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Safeco Insurance Company of America v. S & T Bank

March 3, 2010

SAFECO INSURANCE COMPANY OF AMERICA, ET AL., PLAINTIFFS,
v.
S & T BANK, DEFENDANT.



The opinion of the court was delivered by: Nora Barry Fischer United States District Judge

MEMORANDUM ORDER

This matter is before the Court on Defendant's Motion to Strike The Testimony and Expert Report of Mr. William Schwartzkopf (Docket No. 103). The main question is whether Plaintiff's expert's methodology for calculating damages is reliable enough to furnish admissible expert testimony, given Plaintiff's proffer of various witness testimony on causation. The Court finds that it is, at this stage of the litigtion. Therefore, upon consideration of the arguments of the parties, and for the reasons described herein, it is hereby ORDERED that Defendant's Motion to Strike the Testimony and Expert Report of Mr. William Schwartzkopf (Docket No. [103]) is DENIED. And, it is further ORDERED that the bench trial in this matter will proceed in two phases, the first to determine liability and causation and the second to determine damages; Plaintiff's expert's testimony and report will not be admitted or considered until the second phase.

I. FACTUAL BACKGROUND

The parties are familiar with the complex history of this matter, and, therefore, the Court will only briefly recapitulate it here. This multi-part litigation stems from the same set of facts concerning the parties' relationships with A&L, Inc., a construction company. Plaintiff Safeco*fn1 provided surety bonds to A&L, Inc., to assist in the performance of bonded construction contracts, pursuant to a General Agreement of Indemnity for Contractors ("Indemnity Agreement"), giving Plaintiff security interests in certain assets of A&L. (See Docket No. 37-2, Exh. A). Since Plaintiff's security interests in certain A&L assets coexisted with prior security interests held by Defendant, Plaintiff and Defendant executed an "Intercreditor and Mutual Subordination Agreement" ("Intercreditor Agreement") on or about June 13, 2006. (See Docket No. 37-6, Exh. E).

Two of A&L's bonded construction contracts involved the Port Authority of Allegheny County ("Port Authority") and resulted in litigation between A&L and Port Authority in the Court of Common Pleas of Allegheny County (C.A. No. GD-02-006832 (Ct. Comm. Pleas Allegheny Cty. 2005))(the "PAAC Litigation") where A&L sought damages for delays and cost overruns on the construction project, allegedly caused by Port Authority. Plaintiff claims that when it became apparent that A&L could not afford to continue the PAAC Litigation, Plaintiff and Defendant entered into another agreement (the "PAAC Litigation Agreement"), premised on their shared interests in the outcome of the litigation, whereby Plaintiff agreed to prosecute the PAAC Litigation "in exchange for a portion of the proceeds thereof being subordinated by S&T in favor of Safeco, which were otherwise prior perfected collateral of S&T." (Docket No. 37 at ¶25). Defendant denies the existence of any PAAC Litigation Agreement or that Plaintiff took over the PAAC Litigation. A&L and the Port Authority settled the PAAC Litigation in June of 2007 or June of 2008 (the parties disagree as to the date). Plaintiff claims that Defendant thereby breached the PAAC Litigation Agreement. Plaintiff and Defendant both subsequently demanded that the Port Authority pay them the proceeds of the settlement. Plaintiff and Defendant disagree as to who has the proper claim to the proceeds of the settlement.

Plaintiff argues that if it had been able to control the PAAC Litigation, pursuant to the PAAC Litigation Agreement, it would have secured a larger settlement or a larger damages award at the end of litigation. To that end, Plaintiff seeks to introduce the expert opinions of William Schwartzkopf*fn2 regarding the amount of damages allegedly sustained. Mr. Schwartzkopf, at the behest of Plaintiff, prepared a report calculating damages allegedly sustained by A&L in four areas of its work (the soldier pile work; the earthwork; the bridge superstructure; and general delays of 190 days), but he did not perform any analysis of the causes of those damages. (Docket Nos. 103-3 at 6-10; 112 at 100-1). Defendant S&T argues that this testimony and report should not be admitted because the methodology used is unreliable.

To prepare his "Analysis of Amount Claimed by A&L Against the Port Authority" (the "Report") (Docket No. 103-3) Mr. Schwartzkopf evaluated the following documents and materials provided to him by Plaintiff:

1. The Request for Equitable Adjustment Demand for Payment dated September 2004.

2. A Job Cost History Summary dated September 8, 2004.

3. A Project Breakdown showing the bid units, bid amounts and the actual labor, equipment, materials, and subcontracts expended against those bid amounts as of July 30, 2004.

