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.
CIV. NO. 19-00574 JAO-RT
CIV. NO. 20-00246 JAO-RT1
ORDER GRANTING IN PART
AND DENYING IN PART
DEFENDANTS’ MOTIONS TO
EXCLUDE THE EXPERT
TESTIMONY OF JAMES DUCA,
ECF NOS. 133 AND 136
1 Case No. 20-00246 JAO-RT was consolidated with Case No. 19-00574 JAO-RT
on April 7, 2021. The latter case is the lead case, and the Court cites only to the
docket items from that case, in this Order. See ECF Nos. 16 & 17. The former
case involves mostly the same parties but has a different procedural posture,
having been brought as a bankruptcy adversary proceeding in the matter of Debtor
Hawaii Island Air, Inc., the corporate entity at the center of both cases.
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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’
MOTIONS TO EXCLUDE THE EXPERT TESTIMONY OF JAMES DUCA,
ECF NOS. 133 AND 136
Before the Court are two motions to exclude expert testimony in this
bankruptcy adversary proceeding, which was initiated in the United States
Bankruptcy Court for the District of Hawaii2 on August 12, 2019 by Plaintiff
Elizabeth A. Kane—the Chapter 7 Trustee (“Trustee”) for Debtor Hawaii Island
Air, Inc. (“Island Air” or the “Debtor”)—as well as by Plaintiffs Air Line Pilots
Association, International, and Hawaii Teamsters and Allied Workers, Local 996
(collectively, “Plaintiffs”). Following withdrawal of the reference to the
Bankruptcy Court on November 20, 2019, ECF No. 6, the parties conducted expert
discovery, during which two groups of Defendants moved to exclude expert
testimony under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579
(1993). The first group, the “Malama Defendants,” comprised:
Jeffrey Au (“Au”);
Malama Investments, LLC;
PaCap Advisors, LLC;
PaCap Aviation Finance, LLC;
PaCap Management Holdings, LLC;
PaCap Management Solutions, LLC;
PacifiCap Investment Management, LLC;
PacifiCap Management, Inc.;
SnowBiz Ventures, LLC;
2 Kane v. PaCap Aviation Fin., LLC, AP No. 19-90027 (Bankr. D. Haw.) (“AP”),
ECF No. 1. In this Order, the Court cites to filings in the adversary proceeding as
“AP ECF No. ##.”
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Jack Tsui; and
The Jack Cheuk She Tsui Revocable Living Trust.
See ECF No. 66. The second group, the “Ohana Defendants,” comprised:
Paul Marinelli (“Marinelli”);
Ohana Airline Holdings, LLC;
Carbonview Limited, LLC;
Lawrence Investments LLC;
Lawrence J. Ellison; and
Paul Marinelli and Lawrence J. Ellison, as co-trustees of the
Lawrence J. Ellison Revocable Trust.3
See ECF Nos. 59–62. Both groups of Defendants (collectively, “Defendants”)
moved to exclude the testimony of Plaintiffs’ damages expert James Duca, among
others. See ECF Nos. 61, 66.
On August 17, 2022, the Court granted in part and denied in part
Defendants’ first set of motions to exclude. ECF No. 112. As to Duca’s
testimony, the Court granted those motions because the Court could not discern
whether Duca’s opinions were the product of reliable methodologies. Id. at 17–27.
After the Court’s order, Duca supplemented his expert report to further explain his
damages theories, see ECF No. 133-3, and Defendants renewed their challenges to
Duca’s testimony by filing new Motions to Exclude, ECF Nos. 133 and 136
3 The Bankruptcy Court previously dismissed the Lawrence J. Ellison Revocable
Trust as a party because “it is not an entity with capacity to sue or be sued.” AP
ECF No. 60 at 8. The court specified, however, that the dismissal would “have no
practical effect because the claims against Mr. Marinelli and Mr. Ellison as trustees
of the Ellison Trust [would] remain.” Id.
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(“Defendants’ Motions”). Defendants filed identical motions in the related case,
Case No. 20-00246 JAO-RT, ECF Nos. 134 and 137.
For the following reasons, the Court finds Duca’s methodology for his
damages theory of declining net worth to be reliable, but the Court finds otherwise
regarding Duca’s testimony on his damages theory of increasing liabilities. The
Court thus GRANTS IN PART and DENIES IN PART Defendants’ Motions.
I. 	BACKGROUND
A. 	Factual Contentions in the Complaint
This is a complex case involving multiple parties and claims. The
Complaint is over 100 pages and covers many issues not pertinent to this Order.
See ECF No. 1-2. Because the parties are familiar with the underlying facts, the
Court provides only a brief and simplified overview of the relevant allegations.
This case stems from the shutdown and bankruptcy of the now-defunct
Island Air, a Delaware corporation. See id. The Ohana Defendants were the sole
owners of Island Air from 2013 to February 2016, when they sold a controlling
two-thirds interest to the Malama Defendants. Id. at 9. Defendant Paul Marinelli
was on Island Air’s board of directors from the date of the Ohana Defendants’
purchase until July 2017, effectively representing the interests of the Ohana
Defendants. See id. at 10, 12. Although Defendant Jeffrey Au was never formally
a board member, he effectively represented the interests of the Malama Defendants
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by selecting board members who would not challenge his apparent authority and
by directing day-to-day operations through that apparent authority. See id. at 19–
21, 33. Au, in fact, made attempts to insulate himself from fiduciary duties by
intentionally choosing not to be a director or officer but instead designating
himself the “Managing Director, Chairman and a member of the Executive
Committee.” Id. at 20.
Island Air’s downward spiral began around the time at which the Malama
Defendants purchased their two-thirds controlling interest in it during the first
quarter of 2016 (the “2016 transaction”). See id. at 17. The 2016 transaction
purposefully left Island Air undercapitalized, as Au and Marinelli knew that the
money invested was insufficient capital for Island Air to survive. Id. There was
no scenario where the money invested would have been sufficient to sustain
operations, as shown by reasonable projections of revenue indicating that Island
Air had been unprofitable and had burned through large amounts of cash from
2013 to 2016. Additionally, the Ohana Defendants kept Island Air afloat during
that time by contributing somewhere between $50 to $75 million. See id. That
grim outlook was of little concern to Au and Marinelli, however, because they
structured the 2016 transaction primarily with senior secured loans, instead of
equity investments, in an attempt to guarantee recovery of their respective interest
groups’ investments in the event of Island Air’s bankruptcy. See id. at 13, 16.
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By May 2017, Island Air had run into a financial crisis. Id. at 22. That
crisis continued into October 2017, when Island Air filed for Chapter 11
bankruptcy. Id. at 22–27. Island Air was kept on life support during that May to
October timeframe by a series of cash infusions primarily controlled by Marinelli,
acting on behalf of the Ohana Defendants. See id. The purpose of the infusions
was to keep Island Air alive long enough so that Marinelli could direct the sale of
spare airplane parts on which his investor group held collateral, triggering sizeable
payments to that investor group. Id. at 12–13, 50–51, 77–78. The sale was
completed on September 15, 2017, but Marinelli had resigned from the board
months before to avoid fiduciary liabilities associated with the sale. See id. at 66–
67, 77.
During the same time period that Island Air was on life support—May
through October 2017—Au stonewalled any realistic outside investments that
would have required him to convert his investor group’s debt into equity. Id. at
26–27. He believed such investments would cause his investor group to lose
priority in the event of Island Air’s bankruptcy. Id. He also believed such
investments would dilute his investor group’s equity, causing him to lose control
over the airline. Id. As a result, “he proposed only the most unrealistic
investments that he knew would be unlikely to succeed,” hoping for a homerun
deal with an outside investor that would result in a significant return on the
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purported debt investment. Id. at 27. He figured that this approach had little
downside: either his investment group would hit it big or would get its investment
back quickly in the event of a bankruptcy. Id. at 14, 26–27.
So while Marinelli was interested in keeping Island Air alive only long
enough to sell the spare airplane parts, Au was searching for an improbable offer
from an outside investor and was juicing up Island Air’s financial projections to
lure one in. Id. at 14. All the while, Island Air was in a death spiral, losing money
for its creditors and racking up more debt. Id. at 74. Au’s hopes deflated on
October 16 with the Chapter 11 bankruptcy filing, see id., further deflated on
November 8 with the conversion to Chapter 7 bankruptcy, see id. at 27, and
completely collapsed on November 10 when Island Air permanently shut down its
operations, see id.
Some portions of the Complaint allege that the ultimate outcome of Au’s
and Marinelli’s misconduct—Chapter 7 liquidation and termination—was not
surprising given Island Air’s unmet need for cash and inability to secure outside
investments. See, e.g., id. at 81 (“Island Air’s closure was inevitable.”); id. at 104
(“Island Air was undercapitalized from the beginning[.]”). But elsewhere, the
Complaint seems to suggest that if Au and Marinelli had acted in the interests of
Island Air rather than their own, “the bankruptcy . . . would not have occurred
when it did (if it occurred at all).” Id. at 11.
