It's common that engaging counsel needs to file a Motion to Compel Production of Documents, sometimes many months after our initial document request. In deciding the issue, courts generally require a reason or purpose the specific documents are required. Ed.
In the course of performing a forensic analysis in order to issue an expert report, a business valuator or investigative accountant (expert) might be denied access to important, if not critical, documents and information by the opposing party's counsel. Using matrimonial litigation as an example,1 this article proposes to identify types of documents and information that are often requested by the wife's expert for purposes of determining (a) the value of the defendant's assets for purposes of property division, and (b) the defendant's income-earning capacity (real income) for alimony and/or child support.
The wife is often the best source of information since during the earlier days of the marriage, the defendant would disclose information about his sources of cash. In this hypothetical example, the wife alleges that the defendant's businesses operated as several private companies (companies) he controls are highly profitable, and he has substantial unreported income. She also alleges that defendant pays for many personal and family expenses in cash, including expensive ocean cruises and other vacation trips in exotic places, where the family stays in luxury suites at five-star hotels. Personal travel of a more domestic nature, i.e., within the United States or Canada, is paid for by the companies, which records these as business expenses. Other personal living expenses, such as landscaping and gardening, interior decoration, home renovations, electronic equipment such as expensive high-definition television sets, summer sleep-away camps for the children, art, jewelry and vintage wines, are paid for by the defendant in cash. The automobiles of the wife, children, and their respective spouses are leased by the companies from a car dealer and recorded by the business as "automobile expenses." The private yacht is paid for by the companies and charged to automobile expenses. The Florida condo and related expenses are recorded as rent, occupancy, and office expenses.
The expert, having been retained to quantify the values of defendant's business ownership interests as well as defendant's real income, would prepare a detailed list of relevant documents and information to perform his or her financial analysis with respect to valuing the companies and quantifying the real income.
Defendant's counsel might refuse to allow the client to produce the documents and information enumerated in the expert's request, claiming that none, or most, of the requested items are not relevant. As part of a Motion to Compel Production of Documents, the wife's attorney might request that the expert prepare an affidavit that provides the reasons why each item is necessary for the forensic analysis. Often, the expert's affidavit would not only enumerate the documents and information the expert requests, but also specify why each document or item of information being requested is necessary in order to perform a meaningful and thorough analysis. The expert may be cross-examined on the affidavit by defendant's counsel, in which case the expert may have to justify why each of the documents, interviews, and site visits are relevant and necessary. Defendant's counsel will attempt to spin the expert's document/information request as being a "fishing expedition."
The first part of this article provides a list of the various documents and pieces of information that an expert typically requests, along with reasons and/ or explanations as to why they are relevant for purposes of his or her valuation and income analysis. The second portion of the list simply identifies the types of documents and information that the expert would request, as appropriate in the specific circumstances, but does not provide the respective reasons. This generalized list may serve as a checklist that can be tailor-made for similar types of matrimonial litigation. However, the respective reasons and explanations will be dictated by the specific types of documents and information being requested, considering the case-specific facts. The first few dozen respective explanations accompanying the items listed are merely suggested examples of reasons/explanations that might help persuade a judge to order the defendant to produce the expert's requested data.
Documents and Information Requested
1. Personal balance sheet of defendant as of the valuation date and financial schedules, including data filed with any banks or other financial institutions, wherever located and for whatever purpose.
This is basic information and a necessary starting point for purposes of establishing the net worth and financial state of affairs of defendant, including identification of income- generating assets.
2 Federal and state personal income tax returns with supporting schedules as well as respective Revenue Agent Reports (RARs), notice of assessment, and any correspondence to and from the respective income tax authorities. [Some practitioners also request a Form 4506 to request a copy of a tax return from the Internal Revenue Service or a Form 4506-T to request an account transcript from the Internal Revenue Service. Ed.]
The information contained in these documents is relevant for identifying income by source, the assets generating such income, and the disposal of capital assets during the period under review. The tax notices of assessment would contain the tax authorities' revisions, if any, to defendant's reported income, based on information that they might possess. Correspondence with the tax authorities may contain detailed explanations by them and/or by defendant relating to income items and/or the legitimacy of certain deductions, in arriving at the income reported on his tax returns.
3. Listing, including copies of purchase invoices and insurance coverage, of works of art, antiques, paintings, and coin, stamp and wine collections owned by defendant, wherever situated.
Assists in establishing the net worth of defendant. Insurance coverage generally provides an indication of the replacement value of the assets.