4. The Contract.

5. The Complaint and Jury Demand.

6. Miscellaneous select correspondence on the project. (Docket No. 103-3 at 4).*fn3 In preparing his Report, he did not speak to any A&L personnel or examine any other documents, including Defendant's pleadings in this matter or any documentation prepared by the Port Authority which could have countered A&L's claims. (Docket No. 112 at 71-72). As he worked on the report, Mr. Schwartzkopf repeatedly requested more documentation from Plaintiff, but was told that none was available because A&L was now a defunct corporation. (Docket No. 103-6 at 13). After the Report was completed, however, more documentation came to light, a printout of the detailed transactions register showing specific transactions which made up the subtotals in the documents originally available to him. (Id.; Docket No. 112 at 59). He subsequently compared the subtotals in the materials he had used to the more detailed transaction registers and found that they were largely consistent with one another. (Docket No. 112 at 106). Although he noted in his Report that "[n]ormally in the preparation of analysis of a claim of this type much more detailed, cost and budget information would be available as well as more detailed schedule information and information about activities on the project site," Mr. Schwartzkopf was able to complete the Report and testified repeatedly that he had enough accounting data to prepare his Report and the opinions contained therein. (Docket Nos. 103-3 at 4; 112 at 96-98).*fn4

In his Report, Mr. Schwartzkopf analyzed the documents available to him at the time and determined which entries corresponded to costs incurred in the four areas of the construction project. (Docket No. 103-3 at 6-10). The four areas he considered were those where Plaintiff told Mr. Schwartzkopf that A&L had incurred additional costs caused by the actions of the Port Authority, and those claimed in A&L's Request for Equitable Adjustment Demand for Payment dated September 2004. (Docket No. 112 at 100-01). Mr. Schwartzkopf assumed that the Plaintiff's claims regarding causation were true and would be proven at trial through the testimony of fact witnesses. (Id.). Although his Report contains repeated references to damages "caused" by the Port Authority or "resulting from" the Port Authority's actions, Mr. Schwartzkopf made clear in his testimony that these were merely assumptions based on the Plaintiff's representations to him and A&L's claims in the PAAC litigation. (Id.).

Mr. Schwartzkopf first analyzed which categories of the overall project corresponded to those which he would assume were caused by the Port Authority. (Docket No. 103-3at 2-5). Mr. Schwartzkopf calculated that the total costs incurred by A&L were $43,055,543.00. (Id. at 5). To determine any cost overruns, by comparing cost to budget, Mr. Schwartzkopf took the unit prices provided in the documents and divided by 1.15 to obtain a budget. (Id.). He chose a factor of 1.15, because in his experience, 15% is the minimum charge that a contractor would accept for a construction project like A&L's, and he wished to keep his estimate conservative. (Id.) Mr. Schwartzkopf used an extended estimated cost per unit, and compared cost to budget by specific category of work carried out by A&L. (Id.) He listed the amount budgeted, the cost overrun, the 15% markup for the overrun, and then the difference between the amount budgeted for the specific work done and the sum of the markup and overrun. (Id. at 7-10, Exhibits 3-7). Finally, he calculated "Total Direct Damages" of $11,503,658. (Id. at 10).

II. PROCEDURAL POSTURE

Given the complexity and length of the litigation related to this case, the following describes only that procedural history relevant to Defendant's Motion to Strike and the current procedural posture of the case. (Docket No. 103).

Parallel to this action, filed by Plaintiffs on August 6, 2007 (Docket No. 1), Defendant brought two actions for Declaratory Judgment in the Court of Common Pleas of Indiana County, Pennsylvania (collectively the "Indiana County Action"). S&T Bank v. Safeco Insurance Co. et al, Nos. 11728-CD-2007, 11811-CD-2007 (Indiana Cty. Ct. Comm. Pleas). Plaintiff sought to remove the Indiana County Action to this Court, but it was remanded on March 17, 2008. S&T Bank v. Safeco Insurance Co. et al, Civ A. Nos. 07-1324, 07-1341 (W.D.Pa. Mar 17, 2008).

Defendant first informed the Court of its intention to pose a Daubert challenge to Plaintiff's expert witness during a Status Conference on September 16, 2009. (Docket No. 101). On October 16, 2009, Defendant filed the instant Motion to Strike. (Docket No. 103).

On October 20, 2009, the Court issued an Order staying all dispositive motions practice pending resolution of Defendant's Motion for Partial Summary Judgment in the Indiana County Action. (Docket No. 105). However, in the interests of judicial efficiency, the Court ordered that the deadlines for the instant Daubert challenge remain in place. (Id.)

On November 16, 2009, Plaintiff filed its Response to the Motion to Strike. (Docket No. 106). Defendant filed a Reply Brief on November 30, 2009. (Docket No. 107). And, Plaintiff filed a Sur-Reply Brief on December 14, 2009. (Docket No. 108). On Wednesday, January 6, 2010, the Court convened a hearing and heard testimony from Mr. Schwartzkopf and oral argument. (Docket No. 112).

On January 11, 2010, at the request of the parties, the Court referred the case to Magistrate Judge Cathy Bissoon for a renewed mediation conference, which is now scheduled for March 18, 2010. (Docket No. 110). On January 29, 2010, the Court of Common Pleas of Indiana County issued its Opinion and Order of Court Denying Defendant's Motion for Partial Summary Judgment. S&T Bank v. Safeco Insurance Co. et al, No. 11811 CD 2007 (Indiana Cty. Ct. Comm. Pleas Jan. 29, 2010). This ...


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