in Re Mark A. Jacobs, M.D., and Debra C. Gunn, M.D., and Obstetrical and Gynecologist Associates, P.A. ( 2009 )

Petition for Writ of Mandamus Conditionally Granted in Part, and Denied in Part, and Majority and Concurring Opinions filed October 20, 2009.

In The

Fourteenth Court of Appeals

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NO. 14-09-00123-CV

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IN RE MARK A. JACOBS, M.D., DEBRA C. GUNN, M.D., and OBSTETRICAL AND GYNECOLOGIST ASSOCIATES, P.A., Relators

ORIGINAL PROCEEDING

WRIT OF MANDAMUS

C O N C U R R I N G   O P I N I O N

The Court today reaches a result consistent with the current state of Texas law.  I write separately only to note that the current Texas rule on net-worth discovery is now decades-old and, in light of the evolution of Texas law, needs to be revisited.  The instant case illustrates how it contributes to unnecessary Asatellite litigation@ unrelated to the merits of the case and often produces expense and burden far exceeding any potential benefit.

A brief review of the history of this dispute is illustrative.  It is noteworthy that the medical incident made the basis of this lawsuit occurred in September 2004.  Five years later this legal dispute remains unresolved C even at the trial-court level.

The specific controversy over net-worth discovery is fast approaching its second anniversary and has continued largely unabated. It began with an exhaustive request for financial records covering a multi-year period.  Those discovery requests inevitably produced C over many months C a flood of objections, hours of court hearings, multiple court orders, and the current mandamus proceeding with multiple appellate briefs from each side.  The cost to the parties has no doubt been significant.  The level of chaos in this case C a tort case with themes common to many such disputes C has given me pause, with a belief that some assessment is in order as to the efficacy of this process as well as the relative value of the discovery in question.

A.        The Role of Net-Worth Discovery in Resolving Material Case Issues

Under the Rules, a trial judge should limit discovery for which the burden or expense outweighs the likely benefit.  Tex. R. Civ. P. 192.4(b).  In weighing these factors, courts are to consider, among other things, the importance of the proposed discovery in resolving the material issues of the lawsuit.  See id. 

As a general rule, evidence of a party=s wealth is irrelevant and prejudicial.  See Carter v. Exxon Corp., 842 S.W.2d 393, 399 (Tex. App.CEastland 1992, writ denied). Consequently, it is almost always inadmissible at trial.  See Cooke v. Dykstra, 800 S.W.2d 556, 562 (Tex. App.CHouston [14th Dist.] 1990, no writ); Carter, 842 S.W.2d at 399.

In Lunsford v. Morris, however, the Texas Supreme Court carved out a narrow exception to the general rule of inadmissibility, allowing parties to discover and introduce evidence of a defendant=s net worth in cases in which punitive or exemplary damages could be awarded.  746 S.W.2d 471, 473 (Tex. 1988) (orig. proceeding), disapproved of on other grounds by Walker v. Packer, 827 S.W.2d 833, 842 (Tex. 1992) (orig. proceeding).  However, Lunsford properly should be considered in its historical context.

Specifically, in 1981, the Texas Supreme Court decided to re-visit the standard of review used in reviewing jury awards of punitive damages.  See Burk Royalty Co. v. Walls, 616 S.W.2d 911, 920 (Tex. 1981). Under the prior standard, a defendant could successfully challenge a punitive-damages award on appeal simply by pointing to any evidence suggesting he exercised some care.  See id. at 921.  However, the Court chose to depart from that standard because it was seen as creating a virtually impossible hurdle to the recovery of punitive damages Asince anything may amount to some care.@  Id.  In its place, the Court substituted a no-evidence standard of review that effectively Agave >the jury greater discretion to award punitive damages.=@^[1]

In addition, the Burk Court authorized plaintiffs to prove Agross negligence,@ the standard for imposing punitive damages, merely by constructive notice of the defendant=s subjective state of mind.  See Burk, 616 S.W.2d at 922.  Four years later, the Court re-affirmed that holding and also expanded the definition of Agross negligence@ to give plaintiffs additional methods to prove a defendant=s culpability for exemplary damages:

[T]he test for gross negligence is both an objective and a subjective test.  A plaintiff may prove a defendant=s gross negligence by proving that the defendant had actual subjective knowledge that his conduct created an extreme degree of risk.  In addition, a plaintiff may objectively prove a defendant=s gross negligence by proving that under the surrounding circumstances a reasonable person would have realized that his conduct created an extreme degree of risk to the safety of others.

