Gerhart, et al vs. PA Natural Chicks, Inc.

GERHART, et al vs. PA. NATURAL CHICKS, INC., et al No. 2007-00779

Civil Action – Expert Witness – Market Value of Contaminated Real Estate – Qualification of Expert – Frye Test – Motion in Limine.

1. There are three generally-recognized approaches used by professional appraisers for the valuation of real property:  the Sales Comparison Approach, the Cost Approach, and the Income Capitalization Approach.
2. If scientific, technical or other specialized knowledge beyond that possessed by a layperson will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education may testify thereto in the form of an opinion or otherwise.
3. The time when a scientific principle or discovery crosses the line between the experimental and demonstrable stages is difficult to define.  Somewhere in this twilight zone the evidential force of the principle must be recognized, and while courts will go a long way in admitting expert testimony deduced from a well-recognized scientific principle or discovery, the thing from which the deduction is made must be sufficiently established to have gained general acceptance in the particular field in which it belongs.  This general acceptance in the scientific community assures that those most qualified to assess the general validity of a scientific method will have the determinative voice.
4. The law regarding expert qualification in Pennsylvania is well established.  The standard for qualification of an expert witness is a liberal one.  The test to be applied when qualifying an expert witness is whether the witness has any reasonable pretension to specialized knowledge on the subject under investigation.  If he does, he may testify and the weight to be given to such testimony is for the trier of fact to determine.  It is also well established that a witness may be qualified to render an expert opinion based on training and experience.  Formal education on the subject matter of the testimony is not required.  It is not a necessary prerequisite that the expert be possessed of all of the knowledge in a given field, only that he possess more knowledge than is otherwise within the ordinary range of training, knowledge, intelligence or experience.
5. This test governing admissibility of expert testimony only applies to determine if the relevant scientific community has generally accepted the principles and methodology the scientist employs, not the conclusions the scientist reaches.
6. Whether a witness is qualified to render opinions and whether his testimony passes the Frye test for admission of expert scientific evidence are two distinct inquiries that must be raised and developed separately by the parties, and ruled upon separately by the trial courts.
7. The potential exclusion of expert testimony must be construed narrowly so as not to impede the admissibility of evidence that will aid the trier of fact in the search for truth.
8. Whether or not a witness may be permitted to testify as an expert is a decision that rests within the sound discretion of the trial court.
9. The Court found that Plaintiffs’ expert was qualified as an expert on the subject matter of the market value of real estate and able to to render an opinion of the value of the Plaintiffs’ property for purposes of this litigation.
10. The Court also held that the expert’s opinion as to the value of the Plaintiffs’ property, as affected by the contamination alleged, was admissible and not novel in that he used methods and techniques which are already in use in the field of real estate appraisal.
11. The use of hypotheticals is permitted in appraisals, if necessary, and if the use of this technique is disclosed.

Defendant’s Motion in Limine to Exclude Testimony of Plaintiffs’ Expert Real Estate Appraisers.  C.P. of Lebanon County, Civil Action-Law, No. 2007-00779.

John Wilmer, Esquire, for Plaintiffs

Kandice Kerwin Hull, Esquire, for Defendants

 

TYLWALK, P.J.,  NOVEMBER 6, 2012

 

Before us is Defendants’ Motion in Limine To Exclude The Testimony of Plaintiffs’ Expert Real Estate Appraisers (“Motion in Limine”) at the trial of this matter.   A hearing was held on the Motion on October 17, 2012 and the parties have filed Briefs in support of their respective positions.  The pleadings and evidence admitted at the hearing reveal the following facts relevant to this Motion.

Defendant PA. Natural Chicks has operated a chicken hatchery at 2401 East Cumberland Street in Lebanon since 1996 and owned the property on which the hatchery is operated  until July 26, 2006.  On July 26, 2006, the property was sold to the current owners, Defendants Richard L. Shenk and Douglas M. Shenk.  (Hereafter, all Defendants will be referred to collectively as “PNC.”)

The PNC property is located directly across Cumberland Street[1] from property owned by  Plaintiff  Robert M. Gerhart (“Gerhart”).  That property is leased to Plaintiffs Bobby Gerhart’s Truck World, Inc., and Gerhart Racing, Inc. (“the Corporations”).  The Amended Complaint alleges that Gerhart is the President of and operates Bobby Gerhart’s Truck World, Inc. and that he personally works on the site.

