First Circuit Rules That Damage Testimony Based On The Plaintiff’s Loss Of Enjoyment Of Life And Loss Of Credit Expectancy Arising Out Of A Real Estate Fraud Scheme Should Not Be Admitted

Smith v Dorchester, 732 F.3d 51 (1st Cir. October 15, 2013) is an appeal from a verdict arising out of a fraudulent real estate mortgage scheme where a nearly incompetent person was duped into acting as a straw buyer for two overvalued residential properties in Massachusetts. One of the defendants, the real estate broker, appealed the verdict contending, inter alia, that the district court erred in allowing plaintiff’s damages expert, forensic economist, Stan V. Smith, Ph.D., to testify. The First Circuit agreed that the district court abused its discretion in allowing the testimony on the loss of enjoyment of life (so-called hedonic damages) and the loss of credit expectancy as a result of two foreclosures on plaintiff’s record. The hedonic damages testimony was based on a willingness-to-pay model which measures the monetary worth of life by calculating the amounts that individuals, government agencies, and businesses are willing to pay for reductions in health and safety risks. The model relies on labor market studies reflecting wage risk premiums, studies reflecting consumer purchases of safety equipment, questionnaires regarding consumers’ willingness to pay for safety measures, and studies of government regulations requiring expenditures for certain safety devices. The court noted that Dr. Smith’s method for valuing life is based on assumptions that appear to controvert logic and good sense. A consumer’s purchase decisions are influenced by many other factors other what they would be willing to pay for safety measures. The wage-risk premiums that Dr. Smith purportedly took into account are too speculative because [t]o say that the salary paid to those who hold risky jobs tells us something significant about how much we value life ignores the fact that humans are moved by more than monetary incentives. The cost of government health and safety regulations per life saved may suggest a collective policy judgment the government has made, or may represent a policy selected for reasons other than the cost-benefit analysis ‘hedonic analysis’ implies, or even a mistaken policy. The testimony was also faulty because it conflated the value of life with the value of the enjoyment of life when those are clearly not the same. The the loss of credit expectancy testimony was based on a calculation that a person with good credit would be able to borrower more than a person with bad credit, which plaintiff suffered a result of the fraud scheme. Dr. Smith concluded that the plaintiff should be compensated as if he had borrowed the maximum amount of available credit in year one at high cost and that difference constituted his damages. The court deemed this testimony unsupportable. Even if plaintiff had good credit before the scheme, there was no evidence that he tried to or had the intention to borrow anything close to that amount during the period before trial. The disconnect between Dr. Smith’s methodology and the facts of the case rendered the testimony unhelpful to the jury in determining plaintiff’s actual damages.

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