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Financial Disco Pre-Adjudication in California

Last edited 144 days ago by Ted Broomfield

SUMMARY

This blog aimed at attorneys practicing in California litigation explains that financial discovery may be propounded upon a Court order after the Court finds good cause meaning that the plaintiff is very likely to obtain an award of punitive damages.

There are four (4) strategic reasons to seek an order granting permission to conduct financial discovery on a defendant for purposes of establishing wealth or financial position in order to prove that a potential punitive award is proportional to the wealth/financial position of defendant. One, it is plaintiff’s burden to prove that a punitive award is proportional to a defendant’s wealth, and waiting until the bifurcated punitive section of trial may limit time and disadvantage plaintiff. Two, some practitioners claim that even a denial of a 3295 motion for financial discovery alone, makes financial discovery easier, in the more time compressed section of the trial allocated to punitive damages. Three, the assigned trial judge will be well aware that the Court has already determined that punitive damages are a substantial probability. Four, the first three factors will encourage settlement.

DETAILS

Context, plaintiff has burden to prove proportionality of punitive to wealth, but generally prohibited from discovery on wealth in discovery phase

In California in order for an award of punitive damages to be sustained on appeal the plaintiff has the burden of proving that the punitive award is proportional to the wealth/financial position of defendant.

The law creates somewhat of a paradox for a plaintiff, because financial discovery is privileged, under the self-executing right to privacy in California. There is a right to financial discovery after adjudication, but, times frames to perform financial discovery are limited, and it should come as no surprise that defendants who are likely to be adjudicated as guilty of malice, oppression and fraud are less that forthcoming and cooperative in providing their private information that can be used against them.

In recognition of this conundrum, California law does recognize an exception to the general rule prohibiting financial discovery during the discovery phase of trial codified at

Civil Code section 3295⁠

. Upon motion, when the Court finds good cause, the Court may issue an order for financial discovery.

The standard for good cause is that the court finds that an award of punitive damages is “substantially likely, meaning, very likely. Synthesizing the authority, in order to find that punitive damages are substantially likely, based on evidence, the Court must find liability is substantially likely, as well as that it was substantially likely that the defendant acted with malice, oppression, or was guilty of fraud, which is the third of the Neal factors on punitive damages.

This blog goes into details of the law and procedure applicable to seeking such a court order.

Punitives a matter of right at Civil Code section 3294

California law codifies that damages for purposes of punishing and making an example of defendant may be awarded when the fact finder has determined that the defendant is guilty of malice, oppression and/or fraud.

Civil Code section 3294⁠

The plaintiff bears the burden of proving that the defendant is guilty of malice, oppression and/or fraud on the clear and convincing evidence standard. Evidence Code section 115, Evidence Code section 500,

Weiner v. Fleischman⁠

(1991) 54 Cal.3d 476, 487 [286 Cal.Rptr. 40, 816 P.2d 892] (quoting

Herman & MacLean v. Huddleston (1983) 459 U.S. 375⁠

, 389-390).) “ ‘Clear and convincing’ evidence requires a finding of high probability.” (

In re Angelia P. (1981) 28 Cal.3d 908⁠

, 919 [171 Cal.Rptr. 637, 623 P.2d 198].

“Under the clear and convincing standard, the evidence must be ‘ “ ‘ “so clear as to leave no substantial doubt” ’ ” ’ and ‘ “ ‘ “sufficiently strong to command the unhesitating assent of every reasonable mind.” ’ ” ’ ” (

Butte Fire Cases⁠

(2018) 24 Cal.App.5th 1150, 1158 [235 Cal.Rptr.3d 228].

Malice, oppression, fraud on clear & convincing get punitives

An appellate court may reverse such an award "only `"[w]hen the award as a matter of law appears excessive, or where the recovery is so grossly disproportionate as to raise a presumption that it is the result of passion or prejudice."'" [

Schroeder v. Auto Driveaway Co. (1974) 11 Cal.3d 908, 919⁠

The Neal-Court established a three prong test to determine if an award were excessive or grossly disproportionate, as follows: (1) Comparison of the punitive/exemplary damages to the degree of reprehensibility of the Defendant's conduct; (2) relationship between the punitive/exemplary damages award and the harm caused by Defendant; and (3) the relationship of the punitive/exemplary damages to the defendant’s wealth in order to determine whether those damages achieve the purpose of punishment and setting an example. [

Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910⁠

, 928 and CACI Number 3940].

Proportionality of punitives to wealth/financial condition to survive appeal

In order for an award of punitive or exemplary damages to survive appeal, the award must be proportionate to the defendant’s wealth or financial position.

This means that the dollar value of the punitive award, relative to the dollar value of the defendant’s wealth or financial position must be sufficiently high to achieve the policy goal of punishing and making an example of defendant, but, must not be so high as to be excessive and represent an unconstitutional taking, excessive fine, or violation of due process.

[

Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910⁠

, 928 and CACI Number 3940].

The plaintiff has the burden of establishing this on the record in the bifurcated punitive section of the trial. Evidence Code section 115 and Evidence Code section 500.