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Regardless, the Complaint alleges that prolonging Island Air’s life
significantly increased its liabilities and dissipated its assets, causing corporate
harm. See e.g., id. at 98–100 (stressing the “harm it caused Island Air”). Simply
put, Plaintiffs allege that, had Island Air shut down sooner, it would not have
needlessly dissipated assets or accumulated debts that could not be repaid to its
creditors. Id. at 12. Victims of Au’s and Marinelli’s misconduct also included
Island Air’s employees, who were given little, if any, warning of the closure and
who were not paid wages from the last pay period. Id. at 14.
In terms of formal legal claims, only a few are relevant to this Order: the
Trustee claims that the “self-interested acts” of Island Air’s ownerships groups—
the Ohana Defendants acting through Marinelli and the Malama Defendants acting
through Au—are to blame for allowing Island Air’s assets to dissipate and its
liabilities to increase over the period of a belatedly terminated death spiral. See id.
at 96–105 (Counts VI through X). In essence, the Trustee claims that Defendants
violated their fiduciary duties of care and loyalty to Island Air by keeping it on life
support for personal and/or other improper motives, thereby depleting its assets
and increasing its liabilities. See id.; see also id. at 9–12.
B. 	Duca’s Opening and Rebuttal Reports
The Trustee employs a dual expert arrangement in support of damages for
her breach of fiduciary duty claims. See ECF No. 81 at 9–10. The Trustee
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retained Duca, a bankruptcy attorney, to testify on damages theories and ultimate
damages amounts, while she retained Mr. Daniel Bowen, an accountant, to compile
the financial data underlying Duca’s testimony. Id.
Duca prepared an opening report in which he states that “damages should be
measured from the time when a reasonable and objective person controlling [Island
Air], whose motivation was solely to promote the best interests of [Island Air],
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.” ECF No. 61-2 at 2–3; see also id. at 9 (“There being no imminent
prospect for financial rehabilitation, the best interests of [Island Air] called for
[Au] and the board to shut it down[.]”). As for specific dates, Duca opines that
Island Air should have been shut down—i.e., the damages period should start—
sometime between January 1, 2016 and July 1, 2016, although he acknowledges
that the jury must ultimately determine that date. See id. at 3, 11. And he submits
that the end date of the damages period should be November 2017, when Island
Air entered Chapter 7 bankruptcy. See id. at 3, 9.
As for how to calculate damages, Duca opines that damages can be
calculated utilizing three alternative methods: (1) the change in Island Air’s net
worth; (2) the change in its liabilities; or (3) operating losses over the damages
period. See id. at 3, 9–11. Of those damages theories, Duca considers the net
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worth theory to be the “best reflective of the damages sustained by [Island Air].”
Id. at 11. Duca provides example calculations of damages under those theories
using starting dates ranging from January 1, 2016 to July 1, 2016. Id. at 3, 11.
Although he ultimately relinquishes the date selection and damages calculations to
the jury, Duca contends that Island Air became insolvent before or near the
beginning of 2016. See id. at 5, 7 n.6. Notably, Duca makes clear that he cannot
testify directly on breaches of fiduciary duties, see id. at 2, 6–10. See also id. at 2
(“I will assume that the Plaintiffs can prove [the alleged breaches of fiduciary
duties] and I will proceed to calculate the resulting damages sustained by [Island
Air].”).
Following his opening report, Duca prepared a rebuttal report in which he
addresses critiques from Defendants’ expert witnesses. ECF No. 133-6. He
maintains his conclusion that Island Air should have been shut down in the first
half of 2016. See id. at 8 (citing evidence showing that Island Air was doomed to
fail as of early 2016). He opines on how Island Air had “insufficient capital to
reverse its downward financial spiral as it continued to deplete its cash” from
2016–2017, id. at 14, and how the “2017 cash infusions at [Island Air]’s eleventh
hour were the equivalent of providing a ventilator to briefly extend the lifetime of a
terminally ill patient,” id. at 15. He also avers that because Island Air was an
insolvent company without prospect for avoiding liquidation, he does not need to
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account for intangible assets when valuing Island Air. See id. at 7–8, 10; see also
id. at 4, 11–12 (opining that Defendants’ investments in Island Air were “not
enough to create a going concern” and that “going concern valuation
methodology” is improper because Island Air “could not generate sufficient sales
to pay its operating costs”).
Perhaps most notably, Duca uses his rebuttal report to refine his damages
theories; specifically, he offers two versions of his net worth theory. See id. at 17.
The first calculates the change in Island Air’s net worth by comparing the
beginning and ending book values of Island Air’s assets and liabilities. See id.
This version resembles Duca’s change in liabilities theory, as both rely exclusively
on book values. See ECF No. 61-2 at 7 n.10. The second version calculates the
change in net worth by computing the beginning net worth using liquidation values
for the assets sold during the 2018 bankruptcy liquidation, along with book values
for the other assets and for all liabilities, and then subtracting the per-quarter
operating losses from that initial net worth until the end of the damages period.
See ECF No. 133-6 at 17.
After refining his damages theories, Duca presents a date-value table
containing valuation metrics at different times. Id. Duca intends for jurors to
select values corresponding to the dates of any fiduciary violations and to calculate
damages based on those selected values. See id. at 17–18.
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C. 	The 2022 Daubert Order
Defendants challenged Duca’s testimony with an initial round of
Daubert motions to exclude. ECF Nos. 61, 66. Following a hearing on those
motions, see ECF No. 108, the Court issued an order dated August 17, 2022 that
granted in part and denied in part Defendants’ motions to exclude Duca. ECF No.
112 (the “2022 Daubert Order”). In that order, the Court found Duca to have the
necessary knowledge and experience to testify in this case. Id. at 14–15. The
Court also found Duca’s testimony to be helpful to the jury. Id. at 15–17.4
But the Court found Duca’s testimony unreliable, at least for the time being,
because he “fail[ed] to explain why his methodology yields a reliable measure of
harm that Island Air purportedly suffered.” Id. at 18. The Court agreed with
Defendants that “any damages must measure harm to Island Air rather than harm
to its creditors.” Id. at 22. And “[t]o 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 seem[ed] crucial.” Id. at 23. The Court described how “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 failed to explain or account for.” Id.
4 Additionally, the Court rejected Defendants’ challenges to Mr. Bowen’s
testimony. See ECF No. 112 at 27–29.
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The Court also noted that the damages theories proposed by Duca typically
“require[d] proof of specific itemized damages, such as increased liabilities and
lost profits.” Id. at 25. And that “while the decrease in net value or increase in
liabilities may very well be proper measures of damages to the Debtor, Plaintiffs
[had] not met their burden of demonstrating that their expert has a reliable method
for calculating those damages[.]” Id. at 26.
D. 	Duca’s Supplemental Report
Duca prepared a supplemental report to address the Court’s concerns. ECF
No. 133-3. Duca begins that report by stepping back from the details of his
damages theories and explaining why Island Air was harmed in the first place. In
particular, he opines on how this is not a case where a corporation is harmed by an
improper transaction or an injury to a specific asset, such as when a disloyal
director usurps a corporation’s business opportunity. See id. at 2. Instead, Duca
says, this case is about “wrongfully prolonging corporate life,” whereby a
corporation is harmed by compounding its already existing distress through the
depletion of its assets and increase in its liabilities. Id. at 2, 4; see also id. at 4–5
(“The depletion of assets is obvious as a form of damages and requires little
explanation. . . . [T]he vast majority of the increases in liabilities correspond to a
dissipation of assets[.]”). So according to Duca, “it is unnecessary to further
‘parse’ out harm to Island Air,” given the injury alleged in this case. Id. at 6; see
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also id. at 7 (“It was not necessary for me to distinguish between harm to the
corporation and resulting harm to the creditors caused by misconduct by corporate
fiduciaries,” “because harm to the corporation that indirectly affects creditors is
still harm to the corporation that is recoverable by the corporation, and only the
corporation, as damages.” (footnote omitted)).
Duca thus explains that his change in net worth theory is most preferred
because it incorporates both diminution in assets and increases in liabilities. Id. at
3. Duca admits that his change in liabilities theory is less preferred and that there
is some caselaw suggesting that a mere increase in liabilities is not harmful to a
company when the company later goes into bankruptcy and does not have to pay
back the liabilities. Id. at 4; see also id. at 6 (maintaining his opinion that Island
Air was not a “going concern” as of the beginning date of the damages period).
Despite those admissions, Duca opines that his change in liabilities theory is a
reliable measure of damages in this case. See id. at 4. But unlike with his change
in liabilities theory, Duca does not attempt to support his operating losses theory as
a standalone damages theory in his supplemental report. See id.
E. 	The Latest Motions to Exclude
Defendants renewed their objections to Duca’s testimony by filing their
Motions to Exclude and supporting briefing on January 27, 2023. ECF Nos. 133
and 133-1 (the Ohana Defendants’ Motion and briefing); ECF No. 136 and 136-1
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(the Malama Defendants’ Motion and briefing). Plaintiffs filed oppositions to the
Motions. ECF Nos. 146 and 147. And Defendants filed replies to the oppositions.
ECF No. 152 and 153. On April 17, 2023, the Court entered a minute order
directing the parties to prepare to discuss at the upcoming hearing on the Motions a
few issues not fleshed out in the briefing. See ECF No. 160. The Court heard the
Motions on April 21, 2023. ECF No. 162.
