The Texas Legislature Has Limited Discovery Of A Defendant’s Net Worth For Exemplary Damage Claims
Plaintiffs in civil litigation often seek punitive or exemplary damages. “Exemplary damages” means any damages awarded as a penalty or by way of punishment but not for compensatory purposes. Exemplary damages are neither economic nor noneconomic damages. “Exemplary damages” includes punitive damages. Tex. Civ. Prac. & Rem. Code Ann. § 41.001(5). A jury may only award exemplary damages if the claimant proves, by clear and convincing evidence, that the harm resulted from: (1) fraud; (2) malice; or (3) gross negligence. Id. at § 41.003(a). Under Texas case law, exemplary damages may be proper in breach of fiduciary duty cases where the plaintiff can prove by clear and convincing evidence that the action arose by actual fraud, malice, or gross negligence. Murphy v. Canion, 797 S.W.2d 944, 949 (Tex. App.—Houston [14th Dist.] 1990, no pet.); see also Lesikar v. Rappeport, 33 S.W.3d 282, 311 (Tex. App.—Texarkana 2000, pet. denied); Natho v. Shelton, No. 03-11-00661-CV, 2014 Tex. App. LEXIS 5842, 2014 WL 2522051, at *2 (Tex. App.—Austin May 30, 2014, no. pet.).
A jury must consider multiple factors in determining the amount of an exemplary damages award: “(1) the nature of the wrong; (2) the character of the conduct involved; (3) the degree of culpability of the wrongdoer; (4) the situation and sensibilities of the parties concerned; (5) the extent to which such conduct offends a public sense of justice and propriety; and (6) the net worth of the defendant.” Tex. Civ. Prac. & Rem. Code Ann. § 41.011. So, a jury may consider the defendant’s net worth (size) in determining the amount of damages to assess as exemplary damages. A jury may determine that a larger exemplary damages award may be appropriate to punish a larger defendant in order to dissuade future similar bad conduct.
One issue that arises is whether a plaintiff is entitled to discovery into the net worth of a defendant by simply pleading an exemplary damages claim. Many defendants, especially individuals and private entities, understandably consider that type of information to be confidential or even trade secrets. Those defendants have argued that before they have to turn over that type of sensitive information, there should be some evidentiary showing that there is some merit to the exemplary damages claim.
More than twenty-five years ago, the Texas Supreme Court expressly rejected an argument that net-worth discovery should be limited until plaintiffs show that they are entitled to exemplary damages. Lunsford v. Morris, 746 S.W.2d 471, 473 (Tex. 1988) (orig. proceeding), overruled on other grounds by Walker v. Packer, 827 S.W.2d 833, 842 (Tex. 1992) (orig. proceeding). Under prior Texas law, a party seeking discovery of net-worth information did not need to satisfy any evidentiary prerequisite, such as making a prima facie showing of entitlement to exemplary damages, before discovery of net worth was permitted. In re Jacobs, 300 S.W.3d 35, 40-41 (Tex. App.—Houston [14th Dist.] 2009, orig. proceeding [mand dism’d]); In re House of Yahweh, 266 S.W.3d 668, 673 (Tex. App.—Eastland 2008, orig. proceeding); In re Garth, 214 S.W.3d 190, 192 (Tex. App.—Beaumont 2007, orig. proceeding [mand. dism’d]); In re W. Star Trucks US, Inc., 112 S.W.3d 756, 763 (Tex. App.—Eastland 2003, orig. proceeding); Al Parker Buick Co. v. Touchy, 788 S.W.2d 129, 131 (Tex. App.—Houston [1st Dist.] 1990, orig. proceeding).
On June 19, 2015, Senate Bill 735 was signed into law changing the way net-worth discovery will be conducted going forward. Act of June 19, 2015, 84th Leg., R.S., ch. 1159, § 2, 2015 Tex. Sess. Law Serv. 3923, 3923 (West 2015). The bill, codified as Section 41.0115 of the Civil Practice And Remedies Code, requires a party seeking net worth discovery to first demonstrate and obtain a finding from the trial court that there is a substantial likelihood of success on the merits of a claim for exemplary damages. See Tex. Civ. Prac. & Rem. Code § 41.0115(a) (West Supp. 2015).