Williams v. Steves Indus., Inc., 699 S.W.2d 570, 573 (Tex. 1985) (emphasis added), superseded by statute as recognized by Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 20 n.11 (Tex. 1994).

In 1987, the Texas Legislature began to scale back the availability of punitive damages by enacting Chapter 41 of the Texas Civil Practice and Remedies Code.^[2]  However, while the original version of Chapter 41 introduced basic limitations to the recovery of punitive damages,^[3] the protections it extended to defendants pale in comparison with those found in the version currently in effect.^[4]  Lunsford was decided the following year but, apart from a brief mention in one of the dissenting opinions, ignores any discussion of the 1987 reforms or their effect on the Court=s expansive exemplary-damage decisions from earlier that decade.  See Lunsford, 746 S.W.2d at 476 (Gonzalez, J., dissenting).

In 1995, the Legislature passed more sweeping tort reform to the substantive and procedural law governing punitive damages.  See Act of April 11, 1995, 74th Leg., R.S., ch. 19, ' 1, 1995 Tex. Gen. Laws 108, 108B13 (amended 2003) (current version at Tex. Civ. Prac. & Rem. Code Ann. '' 41.001B.013 (Vernon 2008 & Supp. 2009)).  Chapter 41 was significantly rewritten to provide defendants dramatic protection from punitive-damage awards, including:

$          Juries could no longer award exemplary damages intended solely to serve Aas an example to others,@ but were instead limited to assessing damages with the purpose of punishing the defendant.

$          The Legislature dramatically expanded Chapter 41=s coverage to apply to all but a very few types of tort actions.

$          A plaintiff=s burden of proof for punitive damages was elevated to require proof of all elements by clear and convincing evidence.

$          With few limitations, a defendant could no longer be exposed to punitive damages because of another person=s criminal act.

$          The Legislature lowered the existing cap on punitive damages.

$          Upon a defendant=s motion, the trial court had to bifurcate the jury=s determination of the amount of punitive damages, and evidence of a defendant=s net worth could not be admitted during the liability phase of the trial.

Id.  These substantive and procedural amendments changed the legal landscape on two levels.  First, they further limited the amount of punitive damages that could be assessed.  See id. ' 1 secs. 41.007, 41.008.  Second, and more significantly, these revisions dramatically lessened the chances of any punitive-damage recovery by a claimant.  See id. ' 1 secs. 41.001(5), 41.002, 41.003(b), 41.005.

In 2003, the Legislature further eroded a plaintiff=s ability to recover punitive damages as a part of comprehensive tort-reform legislation.^[5] Now, unlike the general rule permitting a civil verdict upon the vote of only ten jurors, an award of punitive damages requires a unanimous verdict as to liability for, and the amount of, such damages.  See Tex. Civ. Prac. & Rem. Code Ann. ' 41.003(d) (Vernon 2008 & Supp. 2009); Tex. R. Civ. P. 292; DeAtley v. Rodriguez, 246 S.W.3d 848, 850 (Tex. App.CDallas 2008, no pet.).

In their brief, the McCoys acknowledge the dramatic shift in the law on punitive damages since Lunsford, as the Legislature has repeatedly acted Ato tightly restrict the ability of litigants to seek and recover exemplary damages.@^[6]  Thus, in the current legal climate, far fewer cases are likely to present fact issues for trial as to punitive-damage liability than when Lunsford was decided more than two decades ago.^[7]  Accordingly, because net-worth discovery may serve little practical purpose in many cases,^[8] trial courts performing a benefit-to-burden analysis should consider appropriate management of the scope of such discovery corresponding to its utility in resolving these important issues.  See Tex. R. Civ. P. 192.4(b).

B.        Burden and Expense of Net-Worth Discovery

The benefits of net-worth discovery are likely limited in most cases, but the direct and indirect costs may not be.  Of course, a case against a publicly traded corporation may present little problem in this respect, as its net worth should be discernible simply from the contents of a widely available annual report.  Under that scenario, the burden and expense of the proposed discovery would be minimal.  See id.