II. 	LEGAL STANDARD
Federal Rule of Evidence (“FRE”) 702 governs the admissibility of expert
testimony. 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 the following requirements are met:
(a) 	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;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and
methods; and
(d) the expert has reliably applied the principles and methods to
the facts of the case.
Fed. R. Evid. 702. The admissibility standard embodied by FRE 702 is flexible
and should be applied with a liberal thrust favoring admission. Wendell v.
GlaxoSmithKline LLC, 858 F.3d 1227, 1232 (9th Cir. 2017).
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In Daubert, the Supreme Court focused on the admissibility of scientific
expert testimony, clarifying that FRE 702 controls the admissibility of such
testimony through the conventional relevancy and reliability standards. 509 U.S.
at 589. Scientific expert testimony—like all other expert testimony—is relevant if
it has a valid connection to the pertinent inquiry and reliable if the methodology
underlying it has a reliable basis in the knowledge and experience of the relevant
discipline. See id. at 591–92; Primiano v. Cook, 598 F.3d 558, 565 (9th Cir. 2010).
The burden of proving relevancy and reliability rests with the proponent of the
expert testimony. Lust by & through Lust v. Merrell Dow Pharms., Inc., 89 F.3d
594, 598 (9th Cir. 1996). Notwithstanding that burden of proof, district courts
have their own duty to ensure the reliability and relevancy of all expert testimony
submitted to a jury. See Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148–49
(1999) (describing the “gatekeeping obligation” of district courts).
When assessing reliability, district courts have broad latitude in choosing
their methods of assessment. Hangarter v. Provident Life & Acc. Ins. Co., 373
F.3d 998, 1017 (9th Cir. 2004). Daubert outlines the following nonexclusive
factors that may bear on determining 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
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applicable scientific community.” Murray v. S. Route Mar. SA, 870 F.3d 915, 922
(9th Cir. 2017). “A district court may permissibly choose not to examine [the
particular Daubert] factors that are not ‘reasonable measures of reliability in a
particular case.’” Murray, 870 F.3d at 922 (quoting Kumho, 526 U.S. at 153).
And a district court may, of course, consider other factors pertinent to the
reliability inquiry in a particular case. See id. at 924 (citing Black v. Food Lion,
Inc., 171 F.3d 308, 311–12 (5th Cir. 1999)).
III. 	DISCUSSION
The question here is whether Duca’s testimony is reliable. The Court
considers the third and fourth Daubert factors to be useful in assessing the
reliability of Duca’s testimony because, although not empirical, it is grounded in
logic and math and is thus amenable to a modified version of Daubert’s scientific
inquiry. And so the Court considers whether Duca’s damages theories find support
in damages jurisprudence and whether the error rates (accuracy) of Duca’s theories
are acceptable. The Court assesses those two factors under Delaware law, which
controls the fiduciary duty claims in this case, see, e.g., AP ECF No. 61 at 4.
Duca proposes two distinct but related damages theories: damages equaling
the change in Island Air’s net worth (which declined) and damages equaling the
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change in Island Air’s liabilities (which increased).5 Those changes are measured
over the relevant time period, i.e., the period ending with Island Air’s November
2017 shutdown and beginning on the date a loyal director would have shut down
Island Air to avoid further losses and liabilities.
Duca does not opine on any breaches of fiduciary duties. But he does opine
on the possible dates a loyal director would have shut down Island Air, and
theorizes that those possible dates followed the point at which Island Air turned
insolvent and the point at which Island Air was no longer a going concern6—
implicit but critical assumptions of his damages theories, as discussed below in
Part III.A.2. Duca accounts for variability in the relevant period by providing a
5 Because Duca does not attempt to support his operating losses theory in his
supplemental report, the Court finds his testimony on that theory to be unreliable.
The Court will not, therefore, discuss that theory in the remainder of this Order.
6 A company is a “going concern” when it has “sufficient resources to operate for
the foreseeable future without the threat of liquidation.” TCV VI, L.P. v.
TradingScreen Inc., No. CV 10164-VCN, 2015 WL 1598045, at *6 (Del. Ch. Feb.
26, 2015), aff’d sub nom. Cont’l Invs. Fund LLC v. TradingScreen Inc., 275 A.3d
754 (Del. 2022).
For purposes of this Order, the Court treats “not a going concern,” “inevitable
liquidation,” “inevitable dissolution,” and “inevitable closing” as one and the same.
Those conditions capture the allegation that at some point in 2016, Island Air was
doomed to Chapter 7 bankruptcy—and the accompanying shutdown, liquidation,
and dissolution—regardless of any modifications to its operations. Notably,
“insolvency” is necessary but insufficient for those conditions.
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date-value table from which jurors can select values corresponding to the dates of
any fiduciary violations and calculate damages based on those values.
Defendants’ challenges to the reliability of Duca’s theories sort neatly into
two buckets and align with the two reliability factors identified above. The first
bucket—which concerns damages jurisprudence and applies to both of Duca’s
damages theories—includes Defendants’ argument that Duca’s testimony should
be barred as a matter of Delaware law because he proposes “deepening
insolvency” damages, a theory of damages that Delaware courts have soundly
rejected, according to Defendants. The first bucket also includes Defendants’
argument that Duca’s testimony is unreliable because, as a matter of Delaware law,
prolonging corporate life in the face of inevitable liquidation causes no harm to a
corporation. Finally, the first bucket also includes Defendants’ argument that
Duca’s testimony is unreliable because Island Air actually benefitted from the
delayed closing alleged in this case. For the reasons provided below, the Court
rejects those reliability challenges.
The challenges in the second bucket concern the accuracy, or error rates, of
Duca’s damages theories. Some of those challenges are more discrete, e.g., that
Duca’s declining net worth theory erroneously uses liquidation values instead of
true fair market values, while other challenges are more theoretical, e.g., that
Duca’s increasing liabilities theory does not isolate the harms allegedly suffered by
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Island Air. Because many of the accuracy challenges apply to only one theory or
the other, the Court addresses those challenges in separate sections for each of
Duca’s damages theories. For the reasons provided below, the Court rejects the
accuracy challenges to Duca’s declining net worth theory but sustains the accuracy
challenges to Duca’s increasing liabilities theory. The Court thus finds his
declining net worth theory reliable and his increasing liabilities theory unreliable.
A. 	The First Bucket—Reliability Challenges Relating to Damages
Jurisprudence
1. 	Deepening insolvency damages under Delaware law
The Ohana Defendants argue that Duca’s damages theories are congruent
with a “deepening insolvency” theory of damages. As a technical matter, only
Duca’s declining net worth theory is truly a “deepening insolvency” theory. If net
worth is simply assets minus liabilities, and if insolvency exists when assets are
less than liabilities, then decreasing the net worth of an already insolvent company
will necessarily deepen its insolvency. See Quadrant Structured Prod. Co. v.
Vertin, 115 A.3d 535, 560 (Del. Ch. 2015) (“[A] corporation is insolvent under
[the balance sheet] test when it has liabilities in excess of a reasonable market
value of assets held.” (quotation marks omitted)); Gibralt Cap. Corp. v. Smith, No.
17422, 2001 WL 647837, at *8 (Del. Ch. May 9, 2001) (defining insolvency under
a receivership statute to mean “assets below liabilities (i.e., a negative net worth)”).
Yet, increasing the liabilities of an already insolvent company does not necessarily
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deepen its insolvency because, as the Ohana Defendants argue elsewhere, taking
on new debt “also increases . . . assets (in the form of cash) by an equal amount,”
at least temporarily offsetting that debt on the balance sheet. ECF No. 133-1 at 15.
For that reason, Duca’s increasing liabilities theory is not a true deepening
insolvency theory, and so the Court’s discussion here focuses on Duca’s declining
net worth theory.
Defendants argue that “Delaware courts have consistently rejected” a
deepening insolvency theory of damages. ECF No. 133-1 at 28–29. That
argument incorrectly asserts that Delaware courts have settled the issue of whether
deepening insolvency is a viable damages theory. As explained below, they have
not—the decisions cited by the Ohana Defendants discuss deepening insolvency
only as a theory of liability (a cause of action), not as a damages theory. See 2022
Daubert Order, ECF No. 112 at 20 (“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.”).