ID docs & witnesses with knowledge of defendant's wealth/financial position, without a Court Order

Although "[n]o pretrial discovery by the plaintiff shall be permitted with respect to...[financial discovery]...unless the court enters an order permitting such....the plaintiff may subpoena documents or witnesses to be available at the trial for the purpose of establishing the profits or financial condition....and 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." [

Civil Code section 3295⁠

(c)].

However, that may not be sufficient, so, it is possible to obtain financial discovery, upon a Court order.

Court order for financial discovery upon finding good cause, meaning it is very likely that defendant will be subject to a judgment for punitive damages

Before adjudication, California Courts may order financial discovery upon motion, before adjudication by express permission of the California Congress under Code of Civil Procedure section 3295. "Upon 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."

Civil Code section 3294⁠

Legal Standard for the Court to issue an order for financial discovery is very likely, and does not require adjudication

Jabro made it clear that the “…interpret[ation of] the words good cause in the statute means "substantial probability" and substantial probability means "very likely" or "a strong likelihood" just as their plain meaning suggests.” [

Jabro v. Superior Court (2002) 95 Cal.App.4th 754⁠

, 758].

Jabro explains that although the standard for issuing an order for financial discovery is higher than merely "more likely than not," but also that the standard of “substantial probability,” meaning “very likely,” to issue a court order allowing financial discovery is less than an adjudication and is less than clear and convincing. [

Jabro v. Superior Court (2002) 95 Cal.App.4th 754⁠

, 758].

Good cause depends on likelihood of liability and degree of reprehensibility

Liability

It is elementary that a Plaintiff must prove each essential factual element of fraud, deceit and/or malice or oppression.

Reprehensibility is the Only Neal Factor Applicable for a Pre-Adjudication Motion for Financial Discovery

Because a 3295 Motion seeks discovery on financial condition before punitive or exemplary damages are adjudicated, it is impossible to measure the damages awarded to either the degree of harm or defendant's wealth. Indeed, the Legislative intent of allowing a 3295 Order for Financial Discovery is to enable a plaintiff to be able to sustain an award by proving a Defendant's wealth. Therefore, the first two Neal prong tests are not pertinent to a 3295 motion.

Instead, only Neal Prong three, the reprehensibility of Defendant is pertinent to a 3295 motion.

⁠

CACI 3940⁠

test of reprehensibility is formulated in questions for the jury to consider

Did Defendant's conduct cause physical harm?

Did Defendant disregard the health or safety of others?

Was plaintiff financially weak, and did Defendant seek to take advantage of Plaintiff's financially week condition?

Did Defendant's conduct involve a pattern or practice?

Did Defendant act with trickery and deceit?

⁠

Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910⁠

, 929

Seek financial discovery to reduce risk, influence Court & defendant

One, it is plaintiff’s burden to prove that a punitive award is proportional to a defendant’s wealth, and waiting until the bifurcated punitive section of trial may limit time and disadvantage plaintiff.

Two, some practitioners claim that even a denial of a 3295 motion for financial discovery alone, makes financial discovery easier, in the more time compressed section of the trial allocated to punitive damages.

Three, the assigned trial judge will be well aware that the Court has already determined that punitive damages are a substantial probability.

Four, the first three factors will encourage settlement.

RECAP

When a plaintiff proves that a defendant is liable for a non-contractual obligation with malice, oppression or fraud on clear and convincing evidence a fact finder may award that plaintiff damages to punish and make an example of defendant.

In order to survive appeal on challenges as a taking, excessive fine, and due process, the plaintiff bears the burden of proving the three Neal factors: (1) reprehensibility; (2) proportionality of punitives to compensatory damages; and (3) proportionality of punitives to defendant’s wealth or financial position to ensure the policy goal of punitives.

The final element, proportionality of punitives to defendant’s wealth or financial position to ensure the policy goal of punitives can be daunting, because the general rule is that financial discovery is not available until after the award, which may prove to late, with too little time to obtain the necessary evidence.

Two tools exist. One, The absolute right, without any order, of a plaintiff to identification of document and witnesses necessary to establish financial position for purposes of issuing a subpoena for trial, under Civil Code section 3295. Two, seeking a court order for financial discovery under Civil Code section 3295, on good cause, or proving with evidence that plaintiff is very likely to obtain an award for punitives.

There are four strategic reasons to seek such an award. One, reduce risk of insufficient time after the award. Two, even if denied, the court may be more amenable to financial discovery after the award. Three, if granted, the court will be well aware that punitives have been found to be very likely. Four, the first three factors may motivate defendant to make a more favorable settlement offer.

SUMMARY

DETAILS

Context, plaintiff has burden to prove proportionality of punitive to wealth, but generally prohibited from discovery on wealth in discovery phase

Punitives a matter of right at Civil Code section 3294

Malice, oppression, fraud on clear & convincing get punitives

Proportionality of punitives to wealth/financial condition to survive appeal

ID docs & witnesses with knowledge of defendant's wealth/financial position, without a Court Order

Court order for financial discovery upon finding good cause, meaning it is very likely that defendant will be subject to a judgment for punitive damages

Legal Standard for the Court to issue an order for financial discovery is very likely, and does not require adjudication

Good cause depends on likelihood of liability and degree of reprehensibility

Liability

Reprehensibility is the Only Neal Factor Applicable for a Pre-Adjudication Motion for Financial Discovery

Seek financial discovery to reduce risk, influence Court & defendant

RECAP

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