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Proving Evidence of Financial Condition in Punitive Damage Cases

By Gerald A. Klein, P.C.

You have just rested in the best punitive damage case of your career. The defendant not only admitted seriously injuring your client, but said he was glad he crippled her and would do it again if given an opportunity. He admitted spending his prior summer as a camp counselor for his local Hitler youth group and everyone on the jury has been making faces at him since voir dire.

You are therefore shocked and amazed when the court precluded you from arguing punitive damages to the jury even though the jury specifically found the defendant acted with malice, oppression, and fraud in the liability phase of trial. What went wrong? It turns out you forgot to present evidence of the defendant’s financial condition. The consequence is a death penalty for your punitive damage claim.

This article briefly reviews the financial condition requirement to recover punitive damages and survive appeal.

1. The Requirement of Proving Financial Condition.

To recover an award of punitive damages, it should be enough to show the defendant is a menace to society, who thought nothing of robbing, stealing, and pillaging to make a profit no matter who got hurt. But ever since Adams v. Murakami (1991) 54 Cal.3d 105, our supreme court has made it clear you will need evidence over and above the defendant’s wrongdoing if you want to win punitive damages at trial and keep them on appeal.

In Adams, our supreme court said proof of financial condition is an essential element plaintiffs must prove to recover punitive damages. The Adams court noted that the purpose of punitive damages is to sting, not to destroy. Adams v. Murakami, supra, 54 Cal.3d at 110. Accordingly, evidence of financial condition is indispensable for a jury to consider in deciding how much to award in a punitive damage case because punitive damages that might crush someone of modest means would not even be felt by some of the largest companies in the world and vice versa. Adams v. Murakami, supra, 54 Cal.3d at 110-111. Based upon this principle of law, the Adams decision requires plaintiffs seeking punitive damages to present evidence of the defendant’s financial condition as a prerequisite to a punitive damage award. No evidence of financial condition – no punitive damages. Adams v. Murakami, supra, 54 Cal.3d at 112. Therefore, unless you present evidence of the defendant’s financial condition, a punitive damage claim should not go to the jury – no matter how evil the defendant might be. Ibid.

2. Financial Condition and “Net Worth” Are Not The Same Thing – or Are They?

Both judges and attorneys commonly believe that evidence of financial condition is the same thing as net worth. The Adams court made it clear that the two concepts were not synonymous and declined to require proof of net worth before punitive damages could be awarded. Adams v. Murakami, supra, 54 Cal.3d at fn. 7. The court refused to state that proof of net worth was the only way to prove financial condition. This is significant because assuming the defendant does not admit what his/her/its net worth might be, expert testimony might be necessary to determine net worth. See, e.g., Rufo v. Simpson (2001) 86 Cal.App.4th 573. The concept of net worth can get extremely subjective in the case of individuals and companies with complicated financial structures. Accordingly, it is easier to present evidence of financial condition ( i.e., the ability to pay an award), than it is to prove a defendant’s net worth.

At least one court has held that even if the defendant has a negative net worth, that fact alone will not allow the defendant to escape a punitive damages award. Zaxis Wireless Communications v. Motor Sound Corporation (2001) 89 Cal.App.4th 577. See also, Rufo v. Simpson, supra, 86 Cal.App.4th at 621. In Zaxis, the court found that even though the defendant had a negative net worth, it had a credit line of $50 million that would allow the company to pay a $300,000 punitive damage award. But other courts have argued that (notwithstanding the language in Adams), proof of net worth is essential to a punitive damage claim. See, Lara v. Cadag (1993) 13 Cal.App.4th 1061 and Kenly v. Ukegawa (1993) 16 Cal.App.4th 49.

Accordingly, it seems unclear whether the concepts of financial condition and net worth are synonymous or not. Until the supreme court weighs in on the issue, it is still safer to present evidence of net worth if you want to win and keep a punitive damage award.

3. Proving Financial Condition

The Adams court made it clear it is the plaintiff’s burden to present evidence of net worth, not the defendant’s burden to rebut the evidence. Adams v. Murakami, supra, 54 Cal.3d at 120-21. It is not enough that the courts make it difficult to collect punitive damages from even the most evil of defendants. Our legislature has seen fit to make it more difficult to collect the evidence of financial condition you will need to prove your punitive damage case.

Civil Code section 3295(c) requires plaintiffs attempting to discover evidence of financial condition to file a motion with the court before the defendant is required to respond to such discovery. To win such a motion, Civil Code section 3295(c) requires you to prove it is more likely than not you will prevail on a punitive damage claim. That can be a tall order early in the case when many facts are either unknown or hotly disputed. In larger cases, the motion can be lost based just on the sheer volume of documents and the limited time a court has to address the issues in a motion setting.

The requirement of Civil Code section 3295(c) puts plaintiff lawyers on the horns of a dilemma in most cases. Where the evidence is obvious and overwhelming that a defendant is guilty of malice, oppression, or fraud, then deciding to file a Civil Code section 3295(c) motion is an easy decision. But what about cases where the evidence is not as clear or overwhelming? In such cases, you could bring a section 3295(c) motion – only to lose it. If you lose the Civil Code section 3295(c) motion, you may face a summary adjudication motion on the punitive damage claim or a motion in limine at trial requesting an evidentiary hearing before anyone can refer to malice, oppression, or fraud – given the fact you would not have any evidence to prove financial condition – an essential element of net worth. Moreover, defendants who at one point may have been concerned about a punitive damage award are likely to become more confident in their cases after a Civil Code section 3295(c) motion has been lost.

Thus, the decision to file a motion to obtain pre-trial discovery of net worth has to be made on a case-by-case basis. In some cases, you may have sufficient evidence of financial condition to survive a motion for summary adjudication even without pre-trial discovery. You may even have enough evidence of financial condition to get the issue of punitive damages to the jury without discovery. In such a case, filing a Civil Code section 3295(c) motion is unnecessary.

Even if you do not have any evidence of net worth, Civil Code section 3295(c) allows plaintiff to subpoena documents of financial condition for delivery at trial. Unfortunately, it is not easy to subpoena evidence unless you know it exists and can describe the documents you need with particularity. If you do not know what types of documents the defendant has which provide evidence of financial condition, you may not know what to request in your subpoena.

Even if the evidence you subpoena turns out to be unhelpful or non-existent, once the jury finds malice, oppression, or fraud, the trial court may be willing to order the defendant to produce financial information – an order it might have been reluctant to issue earlier in the case when liability for punitive damages was not as clear. But, such a strategy is risky. There is no guarantee a court will order the defendant to produce financial documents after discovery is closed, even if the jury has found the defendant guilty of malice, oppression, or fraud. If the trial subpoena does not provide evidence of financial condition, the request for punitive damages may not get to the jury. And you will have a difficult discussion with your client.

4. Conclusion

For the most part, trial lawyers are so focused on proving malice, oppression, or fraud in punitive damage cases, they overlook the need to prove the defendant’s financial condition. The “financial condition” element may be the toughest punitive damage element to prove. In an obvious case where a jury is almost certainly going to find evidence of malice, oppression, or fraud, trial lawyers should make a motion for pretrial discovery pursuant to Civil Code section 3295(c). However, in typical cases, where liability for punitive damages is not as clear, a trial lawyer must make a difficult choice about whether to bring such a motion for pre-trial discovery or simply subpoena documents for trial, which may or may not establish financial condition. These are not easy decisions and the issue should be analyzed well before discovery is cut off.

This article first appeared in the OCTLA Gavel, Winter 2013.