To resolve the unsettled issue—whether deepening insolvency is a viable
damages theory under Delaware law—this Court must predict how the Supreme
Court of Delaware would rule. Making that prediction involves analogizing this
case to any relevant decisions from the Supreme Court of Delaware and the Court
of Chancery of Delaware (the “Chancery Court”); it also involves weighing on-
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point decisions from other jurisdictions, especially those interpreting and applying
Delaware law. See Strother v. S. Cal. Permanente Med. Grp., 79 F.3d 859, 865
(9th Cir. 1996) (“[A] federal court must predict how the highest state court would
decide the issue using intermediate appellate court decisions, decisions from other
jurisdictions, statutes, treatises, and restatements as guidance.”); In re Exide
Techs., Inc., 299 B.R. 732, 751 (Bankr. D. Del. 2003) (“To [predict state law], the
Court must examine: (1) what the Delaware Supreme Court has said in related
areas; (2) the ‘decisional law’ of the Delaware intermediate courts; (3) federal
appeals and district court cases interpreting the state law; (4) decisions from other
jurisdictions that have discussed the issue we face here.” (citing Wiley v. State
Farm Fire & Cas. Co., 995 F.2d 457, 460 (3d Cir. 1993))). This Court predicts
that the Supreme Court of Delaware would accept deepening insolvency as a
theory of damages.
a. 	Supreme Court of Delaware decisions
Relevant decisions from the Supreme Court of Delaware are few and far
between. Not a single decision discusses the concept of “deepening insolvency,”
either as a cause of action or damages theory. And while the Supreme Court of
Delaware affirmed a Chancery Court decision that refused to recognize deepening
insolvency as a cause of action, see Trenwick Am. Litig. Trust v. Billett, 931 A.2d
438 (Del. 2007) (affirming Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P.,
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906 A.2d 168 (Del. Ch. 2006)), that affirmance came in the form of an unpublished
disposition with no substantive analysis, see 931 A.2d 438, and the Chancery
Court’s decision did not address deepening insolvency as a damages theory, see
infra Part III.A.1.b.7
There are, however, a couple of holdings from the Supreme Court of
Delaware that when pieced together, indirectly support deepening insolvency as a
viable damages theory. First, there are decisions holding that, in the case of an
insolvent corporation, derivative actions may be brought on behalf of the
corporation for breaches of fiduciary duties causing harm to the corporation. See,
e.g., N. Am. Cath. Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92,
101–02 (Del. 2007) (“[C]reditors of an insolvent corporation have standing to
maintain derivative claims against directors on behalf of the corporation for
breaches of fiduciary duties. The corporation’s insolvency makes the creditors the
principal constituency injured by any fiduciary breaches that diminish the firm’s
value.” (footnote and quotation marks omitted)). And second, there are of course
decisions explaining that in a derivative action brought on behalf of a solvent
corporation, the corporation is entitled to recover the loss in value caused by a
breach of fiduciary duties. See, e.g., Brookfield Asset Mgmt., Inc. v. Rosson, 261
7 This Court will refer to the Chancery Court’s decision as the Trenwick decision.
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A.3d 1251, 1262–63, 1266 (Del. 2021) (“The alleged economic dilution in the
value of the corporation’s stock is the unavoidable result of the reduction in the
value of the entire corporate entity[.]” And “[b]ecause a derivative suit is brought
on behalf of the corporation, any recovery must go to the corporation.”); Kramer v.
W. Pac. Indus., Inc., 546 A.2d 348, 351 (Del. 1988).
Putting the pieces together: if in a derivative action a solvent corporation
can recover the loss in value caused by a breach of fiduciary duties, and if
derivative actions may be brought on behalf of an insolvent corporation for
breaches of fiduciary duties, then the insolvent corporation should be able to
recover the loss in value—its deepening insolvency or increasingly negative net
worth—caused by the breaches of fiduciary duties. In short, Supreme Court of
Delaware caselaw indirectly supports deepening insolvency as an appropriate
damages theory for breach of fiduciary duty claims brought on behalf of an
insolvent corporation. Cf. Collins & Aikman Corp. v. Stockman, No. CIV 07-265-
SLR/LPS, 2009 WL 3153633, at *3 (D. Del. Sept. 30, 2009) (explaining how
“deepening insolvency” is simply a form of economic loss encompassing
“increased liabilities, decrease in fair asset value [and/or] lost profits of a
corporation”).
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b. 	Chancery Court decisions
There are a few decisions from the Chancery Court addressing deepening
insolvency; the Ohana Defendants cite one such decision. See ECF No. 152 at 20
(citing Trenwick, 906 A.2d 168). Those decisions reject deepening insolvency as a
cause of action, but they are silent on deepening insolvency as a damages theory.
In Trenwick, the Chancery Court held that “Delaware law does not recognize
[deepening insolvency] as a cause of action.” 906 A.2d at 174. The Court
declined to follow Official Community of Unsecured Creditors v. R.F. Lafferty,
267 F.3d 340 (3d Cir. 2001)—a decision approving of deepening insolvency—
while noting that “many of the decisions that seem to embrace the concept of
deepening insolvency [(including Lafferty)] do not clarify whether the concept is a
stand-alone cause of action or a measurement of damages (the extent of deepening)
for other causes of action.” Trenwick, 906 A.2d at 207. The Chancery Court also
described how In re CitX Corp., Inc., 448 F.3d 672 (3d Cir. 2006) had clarified
Lafferty by confirming that Lafferty accepted a deepening insolvency cause of
action but also by explaining that Lafferty had not accepted deepening insolvency
as a damages theory. See Trenwick, 906 A.2d at 207 n.108.
The Chancery Court’s analysis of Third Circuit law is important because it
makes clear that the Chancery Court was aware of the distinction between
deepening insolvency as a theory of liability and deepening insolvency as a theory
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of damages. That awareness indicates that the Chancery Court’s holding,
“Delaware law does not recognize [deepening insolvency] as a cause of action,”
906 A.2d at 174, should be interpreted literally, only to the breadth of its express
language.
In Quadrant, the Chancery Court confirmed that “Delaware does not
recognize the theory of ‘deepening insolvency.’” 115 A.3d at 547 (citing
Trenwick, 906 A.2d at 174); see also id. at n.17 (“Delaware law does not recognize
this catchy term as a cause of action[.]” (quoting Trenwick, 906 A.2d at 174)).
The Chancery Court recited the Trenwick rule en route to its largely unrelated
holding that a corporate creditor does not need to prove continuous insolvency in
order to bring a derivate action against corporate directors. See id. at 547–56.
Nowhere in the Quadrant opinion does the Chancery Court consider extending the
Trenwick rule to deepening insolvency damages theories. See id.
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So it’s clear that neither Trenwick nor Quadrant address deepening
insolvency as a damages theory.8 Yet, if anything, the reasons given by the
Chancery Court for rejecting a deepening insolvency cause of action support the
conclusion that the Chancery Court would not reject a deepening insolvency
damages theory per se, and especially not under the facts of this case.
The Trenwick decision reasons that “[e]ven when a firm is insolvent, its
directors may, in the appropriate exercise of their business judgment, take action
that might, if it does not pan out, result in the firm being painted in a deeper hue of
red.” 906 A.2d at 174 (emphasis added). The emphasized phrase implies that
deepening insolvency could constitute a corporate harm if caused by inappropriate
director actions, e.g., breaches of fiduciary duties. Indeed, the Trenwick decision
later describes how rejecting deepening insolvency as a cause of action “does not
absolve directors of insolvent corporations of responsibility”; “[r]ather, it remits
8 Another Chancery Court decision, Shandler v. DLJ Merch. Banking, Inc., No.
CIV.A.4797-VCS, 2010 WL 2929654 (Del. Ch. July 26, 2010), mentions
“deepening insolvency.” See id. at *13. But Shandler’s discussion of that term is
too short and its holdings too fact-specific to be useful to this Court’s analysis. See
id. at *13–15 (“Likewise, I dismiss [plaintiff’s] third and final category, his so-
called ‘deepening insolvency’-based fiduciary duty claim. . . . In the absence of
any pled facts that plausibly support an inference that [the controlling directors]
could rationally benefit from knowingly diminishing [the] enterprise value by
purposely delaying bankruptcy when [they] knew that filing was the value
maximizing option, I cannot conclude that the complaint pleads a claim for the
breach of the duty of loyalty[.]”).
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plaintiffs to the contents of their traditional toolkit, which contains, among other
things, causes of action for breach of fiduciary duty[.]” Id. at 205. Thus, if a
breach of fiduciary duties increases corporate insolvency, and if that breach is
actionable under Delaware law, it stands to reason that an appropriate damages
remedy would track the decline in corporate value, i.e., the deepened insolvency,
caused by the breach. See Collins, 2009 WL 3153633, at *3; cf. Trenwick, 906
A.2d at 174 (“[D]eepening insolvency’ is no more of a cause of action when a firm
is insolvent than a cause of action for [mere] ‘shallowing profitability’ would be
when a firm is solvent.”).
The reasoning in Quadrant supports the same conclusion. There, the
Chancery Court provided further explanation for the Trenwick rule by describing
how directors should not be held liable for “continuing to operate an insolvent
entity in the good faith belief that they may achieve profitability, even if their
decisions ultimately lead to greater losses for creditors.” Quadrant, 115 A.3d at
547 (emphasis added). Again, the emphasized phrase implies that directors can be
held liable for breaching fiduciary duties owed to an insolvent firm—the damages
remedy would logically track the decrease in value caused by the directors, i.e., the
deepened insolvency.
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c. 	Decisions from other courts discussing deepening insolvency
as a damages theory
There are many decisions from outside the Delaware court system that
address deepening insolvency as a damages theory. This Court’s review of those
decisions is not exhaustive; it focuses on the decisions cited by the parties,
particularly those predicting Delaware law, and presents the strongest decisions
supporting both sides.