A private individual, however, presents a far different profile with, at minimum, potentially serious issues as to privacy rights and availability of responsive information.  Net-worth discovery as to an individual will almost inevitably require C and deserve C much more management and oversight by the trial court.^[9]  See In re Weekley Homes, L.P., ___ S.W.3d ___, 52 Tex. Sup. Ct. J. 1231, 2009 WL 2666774, at *4 (Tex. Aug. 28, 2009) (orig. proceeding) (ATo the extent possible, courts should be mindful of protecting sensitive information and should choose the least intrusive means of retrieval.@).

In this case, the McCoys sought audited financial statements that, while invasive, may at least represent one of the most accurate and efficient ways for indicating an individual=s net worth, if available.^[10] However, they also sought countless other categories of documents that have been repeatedly held undiscoverable, such as income-tax returns,^[11] or which possess only the most indirect and tenuous connection to net worth. Among this latter category of documents are the McCoys= requests for (1) HUD statements reflecting the sale or purchase of real estate; (2) Aany and all contracts that you are a party to with any health insurance company, HMO, including Medicare and/or Medicaid, managed care entity, or hospital@; (3) any documents reflecting accounts receivable, from any time period, for the provision of medical care; (4) accounts receivable due to the defendant=s Aparticipation in any clinical drug trials, medical device trials, or other medical product trials@ for the purpose of obtaining FDA approval; and (5) all medical bills issued for an entire calendar year, presumably as to all of the physicians= patients, Atouching, concerning, or dealing with@ the provision of medical care.

This sort of invasive discovery generally raises very serious privacy concerns, but that is not its only cost.  It also imposes additional burden and expense on the parties and their attorneys, as well as occupying the limited resources of the trial court and, now, this appellate court.  See Wal-Mart Stores, Inc. v. Alexander, 868 S.W.2d 322, 331B32 (Tex. 1993) (Gonzalez, J., concurring) (commenting on the privacy concerns and potential for abuse inherent in the Aunlimited discovery . . . of sensitive, private, and confidential financial information@). 

However, this sort of discovery should not be unexpected given the Texas Supreme Court=s lengthy silence as to both the precise definition of Anet worth@ in this context and the proper boundaries for the discovery and ultimate presentation of information as to a defendant=s net worth:

This Court in Lunsford failed to define net worth and failed to suggest a procedure for placing such evidence before the jury.  I predicted then that in the absence of guidance from this Court, Aconfusion will prevail as practitioners and judges attempt to ascertain the components of >net worth.=@  Lunsford, 746 S.W.2d at 475.

Conflicting appellate court decisions on the meaning of the term Anet worth@ are evidence of the confusion surrounding this fundamental issue.  This confusion should be resolved by this Court.

Wal-Mart, 868 S.W.2d at 330 (Gonzalez, J., concurring) (citations omitted); see also Lunsford, 746 S.W.2d at 476 (Gonzalez, J., dissenting) (calling for clear definition of term Anet worth@ and clarity on types of documents relevant to calculate it).

Here, the majority attempts to fairly bridge some of this gap by offering a solid definition of Anet worth@ as assets minus liabilities.  See Black=s Law Dictionary 1041 (6th ed. 1990); Wal-Mart, 868 S.W.2d at 330B31 (Gonzalez, J., concurring).  Yet, even this pronouncement may still lead to disagreements about the documents that are relevant and discoverable to calculate this figure, in light of the relative lack of guidance on this issue.

Trial courts have the necessary management tools to control the sequence, timing, and scope of discovery to minimize burden, maximize efficiency, and protect privacy rights.^[12] See Tex. R. Civ. P. 166, 192.  Still, we must acknowledge that there are literally hundreds of Texas trial-court judges C spread over 254 counties C who may preside over cases with claims for exemplary damages and, of necessity, disputes involving net-worth discovery.  They each have different backgrounds, different approaches, and different dockets.  Those dynamics are likely to produce a highly unpredictable and idiosyncratic approach to the management of these issues across the state C and history shows us that these are issues that regularly recur.  I believe parties to litigation in Texas are entitled to greater clarity and predictability from our courts.  Accordingly, I would urge that Lunsford be revisited and updated.

/s/        Kent C. Sullivan

Justice

Panel consists of Justices Brown, Boyce, and Sullivan.  (Brown, J., majority) (Sullivan, J., concurring).

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^[1]  Patricia F. Miller, Comment, 2003 Texas House Bill 4: Unanimous Exemplary Damage Awards and Texas Civil Jury Instructions, 37 St. Mary=s L.J. 515, 529 (2006) (citations omitted); see Burk, 616 S.W.2d at 922.