The provisions of section 41.0115 did not become effective until September 1, 2015, and apply only to an action filed on or after that effective date. See Act of June 19, 2015, 84th Leg., R.S., ch. 1159, § 3, 2015 Tex. Sess. Law Serv. 3923, 3923 (West 2015). Parties have requested that courts apply this statute retroactively, but at least one court has expressly denied that request. In re Michelin N. Am., Inc., No. 05-15-01480-CV, 2016 Tex. App. LEXIS 2467 (Tex. App.—Dallas March 9, 2016, original proceeding). Further, the Texas Supreme Court denied a petition for review seeking a similar holding after full briefing on the merits. In re Robinson Helicopter Co., 2016 Tex. App. LEXIS 378 (Tex. May 13, 2016). So, at this point, the only authority is that Section 41.0115 is not retroactive and only applies to cases filed after September 1, 2015. Of course, this issue becomes less important as time passes and fewer cases that were filed before 2015 exist.
Texas Civil Practice and Remedies Code Section 41.0115 provides:
(a) On the motion of a party and after notice and a hearing, a trial court may authorize discovery of evidence of a defendant’s net worth if the court finds in a written order that the claimant has demonstrated a substantial likelihood of success on the merits of a claim for exemplary damages. Evidence submitted by a party to the court in support of or in opposition to a motion made under this subsection may be in the form of an affidavit or a response to discovery.
(b) If a trial court authorizes discovery under Subsection (a), the court’s order may only authorize use of the least burdensome method available to obtain the net worth evidence.
(c) When reviewing an order authorizing or denying discovery of net worth evidence under this section, the reviewing court may consider only the evidence submitted by the parties to the trial court in support of or in opposition to the motion described by Subsection (a).
(d) If a party requests net worth discovery under this section, the court shall presume that the requesting party has had adequate time for the discovery of facts relating to exemplary damages for purposes of allowing the party from whom net worth discovery is sought to move for summary judgment on the requesting party’s claim for exemplary damages under Rule 166a(i), Texas Rules of Civil Procedure.
Tex. Civ. Prac. & Rem. Code Ann. § 41.0115.
This provision sets up several steps for a plaintiff to obtain net worth information. First, the plaintiff must file a written motion requesting that information. The statute does not state what is required in this motion. The statute does not appear to require that the motion be verified. Presumably, it can be a simple one page motion stating a request for the net worth discovery, and then the movant can elaborate at the hearing. An advocate may choose to have a longer motion that describes the facts, claims, evidence, and explains how the evidence establishes a substantial likelihood of success on the merits.
Second, the plaintiff must set a hearing and provide notice of same to the defendant. There is no express requirement for how much notice should be provided. Certainly, many courts are so busy that a short notice period will not be possible. The Texas Rules of Civil Procedure provide that there should, generally, be at least three-days’ notice of a hearing.
Third, the statute provides that the opposing party can file evidence. The statute does not require a written response though it requires a written motion. So, a party opposing such a motion can forego a written response and simply show up at the hearing and offer evidence and argument to contradict the plaintiff’s motion. However, once again, an advocate may decide to prepare and file a detailed response that contradicts the plaintiff’s claims and evidence.
Fourth, there must be a hearing where the plaintiff must “demonstrate a substantial likelihood of success on the merits of a claim for exemplary damages.” Id. The statute does not describe what this standard means or provide other guidance. The Texas Civil Practice and Remedies Code provides that, at trial, a party has to establish a claim for exemplary damages by clear and convincing evidence. Clear and convincing evidence is “proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established.” In re J.O.A., 283 S.W.3d 336, 345 (Tex. 2009). This is an intermediate standard, falling between the preponderance standard of ordinary civil proceedings and the reasonable doubt standard of criminal proceedings. State v. Addington, 588 S.W.2d 569, 570 (Tex. 1979). While the proof must weigh heavier than merely the greater weight of the credible evidence, there is no requirement that the evidence be unequivocal or undisputed. Id. This burden of proof should be compared to a preponderance of the evidence. Under a preponderance of the evidence burden, the fact finder must decide if the plaintiff’s allegations meet the legal standard of the preponderance of the evidence meaning that they are “more likely true than not.” Essentially, the fact finder must be convinced that it is at least 51% likely that the plaintiff’s allegations are correct.