Gerhart and the Corporations instituted this action, alleging that PNC discharged industrial waste consisting of dead chickens, eggs, fecal matter, bacteria and viruses, onto the hatchery property where it mixed with surface water, flowed through a stormwater drain to Gerhart’s property and contaminated the groundwater and drinking water.  It is also alleged that leaks in PNC’S sewer system carried sewage and chicken matter to Gerhart’s property and caused additional pollution.  Plaintiffs allege the contamination caused illness to Gerhart and several employees of the Corporations, property damage and diminution in property value.  The Amended Complaint includes counts for violation of the Clean Streams Law, private nuisance, public nuisance, trespass, failure of a landowner’s duty to manage surface water and negligence.[2]  Trial is scheduled for the November 2012 term of Civil Jury Trials.

Plaintiffs have provided to Defendants an Appraisal Report prepared, in part, by John J. Hosey, IV of Shelterfield Valuation Services (“Hosey”) regarding his appraisal of  the Gerhart property both unaffected and affected by the alleged contamination and  have identified Hosey  as an expert witness for trial.  Hosey’s opinion compares the before and after values of the property and his final figure reflects the diminution in value allegedly caused by the contamination.  Defendants contend that Hosey’s testimony should be excluded as it does not conform to the standards for the admissibility of  expert testimony established by Frye v. United States, 293 F. 1013 (D.C. Cir. 1923) and Pa.R.E. 702  and, also, that his analysis violates the Uniform Standards of Professional Appraisal Practice “USPAP”), Standard 1 (2008-2009 Edition) (Exhibit “B” to Defendants’ Motion in Limine) .    Plaintiffs counter that Frye is inapplicable as Hosey’s Report does not involve novel scientific methodology and that his opinion was based on an appropriate method of evaluation.

Both Defendants and Plaintiffs acknowledge that there are three generally-recognized approaches used by professional appraisers for the valuation of real property: the Sales Comparison Approach, the Cost Approach, and the Income Capitalization Approach.[3]  Hosey utilized the Income and Cost Approaches in setting the value of the Gerhart property as unaffected by the alleged contamination and Defendants have no issue with the means by which he reached his conclusion as to that figure, $1,500,000.  With regard to the valuation of the property affected by the alleged contamination, however, Hosey indicated that he encountered difficulty in determining an appropriate method by which he could come to a figure which would accurately reflect the value of this property due to the unusual circumstances of the contamination.   He explains that the property is “stigmatized”[4] by the continuing contamination from the PNC property.  He indicated that he was unable to use the Sales Comparison method of valuation as his research uncovered no recent reliable data for comparable sales of similarly stigmatized properties.[5] Hosey also explained that he considered the Cost Approach but found that it was impossible to deduct the cost of curing the problem from the value as the contamination is ongoing and the ability to remedy the situation is out of the Plaintiffs’ control.  He further noted that the highest and best use of the property was its existing use and that the contamination makes remote the possibility of using the property for other uses, such as housing, food services or a hotel.

Instead of utilizing any of these methods, Hosey instead employed an analysis based on a survey conducted in 2006 with regard to the valuation of properties contaminated by hazardous pollutants.  The survey was based on hypothetical situations and submitted to three hundred real estate professionals to provide their thoughts on how the hypothetical stigmas would affect the property values.    Forty respondents took part in the survey.  The first scenario involved twin homes, one of which had sustained damage when an oil company pumped 250 gallons of oil into the basement.  The problem was ultimately cleaned up with no lasting effects.  The survey indicated a market value reduction of 5 to 15 percent for a period of less than 5 years due to the stigma attached to the incident.  The second scenario involved large side-by-side executive homes, with one having an underground plume of gasoline which required continued monitoring for contamination concerns, even though the homes had public water and the water had not yet been affected.  The respondents opined that even though the potable water source had not been affected, the monitoring created an enduring stigma which negatively affected the property value by between 5 to more than 35 percent, with the majority opinion being in the greater than 35 percent range.  As the water supply of the Gerhart property had been affected, Hosey opined that the stigma percentage would be higher than in that hypothetical.  Hosey then used this information in arriving at a value diminution of 66.5 percent or $997,500, for an affected value of $502,500.

The use of expert testimony at trial in Pennsylvania is governed by Pa.R.E. 702, which provides as follows:

 

Rule 702. Testimony by experts

If scientific, technical or other specialized knowledge beyond

that possessed by a layperson will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education may testify thereto in the form of an opinion or otherwise.

 

Pa.R.E. 702.