The three strongest decisions supporting deepening insolvency as a
damages theory are Schacht v. Brown, 711 F.2d 1343 (7th Cir. 1983); In re
Greater Southeast Community Hospital Corp. I, 353 B.R. 324 (Bankr. D.D.C.
2006) (“Tuft”); and In re The Brown Schools, 386 B.R. 37 (Bankr. D. Del. 2008)
(“McCown”). The three strongest decisions opposing deepening insolvency as a
damages theory are In re CitX Corp., Inc., 448 F.3d 672 (3d Cir. 2006); In re Troll
Communications, LLC, 385 B.R. 110 (Bankr. D. Del. 2008); and In re Radnor
Holdings Corp., 353 B.R. 820 (Bankr. D. Del. 2006). The Court finds the former
group to be more persuasive.
In Schacht, the directors of an insolvent company were alleged to have
wrongfully prolonged the company’s life through, among other things, mail fraud,
causing the company to drain over $3 million in assets and to squander its most
profitable business line, thereby deepening the company’s insolvency. 711 F.2d at
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1350. The appellee-plaintiffs clothed their allegations in a civil RICO9 claim,
requesting damages for the “deepening of [the company’s] insolvency.” Schacht,
711 F.2d at 1350. Applying Illinois law, the Seventh Circuit rebuffed appellants’
argument that a party “may never sue to recover damages alleged to have resulted
from the artificial prolongation of an insolvent corporation’s life.” Id. That
argument, according to the court, “collide[d] with common sense, for the corporate
body is ineluctably damaged by the deepening of its insolvency.” Id. The court
emphasized that “the ‘asset dissipation’ alleged was not only that which resulted
from the normal operation of the business, as in the cases cited by the [appellants],
but also that which resulted from the bleeding of [the company] which was a part
of the underlying scheme to defraud.” Id. (footnote omitted).
In contrast, the Third Circuit appeared to hold in CitX that “deepening
insolvency is not a valid theory of damages for negligence” under Pennsylvania
law. 448 F.3d at 681. The pertinent claim alleged that the auditor-appellees were
negligent in preparing a financial statement ultimately used to procure a $1 million
equity investment for the debtor corporation, CitX, which prolonged its existence,
thereby causing it to accrue millions in additional debt and “dramatically
deepen[ing] [its] insolvency.” Id. at 676–77.
9 “RICO” is the Racketeer Influenced and Corrupt Organizations Act of 1970, 18
U.S.C. §§ 1961–1968.
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The Third Circuit first clarified that its prior decision in Lafferty was silent
on the issue of whether deepening insolvency was a viable damages theory. See
CitX, 448 F.3d at 677. The court then explained how the appellant’s deepening-
insolvency theory of damages was tantamount to impermissible “hindsight bias”:
the $1 million investment “did nothing to ‘deepen’ CitX’s insolvency.” Id. “It did
the opposite,” as “[i]nsolvency decreased rather than deepened.” Id. CitX’s
management “could have instead used that opportunity to turn the company around
and transform it into a profitable business,” but “[t]hey did not, and therein lies the
harm to CitX.” Id. at 678. The court thus rejected appellant’s damages theory
because “the deepening of [CitX’s] insolvency [was] not an independent form of
corporate damage.” Id.
Significantly, the Third Circuit’s later decision in Thabault v. Chait, 541
F.3d 512 (3d Cir. 2008), calls CitX’s holding into doubt. Thabault clarifies that
“CitX does not support [the] proposition” that “recovery is not permissible”
“[w]hen a plaintiff brings an action for professional negligence” and seeks
damages for “an injury to the [d]ebtor’s corporate property from the fraudulent
expansion of corporate debt and prolongation of its corporate life.” Thabault, 541
F.3d at 520.
In any event, this Court is more persuaded by the reasoning in Schacht than
in CitX. To begin with, the Court is not entirely sure whether CitX actually holds
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that deepening insolvency is an improper damages theory. See Thabault, 541 F.3d
at 521 (framing CitX’s holding as a causation ruling, where “the ultimate harm [of
deepened insolvency] was caused by mismanagement, not the auditor”). More
importantly, the Court disagrees with CitX that deepening insolvency damages rely
on impermissible “hindsight bias,” which the Court interprets as a reference to the
principle that directors should not be liable for merely taking actions that happen to
turn out poorly for the corporation. If directors are held liable for merely making
poor business decisions—e.g., a reasonable investment that doesn’t quite pan out—
then “deepening insolvency” serves not only as a damages theory but also as a
cause of action, as there would be no other hook for legal liability.
A deepening insolvency “damages theory” assumes, however, that there is a
separate theory of liability to which the damages theory can apply. In other words,
with a separate liability hook in place, “deepening insolvency” simply becomes a
form of compensatory damages intended to remedy an established legal wrong—
e.g., breach of fiduciary duties—by estimating economic loss in the form of
declining corporate value. The analysis in Schacht is consistent, as it highlights the
“scheme to defraud” on which the deepening insolvency damages were based.
The second decision supporting deepening insolvency damages, Tuft,
provides a more thorough analysis that also declines to follow CitX:
[T]his court [is not] aware of any common law principle holding
that an injury sustained as a result of one tort (fraud) is somehow
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not an injury when it is caused by a different tort (negligence), as
the CitX court seems to suggest. 	The cause of an injury might
determine whether a tort occurred, but it does not determine
whether 	the 	injured 	person 	suffered 	an 	injury 	in 	the 	first
place. . . .
The Lafferty court, [unlike the CitX court], did not fix its star
upon the notion that deepening insolvency was a tort. Instead, it
concluded that the accumulation of debt by an insolvent entity
could, in certain circumstances, be harmful to the corporation.
Lafferty, 267 F.3d at 349–50. These injuries can occur as a result
of management’s negligence just as easily as they can due to
management’s fraud. . . .
[T]his court prefers to treat deepening insolvency as the theory
of harm that it was always meant to be, and will rely on other,
more established (not to mention less convoluted) common law
causes of action to ascertain whether the defendants in this case
have engaged in a legal wrong for which [plaintiff-trustee] is
entitled to recover.
Tuft, 353 B.R. at 337–38 (appearing to apply District of Columbia law10).
The third decision supporting deepening insolvency damages is McCown,
386 B.R. 37. There, the United States Bankruptcy Court for the District of
Delaware found Tuft’s analysis to be persuasive and held that deepening
10 The Tuft court stated that “deepening insolvency will remain a viable theory of
damages in [the District of Columbia]” “until [the] court is told differently by a
higher court in its own circuit.” 353 B.R. at 338. And in a prior order in the same
case, the court described how “[t]he District of Columbia courts have not yet
recognized a cause of action for deepening insolvency.” In re Greater Se. Cmty.
Hosp. Corp., 333 B.R. 506, 517 (Bankr. D.D.C. 2005); see also id. at 523 n.14
(holding that because the debtor was incorporated in Delaware, Delaware law
defined “the fiduciary duties of its officers and directors,” but not mentioning what
law controlled damages theories).
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insolvency is a viable damages theory for a claim governed by Delaware law. See
McCown, 386 B.R. at 43, 47–48. The bankruptcy court also interpreted Trenwick
consistent with this Court’s reading, above. Compare supra Part III.A.1.b, with
McCown, 386 B.R. at 46–47.
The second and third decisions opposing deepening insolvency damages,
Troll Communications and Radnor, do little to rebut the persuasiveness of Schacht,
Tuft, and McCown. In Troll Communications, the bankruptcy court concluded that
“deepening insolvency ha[d] been rejected as a valid cause of action or a theory of
damages under Delaware law.” 385 B.R. at 122. But the bulk of the court’s
analysis focused on whether deepening insolvency was a viable a cause of action,
not a viable damages theory. See id. at 121–22. In the analysis that did concern
deepening insolvency damages, the court considered only the CitX decision and an
academic article when reaching its conclusion that Delaware law precluded
deepening insolvency damages. See id. The bankruptcy court’s analysis in
Radnor is equally terse and also relies principally on CitX when rejecting
deepening insolvency damages. See 353 B.R. at 849.
d. 	Weighing the results of the factor test and making a
prediction
In sum, the prediction analysis indicates that the Supreme Court of Delaware
would accept deepening insolvency as a damages theory. The reasoning provided
by the Delaware courts in various opinions indirectly supports that conclusion, and
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the more relevant analyses provided in Schacht, Tuft, and McCown are
considerably more persuasive than the analyses provided in CitX, Troll
Communications, and Radnor. The Court thus rejects the Ohana Defendants’
contention that Duca’s deepening insolvency damages (his declining net worth
theory) should be barred as a matter of Delaware law.
2. 	Corporate harm from prolonging corporate life in the face of
inevitable liquidation
As another reliability challenge relating to the damages jurisprudence, the
Ohana Defendants argue that “when liquidation is inevitable, any delay in filing for
bankruptcy causes no additional harm to the corporation; it harms only the
corporation’s creditors.” ECF No. 133-1 at 23. Prolonging the inevitable
termination of corporate life, the Ohana Defendants say, “add[s] insult only to
death.” Id. (quoting S. Willett, “The Shallows of Deepening Insolvency,” 60 Bus.
