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Summary of Issue
Attorneys representing parties
involved in a business partner dispute contacted our office to request
assistance with developing a theory of damages and preparing damage
calculations. This is a typical request that happens in our offices at
least 30 times a year - something bad happens and the lawyers need to
know the financial impact. Unfortunately, this was a case of hiring the
expert too late in the process and with unrealistic expectations.
Why the Request?
A holding company was formed to buy,
hold, and operate businesses that were to be acquired in the future.
The holding company did indeed buy several franchise businesses before
the relationship between the shareholders soured significantly. At the
core of the broken relationship was a financial commitment by one owner
on behalf of the entire business obligating the expenditure of millions
of dollars under a binding contract with a franchisor. The required
timing and amount of the expenditures would require large capital
contributions to provide the necessary cash or acquiring debt that was
likely beyond the ability of the firm to either obtain or repay from
operating cash flow.
Arxis Analysis
Financial data was obtained and
analysis was done to understand the historical, financial, and economic
activity taking place in the business. Historical financial reporting
was converted to monthly cash flow analysis that isolated operating
results, working capital, fixed asset activity, and debt transactions.
Based on the cash flow history, analysis was done to project the impact
of the disputed contract historically and into the future. There was no
doubt the contract that was the subject of the dispute was ill-advised
and highly unfavorable to the business. The damage to the business was
significant. The analysis done and methods used to calculate damages
were consistent with normal expectations and prior similar cases.
As is customary in similar cases, there
was a series of meetings with the clients and attorneys to review
preliminary findings and opinions. In the initial meeting, counsel and
their clients kept turning the conversation towards a single theory and
methodology (which was not used or recommended by Arxis) and it emerged
in the conversation that there was either a legal or even emotional
attachment to their "preferred" method. Both the client and
counsel became increasingly agitated as they heard that their
"preferred" methodology might not be appropriate and that
using that method would result in a much lower damage conclusion than
they had hoped. Although an alternative was presented showing a more
appropriate method that resulted in a larger (and more accurate) damage
amount, they simply would not adopt it due to their predisposed
position. As the conversations progressed, aggressive statements were
made by the attorneys and clients that, "you must testify"
using their preconceived methods, assumptions, and conclusions.
Result
Counsel later contacted our office to
say that, although the Arxis professional was disclosed as a testifying
expert, opposing counsel did not disclose a financial expert.
Therefore, the attorneys decided to present their preferred theory of
damages through their clients' testimony and the expectation was there
would be no opposing expert to challenge their methodology or
conclusions. The services of Arxis were no longer needed.
Unfortunately, to the client's detriment, Arxis' loss calculations were
not to be utilized in the litigation proceedings, even though the
amount of damages actually exceeded what they ended up asking for and
the methods and assumptions were far more logical, sound, and
defensible.
Observations
There is a reason that financial, and
other, experts are retained initially as consultants. This gives the
retaining counsel the opportunity to decide whether they want the
independent expert to actually testify after seeing and hearing how the
expert will testify. If for any reason, they are uncomfortable with it
they simply move on without that expert. It does not reflect poorly on
the expert or the retaining law firm. It is part of the strategy of
litigation.
However, there were some elements of
this case that made it notable. The following are some observations
about this case:
- By
the time Arxis was retained, everyone involved — attorneys and
clients — were firmly settled on a methodology that was
inaccurately applied and, when properly applied, understated the
loss. This methodology was not disclosed until after Arxis
presented our conclusions.
- A
financial expert should be involved early enough in a matter to
assist the parties with settlement and mediation attempts. All too
often the litigator exhausts all attempts to avoid trial and then,
when that fails, there is a scramble to find an expert to
validate, affirm, and testify. It is a dangerous strategy, as
illustrated in this case.
Insistence that an expert "must
testify" contrary to their training and experience is, at best,
unwise. A reputable expert would never compromise their independence
and objectivity. For the sake of the client's case, a litigator should
never want to hire an expert that is willing to do so.
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As part of Arxis Financial's "Litigation
Consulting" practice, we regularly work with attorneys
on insurance claims/bad faith matters. Although insurance companies owe
a duty of good faith in dealing with the persons they insure, violation
of that obligation occurs in commercial policies that can involve huge
sums of money. Examples of bad faith include undue delay in handling
claims, inadequate investigation, refusal to defend a lawsuit, threats
against an insured, refusing to make a reasonable settlement offer, or
making unreasonable interpretations of an insurance policy.
Arxis Financial provides objective
and independent evaluation of the economic and financial issues
involved in insurance claims/bad faith litigation. We work with
litigators through the evaluation of opposing party's claims,
assistance in preparation of deposition and cross-examination questions,
document request lists, other discovery assistance, analysis and
calculation of damages, preparation of trial exhibits, and expert
witness testimony. Clients are pleased with Arxis Financial's abilities
to clearly, persuasively, and accurately present economic and financial
arguments.
If you have any questions about Litigation Consulting Services
for Insurance Claims/Bad Faith, please feel free to contact
us.
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Chris Hamilton's upcoming presentations include:
- "Valuation
Certification Training" (2 days online) - NACVA, Nov. 28, 29
- "Valuation
Certification Training" (2 days) - NACVA, Park City, UT, Dec. 12, 13
- "Asset
and Income Approach"
- NACVA, Park City, UT, Dec. 14
- "How
and When to Use a Valuation Expert" — Estate Planning Council, Jan. 26
If you are interested in asking Mr.
Hamilton to speak at your organization's upcoming meeting, please feel
free to contact him.
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