4. Listing, including copies of purchase invoices and insurance coverage, of jewelry owned.
Assists in establishing the net worth of defendant. Insurance coverage generally provides an indication of the replacement value of the jewelry.
5. Statement indicating defendant's ownership and/or interest in any life-insurance policies, indicating the names of insurance companies, face values of policies, the type of insurance and the cash surrender value of each of the policies, names(s) of beneficiary (ies), and whether such policies are owned by the defendant personally or by a closely held company in which defendant has an equity ownership interest.
This information is relevant for purposes of establishing the net worth of defendant and may provide an indication of his own views of his net worth in that the policy (ies) may have been purchased to provide liquidity for succession planning purposes and/or fund the post-mortem acquisition from his estate of his private-company shares.
6. (a) Canceled checks and bank statements of all personal checking, savings, and other bank accounts, located throughout the world, for the three years immediately preceding the valuation date.
These items would assist in establishing defendant's sources of income receipts; living expenses; allocation of his funds; his lifestyle; possible existence of non-arm's length payees; and unrecorded investments and other assets acquired by him.
(b) List of all bank accounts closed or transferred within the past three years.
There may have been cash transactions that occurred in bank accounts that are now closed. These transactions would be relevant for determining defendant's real income.
(c) List of all safety deposit boxes in defendant's name (and in the name(s) of nominee(s) or alter egos, if applicable), including location of each box over which defendant has signing authority, wherever situated throughout the world, along with schedule of visits during the three years immediately preceding the valuation date and list of all persons having access to these boxes during the said period.
These details may be relevant to establishing the location of defendant's assets and may provide information as to when safety deposit box contents may have been added or removed, possibly indicating unrecorded cash transactions during the relevant period as well as additional information regarding defendant's net worth.
7. Details of all sums paid or credited to or received by defendant by any third persons, companies, firms or corporations either as salaries, bonuses, fees, dividends, profit-share redemptions and/ or sale of shares, reimbursement of loans, advances, liquidation or sale of assets, payment and/or reimbursement of expenses (expense accounts), expense allowances, car allowances, golf club, yacht club, social club, and other club dues and expenses, entertainment, sporting events (including season tickets), and other emoluments or forms of payment or remuneration received or enjoyed by defendant, directly, indirectly or in any manner whatsoever, including that received constructively.
This information may be relevant for obtaining a complete perspective of all cash in-flows and out-flows of defendant during the relevant period for purposes of determining his real income, sources of receipts, disposals of assets, and possible identification of the existence of other assets.
8. List of all personal credit cards held in defendant's name, or that/ those of his nominee(s) with respective account numbers, as well as monthly statements of his credit cards for the 24-month period ended on the valuation date.
This information may be relevant in determining defendant's level of living expenses, lifestyle, standard of living, identification of payees, etc.
9. Schedule of all payments made on defendant's behalf and/or for his benefit by any of his companies with respect to his use of credit cards or charge cards such as (but not limited to) American Express, MasterCard, Visa, retail stores, restaurants, or any other credit cards, including copies of all credit card statements.
This information may be relevant for purposes of determining defendant's real income. It will assist in the analysis of the nature and amount of expenses paid by the companies on his behalf, thereby forming part of his real income (whether directly, indirectly, or constructively received or enjoyed) as well as for determining the value of the companies for purposes of establishing defendant's net worth. In addition, expenses paid by any of the companies on defendant's behalf, or expenses claimed by such business that are not effectively connected therewith (untaxed benefits in his hands), should be adjusted on the payor company's books income for valuation purposes, thereby increasing the company's valuation and, hence, value of defendant's ownership interest therein.
10. Schedule of all out-of-town travel (business and pleasure) (outside a radius of 300 miles from office/home) during the immediately preceding 36 months, including:
- Purpose of visit
- Place(s) visited
- Duration of stay
- Copies of invoices for hotel and other accommodation
- Copies of airline tickets (or e-mail itinerary)
- Person(s) by whom defendant was accompanied
- Approximate cost per trip
- Names and addresses of travel agents used to book defendant's travel
- Copies of all airline frequent-flyer statements and other air-miles program statements
This information may assist in analyzing expense items such as travel, promotion, etc., paid by the business which may, in fact, be of a personal, non-operational nature and which may have to be adjusted on the books of the business(es) in determining the value thereof for purposes of establishing defendant's net worth. Moreover, this information is relevant for establishing, more accurately, the real income of defendant.
