists that Newlon
used. See generally id.
In reply, the Malama-Related Defendants claim that Newlon ignored
“essential” data by disregarding the Unions’ administrative expense requests and
by not verifying counsel’s list of designated employees, but fail to explain why
such data are essential or even relevant. The Malama-Related Defendants’ motion
on these grounds is DENIED.
E. 	Gibson
1. 	Relevance
Plaintiffs offer Gibson as an airline industry expert. See ECF No. 60-2.
Neither group of Defendants challenge his qualifications or expertise as to the
airline industry. Instead, the Defendants contest the relevance of Gibson’s
opinions. The Ohana-Related Defendants present a more substantial challenge to
Gibson. First, they argue that Gibson’s testimony is irrelevant in that it relates to
“duty of care” issues and not “duty of loyalty” or “duty of good faith” issues. See
ECF No. 60 at 8–14. The Ohana-Related Defendants also argue that Gibson’s
opinions about topics outside of his expertise must be excluded. Id. at 14.
Specifically, they attack portions of Gibson’s report that purportedly relate to
Defendants’ states of mind or motives, portions of his report where he “argue[s]
from the evidence,” and portions of his report where he allegedly provides legal
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conclusions. See id. at 14–19. The Malama-Related Defendants argue that their
expert says that Gibson’s report at times relies on hindsight and engages in
speculation. See ECF No. 66-1 at 21–22. They ask that those passages of the
Gibson report be excluded. Id. at 22.
As an initial matter, the Court concludes that the instant set of motions is an
inappropriate time to conduct a line-by-line examination of Gibson’s reports to
determine the admissibility of each individual statement. Such objections may be
addressed ahead of trial in the form of a motion in limine, or during trial. Thus, to
the extent the Defendants ask the Court to analyze each line of the reports, the
Court presently declines to do so and denies the requests. The Court focuses on
the bigger picture relevance questions regarding Gibson’s proposed testimony.
a. 	“Duty Of Care” Testimony
Under Delaware law, corporate directors have three fiduciary duties: due
care, loyalty, and good faith. See Emerald Partners v. Berlin, 787 A.2d 85, 91
(Del. 2001). “A plaintiff cannot prove a breach of the duty of care without a
showing of gross negligence. The exact behavior that will constitute gross
negligence varies based on the situation, but generally requires directors and
officers to fail to inform themselves fully and in a deliberate manner.” Off. Comm.
of Unsecured Creditors of Fedders N. Am., Inc. v. Goldman Sachs Credit Partners
L.P. (In re Fedders North America, Inc.), 405 B.R. 527, 539 (Bankr. D. Del. 2009)
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(citations omitted). “By contrast, the duty of loyalty mandates that the best interest
of the corporation and its shareholders takes precedence over any interest
possessed by a director, officer or controlling shareholder and not shared by the
stockholders generally.” Id. at 540 (internal quotation marks and citation omitted).
To plead a breach of loyalty, “plaintiffs must allege facts showing that a self-
interested transaction occurred, and that the transaction was unfair to the
plaintiffs.” Id. (internal quotation marks and citation omitted). A plaintiff can
establish a breach of the duty of good faith in various ways, but three examples are
when a director intentionally acts with a purpose other than advancing the best
interests of the corporation, when a director intentionally violates a law, or when a
director intentionally fails to act in the face of a known duty to act. See id. (citing
Brehm v. Eisner (In re Walt Disney Co. Deriv. Litig.), 906 A.2d 27, 67 (Del.
2006)).
A corporation may include in its articles of incorporation a provision “to
exculpate their directors from monetary damage liability for a breach of the duty of
care.” See In re Walt Disney Co. Deriv. Litig., 906 A.2d at 65 (citing Del. Code tit.
8, § 102(b)(7)). A corporation may not, however, exculpate directors for breaches
of the duties of loyalty or good faith. See Del. Code tit. 8, § 102(b)(7).
The Ohana-Related Defendants argue that the Debtor’s articles of
incorporation exculpate Marinelli for monetary liability from any breach of the
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duty of care. See ECF No. 60 at 8–9. Thus, they argue that any testimony from
Gibson about duty of care issues is irrelevant. See id. at 9–10. To highlight where
Gibson’s report allegedly discusses duty of care issues as opposed to issues related
to other duties, the Ohana-Related Defendants provide Appendix 1, which cites
various excerpts of Gibson’s report. See id. at 21–25. The Ohana-Related
Defendants’ arguments are unpersuasive for several reasons.
First, even if a Daubert motion as opposed to a motion for summary
judgment is a proper vehicle to raise the exculpatory provision, the Ohana-Related
Defendants ignore that there is a factual dispute about whether the exculpatory
provision applies to Au. See ECF No. 80-6 at 6 (Bankruptcy Court’s denial of
Malama-Related Defendants’ motion to dismiss on the exculpatory provision).
Thus, duty of care questions may still be relevant in this case.
Further, opinions can be relevant to multiple issues. That Gibson’s opinions
may discuss duty of care issues does not preclude them from also being relevant to
duty of loyalty or good faith questions. For example, opinions about whether the
Debtor’s actions were realistic or reasonable, see e.g., ECF No. 60 at 21–22,
certainly relate to whether the Defendants acted with gross negligence. But they
can also be relevant to whether the Defendants’ had ulterior motives that were
either self-interested or contrary to the best interests of Island Air. The Court thus
denies the Ohana-Related Defendants’ challenge on this ground.
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b. 	Topics Allegedly Outside Gibson’s Expertise
The Ohana-Related Defendants challenge Gibson’s testimony that they
argue relates to the Defendants’ motive or state of mind, “arguments from
evidence,” and legal opinions. See id. at 15–19. In doing so, they provide a
sampling of allegedly improper statements. See id. at 21–32. Similarly, the
Malama-Related Defendants seek to exclude Gibson’s statements where he
allegedly relies on hindsight and speculation. See ECF No. 66-1 at 21–22. As the
Court stated above, it will not conduct a line-by-line analysis of the reports at this
time.
