Pat Long-Weaver 2016-09-26 23:41:11
Will it provide a “substantial likelihood” of disagreement? While Texas’s new net worth discovery statute resolves some issues associated with cases seeking exemplary damages, it presents a number of practical problems for attorneys on both sides of the aisle. The law provides a formal procedure for net worth discovery;1 but how will this play out in practice? Under the statute, claimants will not be entitled to any net worth discovery unless and until they demonstrate on hearing “a substantial likelihood of success on the merits of a claim for exemplary damages.” This is a marked change from the previous practice of allowing discovery of net worth evidence without meeting any threshold of proof. Before the statutory change, when caselaw allowed such discovery, disputes arose regarding the types of evidence that could be obtained, often leading to extended discovery disputes. That changed for cases filed as of September 1, 2015, the effective date of new statutory provisions brought by Senate Bill 735.2 While there was a great deal of debate surrounding the enactment of the statute, its practical application has been less discussed. Hearing then discovery. The bill prescribes a specific protocol and establishes the threshold that must be met for discovery on net worth to proceed.3 First, the trial court can authorize net worth discovery only on motion of a party. As is to be expected, the opponent must be given an opportunity to respond, and the motion must be heard by the trial court, apparently prohibiting ruling on submission. But the statute states that evidence is to be in the form of affidavits or discovery responses, precluding live testimony. The court must then enter a written order on the motion. Even when permitting net worth discovery, the trial court is admonished to authorize only the “least burdensome method available” to obtain it.4 Critically, the statute prescribes a two-step process. In a marked departure from previous practice, the court may not simply allow what appears to be minimally invasive discovery or apply a de facto balancing test. Instead, the court must answer two distinct questions: whether plaintiffs met their burden, so as to allow net worth discovery, and if that burden is met, what is the “least burdensome” method to obtain that discovery. Step one: defining “substantial likelihood.” Key to the court’s analysis, as well as the expected dispute between the parties, is that the discovery can go forward only if claimants have demonstrated a “substantial likelihood of success” on the merits of their claims for exemplary damages. Significantly, the statute does not provide discovery based on a “good faith” basis nor does it state that one must only present a prima facie case. The parties, as well as the trial court, it would seem, may disagree on how success is defined. The statutory framework allowing punitive damage awards is very specific: It must be by a unanimous verdict based on a clear and convincing evidence standard.5 The Texas Supreme Court has recently reexamined the standards for imposition of gross negligence, going so far as to affirm a no-evidence summary judgment in Boerjan v. Rodriguez.6 So what is the “success” analysis based on? Logically, it has to be tied to the success of obtaining such a finding on conduct sustaining a punitive damages award. In other words, has the plaintiff established a “substantial likelihood” of obtaining a unanimous verdict and that “clear and convincing evidence” supports a finding that will then support punitive damages? Numerous discussions of the underlying bill suggest that certain legislators did not believe the bill as proposed had a “high” evidentiary standard.7 The Legislature did not specifically define “substantial likelihood,” so the term should be liberally construed.8 Defendants will argue that the words in the statute should be given their ordinary meaning.9 And while parties may refer to other statutes where “substantial likelihood” or similar concepts are utilized, the disconnect will be whether the level of proof needed in those cases is really comparable to that needed for an award of exemplary damages. Generally, in civil litigation, the verdict need not be unanimous, nor does it need to be by clear and convincing evidence. The threshold for “success,” in this context, is simply much higher than the normal level of proof presented. On the other hand, the statute references a time when summary judgment is appropriate as timing for the contemplated motion. Could that be interpreted to mean a lower, “no-evidence” type standard as seen in summary judgment practice? Step two: least burdensome means. Even if discovery is allowed, the trial court is further required to order that the discovery of net worth be by