Early Discovery of Financial Information to Support Claim for Punitive Damages

Kristen M. Bush, Esq.
Schwartz Semerdjian Cauley & Moot LLP
Published:  01.01.2017

Punitive damages are a remedy that may not receive the attention they deserve during the discovery phase of a trial. These deterrent based damages are available in most intentional tort actions when the plaintiff is able to prove that the defendant’s conduct amounted to malice, oppression or fraud. In determining the reasonableness of a punitive damages award, courts look towards the following three factors: “(1) the reprehensibility of the defendant’s conduct; (2) the actual harm suffered; and (3) the wealth of the defendant.” Zaxis Wireless Communications, Inc. v. Motor Sound Corp. (2001) 89 Cal.App.4th 577, 581-582. However, accessing information related to the wealth of the defendant may pose additional hurdles for plaintiff’s in light of California’s privacy protections.

This article discusses strategies for securing financial information early in litigation to better secure evidence in support of punitive damage claims.

Seeking a Court Order to Secure Discovery

Pretrial discovery of a defendant’s financial condition in support of a punitive damage claim is generally prohibited. Doak v. Superior Court (1968) 257 Cal.App.2d 825, 832-834. However, a defendant’s net worth is a necessary component for the purpose of establishing a punitive damages award.

In a bifurcated trial separating the punitive damages phase, after a finding that the defendant’s conduct amounted to malice, oppression or fraud, the plaintiff has the burden to present evidence of the defendant’s financial condition and net worth to support the amount of punitive damages sought by the plaintiff. It may be necessary prior to the trial to bring a motion to secure evidence related to a defendant’s financial condition.

[A] defendant’s ability to pay a punitive damage award must be based on meaningful and substantial evidence of his or her financial condition. [Citations.] A defendant’s ‘net worth’ is the critical determinant of financial condition, but there is no rigid formula and other factors may be dispositive especially when net worth is manipulated and fails to reflect actual wealth. [Citations.] The purpose of punitive damages ‘is not served by financially destroying a defendant. The purpose is to deter, not to destroy.’ [Citation] In all cases, the plaintiff has the burden of proving the financial condition of the defendant.

County of San Bernardino v. Walsh (2007) 158 Cal.App.4th 533, 546 (“Walsh”).

California Civil Code section 3295, subdivision (c), provides, “[n]o pretrial discovery by the plaintiff shall be permitted with respect to the evidence referred to in paragraphs (1) and (2) of subdivision (a) unless the court enters an order permitting such discovery pursuant to this subdivision.” Section 3295, subdivision (a), paragraphs (1) and (2), refer to profits gained by wrongful conduct and the defendant’s financial condition.

The procedure for obtaining pretrial discovery of a defendant’s wealth is straightforward. The order must be obtained through a noticed motion. Section 3295(c), instructs as follows: “[u]pon motion by the plaintiff supported by appropriate affidavits and after a hearing, if the court deems a hearing to be necessary, the court may at any time enter an order permitting the discovery otherwise prohibited by this subdivision if the court finds, on the basis of the supporting and opposing affidavits presented, that the plaintiff has established that there is a substantial probability that the plaintiff will prevail on the claim pursuant to Section 3294.” In sum, the plaintiff is required to file a noticed motion with supporting declarations which support a finding of “oppression, fraud or malice.”

Substantively, the plaintiff’s burden on a Section 3294 motion presents a significant burden. The “substantial probability” requirement is clarified in Jabro v. Superior Court (2002) 95 Cal.App.4th 754 (“Jabro”). As discussed in Jabro, the “court must (1) weight the evidence presented by both sides, and (2) make a finding that it is very likely the plaintiff will prevail on his claim for punitive damages.” Id. at 755.

Civil Code section 3294, subdivision (c), equally applies to discovery sought in an arbitration proceeding such that a plaintiff must obtain a court order to conduct discovery with respect to defendant’s financial condition. Code of Civ. Proc. § 1141.19.5.

If the plaintiff is able to prove a substantial probability that he or she will prevail on his or her punitive damages claim and permits pretrial discovery of a defendant’s wealth, it is not a per se finding of “oppression, fraud or malice.” Civil Code section 3295, subdivision (c), states that such an order “shall not be considered to be a determination on the merits of the claim or any defense thereto and shall not be given in evidence or referred to at the trial.” The plaintiff must still convince the trier of fact.