Law at 566). The Malama Defendants similarly argue that Duca “purports to
measure nothing more than some metaphysical theoretical harm or injury to the
Debtor, but not any ACTUAL harm suffered by the Debtor.” ECF No. 136-1 at
14.
Defendants’ arguments challenge as a matter of law the critical assumption
underlying Duca’s damages theories, i.e., that an inevitably defunct business can
suffer harm when its insolvency increases. That assumption is tacit throughout
Duca’s reports. See, e.g., Duca’s Opening Report, ECF No. 61-2 at 9 (reasoning
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that the relevant damages period begins on the date a loyal director would have
shut down Island Air, the date at which there was “no imminent prospect for
financial rehabilitation”); Duca’s Supp. Report, ECF No. 133-3 at 6 (reasoning the
same, and describing how Island Air was “not a going concern” and was harmed
by the “further deterioration in [its] finances and increased liabilities”); Duca’s
Rebuttal Report, ECF No. 133-6 at 15 (“The 2017 cash infusions . . . were the
equivalent of providing a ventilator to briefly extend the lifetime of a terminally ill
patient.”). According to Defendants, Duca’s assumption is legally wrong because
although creditors are harmed by increasing the insolvency of a corporation that
will inevitably dissolve (the odds of collection decrease), the insolvent corporation
suffers no related harm.
But Defendants’ point is refuted by Delaware law that makes clear that an
insolvent corporation’s interests are bound up with its creditors’ interests. As the
Supreme Court of Delaware explained in Gheewalla, creditors are the “principal
constituency” injured by an insolvent firm’s loss in value:
It is well settled that directors owe fiduciary duties to the
corporation. 	When 	a 	corporation 	is 	solvent, 	those 	duties
may be enforced by its shareholders. . . . When a corporation is
insolvent, 	however, 	its 	creditors 	take 	the 	place 	of 	the
shareholders as the residual beneficiaries of any increase in
value.
Consequently, the creditors of an insolvent corporation have
standing to maintain derivative claims against directors on behalf
of 	the 	corporation 	for 	breaches 	of 	fiduciary 	duties. 	The
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corporation’s 	insolvency 	makes 	the 	creditors 	the 	principal
constituency injured by any fiduciary breaches that diminish the
firm’s value.
930 A.2d at 101 (footnotes and quotation marks omitted).
The court’s description of creditors as a “constituency” was not meaningless
semantics. Elsewhere in Gheewalla, the court described how directors have a duty
to maximize the value of an insolvent corporation “for the benefit of all those
having an interest in it” and how creditors could “protect their interest by bringing
derivative claims on behalf of the insolvent corporation.” Id. at 103; see also
Constituent, Black’s Law Dictionary (11th ed. 2019) (“One part of something that
makes up a whole; an element.”). The Chancery Court has similarly explained that
“directors of an insolvent firm do not owe any particular duties [directly] to
creditors” but they do “owe fiduciary duties to the corporation for the benefit of all
of its residual claimants, a category which [after Gheewalla] includes creditors.”
Quadrant, 115 A.3d at 547.
To be clear, saying that the insolvent corporation’s interests are bound up
with its creditors’ interests does not mean that the corporation and its directors are
duty-bound to follow the will of its creditors. That duty seems to be the exception
rather than the norm. See Prod. Rsch. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d
772, 787, 798 (Del. Ch. 2004) (explaining the “realities” behind “directors tak[ing]
on a fiduciary relationship to the company’s creditors” during insolvency: “[s]o
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long as the directors honor the legal obligations they owe to the company’s
creditors in good faith, as fiduciaries they may pursue the course of action that they
believe is best for the firm and its stockholders” (emphasis added)).
This case is exceptional in the sense that Duca’s theories assume that Island
Air was insolvent and doomed for dissolution. In such a scenario, the “primar[y]
focus[] on generating economic returns that will . . . deliver a return to the
[shareholders],” id. at 787, falls off the table, making the creditors’ interest in
preserving corporate value the chief remaining interest. That interest would hardly
be honored “in good faith” by prolonging corporate life and spending assets on
futile business endeavors. In that way, the “good faith” standard is just legal
jargon for the common-sense idea that directors should not be free to fritter away
the assets of an unavoidably shuttering enterprise, particularly at the expense of
legitimate interest holders.
The Ninth Circuit applied that common sense in Smith v. Arthur Andersen
LLP, 421 F.3d 989 (9th Cir. 2005), when finding a cognizable harm to support the
trustee’s breach of fiduciary duty claims. There, the trustee claimed that the
defendants breached their fiduciary duties by wrongfully prolonging corporate life,
causing the debtor to be “encumbered with additional debt obligations that it had
no realistic chance of repaying” and causing the debtor’s assets to be “squandered
on an unviable business plan.” Id. at 995. The court focused on the latter when
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holding that the plaintiff had Article III standing: if assets are spent on a “failing
business,” that “wrongful expenditure . . . qualifies as an injury to the firm which is
sufficient to confer standing upon the [t]rustee.” Id. at 1003; see also id. at 1004
(“We rely only on the dissipation of assets in reaching the conclusion that [the
debtor] was harmed.”). The court further explained that although “the dissipation
of assets limited the firm’s ability to repay its debts in liquidation,”
“[a]cknowledgment of [that] fact is not, however, a concession that only the
creditors, and not [the debtor] itself, have sustained any injury.” Id. at 1004.
“[P]oor decisions by directors that lead to a loss of corporate assets [of an insolvent
firm] and are alleged to be breaches of equitable fiduciary duties remain harms to
the corporate entity itself.” Id. at 1005–06 (quoting Prod. Res. Group, 863 A.2d at
792).
In short, the Court agrees with Duca’s assumption of harm. An inevitably
defunct business can be harmed by increasing its insolvency due to the needless
dissipation of assets11 and blatant disregard for the rights of its creditors (the
11 That “dissipation” was allegedly “needless” in the sense that it serviced the
operations of a futile business that should have been terminated at an earlier date.
The Ohana Defendants’ contention on pages 18 through 19 of their brief, ECF No.
133-1, that director liability exists only if assets were “misused” or “squandered”
on specific transactions, thus misunderstands the allegations in this case.
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principal constituency), beneficiaries, and interest holders of the insolvent
corporation. Defendants’ matter-of-law challenge is therefore rejected.
3. 	Actual harm to Island Air from the delayed closing
The last of Defendants’ reliability challenges relating to the damages
jurisprudence is their challenge to the factual predicate of Duca’s testimony, that
Island Air was harmed by the delayed closing alleged in this case.
The Ohana Defendants argue that Island Air actually benefited from the
delayed closing because its employees remained gainfully employed and its
customers continued to use its services in healthy competition with other airlines.
ECF No. 133-1 at 10. Even the shareholders suffered no harm, according to the
Ohana Defendants, because if Island Air was truly insolvent during the relevant
period, then the shareholders’ investments had already bottomed out at zero,
leaving them unaffected by any the further decline in corporate value. Id.
For the purposes of this Order, it is enough to conclude that the Ohana
Defendants simply raise an issue of fact with Duca’s theory of harm: whether
Island Air was harmed by the delayed closing, considering the balance of the
interests of its various constituencies, and also the dissipation of its assets, see
Arthur Andersen, 421 F.3d at 1004.
The Malama Defendants argue that “a reasonable person could not [have]
determine[d] whether Island Air incurred damages and/or should have been shut
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down between 2015 and 2017” given Duca’s testimony that operating losses
fluctuated during that time. ECF No. 136-1 at 26. But that argument, like the
Ohana Defendants’ argument above, merely raises a fact issue with Duca’s
testimony. Particularly, it raises a triable issue as to whether a loyal fiduciary
would have shut down Island Air during the relevant period considering all the
relevant data, including operating losses. See Duca’s Supp. Report, ECF No. 133-
3 at 6 (“Ultimately it is the jury’s decision to determine when the date when [sic]
the alleged breaches first occurred—i.e., when the fiduciaries knew or should have
known that Island Air . . . was not a going concern . . . and that further
prolongation of Island Air’s operations would produce further deterioration in
Island Air’s finances and increased liabilities.”).12
The Court therefore rejects Defendants’ challenges to the factual predicate
of Duca’s testimony because they merely raise issues of fact that cannot be
resolved at this stage. Having considered and rejected all of Defendants’ reliability
12 The Malama Defendants also argue that Duca’s testimony is flawed because he
“fails to identify specifically what ‘self-interest’ the [Defendants] allegedly
pursued that caused them to allegedly breach their fiduciary duty of loyalty.” ECF
No. 136-1 at 12. That argument, too, raises a fact issue with Duca’s testimony that
must be resolved at trial, likely through the testimony of other witnesses. See
Duca’s Opening Report, ECF No. 61-2 at 2 (“I also have not been asked to
evaluate whether Mr. Au’s actions or those of his colleagues breached a fiduciary
duty of loyalty to Island Air. I will assume that the Plaintiffs can prove this[,] and
I will proceed to calculate the resulting damages sustained by the Company.”).
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challenges in this section, the Court finds that Plaintiffs have met their burden of
showing that Duca’s damages theories are adequately supported by the damages
jurisprudence.