However, Legislative history indicates that the phrase “substantial likelihood is not intended to be the same as the clear and convincing standard” nor is it even a “preponderance standard.” The intent is that, for the “the plaintiff to be entitled to net worth discovery, it’s only necessary that the claimant present a prima facie case, but not to demonstrate that he is certain to win.” The plaintiff need only raise “questions on the merits to make them fair ground for more deliberative investigation.” A similar standard may be the “probably right to recovery” standard that is required for a court to issue temporary injunctive relief. To show a probable right of recovery, an applicant need not establish that it will finally prevail in the litigation, rather, it must only present some evidence that, under the applicable rules of law, tends to support its cause of action. Camp v. Shannon, 162 Tex. 515, 348 S.W.2d 517, 519 (Tex. 1961); Butnaru v. Ford Motor Co., 84 S.W.3d 198, 211, (Tex. 2002); IAC, Ltd. v. Bell Helicopter Textron, Inc., 160 S.W.3d 191, 197 (Tex. App.—Fort Worth 2005, no pet.); Glattly v. Air Starter Components, Inc., 332 S.W.3d 620, 638 (Tex. App.—Houston [1st Dist.] 2010, pet. denied); Gatlin v. GXG, Inc., No. 05-93-01852-CV, 1994 Tex. App. LEXIS 4047 (Tex. App.—Dallas April 19, 1994, no pet.); 183/620 Group Joint Venture v. SPF Joint Venture, 765 S.W.2d 901, 904 (Tex. App.—Austin 1989, writ dism’d). To establish a probable right of recovery, a party need only show that a bona fide issue exists as to its right to ultimate relief. Gatlin, 1994 Tex. App. LEXIS at 4047; 183/620 Group Joint Venture, 765 S.W.2d at 904; Camp v. Shannon, 162 Tex. 515, 348 S.W.2d 517, 519 (1961). The common law clothes the trial court with broad discretion in determining whether an applicant has met its burden. Recon Exploration, Inc. v. Hodges, 798 S.W.2d 848, 851 (Tex. App.—Dallas 1990, no writ).
What type of evidence can a trial court consider in making this determination? The statute provides that this finding may be supported or opposed by “an affidavit or a response to discovery.” So, parties may file affidavits, interrogatory responses from the opposing party, responses to requests for admission, documents, deposition transcripts, etc. The statute, however, does not limit evidence to affidavits and discovery products. A party can potentially call a witness and have live sworn testimony.
Fifth, if the court grants the discovery, the trial court must file a written order that “that the claimant has demonstrated a substantial likelihood of success on the merits of a claim for exemplary damages.” So far there is only one case that has applied Section 41.0115: In re WTG Fuels, Inc., No. 11-19-00390-CV, 2020 Tex. App. LEXIS 280 (Tex. App.—Eastland January 13, 2020, original proceeding). In that case, a trial court allowed the net worth discovery and signed an order that stated:
BE IT REMEMBERED that on this the 25th day of September, 2019, came on to be heard Plaintiffs’ Motion to Conduct Net Worth Discovery for Gross Negligence Claims Against Defendant WTG Fuels, Inc., and the Court having reviewed the pleadings and heard the arguments of counsel finds that said motion should be GRANTED on a limited basis. IT IS THEREFORE ORDERED that Plaintiffs’ Motion to Conduct Net Worth Discovery for Gross Negligence Claims Against Defendant WTG Fuels, Inc. is GRANTED. However, it is limited to discovery of the Balance Sheet of WTG for the current year and the preceding year only.
There was no express finding of that the claimant had demonstrated a substantial likelihood of success on the merits of a claim for exemplary damages. The court of appeals granted mandamus relief to reverse the order, stating: “In the October 9, 2019 order, Judge Satterwhite did not make a finding that Plaintiffs had demonstrated a substantial likelihood of success on the merits of their claim for gross negligence. In the absence of that statutorily required finding, Judge Satterwhite could not exercise discretion to order discovery of WTG’s net worth.” Id. So, the court held that the statute means what it says, the trial court must expressly state that there is a substantial likelihood of success on the merits. There are no implied findings that support the order. However, it should be noted that the statute does not require the trial court to discuss the evidence and explain why the plaintiff met the statutory burden.