In Frye v. United States, supra., the Court offered the following comment on the use of expert opinions at trial:

The rule is that the opinions of experts or skilled witnesses are admissible in evidence in those cases in which the matter of inquiry is such that inexperienced persons are unlikely to prove capable of forming a correct judgment upon it, for the reason that the subject-matter so far partakes of a science, art, or trade as to require a previous habit or experience or study in it, in order to acquire a knowledge of it. When the question involved does not lie within the range of common experience or common knowledge, but requires special experience or special knowledge, then the opinions of witnesses skilled in that particular science, art, or trade to which the question relates are admissible in evidence.

 

Numerous cases are cited in support of this rule. Just when a scientific principle or discovery crosses the line between the experimental and demonstrable stages is difficult to define. Somewhere in this twilight zone the evidential force of the principle must be recognized, and while courts will go a long way in admitting expert testimony deduced from a well-recognized scientific principle or discovery, the thing from which the deduction is made must be sufficiently established to have gained general acceptance in the particular field in which it belongs.

 

Frye v. United States, 293 F. at 1014.  The requirement of general acceptance in the scientific community assures that those most qualified to assess the general validity of a scientific method will have the determinative voice.   Commonwealth v. Topa, 369 A.2d 1277, 1282 (Pa. 1977), citing United States v. Addison, 498 F.2d 741 (C.A.D.C. 1974).

The Frye test is part of Rule 702.   Grady v. Frito-Lay, Inc., 839 A.2d 1038 (Pa. 2003).  The Comment to this Rule provides, in part:

“[a]doption of this Rule does not alter Pennsylvania’s adoption of the standard in Frye v. United States, 293 F. 1013 (D.C. Cir. 1923), which requires scientific evidence to have “general acceptance” in the relevant scientific community. See Commonwealth v. Dunkle, supra; Commonwealth v. Nazarovitch, 496 Pa. 97, 436 A.2d 170 (1981); Commonwealth v. Topa, 471 Pa. 223, 369 A.2d 1277 (1977). In 1993, the United States Supreme Court held that Frye was superseded in the federal courts by the adoption of F.R.E. 702. Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). In Grady v. Frito-Lay, Inc., 576 Pa. 546, 839 A.2d 1038 (2003), a majority of the Pennsylvania Supreme Court rejected the Daubert standard and affirmed the applicability of the Frye standard in the Pennsylvania state courts.

 

…

 

In addition, Pa.R.E. 702 does not change the Pennsylvania rule for qualifying a witness to testify as an expert. In Miller v. Brass Rail Tavern, Inc., 541 Pa. 474, 480-81, 664 A.2d 525, 528 (1995), the Supreme Court stated:

 

The test to be applied when qualifying a witness to testify as an expert witness is whether the witness has any reasonable pretension to specialized knowledge on the subject under investigation. If he does, he may testify and the weight to be given to such testimony is for the trier of fact to determine.”

 

Pa.R.E. 702 – Comment.

 

 As the Frye rule governs the potential exclusion of expert testimony,  it must be construed narrowly so as not to impede the admissibility of evidence that will aid the trier of fact in the search for truth. Trach v. Fellin, 817 A.2d 1102 (Pa. Super. 2003), appeal denied Trach v. Thrift Drug, Inc., 847 A.2d 1288 (Pa. 2004), citing Pa.R.E. 702.  This test governing admissibility of expert testimony only applies to determine if the relevant scientific community has generally accepted the principles and methodology the scientist employs, not the conclusions the scientist reaches. Grady v. Frito-Lay, Inc., supra.  Whether a witness is qualified to render opinions and whether his testimony passes the Frye test for admission of expert scientific evidence are two distinct inquiries that must be raised and developed separately by the parties, and ruled upon separately by the trial courts.  Id.

The law regarding expert qualification in Pennsylvania is well established:  [T]he standard for qualification of an expert witness is a liberal one. The test to be applied when qualifying an expert witness is whether the witness had any reasonable pretension to specialized knowledge on the subject under investigation. If he does, he may testify and the weight to be given to such testimony is for the trier of fact to determine. It is also well established that a witness may be qualified to render an expert opinion based on training and experience. Formal education on the subject matter of the testimony is not required…. It is not a necessary prerequisite that the expert be possessed of all of the knowledge in a given field, only that he possess more knowledge than is otherwise within the ordinary range of training, knowledge, intelligence or experience.

Hein v. Hein, 717 A.2d 1053, 1057 (Pa. Super. 1998), citing  Zak v. Prudential Property & Casualty Insurance Company, 713 A.2d 681, 689 (Pa.Super. 1998).   Moreover, whether or not a witness may be permitted to testify as an expert is a decision that rests within the sound discretion of the trial court.  Id.