B. 	The Second Bucket—Reliability Challenges Relating to Accuracy and
Error Rates
1. 	Accuracy challenges to Duca’s declining net worth theory
Defendants make various challenges to the accuracy of Duca’s declining net
worth theory. The Court starts with the more discrete challenges.
a. 	Discrete challenges to the accuracy of the net worth theory
The Ohana Defendants argue that Duca’s net worth theory is inaccurate
because he either does not attempt to use fair market values in that theory or, even
if he does, his attempt is flawed by not using actual fair market values. See ECF
No. 133-1 at 11–14. The latter half of that argument targets Duca’s net worth
calculations that use liquidation values as proxies for fair market values.
Particularly, for the assets sold during the 2018 bankruptcy liquidation, Duca uses
the liquidation values of those assets and the book values of the remaining assets to
estimate Island Air’s net worth at the beginning of the damages period. That
approach is erroneous, according to the Ohana Defendants, because true fair
market value assumes a company is a going concern and thus valuates assets using
empirical indicators like “market transactions, discounted cash flow, enterprise
value, etc.” Id. at 12.
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The Ohana Defendants cite Delaware caselaw in support of their argument,
see id. at 12–14, but the cited cases do not square with this case. In particular, the
cited cases do not find calculations such as Duca’s net worth calculations—which
calculate changes in values over accounting periods—to be improper, because
those cases concern whether using liquidation values in a same-time, snapshot
comparison is improper. See Rosenblatt v. Getty Oil Co., 493 A.2d 929, 942 (Del.
1985) (noting, in a merger lawsuit, that “a company [should be] valued as a going
concern, not on what can be obtained by its liquidation,” when determining a fair
stock price to compare with the price paid); In re Radiology Assocs., Inc. Litig.,
611 A.2d 485, 496 (Del. Ch. 1991) (same, citing Rosenblatt, 493 A.2d at 942); In
re Rural/Metro Corp. S’holders Litig., 102 A.3d 205, 224 & n.8 (Del. Ch. 2014)
(comparing, in a merger lawsuit, the fair value of shares held by class members
against the purchase price of those shares, and noting that “when determining the
stock’s ‘true value’ for purposes of compensatory damages [comparisons], the
stock is to be evaluated on a going-concern basis and not on a liquidation basis”
(citation and quotation marks omitted)).
So the Ohana Defendants’ challenge falters because it fails to account for the
fact that Duca’s net worth theory calculates a change over time. Specifically, for
the version of Duca’s net worth theory that uses liquidation values, the net worth
estimated at the beginning of the damages period is decreased by the quarterly
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losses (expenses exceeding revenues) until the end of the damages period, and the
ending net worth is compared with the beginning net worth to yield the damages
amount. Looking closely at that version reveals that it is the repeated subtraction
of quarterly losses that is determinative of the damages amount, not any alleged
inaccuracies in the beginning net worth calculation.
For example, the initial net worth estimate could be inaccurate by
overvaluing Island Air at $10 million or undervaluing Island Air at $1 million, but
that inaccuracy is largely immaterial to the decline in net worth over, say, a seven-
quarter period because the decline is a function of actual monies spent exceeding
actual monies received, i.e., aggregate losses, and because the monies spent and
received are mostly independent of the initial, inaccurate valuations.
Granted, aggregate losses are not entirely independent of initial valuations.
A component of loss is expenses, and expenses include indirect expenses like
quarterly depreciation that, depending on the depreciation formula applied, could
increase or decrease based on the initial valuation of an asset. But notably, the
Ohana Defendants do not explicitly argue that Duca’s net worth theory is
unreliable because he calculates quarterly expenses with a base of liquidation
values. Nor would such an argument succeed because the main driver of Island
Air’s operating losses was monies dispersed from loans. See also Duca’s Supp.
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Report, ECF No. 133-3 at 5 (“[T]he vast majority of the increases in liabilities
correspond to a dissipation of assets[.]”).13
Even assuming that Duca’s beginning net worth valuation might materially
influence the aggregate operating losses, the Ohana Defendants’ challenge also
falters on the invalid assumption that liquidation values are less accurate than fair
market values14 for valuing Island Air’s assets. The cases cited by the Ohana
Defendants, above, were merger-objection cases in which there were no allegations
that the merged entity was irretrievably insolvent or doomed to fail. Because the
merging entities were not doomed to fail, the courts appropriately valued those
entities at fair value, under the assumption that those entities were a going concern.
See, e.g., In re Rural/Metro, 102 A.3d at 224–25.
But here, Duca assumes that Island Air was not a going concern at the
beginning of the relevant damages period. See Duca’s Supp. Report, ECF No.
133-3 at 6. And if a business is not a going concern, it is more appropriate to value
13 The Trustee’s counsel represented during the April 21, 2023 hearing that the net
worth damages calculation is driven by Island Air’s taking on millions in liabilities
and spending the corresponding monies, not by the amount of depreciation in the
assets existing at the beginning of the damages period.
14 A fair market value is “the price which would be agreed upon by a willing seller
and a willing buyer without any compulsion upon the seller to sell or the buyer to
buy.” State ex rel. Sec’y of Dep’t of Highways & Transp. v. Davis Concrete of
Del., Inc., 355 A.2d 883, 886 (Del. 1976).
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that business with liquidation values than with fair market values. See In re Am.
Classic Voyages Co., 367 B.R. 500, 508 (Bankr. D. Del. 2007) (“Before the going
concern valuation is to be abandoned, the business must be wholly inoperative,
defunct or dead on its feet.” (citation and quotation marks omitted)), aff’d sub
nom. In re Am. Classic Voyages, Co., 384 B.R. 62 (D. Del. 2008); In re Adler,
Coleman Clearing Corp., 247 B.R. 51, 111 (Bankr. S.D.N.Y. 1999) (“[W]here a
company is on its deathbed, we will value its assets according to what could be
obtained at a liquidation sale and not give them a going concern value.” (citation
and quotation marks omitted)), aff’d, 263 B.R. 406 (S.D.N.Y. 2001); cf. In re Tesla
Motors, Inc. S’holder Litig., No. CV 12711-VCS, 2022 WL 1237185, at *40 (Del.
Ch. Apr. 27, 2022) (deciding, in a stock-for-stock merger case, to “set[] aside [the
issue] whether net liquidation value is a proper methodology to value [the acquired
entity], a point the parties dispute[d],” and where an expert opined that the entity
was not a going concern). Of course, the question of when Island Air ceased being
a going concern will be a central issue for the jury to decide, and Duca’s
assumption in this regard is fair game for cross examination.
It may have been most accurate for Duca to provide a more
contemporaneous estimate of liquidation values for a damages period beginning in
2016, rather than using liquidation values from 2018. But as the Trustee’s counsel
suggested at the April 21 hearing, estimating liquidation values in such a
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retrospective manner may be extremely difficult or even impossible. The Court
does not demand that amount of accuracy from Duca’s methodology. See Jackson
v. E-Z-GO Div. of Textron, Inc., 326 F. Supp. 3d 375, 412 (W.D. Ky. 2018)
(“Daubert and Rule 702 do not require perfection.”).
Defendants also argue that Duca’s net worth theory is inaccurate because in
certain situations he does not even attempt to use fair market values. See ECF No.
133-1 at 11–14, 19–20; ECF No. 136-1 at 13–14 (attacking depreciation and
amortization, the concepts behind book value). That argument targets Duca’s net
worth calculations that use book values for liabilities and assets; it also targets
Duca’s net worth calculations discussed above that use liquidation values for select
assets and book values for liabilities and other assets. See ECF No. 133-1 at 14
(“Net worth figures, based on book value, are not a reliable measure of harm to
Island Air[.]”).
But Defendants repeat the mistake of relying on caselaw that cautions
against using anything other than fair values (e.g., book values) for a snapshot
damages comparison. See ECF No. 133-1 at 12 (citing In re TransCare Corp., No.
20-CV-06274 (LAK), 2021 WL 4459733 (S.D.N.Y. Sept. 29, 2021)). In
TransCare, the plaintiff challenged a foreclosure sale as being made at an unfair
price, and the court held that book value could not be used to establish the fair
price of that sale. 2021 WL 4459733, at *11. The court even clarified that it was
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rejecting book value because “[b]ook value tends to undervalue a business as a
going concern” and “because [book value] does not fully account for intangible
value attributable to the operations.” Id. Those clarifying statements distinguish
TransCare from this case, where Duca assumes Island Air had no valuable
intangible assets as an inevitably dissolving business and where Duca is calculating
changes in values over accounting periods, not comparing values at a single point
in time.
And although the Court agrees with Plaintiffs that valuing certain Island Air
assets with liquidation values is most accurate (i.e., the “preferred measure,” ECF
No. 146 at 17), that does not mean that valuing those assets with book values is
unacceptable. Book value is a traditional accounting metric through which value is
estimated using “depreciation or appreciation as computed upon an originally
determined base.” DeFazio v. Hollister Emp. Share Ownership Tr., 406 F. Supp.
