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Ltd. v. FSAR Holdings, Inc.

Court of Chancery of Delaware

May 3, 2017

Zohar II 2005-1, Limited
v.
FSAR Holdings, Inc.

          Date Submitted: May 1, 2017

          Kenneth J. Nachbar, Esquire Morris, Nichols, Arsht & Tunnell LLP

          Kevin G. Abrams, Esquire Abrams & Bayliss LLP

         Dear Counsel:

         I have reviewed the parties' correspondence regarding the admissibility of the valuation evidence Defendants wish to introduce at trial. Time does not allow me to provide a reasoned opinion in support of my rulings on admissibility. I am giving the rulings to you in this format so that you have time to prepare your trial presentations accordingly. I may provide further bases for my rulings in my post-trial opinion.

         The Third-Party Valuation Evidence

         Although there appears to be little, if any, dispute on this point, I am satisfied that all of the valuation evidence is hearsay to the extent Defendants seek to offer the evidence for the truth of the matters asserted within the documents (including opinions expressed therein). See DRE 801. Many of the documents, especially the valuation analyses prepared by third parties (e.g., JX 1381, 1382, 1414, 1418, 1421, 1422, 1423), contain hearsay within hearsay. See DRE 805. These valuation documents express the opinions of experts on complex subjects. Expert opinions should be subject to cross-examination except in limited circumstances; when they are not, our courts are even more inclined to enforce the hearsay rule. See, e.g., Moore v. Perdue Farms, Inc., 1990 WL 63953, at *3 (Del. Super. Ct. Apr. 30, 1990) (holding that expert report was hearsay and properly excluded since the party against whom the report would be offered "should have been given the opportunity to cross-examine" the expert). This hearsay problem was curable (see DRE 702-705) but Defendants chose not to cure it.[1]

         Defendants offer four reasons why the hearsay rule should not bar the admission of the third-party valuation evidence. Each misses the mark.

         First, Defendants allege that the valuations prepared for MBIA are not hearsay under DRE 801(d)(2)(E). This argument fails because the evidence of a "conspiracy, " as contemplated by this Rule, is lacking and, in any event, the statements at issue were not made by the alleged co-conspirator(s).[2]

         Second, they allege that all of the valuation documents are admissible under DRE 803(6) as records of regularly conducted activity of either MBIA or Patriarch. The foundation for that exception has not been demonstrated in the submissions (or the attached exhibits), again a circumstance that was curable but not cured.[3]

         Third, Defendants invoke DRE 804(b)(3) and argue that, at least as to the MBIA valuations, they are statements against interest. Setting aside the fact that Defendants have offered no basis for me to determine that the declarants are unavailable, as required by DRE 804(a), they have likewise presented no evidence that the statements contained within the valuations were "at the time of [their] making so far contrary to the declarant's pecuniary or proprietary interests . . . that a reasonable person in the declarant's position would not have made the statement. . . ." (emphasis supplied).[4] DRE 804(b)(3) does not apply here.

         Finally, Defendants seek to invoke the residual hearsay exception in DRE 807. I have previously observed that this exception must be "construed narrowly so that the exception does not swallow the hearsay rule." Stigliano v. Anchor Packing Co., 2006 WL 3026168, at *1 (Del. Super. Ct. Oct. 18, 2006). I also noted in Stigliano that the residual exception is not "firmly rooted" in the common law and that, under such circumstances, even in civil cases, the court should be especially mindful of the risk that DRE 807 will be invoked to admit hearsay that has not been "confronted" with cross examination. Id. at n.7. I reiterate those concerns here. As noted, the evidence at issue here is highly nuanced and complex opinion testimony. It has not been explained or tested through the usual tools available to trial courts as they ferret out evidence in search of the truth. See United Health All., LLC v. United Medical, LLC, 2013 WL 1874588, at *4 n.19 (Del. Ch. May 6, 2013) (noting that "[t]he primary justification for the exclusion of hearsay is the lack of any opportunity for the adversary to cross-examine the absent declarant whose out-of-court statement is introduced into evidence") (citation omitted).

         For the reasons just stated, the valuation evidence in the form of opinions from valuation experts may not be admitted for their truth.

         Assuming a proper foundation is laid, I will allow the valuation evidence available to Ms. Tilton at or prior to the time she executed the irrevocable proxies to be admitted not for truth of the matter but as evidence of her state of mind at the time she executed the proxies. Plaintiffs have argued that Ms. Tilton acted as a faithless fiduciary when she executed the irrevocable proxies, that her interests were not aligned with the Zohar Funds' interests and that, as a matter of equity, the proxies should be set aside even if lawful. If Ms. Tilton can demonstrate the she believed her preference shares were in the money at the relevant time, that may be probative of ...


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