Each legislative session, the Texas Legislature overturns everyone's understanding of the way things work in certain nooks and crannies of the legal world.  This time around, one of those (nooks? crannies? both? what, exactly, is the difference between a nook and a cranny anyway?) is discovery of the defendant's net worth in a case where exemplary damages are sought.

Since the Supreme Court of Texas decided Lunsford v. Morris in 1988, we've all come to think we know how net-worth discovery works – the plaintiff is entitled to it and doesn't have to make any threshold showing to get it, but the usual discovery balancing tests of burden vs. probative value apply, with at least the result that the plaintiff can't embark on an open-ended fishing expedition through the defendant's books and financial reports.  But that understanding has been rendered substantially obsolete by Senate Bill 735, which applies to cases filed on or after September 1, 2015.

Under new section 41.0115 of the Civil Practice and Remedies Code, as added by the bill, discovery of net worth is not authorized unless and until the trial court signs an order finding that the claimant has shown a substantial likelihood of success on the merits of a claim for exemplary damages.  The requisite showing may be made through affidavits and discovery materials, and can be resisted in the same way.  And if the trial court allows the discovery, it may only authorize the least burdensome method available to obtain the net worth evidence.

The filing of a motion for net worth discovery by the claimant creates a presumption (rebuttable? irrebuttable? the statute doesn't say) that the case is ripe for a no-evidence motion for summary judgment by the defendant on exemplary damages.  Presumably most defendants will file such a motion simultaneously with, or even as part of, their response to the discovery motion.  So the plaintiff must take a deep breath before filing the discovery motion.

The bill also makes an interesting amendment to the definitions section of chapter 41: "net worth" is now defined as assets minus liabilities "on a date determined appropriate by the trial court."  So the relevant date for the defendant's net worth – not just for discovery purposes but for all exemplary-damage purposes – has become a matter of trial court discretion.  The bill offers no standards to guide that discretion; trial courts will likely consider such matters as ready ascertainability (making the date coincide, for example, with one of the defendant's regular accounting reporting dates), whether unusual fluctuations, manipulations, or events make one date more representative than another of the defendant's true net worth, and the idea that the most recent reasonably available date will help the jury choose an amount of exemplary damages that suitably punishes the defendant.

It will, of course, be several years before appellate decisions start resolving the ambiguities in the new statute and the issues it leaves unresolved.  Except in an extraordinary case, that review will come by mandamus, since the bill creates no interlocutory appeal for net-worth discovery orders or their denial.  Stay tuned.

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