2d 1085, 1088 n.2 (E.D. Cal. 2005). While that traditional metric may be
erroneous when valuing a going-concern business, that is not what Duca is doing
here. He is instead valuing a business that he asserts was not a going concern and,
in one version of his net worth theory, he does so using book values on both sides
of a decline in net worth calculation, tending to minimize any inaccuracy that
might seep into the book values of assets that have been on the books for many
years. For example, if a certain physical asset had been on Island Air’s books for
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20 years before the start of the relevant damages period, that book value may be
inaccurate due to, e.g., assumed straight-line depreciation. But because Duca
compares that starting book value with the ending book value—a value that carries
forward the initial inaccuracy—that initial inaccuracy cancels out of Duca’s
damages calculation.
Moreover, because the comparison period in this case is relatively short—at
most, 23 months—any inaccuracy that might be introduced by comparing book
values over that change in time is likely insignificant. Defendants are free to cross-
examine Duca on his use of book values, but that usage does not constitute
unacceptable error under FRE 702 and Daubert. See Alaska Rent-A-Car, Inc. v.
Avis Budget Grp., Inc., 738 F.3d 960, 970 (9th Cir. 2013) (“Avis challenges three
aspects of the witnesses[’] testimony: using Alamo as the comparator, using the
national rather than the Alaska market as a baseline, and extrapolating from the
Juneau market to the entire Alaska market. . . . [Those challenges] all go to the
weight of the testimony and its credibility, not its admissibility.”).
The Court has also considered Defendants’ argument that Duca’s net worth
theory is flawed because he values Island Air’s liabilities using book values as
well, see, e.g., ECF No. 133-1 at 19–20, and the Court rejects that argument for the
same reasons it rejects Defendants’ argument concerning Duca’s valuing Island
Air’s assets with book values. Both arguments can, however, be stored in
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Defendants’ armory for future use during cross-examination. See Alaska Rent-A-
Car, 738 F.3d at 970.
Lastly, the Malama Defendants attack Duca’s net worth theory using
arguments that they did not raise during the prior round of motions to exclude:
Duca fails to exclude post-petition claims, ECF No. 136-1 at 18–21; Duca fails to
consider off balance sheet assets, id. at 23–24; and Duca improperly ignores the
effect of COD income and expenses, id. at 27–29. Those arguments are waived
because they could have been raised against Duca’s Opening and Rebuttal Reports
but were not.15 See Questar Pipeline Co. v. Grynberg, 201 F.3d 1277, 1289–90
(10th Cir. 2000) (“A party may waive the right to object to evidence on
Kumho/Daubert grounds by failing to make its objection in a timely manner.”).
15 Some of those arguments focus on Duca’s testimony from a supplemental
deposition that occurred after the Malama Defendants’ initial motion to exclude
and after the Court’s 2022 Daubert Order. See, e.g., ECF No. 136-1 at 19–20. But
that deposition testimony did not raise new theories or provide new opinions
absent from Duca’s prior reports and testimony, such that it could provide a new
basis for attack in the Malama Defendants’ subsequent Motion. Instead, that
testimony concerned alleged errors that already existed in Duca’s theories and that
the Malama Defendants could have attacked in their initial motion. See, e.g., ECF
No. 136-4 at 9 (deposition question asking Duca to clarify the book values that he
uses in his net worth theory). Moreover, when the Court reopened expert
discovery so that Duca could supplement his report and his deposition testimony,
the Court specified that the reopening intended to give Duca and Plaintiffs the
opportunity to “answer questions and concerns the [Court] had about Duca’s
reports” in the 2022 Daubert Order. ECF No. 118 at 2–3; see also ECF No. 127.
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And even considering those arguments, the Court finds that they do not raise issues
with Duca’s net worth theory that amount to unacceptable error.
b. 	Theoretical challenges to the accuracy of the net worth theory
On the more theoretical side of the fence, Defendants argue that Duca’s
declining net worth theory is inaccurate because he fails to adequately parse out the
harm that Island Air purportedly suffered due to the alleged breaches of fiduciary
duties. ECF No. 133-1 at 25–28; ECF No. 136-1 at 11–12 (“Mr. Duca defiantly
contradicts the Court’s criticism and asserts that ‘it is unnecessary to further 'parse'
out the harm to Island Air.’” (quoting Duca’s Supp. Report, ECF No. 133-3 at 6)).
It is true that in the 2022 Daubert Order, the Court criticized Duca for
apparently making no attempt to parse out the harm that Island Air suffered
because of Defendants’ alleged breaches. ECF No. 112 at 25. But in rendering
that criticism, the Court noted the possibility that parsing out harms may be
unnecessary under Duca’s net worth theory. See id. If so, Duca simply needed to
explain why that was the case. Id.
He does so in his latest report. He explains how Plaintiffs’ theory of liability
in this case is that Defendants—specifically Au and Marinelli—should have
realized that Island Air was doomed to fail and, had they not been disloyal by
acting in their own self-interests, would have shut down the business sooner rather
than later. ECF No. 133-3 at 6. The theory of harm, as Duca explains it, is that
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Island Air’s life was wrongfully prolonged, causing the needless dissipation of
assets and the incurrence and deepening of liabilities it could not pay back. Id. It
makes sense then, according to Duca, that the measure of damages in such a case
would account for the both the decrease in assets and increase in liabilities, and
that those damages would be measured over the period in which Island Air’s life
was prolonged. See id.
The Court agrees with Duca’s explanation that the most reasonable theory of
damages in this case, given Plaintiffs’ theories of liability and harm, is the net
decline in assets and increase in liabilities over the relevant period, i.e., the change
in “net worth.” That theory of damages is tailored directly to the corporation itself,
not merely to its creditors or its shareholders (who effectively have no interest
because of irretrievable insolvency). That theory of damages also accounts for
Plaintiffs’ theory that as of the date Defendants should have shut down Island Air,
all further asset expenditures and debt incurrences were improper and harmful.
There is thus no reason to further “quantify the impact of the debt accumulated by
[Island Air] due to the defendants’ actions on [Island Air’s] business operations,”
ECF No. 133-1 at 22 (quoting Tuft, 353 B.R. at 338).
In sum, the Court finds that Duca has adequately explained his declining-net
worth theory of damages. That theory finds support in the damages jurisprudence
and has an acceptable error rate. It is therefore reliable under FRE 702 and
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Daubert. Defendants’ requests to exclude Duca’s testimony on that theory are
denied.
2. 	Accuracy challenges to Duca’s increasing liabilities theory
Defendants also challenge the accuracy of Duca’s increasing liabilities
theory of damages. Plaintiffs oppose that challenge because, among other things,
Duca’s increasing liabilities theory is merely an “alternate measure of damages.”
ECF No. 146 at 17.
But for the same reason Duca’s declining net worth theory navigates the
reliability challenges, his increasing liabilities theory runs ashore on those
challenges. Specifically, his increasing liabilities theory is unreliable because it
offers only half the picture of Island Air’s declining financial health—its increase
in uncollectable liabilities but not its needless dissipation of assets—and because
that half picture is more tailored to the harms suffered by Island Air’s creditors
than to the harms suffered by the entire corporate body. Island Air was harmed by
the combination of the increase in liabilities and the dissipation of assets. Looking
at just the liabilities side focuses too much on the creditors’ harm, which can
overlap with the corporation’s harm, see supra Part III.A.2, but should nevertheless
not be the focus of a damages theory on a claim brought by the Trustee.
Also, focusing on just the liabilities side increases the likelihood of discrete
error in quantifying the harm to Island Air: for example, if Island Air incurred
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loan debt near the end of the relevant damages period, that debt would increase
liabilities and thus damages, but it would not have caused significant harm to
Island Air because the cash received on the loan would likely still be in Island
Air’s coffers.
Duca does little to rebut those concerns, instead conceding that his
increasing liabilities theory is less preferred than his declining net worth theory.
See Duca’s Supp. Report, ECF No. 133-3 at 4; see also ECF No. 146 at 17
(Plaintiffs admitting that the increasing liabilities theory is “not [Duca’s] preferred
measure”).
Accordingly, because the Court is not satisfied with Duca’s explanation for
his increasing liabilities theory of damages, the Court does not find that theory to
have an acceptable error rate. Duca’s increasing liabilities theory is therefore
unreliable under FRE 702 and Daubert. Defendants’ requests to exclude Duca’s
testimony on that theory are granted.
IV. 	CONCLUSION
For the foregoing reasons, the Court GRANTS Defendants’ Motions to
Exclude, ECF Nos. 133 and 136, with respect to Duca’s damages theory of
increasing liabilities, and DENIES the Motions with respect to Duca’s damages
theory of declining net worth. The Court also GRANTS in part and DENIES in
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part the identical motions filed in Case No. 20-00246 JAO-RT, ECF Nos. 134 and
137.
IT IS SO ORDERED.
DATED: Honolulu, Hawaiʻi, May 3, 2023.
CIV. NO. 19-00574 JAO-RT, Kane v. PaCap Aviation Fin., LLC; CIV. NO. 20-00246 JAO-RT,
In re Hawaii Island Air, Inc.; Order Granting in Part and Denying in Part Defendants’ Motions to
Exclude the Expert Testimony of James Duca, ECF Nos. 133 and 126
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