Production of Financial Documents to Prove Economic Damages – How to Obtain the Documentary Support Needed to Prove Lost Profits? by Daniel S. Hughes, CPA/CFF/CGMA, CVA, and Richard S. Fechter, JD, CFE, CAMS
Posted on November 10, 2023
by
Daniel Hughes
When my colleagues and I delivered a presentation to the Business Law Section of the Florida Bar about proving and defending claims of lost profits in commercial litigation matters, a Florida Judge asked a thought-provoking question: How many years of financial documents should a Plaintiff seeking economic damages be able to get (2 years, 3 years, 5 years, etc.)? While the lawyers and legal experts in the room discussed the issue at length attempting to reach a definitive answer, the agreed upon answer was that “it depends” on the facts and circumstances of the case.
Generally, how far back a Plaintiff can go in order to prove economic damages depends on the facts and circumstances of the particular case. However, there are some standards utilized by federal and state courts as well as case law that can assist Plaintiffs and their counsel to request financial documents and obtain the production they need to prove economic damages.
In Florida, requests for production are governed by Florida Rule of Procedure 1.280. According to Fla. R. Civ. P. 1.280 (b)(1), “Parties may obtain discovery regarding any matter, not privileged, that is relevant to the subject matter of the pending action…” While this standard appears clear (i.e., relevancy), the application and determination of relevancy relating to the production of financial documents can be confusing to many judges, especially those with limited financial or accounting background.
For example, many lost profits claims begin with a calculation of the Plaintiff’s lost revenues from the date of the alleged contractual breach or other malfeasance. To identify and calculate the lost revenues, it would be appropriate to compare the company’s current (or impacted) revenues to its average revenues during a period of time before the impacting event. The number of years necessary to go back and find a period that was not impacted by the Defendant’s action can vary widely. This is especially true for many lost profits analyses calculated today, only a couple of years after the pandemic’s financial impact on many businesses. Not only can the number of years needed vary greatly, but so can the determination of how many years should be used to calculate the average (e.g., new business vs. established businesses).
To handle many of these production issues, Florida Courts have increasingly relied on the “proportionality rule” followed by the Federal Courts for which discovery is limited material that is both “relevant to any party’s claim or defense and proportional to the needs of the case.” However, what is proportional under the facts of one case (See, Booya Charters of Key W. v. Jumpem, Fla. 8th Cir., 2020 Fla. Cir. LEXIS 5777, October 1, 2020, in which the Court granted motion to compel finding the financial documents requested both relevant and proportional where Plaintiff’s expert provided an affidavit in which he attested as to the need, relevance and probative value of the company financial records to opine as to causation and damages) might be considered too onerous in another (See, Nafta Traders, Inc. v. Hewy Wine Chillers, LLC, U.S. Dist. Ct. S.D.Fl., 2020 U.S. Dist. LEXIS 242124 *; 2020 WL 7421940, August 17, 2020, in which the court reduced Plaintiff’s request for five years of financial information to three years based on the proportionality test).
What is clear is that the courts determine each case on the facts presented. Enlisting a trained forensic accountant to assist with drafting the Request for Production and providing testimony (in court or through an affidavit) for why the documents are relevant and proportional to prove economic damages, will provide Plaintiffs with the best chances of successfully obtaining the documents needed to prove your claims.
About the Authors: Daniel S. Hughes, CPA/CFF/CGMA, CVA, is a director with Berkowitz Pollack Brant’s Forensic and Advisory Services practice, where he helps clients in the United States and abroad prepare, present and settle complex real estate disputes.
Richard S. Fechter, JD, CFE, CAMS, is an associate director with Berkowitz Pollack Brant’s Forensic and Advisory Services practice, where he conducts forensic accounting investigations and provides expert analysis on the economic, finance, and accounting issues pertaining to economic damages and other business matters in complex commercial disputes.
Both can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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