11. Copies of all pages of defendant's passport(s) and, if the passport(s) had recently been renewed, copy of immediately preceding passport(s).
This information may assist in measuring more accurately the indicated real income of defendant by providing details (e.g., destinations and length of visits) of his personal travel charged to the business but enjoyed by him as a personal benefit. To the extent there is indication of frequent visits to tax-haven jurisdictions where assets may be held, it might be a sign that further inquiry is necessary.
12. Copies of all applications submitted by defendant to any thirdparty or financial institution that were accompanied by his personal balance sheet.
Applications for credit are significant documents, providing defendant's own representations and assessments of his income and net worth.
13. Financial statements (audited, if available) of all business and investment entities in which defendant has a direct or indirect interest, including (but not limited to) partnerships, joint ventures, and other co-ownerships.
Financial statements contain basic financial information and are typically a necessary starting point for purposes of valuing business interests and relate to establishing defendant's net worth. As defendant is a shareholder (or partner, as the case may be), it is necessary to value the shares or partnership interest of each entity on an en bloc basis in order to value defendant's equity interests therein.
14. Federal and state income tax returns and schedules of the companies, along with respective RARs and notices of assessment, if any.
Revenue Agents Reports and notices of assessment may contain the taxation authorities' revisions to the companies' respective declared incomes based on information the taxation authorities might possess. The schedules appended to the income tax returns might contain other information relevant from a valuation standpoint, such as tax cost bases, tax credits, loss carryforward balances and the identification of related parties, etc. The information contained therein may impact the value of the companies and, as the defendant derives his income mainly from these closely held entities, such information will also assist in measuring his income-earning capacity for alimentary and child support purposes.
15. Access to minute books of the companies, including articles of incorporation, amendments, by-laws as well as minutes and resolutions of shareholders and directors during the relevant period.
This information is relevant for ascertaining the rights, privileges, restrictions, obligations, and other attributes of the companies' shares, as contained in the articles of incorporation, by-laws, minutes and resolutions, and the existence of contracts and shareholders' agreements. These factors, in turn, may have a direct and material impact on the value of the shares held by defendant, to the extent that these documents may refer to shareholder agreements, dividend rights, profit-sharing and bonus arrangements, management fees, and other potential income distributions.
16. Copies of (or access to) auditors' or accountants' year-end work papers, including journal entries, in respect of each of the companies for the relevant fiscal years.
This information is relevant, as a review of these auditors' or accountants' work papers may provide information with respect to adjustments that may be necessary for valuation and income-measurement purposes.
17. Copies of all shareholders' agreements, including buy-sell covenants, to which either defendant or his nominee was party, as well as copies of agreements that were previously in effect.
Shareholders' agreements may include buy-sell provisions that contain a formula or other mechanism to acquire or sell shares of the companies, as well as references to price/value "formulas" and so forth, when there is a "triggering event." They can also include provisions restricting the transferability of shares, and provisions regarding payments and distributions of profits and gains.
18. Copies of all bank, mortgage loan, and government grant applications of the companies during the relevant period, including all documentation filed with the particular lending institution(s) for purposes thereof.
Applications for financing are important documents and may provide defendant's or management's own assessment of income and value. [Many documents filed with lending institutions are filed under penalty of perjury. Ed]
19. Copies of all contracts and agreements to which the companies were party as of the valuation date.
This information will facilitate the assessment of the nature and amount of any contractual benefits or obligations of the companies, as the case may be, for valuation purposes. Further information that might be provided by these contracts and agreements may include the length of time over which such benefits would be received or obligations would be payable. For purposes of the valuation, a materiality threshold could be applied, limiting the request to all contracts and agreements involving financial consideration in excess of $20,000.
20. Copy of insurance policy (or summary sheet) with respect to the companies' fixed assets (other than land) and inventory, including business interruption.
This information may help corroborate the value of the companies' tangible assets as well as the companies' profitability and intangible value. The business interruption portion of the policy might indicate what the companies' management considers to be the level of profitability of the business (es). Profitability can directly impact corporate value, the ability of the companies to make corporate distributions of income by dividends or otherwise, and/or invest in capital projects.
21. Copies of municipal valuations for land and building.
This information may help corroborate the values of the companies' tangible business assets, which in turn impacts the value of defendant's shares.
22. Copies of any appraisals of the companies' real estate commissioned within the two years immediately preceding the valuation date.
