by Michael Lyons, Brian Lauten, and Christopher Simmons
The Texas Supreme Court has held that net worth is relevant to the award of exemplary damages and is, therefore, discoverable. Senate Bill 735 was signed into law on June 19, 2015, changing the way discovery is conducted concerning a defendant’s net worth. Act of June 19, 2015, 84th Leg., R.S., ch. 1159, § 2, 2015 Tex. Sess. Law Serv., 3923, 3923 (West 2015). Codified as section 41.0115 of the Texas Civil Practice and Remedies Code, the statute requires a party seeking discovery regarding net worth 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. This is a significant departure from conventional methods for the discovery of this information.
In the past, many intermediate appellate courts adopted definitions for net worth, holding, in essence, that net worth is the difference between total assets and liabilities as determined by generally accepted accounting principles. That definition is now a statutorily defined term. “Net worth” now means the total assets of a person minus the total liabilities of the person on a date determined appropriate by the trial court.
The new procedure prevents discovery of net worth information without authorization of the trial court upon motion, notice, and hearing. Parties are required to submit evidence in the form of an affidavit or a response to discovery in support of or opposition to net worth discovery, and the court is only permitted to consider evidence presented in the motion, in the response, or at the hearing. There is a presumption that “adequate time for discovery” has elapsed for the filing of such a motion. While the statute does not define what an adequate time for discovery is, it does provide that an adequate time for discovery means enough discovery of the facts has been conducted such that the defendant has sufficient information to prepare a no-evidence motion for summary judgment on the plaintiff’s exemplary damage claim. Thus, trial courts must now consider a defendant’s argument that insufficient time has elapsed for discovery of the plaintiff’s claims to permit the discovery of net worth information.
The statute itself provides little clarity on how the plaintiff can meet the burden to prove “substantial likelihood of success on the merits.” The Plaintiffs’ trial burden on exemplary damages is by “clear and convincing” evidence, and there is ample case authority demonstrating how a plaintiff can meet this burden. A close investigation of the legislative history for Senate Bill 735 makes it clear that the discovery burden of “substantial likelihood” was intended as a lower standard. It was the intent of the legislature that the plaintiff merely demonstrate a “prima facie” showing and not that “he is certain to win.” As such, a claimant need only “raise questions on the merits” to make them “fair ground for more deliberative investigation.” It is clear the legislature’s intent was a lower standard than even a “preponderance standard.”
If the trial court determines that net worth discovery is appropriate, it is required that any order of net worth information permit discovery only in the “least burdensome” method. The Dallas Court of Appeals held as recently as March of 2016 (in a case that pre-dated the effective date of Senate Bill 735) that net worth inquiries should be limited to inquiry into a defendant’s current net worth, holding that requiring a defendant to produce more than its current financial information was an abuse of discretion by the trial court.
It is important to underscore that while Senate Bill 735 became effective September 1, 2015, and presently only applies to cases filed on or after the effective date, a case pending before the Texas Supreme Court will decide whether section 41.0115 should be applied retroactively. See In re Robinson Helicopter Co., No. 01-15-00594-CV, 2015 WL 4623939 (Tex. App.—Houston [1st Dist.] Aug, 4, 2015 orig. proceeding [mand. pending]). Full briefing has been ordered in this case, and the decision could impact cases filed even before the effective date of the provision.
Michael Lyons, Brian Lauten, and Christopher Simmons are partners at Deans & Lyons, LLP. They can be reached at firstname.lastname@example.org; email@example.com; and firstname.lastname@example.org, respectively.