Plaintiffs claim that the field of real estate appraisal is not a science, and that therefore the Frye analysis is inapplicable.  Defendants argue that the appraisal of real properties necessarily involves mathematical calculations and statistics which implicate the type of inquiry required by Frye.

In Reading Radio, Inc. v. Fink, 833 A.2d 199 (Pa. Super. 2003), appeal denied 847 A.2d 1287 (Pa. 2004), it was recognized that an appraisal could possibly be considered scientific evidence.[6]    However, the Court refrained from an application of the Frye standard, stating “[i]n the present case, Frye is inapplicable because … testimony regarding … diminution of value is not, nor could it be considered, novel scientific evidence. … Valuation is mathematical and, in that sense, scientific, yet the methodologies used … in this case (market analysis and performance analysis) were not novel, and Appellants failed to produce evidence that they were novel.   Therefore, Appellants’ reliance on Frye and its progeny is erroneous.”  Id. at  208.

Undoubtedly, the valuation of real estate is an issue for which the jury will be aided by the opinion of an expert in that field.  Hosey’s curriculum vitae indicates that he is certified as a real estate appraiser and broker in Pennsylvania and as an appraiser in New Jersey and Delaware.  He has been involved in real estate practice as a broker, manager and appraiser in Pennsylvania beginning in 1971.  Since 1973, he has been practicing as an independent real estate appraiser and is currently the President of Shelterfield Valuation Services, a professional valuation services firm, and is involved in various other endeavors in the field of real estate appraisal.  He has completed numerous courses on the appraisal of properties with considerable experience in the valuation of commercial real estate. Clearly, this witness has a reasonable pretension to specialized knowledge as to the market value of real estate, the issue on which he will testify.  We find that Hosey is qualified as an expert on this subject matter to render an opinion of the value of the Gerhart property for purposes of this litigation.

Our next inquiry is whether his opinion as to the value of the Gerhart property, as affected by the contamination alleged, is inadmissible due to the method by which Hosey arrived at the figure contained in his Appraisal Report.

We find that it is not.

Although the Standards Rules identify and discuss the three widely recognized approaches, they do not indicate that other considerations may not be used when strict adherence to those methods is not plausible.  For example, Standards Rule 1-4 provides guidance “(a) [w]hen a sales comparison approach is necessary for credible assignment results, …,” “(b) [w]hen a cost approach approach is necessary for credible assignment results, …” and “(c) [w]hen an income approach is necessary for credible assignment results … .”  Standards Rules 1-4(a)-(c) USPAP.  We do not interpret this Rule to mean that one of these approaches will always be necessary for credible assignment results; instead, it appears that these provisions contemplate that in some situations, other techniques may be more appropriate.  For example, Standards Rule 1-1 of the USPAP states that “[i]n developing a real property appraisal, an appraiser must:  (1) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal … . “  Standards Rule 1-1(a) USPAP.  The Comment to this subsection of the Rule states, in part, as follows:

Comment:  This Standards Rule recognizes that the principle of change continues to affect the manner in which appraisers perform appraisal services.  … To keep abreast of these changes and developments, the appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances.”

 

Standards Rule 1-1(a) USPAP – Comment.

Both Hosey and Defendants’ expert, Val Pasquarella, indicated that surveys are used for various purposes in the real estate field.    The use of hypotheticals is also permitted in appraisals, if necessary, and if the use of this technique is disclosed.  Standards Rule 1-2(g), USPAP.  Pasquarella did not seem to complain about the use of hypotheticals in Hosey’s survey; rather, he seemed to take issue with the type of hypotheticals used.  Hosey explained that his use of hypothetical situations of contamination was necessary due to the lack of comparable sales of similarly-contaminated properties and the inability of the Plaintiffs to control the problem or permanently rectify the situation.   Thus, Hosey’s method was not novel in that he used methods and techniques which are already in use in the field of real estate appraisal.

In addition to their challenge to the Report on the basis of Hosey’s failure to adhere to one of the three basic approaches, Defendants also attack the survey on grounds such as the types of hypotheticals used and their inapplicability to the situation involved in this litigation, the credentials of the respondents, Hosey’s failure to thoroughly research published accounts of contamination cited in his Report,  and his calculation of the rate of decline in value which resulted from the contamination.  While all of these considerations are certainly subject to disagreement due to the respective positions of the parties, none of them renders Hosey’s method so novel that his opinion should be excluded from trial.  When he testifies, Hosey will undoubtedly be cross-examined at length regarding the method and information which he used in his analysis, and the jury will thus be well equipped to assess the reliability of that analysis and give it evidentiary weight accordingly.