This information may help corroborate the values of the companies' real properties, which in turn impacts the value of defendant's shares.
23. Copies of any arm's length offers received during the immediately preceding three years for the companies' assets and/or issued shares.
This information may help corroborate the indicated value of the companies and/or their assets, as arm's length, open-market transactional market data may provide a good indication of price/value.
24. Details of any non-arm's length, or related party, transactions of the companies during the three fiscal years immediately preceding the valuation date.
Such details may be relevant in determining defendant's real income through the determination of personal (or other non-business) amounts and to assess the level and quality of earnings2 generated by each of the companies. Moreover, given the closely held, family run nature of the companies, any non-arm's length or related-party transactions involving consideration not at market values or market prices, or nonoperational in nature, may distort the income-generating capacity and, hence, the value of the companies' business(es). The defendant's principal sources of income and business equity value are derived from the companies.3
25. Copies of all contracts and sub-contracts with respect to any and all repairs, renovations, and improvements made at any of defendant's residence(s) or with respect to any real estate which defendant owns or has an interest in, and names and addresses of architects, engineers, designers, roofers, electrical and plumbing contractors, and gardeners who rendered services at any time during the three years immediately preceding the valuation date.
This information may be relevant as it will provide information as to the amount of expenditures, which may have been charged to, and paid by, the companies, but which were for the personal benefit of defendant. There is also the possibility that certain of these contractors/suppliers may have been paid partly or totally in cash. It may impact both the value of defendant's shares and his real income by helping to trace the sources of cash used to make the payment.
26. List of securities owned directly or indirectly by defendant in public companies and private corporations wherever located throughout the world; investments and other beneficial interests in entities in tax havens such as Bermuda, the Bahamas, Liechtenstein, Luxembourg, Switzerland, Cayman Islands, Turks and Caicos, Cook Islands, or elsewhere; stock rights and warrants, bonds, debentures, guaranteed investment certificates, term deposits, bankers acceptances, treasury bills and bonds, interests in limited partnerships, interests in commercial partnerships, undivided co-ownership and joint tenancy interests in real estate, interests in joint ventures, pension plans, retirement savings plans, employee profit sharing plans, put options, call options, tax shelters, and any other investments or business ownership interests of any nature, held directly, indirectly, or in any manner whatsoever, located anywhere in the world.
May help establish the net worth of defendant in that it would disclose his direct, indirect, and/or beneficial interests in similar investment vehicles and other assets.
The following suggested requests are case specific and the reason/ explanation needs to be developed by the expert based upon the specific needs of the case.
- Schedule of loans, accounts, and claims receivable as of the valuation date, along with related details and agreements.
- Details of any patents, patterns, designs, trademarks, trade names, traded secrets, copyrights and any other intellectual property owned and/or licensed by defendant.
- Real Estate Inquiries
- Schedule of all real estate and interests therein (including, without restriction, undivided co-ownership interests) owned by defendant, directly, indirectly, or in any manner whatsoever, wherever located throughout the world.
- Copies of any real-estate agent agreements, listings, and/or advertisements to purchase or sell real estate on behalf of defendant or on behalf of any group of co-owners or joint venturers of which defendant is a member within the immediately preceding 24 months.
- Copies of municipal tax assessments for the said real estate.
- Copies of all appraisals commissioned within the immediately preceding 24 months in respect of any real property owned directly, indirectly, or affiliated with defendant.
- Insurance coverage on said real estate as of the valuation date.
- Copies of any arm's length offers received within the immediately preceding 24 months in respect of defendant's real estate holdings.
- Details of any contingent assets and liabilities of defendant, including litigious claims by or against him, and the respective status of each (other than with respect to the subject matrimonial proceedings).
- Names and addresses of any persons to whom defendant has given
power of attorney (whether general or specific) within the
immediately preceding five years.
- Copies of relevant documents applicable to above
- Schedule of all vehicles owned or leased by, or for the personal use of, defendant and his family, including (but not limited to) automobiles, boats, planes, snowmobiles, sea-doos, jet skis, etc.
- List of horses owned and barns used to stable said horses as well as insurance policies, if applicable.
- Agreements regarding any trusts established by defendant.
Originally published by National Litigation Consultants' Review, Volume 3 " 2014.
1 For purposes of this example, the husband (defendant) is assumed to be the "moneyed" spouse who is the owner of various businesses and properties and the one who generates the family income.
2 Quality of earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory.
3 This sentence would be used if true and deleted if not true.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.