Suffice it to say, an expert treads on treacherous ground when testifying as
to someone’s motive or state of mind. See Siring v. Or. State Bd. of Higher Educ.
ex rel. E. Or. Univ., 927 F. Supp. 2d 1069, 1077 (D. Or. 2013) (“Courts routinely
exclude as impermissible expert testimony as to intent, motive, or state of mind.”
(citations omitted)). But an expert may testify whether a certain practice is
consistent with a particular state of mind. See In re Term Commodities Cotton
Futures Litig., No. 12-CV-5126 (ALC), 2020 WL 5849142, at *14 (S.D.N.Y. Sept.
30, 2020). The Court will draw finer lines at a later date.
Similarly, the Court will address testimony that strays into argument,
speculation, or legal conclusions ahead of or at trial. Thus, the Court DENIES
Defendants’ motions on these grounds
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c. 	Testimony About Undercapitalization And Insolvency
The Ohana-Related Defendants argue that Gibson’s opinions about
undercapitalization and insolvency are only related to the equitable claims for the
Court to decide and therefore should not be presented to the jury. See ECF No. 60
at 19; see also AP ECF No. 1 at 104–07 (Counts XII and XIII for “Equitable
Subordination” and “Recharacterization from Debt to Equity”). Plaintiffs agreed
to withdraw a portion of the Gibson report but assert that the Debtor’s
undercapitalization is a major aspect of their fiduciary duty claims. See ECF No.
88-9 at 30. The Court DENIES the motion for the reasons Plaintiffs provide.
Their theory of the alleged breaches is that the fiduciaries kept Island Air going for
improper reasons without providing sufficient capital, and they should be able to
present expert testimony in that regard. See, e.g., AP ECF No. 1 at 100–02 (Count
IX for “Breach of Fiduciary Duties of Care and Loyalty and Piercing the Corporate
Veil – Implementing Undercapitalized Business Plan”).
F. 	Kahan
By law, airlines that propose a substantial change in ownership must submit
certain data to the United States Department of Transportation (“DOT”) so that the
agency may determine the fitness of the airline. See 14 C.F.R. § 204.5. As part of
the Malama-Related Defendants’ acquisition of a two-thirds stake in Island Air, the
company submitted sworn financial projections to DOT. See ECF No. 66-1 at 16–
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18; ECF No. 66-7 at 21. Apparently, DOT approved the change in ownership.
See ECF No. 66-8 at 10.
Plaintiffs offered Kahan as a rebuttal witness to Defendant’s expert Edward
McDonough, who noted DOT’s approval of Island Air’s change of ownership as
evidence of the reasonableness of the financial projections that Island Air
submitted to DOT. See ECF No. 66-8 at 2. Kahan explained that his engagement
included “render[ing] an opinion concerning the usefulness in analyzing an
airline’s financial projections of a positive determination of continuing fitness, in
the context of a change-of-control application, by the United States Department of
Transportation.” Id. His report was “intended to help the court evaluate, in
particular, the weight to be given statements by witness Edward M. McDonough
that cite such a fitness determination as implicit evidence of the reasonableness of
an airline’s financial projections.” Id. Kahan opined that DOT approval “is not at
all useful in analyzing whether the company’s financial projections were
commercially realistic.” Id. at 3.
The Malama-Related Defendants seek to exclude Kahan’s report and
testimony because his experience is outdated and because he has no personal
knowledge about how DOT exercised its discretion in approving Island Air’s
change of ownership. See ECF No. 66-1 at 19–21. Specifically, they argue that
Kahan’s experience with DOT’s predecessor agency (the CAB) ended more than
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33 years before the DOT’s approval of Island Air’s change in ownership and that
Kahan’s participation in Spirit Airlines’ change of control fitness determination
occurred two and a half decades ago, in 1996. See id. at 19–20. Plaintiffs respond
with an additional declaration from Kahan, which details his experience. See ECF
No. 79-1.
Lack of personal knowledge as to the DOT’s determination of fitness in this
case is not grounds for excluding Kahan. In fact, if he had such knowledge, he
could potentially testify as a percipient witness rather than an expert. The Court
DENIES the Malama-Related Defendants’ motion on this ground.
As to Kahan’s qualifications, the Court DENIES the Malama-Related
Defendants’ motion. Kahan has decades of airline industry experience and
knowledge of the history of the fitness determination process and regulations. See
ECF No. 66-8 at 2–6. He was involved in the formation of the fitness and
certification standards in the 1980s, and guided Spirit airlines through continuing
fitness proceedings as lead regulatory counsel in 1992, 2004, and 2006. See ECF
No. 79-1 at 2–3. The Court finds Kahan qualified.
IV. 	CONCLUSION
For the foregoing reasons, the Court grants Defendants’ motions to exclude
Duca regarding his damages testimony and reports. The Court denies the
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remainder of the motions to exclude Plaintiffs’ proffered witnesses. The Court
grants in part and denies in part Plaintiffs’ motion to strike.
IT IS SO ORDERED.
DATED: Honolulu, Hawai‘i, August 17, 2022.
CIV. NO. 19-00574 JAO-RT, CIV. NO. 20-00246 JAO-RT, Kane, et al. v. PaCap
Aviation Finance, LLC, et al.; ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANTS’ MOTIONS TO EXCLUDE VARIOUS EXPERT
TESTIMONY (ECF NOS. 59–62, 66), AND GRANTING IN PART AND
DENYING IN PART PLAINTIFFS’ MOTION TO STRIKE (ECF NO. 102)
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