• December 14, 2015


True war story: My client (“Plaintiff”), years ago, hired company to install $100,000+ machine in its factory. The machine was entirely useless and defective and had to be replaced at a cost of about another $100,000+. Plaintiff sued machine seller (“Defendant”) who denied machine was defective.

I served discovery as to the financial health of Defendant. Defendant refused to provide that information. I brought a motion to compel that information. The Court denied my motion agreeing with Defendant’s position that the company’s financial wherewithal was irrelevant to Plaintiff’s claims.

After written discovery, I eventually deposed the machine installer who testified, “Yes. The machine was totally defective. I told seller it would not work and, well, it didn’t.”

After the deposition, I asked the defense counsel if we could discuss settlement in light of the damaging testimony. He answered, “Absolutely not. That machine was fine. The installer is just wrong.” I was baffled.

The case went to trial. Plaintiff and I won. Plaintiff then took steps to enforce the judgment. The Defendant then, finally, opened its books to show that it was insolvent. (So, in case you’re not keeping a tally: $100,000+ for a useless machine, business delay and expense when machine is down, $100,000+ in legal fees and costs to go through discovery and through trial…)

Question: Why do our rules in both federal and state court require defendants to produce evidence of insurance coverage at the outset of litigation (that is, produce evidence that will give a plaintiff some idea of whether bringing a lawsuit makes financial sense) but plaintiffs’ lawyers are generally NOT allowed access to determine a defendant’s financial wherewithal to pay a judgment as part of the litigation (that is, until after the plaintiffs win)?

  1.  The courts do not require defendants to throw open their books, I believe, out of a concern that plaintiffs will exploit this information to seek more than they are entitled to if they learn that the defendant has lots of money. Or they might use the information of defendant’s lack of money to coerce settlement of a weak claim by threatening financial ruin via civil litigation.
  2. The courts do not require defendants to throw open their books, I believe, because we have a sense in our society that one’s wealth is extremely private — “it’s none of your business” (until and unless a court says the plaintiff is entitled to the money, then it is “your business”). (Also, as we all know, this information is fluid; how representative and how thorough would defendants’ financial disclosures be?)
  3. Finally, the courts do not require defendants to throw open their books, I believe, because a penniless or near it defendant will typically voluntarily disclose its poverty to avoid the needless and punishing expense of litigation.

I am not sure what the right answer is here but I think that plaintiffs should be able to get some idea early on in litigation as to the financial well-being or ill health of defendants.

As to the first concern above (call it “green mail”), our system has other means to prevent that. (One cannot simply revise damages claims based on a defendant’s wealth.)

As to the second concern, we have protective orders to keep the information private, to keep its use limited to litigation, and, in very sensitive matters, to keep the information restricted to lawyers only. In especially sensitive cases, review of a defendants’ financials could be conducted  “in camera” by the court (though this might impose a significant burden on the court).

Finally, as to the third point and as my “war story” shows, leaving it to self-disclosure too often it does not work. For example, some lawyers take on some cases for a flat fee, cash up front. A client might say, “I’ll pay you $20,000 cash. Drag this case on for as long as possible and try to defeat it at every turn.” Then a defendant with little money buys that time to try to escape the lawsuit and/or to try to wind down the business and start a new venture. Meanwhile, the plaintiff incurs the expense, of course, of fighting for an ultimately pyrrhic victory. And the cash-strapped court system creaks under the pressure of many frivolous non-meritorious defenses….

These thoughts came to mind when I saw a recent Report and Recommendation by U.S. Mag. Judge Steven E. Rau (D. Minn.) where one party in a $1 million+ lawsuit learned information about the adversary’s alleged attempt to to gut the business and start a new venture. Judge Rau ruled, “Safeguard’s interest in the ultimate destination of Homestar’s assets is speculative. If Safeguard is successful in obtaining a judgment against Homestar, the appropriate time to engage in litigation about Homestar’s assets is after any such judgment is entered.”

I am not saying that Judge Rau got the decision wrong. I have not read the papers closely enough to have an opinion on it. But I have a great deal of sympathy for litigants who have a truly daunting two-phase battle: (1) winning the case; and (2) getting the money. I do not think our system is well-served by holding the likelihood of “Part 2” in abeyance until the conclusion of “Part 1.”

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