^[2]  See Act of June 3, 1987, 70th Leg., 1st C.S., ch. 2, ' 2.12, 1987 Tex. Gen. Laws 37, 44 (amended 1995 & 2003) (current version at Tex. Civ. Prac. & Rem. Code Ann. '' 41.001B.013 (Vernon 2008 & Supp. 2009)).

^[3]  For example, the tort-reform legislation included a basic cap on exemplary damages.  See Act of June 3, 1987, 70th Leg., 1st C.S., ch. 2, ' 2.12 sec. 41.007, 1987 Tex. Gen. Laws 37, 46 (amended 1995 & 2003).  In addition, the legislature effectively abrogated the purely objective method of proving gross negligence.  See Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 20 n.11 (Tex. 1994).  However, because this narrower definition of Agross negligence@ applied only to products-liability cases and certain negligence actions, courts continued to apply Burk Royalty and Steves Industries to all other gross-negligence suits.  See J. Stephen Barrick, Comment, Moriel and the Exemplary Damages Act: Texas Tag-Team Overhauls Punitive Damages, 32 Hous. L. Rev. 1059, 1066 (1995).

^[4]  See infra pp. 4B5.

^[5]  See Act of June 2, 2003, 78th Leg., R.S., ch. 204, '' 13.01B.08, 2003 Tex. Gen. Laws 847, 886B89 (current version at Tex. Civ. Prac. & Rem. Code Ann. '' 41.001B.013 (Vernon 2008 & Supp. 2009)).

^[6]  See Miller, supra note 1, at 520 (A[T]he unanimity requirements make it more difficult for a plaintiff to receive a punitive damage award from a Texas jury.@).

^[7]  In fact, some might argue Chapter 41, as currently constituted, imposes punitive-damage liability only for intentional torts.  See Tex. Civ. Prac. & Rem. Code Ann. '' 41.001(7), (11), 41.003(a) (authorizing exemplary damages only for fraud, malice, and gross negligence, where malice requires proof of Aa specific intent . . . to cause substantial injury or harm@ and gross negligence similarly mandates a showing of the defendant=s (1) actual, subjective awareness of an extreme degree of risk and (2) consciously indifferent decision to proceed nonetheless).

^[8]  Indeed, discovery into a defendant=s net worth may consume a disproportionate amount of attention inasmuch as net worth is only one among several factors a jury should consider, and not even the most important factor in reviewing an amount of punitive damages.  See Tex. Civ. Prac. & Rem. Code Ann. ' 41.011(a) (Vernon 2008); Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35, 45B46 (Tex. 1998) (A[T]he degree of reprehensibility of the defendant=s conduct is >[p]erhaps the most important indicium= of the reasonableness of a punitive damage award.@) (quoting BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 575 (1996)).  In fact, until Lunsford, a defendant=s net worth was not even listed as a factor for the jury to consider in awarding punitive damages.  See Lunsford, 746 S.W.2d at 472B73; Alamo Nat=l Bank v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981). Even so, a post-Lunsford jury may still decide on the amount of punitive damages without considering evidence of the defendant=s net worth.  See Durban v. Guajardo, 79 S.W.3d 198, 210B11 (Tex. App.CDallas 2002, no pet.).

^[9]  Closed corporations and closely-held corporations may present similar, albeit somewhat less serious, issues.

^[10]  See Sears, Roebuck & Co. v. Ramirez, 824 S.W.2d 558, 559 (Tex. 1992) (orig. proceeding).  Of course, the average private individual is highly unlikely to have audited financial statements readily available.

^[11]  See id.; see also Wal-Mart Stores, Inc. v. Alexander, 868 S.W.2d 322, 331 (Tex. 1993) (Gonzalez, J., concurring) (surveying numerous cases precluding discovery into federal income-tax returns).

^[12]  For example, in appropriate cases, some trial courts use a docket-control order to schedule and hear summary-judgment motions on predicate exemplary-damage issues in advance of allowing pre-trial discovery on net worth.  This approach could limit discovery disputes and the potential cost of compliance to only what is necessarily justified by the facts and claims of the case.  Similarly, trial courts may wish in certain cases to allow only the threshold discovery of net-worth amounts by way of limited disclosure at one stage of pre-trial, and delay discovery as to underlying facts or methods of calculation of those amounts C potentially much more invasive and complicated C until a later point when necessary.