The defendant is presumptively entitled to a protective order that the disclosure of the financial documents is limited to the discovering party, its counsel, counsel’s representative and solely for the purposes of the pending lawsuit. Richard v. Superior Court (1978) 86 Cal.App.3d 265.

The decision of whether to seek a court order under Civil Code section 3295 should be determined on a case by case basis. Given the reluctance of some judges to grant the motion, if the plaintiff decides to not bring a Section 3295 motion, there are still opportunities for the plaintiff to prepare for the punitive damage claim. Plaintiffs may still be able to discovery the identity of key witnesses and potentially even financial records related to a defendant’s financial condition. Civil Code section 3295, subdivision (c) provides, “the defendant may be required to identify documents in the defendant’s possession which are relevant and admissible for that purpose and the witnesses employed by or related to the defendant who would be most competent to testify to those facts.” This allows plaintiffs to request the identity of witnesses and documents relating to profits or the defendant’s financial condition. At a minimum, having this information available will permit the plaintiff to have additional tools in his or her belt when entering the punitive damages phase of trial. Having the identity of the witnesses most qualified to testify as to the defendant’s financial condition and the identity of the relevant documents will be helpful in navigating the punitive damage phase of trial.

Informal Discovery

Propounding written discovery is not the only way to find evidence relevant to a defendant’s financial condition. Informal discovery including internet research and monitoring as well as asset searches can be useful avenues for finding information relevant to a defendant’s wealth.

If dealing with an entity defendant, review the business’ website to see how it is projecting itself on the internet. It is possible that the defendant touts its recent projects, orders, or accomplishments. This information could be used to impeach testimony of the business’ meager financial condition.

Similarly, monitoring the defendant’s social media presence can also be a useful. Parties in litigation are not always careful about what is posted online. Extravagant purchases and trips might be displayed for anyone to see. It is also possible to find parties discussing the case on the internet.

Asset searches can also be conducted on both entity and individual defendants. Third party vendors offer varying degrees of searches at a range of price points. It may be useful to conduct multiple asset searches, including before filing suit, shortly after filing suit and post judgment. Pre-litigation asset searches may help with evaluating potential recoverability of a lawsuit. Asset searches over time could show whether a defendant is transferring property in order to frustrate collection efforts.

Financial Evidence at Trial

It is common for defendants to seek a bifurcation of trial to prevent evidence of financial condition and profits during the liability phase of trial. Civil Code section 3295, subdivision (d) provides the court:

…shall, on application of any defendant, preclude the admission of evidence of that defendant’s profits or financial condition until after the trier of fact returns a verdict for plaintiff awarding actual damages and finds that a defendant is guilty of malice, oppression, or fraud in accordance with Section 3294. Evidence of profit and financial condition shall be admissible only as to the defendant or defendants found to be liable to the plaintiff and to be guilty of malice, oppression or fraud. Evidence of profit or financial condition shall be presented to the same trier of fact that found for the plaintiff and found one or more defendants guilty of malice, oppression, or fraud.

If a defendant decides not to bifurcate, the plaintiff is free to present evidence in support of punitive damages during the liability phase of the trial. However, in a case where there is insurance coverage, but the defendant has a poor financial condition, the plaintiff may want to consider seeking to bifurcate punitive damages from the trial. This can be helpful to juries that may be reluctant to higher compensatory damages amount if they learn of the defendant’s poor financial condition.

Civil Code section 3295, subdivision (c), does not bar a plaintiff from subpoenaing relevant profits and financial condition evidence for trial. If plaintiff has not brought a motion to permit pre-trial discovery of these records, plaintiff may still request the documents, but he or she cannot look at them until the conditions of Civil Code section 3295, subdivision (d), are met: that a jury returns a verdict for actual damages and a finding of “oppression, fraud or malice.”

The Type of Evidence That Shows Financial Condition

When propounding discovery related to the defendant’s financial condition, taking a broad approach to the types of records sought is imperative. Not only should documents showing net worth, assets and gross income be sought, but plaintiffs can also request credit information, tax records, accounts receivable, balance sheet reports, real property statements, as well as loan or credit applications. A wise plaintiff’s attorney may wish to seek the assistance from a valuation accountant with experience in litigation to craft written discovery aimed at discovering a defendant’s financial capacity.

“[A]t least one court has held that evidence of the profits wrongfully gained by the defendant is, in itself, adequate evidence upon which to base an award of punitive damages.” Id. (citing Cummings Medical Corp. v. Occupational Medical Corp. (1992) 10 Cal.App.4th 1291, 1298-1301, but noting other courts have disagreed with Cummings).