MAJOR CHANGES COMING IN PUNITIVE DAMAGES PROCEDURE
By: Samuel B. Burke
In many types of civil lawsuits, Plaintiffs can sue for punitive damages. Punitive damages are damages intended to punish a Defendant when they have engaged in fraud or acted with malice or where the Defendant was grossly negligent. Punitive damages are also recoverable in a host of circumstances when the Defendant’s conduct violates a criminal statute. By their nature, punitive damages (sometimes called exemplary damages) are in addition to the damages that compensate a Plaintiff for their loss. Until the late 1980’s, in Texas, the focus of the evidence regarding the amount of punitive damages was the injury inflicted rather than the ability of the Defendant to pay. Therefore, Texas courts did not allow discovery of net worth. In a case named Lunsford v. Morris, the Texas Supreme Court changed this rule and for the first time permitted the use of evidence of a Defendant’s net worth. The Supreme Court in Lunsford decided that net worth evidence was relevant and necessary to accomplish one of the main objectives of punitive damages – deterrence. In making this change, the Texas Supreme Court also decided that no prima facie showing of entitlement to punitive damages was required before the Plaintiff was entitled to discover the Defendant’s net worth. Left undecided by the Texas Supreme Court in Lunsford was the definition of net worth, what types of information could be obtained to determine net worth, and on what date or dates was the Defendant’s net worth relevant.
The Texas Supreme Court’s decision in Lunsford was later codified in section 41.011(a) of the Texas Civil Practice and Remedies Code. In pertinent part, Section 41.011(a) states that, “[I]n determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to… the net worth of the Defendant.” Because Texas state courts require pleadings to provide only fair notice of the Plaintiff’s claims, almost any Plaintiff could plead a claim for punitive damages and thus require the Defendant to reveal his or her net worth. When the legislature codified the Lunsford holding, they also did not provide a definition of net worth nor did they provide any guidance regarding at what point or points in time the Defendant’s net worth was relevant.
Separate and apart from its potential use to support a punitive damages claim, a party’s net worth information is useful in negotiations. Knowing what a party can pay may influence what you ask for. In fact, in cases where insurance is available to pay a claim, parties are required to disclose the limits of their insurance. The exchange of this information in many cases greatly increased the parties’ ability to negotiate in good faith. While I seldom, if ever, encountered a fraudulently pled punitive damages allegation which I believed was solely intended to obtain net worth information, the potential for abuse exists. It is also often disturbing to clients to learn that this type of information is discoverable just because someone alleges they have committed an act that they wholeheartedly deny. Additionally, parties would, at times, disagree regarding the definition of net worth, what types of information should be discoverable to determine net worth, and regarding the time frame during which the Plaintiff should be able to discover a Defendant’s net worth.
In this past Legislative session, the Legislature passed and the Governor signed into law Senate Bill 735. This bill greatly reduces the potential for abuse of punitive damages allegations to obtain net worth discovery. First, Senate Bill 735 provides a definition of net worth. The new definition is “the total assets of a person minus the total liabilities of a person on a date determined appropriate by the trial court.” This definition provides some clarity regarding what net worth means. It informs litigants that net worth will be determined on a specific date, and also provides a process for deciding on the relevant date.
Importantly, the Bill also provides guidance regarding what type of information may be obtained regarding a party’s net worth. The Bill limits the trial court to authorizing only the least burdensome method available to obtain net worth evidence. Most significantly, the Bill allows Plaintiffs to conduct net worth discovery only after they have demonstrated a substantial likelihood of success on the merits of a claim for exemplary damages. Now, when a Plaintiff desires net worth information, the Plaintiff must file a motion with the trial court requesting the discovery. As part of this motion, the Plaintiff must submit evidence supporting his or her claim for punitive damages. Also, by filing the motion requesting net worth information, the Plaintiff is considered to have had sufficient time to obtain evidence supporting their punitive damages claim and the Defendant may file a motion for summary judgment on the claim.
These changes, which apply to all suits filed after September 1st of this year, will likely curb any abuses of net worth discovery. What remains to be seen is if the costs of additional hearings and appeals which the procedure will create will be worth the extra-protection that has been provided. Previously, net worth discovery was often worked out between the parties and the chances of misuse of the information were reduced by protective orders limiting disclosure of the information obtained and how it could be used. It is also possible that Defendants with greater resources will take advantage of the additional hearings and appeals now required to obtain net worth discovery to prevent Plaintiffs from obtaining information that they have legitimately requested. Time will tell. For now, Defendants will at least enjoy clearer standards regarding the types of net worth information they may be required to turn over and will not be required to provide this information merely because allegations of wrongdoing have been made against them.