the least burdensome method available. Plaintiffs and defendants need to consider drafting their own proposed discovery to present to the court for consideration. It is unlikely that a court is going to be interested in holding multiple hearings, so there could be an advantage to presenting the court with the suggested discovery at the time of the hearing. A party needs to be ready to respond to the opponent’s proffered discovery and be ready to show the court a suggested protocol. In the appropriate case, parties may be able to work out an agreed discovery procedure, but they need to be clear on the record that they are not conceding that the discovery should have proceeded in the first instance. Timing of the hearing. The statute presumes that the motion will be entertained only after extended discovery: 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. Again, be mindful that when the net worth hearing is requested, the plaintiff is tacitly conceding that discovery has progressed to the point that a no-evidence summary judgment, while not meritorious, is appropriate from a timing perspective. Double check “canned” discovery requests. Parties should carefully revise their standard discovery to make sure they do not inappropriately ask for net worth discovery prior to a ruling from the court. Defendants need to be ready to object if the opponent improperly asks for the same. Companion no-evidence partial summary judgment. The statute does not require that a companion no-evidence motion for summary judgment be filed by the opponent of the net worth discovery. Parties should, however, consider the practical effect of urging both at the same time. Don’t forget the scheduling order. Parties need to proactively advise the court if net worth discovery is a potential issue. It needs to be discussed and made a part of the scheduling order. Depending on the venue, and the motion practice in that court, counsel will need to double check that the timing of the net worth hearing will coordinate with discovery deadlines and/or any other motion deadlines. If your court allows early scheduling conferences, this is an opportunity to apprise the court that the case may implicate the statute. Understandably, neither party is going to concede its position at this stage, but it may be appropriate to simply consider the timing, should such discovery need to take place after a ruling from the court. The clients’ means will influence whether extensive discovery will likely be sought as well as the measures anticipated to limit such discovery. Depending on the circumstances, this may or may not be an appropriate time to address what would constitute a least burdensome means. Frankly, plaintiffs might be well served to start that dialogue early with the court and their opponents. This is particularly going to be the case if a party is concerned about losing a trial setting or another delay. Defense counsel also need to consider how this hearing and discovery process may impact a decision to seek a bifurcated trial on punitive damages. The new statutory provision did not change the bifurcation rules. It’s not retroactive (at least not yet). At present, we have no court interpretation to guide the parties. The process is that new. It should be noted that the statute’s application and a request for retroactive application has been urged without success at the appellate level. The Texas Supreme Court, at one point, also seemed poised to address the issue, but ultimately did not.10 In any event, the question as to the practical application and impact will certainly be worth monitoring. Notes 1) Tex. Civ. Prac. & Rem. Code Ann. § 41.011. 2) Effective date of section 41.0115. 3) Tex. Civ. Prac. & Rem. Code § 41.0115. 4) As part of the bill, the previous statute defining “net worth” was also amended; it now is specifically defined as “the total assets of a person minus the total liabilities. ...” 5) Tex. Civ. Prac. & Rem. Code Ann. § 41.003. 6) 436 S.W.3d 307 (Tex. 2014). 7) Rachel Ambler, New Net Worth Discovery Law Gives Defendants More Protection, Texas Bar Blog, (Aug. 6, 2015), http://blog.texasbar.com/2015/08/articles/news/new-net-worth-discovery-law-gives-defendants-more-protection/. 8) Id. 9) Tex. Gov’t Code Ann. §§ 312.02-312.006. 10) In re Michelin North America, Inc., No. 05-15-01480-CV, 2016 WL 890970, (Tex. App.—Dallas [5th Dist.] 2016); see also In re Robinson Helicopter Co., No. 01-15-00594-CV, 2015 WL 4623939 (Tex. App.—Houston [1st Dist.] 2015), 2016 WL 1658737, April 26, 2016, mandamus dismis’d. PAT LONG-WEAVER is a founding partner in Long-Weaver, Manning, Antus & Antus whose practice focuses on business litigation in the oil and gas industry. Her primary area of interest is the Permian Basin.
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