If a trial court authorizes net worth discovery, the court’s order will require the defendant to produce the net worth evidence. Tex. Civ. Prac. & Rem. Code Ann. § 41.0115. Section 41.001 of the Texas Civil Practice and Remedies Code defines net worth as: “the total assets of a person minus the total liabilities of the person on a date determined appropriate by the trial court.” Id. at § 41.001. Generally, parties are entitled to only documents that show the current net worth of a defendant. See In re Michelin N. Am., Inc., No. 05-15-01480-CV, 2016 Tex. App. LEXIS 2467 (Tex. App.—Dallas March 9, 2016, original proceeding); In re Ameriplan Corp., No. 05-09-01407-CV, 2010 Tex. App. LEXIS 31, 2010 WL 22825, at *1 (Tex. App.—Dallas Jan. 6, 2010, orig. proceeding) (mem. op.) (trial court erred in ordering production of corporation’s balance sheets for two prior years and its current and prior income statements because documents did not reflect current net worth).
The statute provides that the court’s order may only authorize use of the least burdensome method available to obtain the net worth evidence. Tex. Civ. Prac. & Rem. Code Ann. § 41.0115. This could include tax returns, financial statements, or Securities and Exchange Commission filings. To the extent the information is already public, a defendant objecting to a request for net worth information could plausibly defeat such a motion by arguing that the publicly available information is equally available to both parties and therefore defendant is not required to produce documents or information in response to request. Potentially, a trial court may permit broader discovery in cases in which it is necessary to provide an accurate reflection of the defendant’s net worth. See In re Brewer Leasing, Inc., 255 S.W.3d 708, 713 (Tex. App.—Houston [1st Dist.] 2008, orig. proceeding [mand. denied]) (permitting additional net worth discovery where trial court implicitly found that previously provided unaudited balance sheets did not adequately represent the net worth of the relator).
There is no express right to appeal a trial court’s decision on a motion. Because there is no immediate relief by an interlocutory appeal, one court granted mandamus relief from a trial court’s order granting net worth discovery under the statute. In re WTG Fuels, Inc., No. 11-19-00390-CV, 2020 Tex. App. LEXIS 280 (Tex. App.—Eastland January 13, 2020, original proceeding). The statute does provide that when there is appellate review, the reviewing court may “consider only the evidence submitted by the parties to the trial court in support of or in opposition to the motion.” Tex. Civ. Prac. & Rem. Code Ann. § 41.0115(c). So, a party on appeal should not be able to cite to other evidence in the record to support or attack the trial court’s order. This will require the parties to refile any evidence that they want the court of appeals to consider in conjunction with the motion and response. It is unclear whether the statute abrogates a trial court’s ability to take judicial notice of its own file or a party’s right to incorporate evidence on file with the court in its motion for net worth discovery or response thereto.
Finally, the party seeking net worth discovery via this motion should be prepared to defend a no-evidence or traditional motion for summary judgment on its exemplary damages claim. The statute provides: “the court shall presume that the requesting party has had adequate time for the discovery of facts relating to exemplary damages for purposes of allowing the party from whom net worth discovery is sought to move for summary judgment on the requesting party’s claim for exemplary damages under Rule 166a(i), Texas Rules of Civil Procedure.” Tex. Civ. Prac. & Rem. Code Ann. § 41.0115(d). So, if the plaintiff seeks net worth discovery very early in a case, it should be prepared to have to answer a no-evidence motion for summary judgment on the exemplary damages claim early in the case. A cautious plaintiff may want to wait until near the end of discovery to file a motion for net worth to ensure that it will have time to discover underlying facts and be prepared to respond to a no-evidence summary judgment motion.
The new procedure for obtaining net worth discovery is intended to protect a defendant from the disclosure of confidential information where the plaintiff’s exemplary damages claim is facially meritless. Texas courts will wrestle with how the procedure works in the years to come.