In the 1980s, a warehousing and trucking company was founded. Eventually the business consisted of multiple warehouse locations with millions of square footage, transportation equipment, and relationships with major national retail businesses. In the mid-1990s, and for the next 15 years, evolving technological advances and retail trends heightened the need for, and success of, inventory logistics companies. The company capitalized on those opportunities and relationships. Amid expansion and ongoing success, the owner and CEO of the business suffered personal tragedies including a “mystery” debilitating illness that eventually resulted in his inability to do work of any kind. As a result, the business slowly – and then rapidly – declined. It eventually closed. Eventually, medical advances and testing resulted in the “mystery illness” being identified and causation explained. It was determined that the cause of the illness was chemical poisoning from groundwater in the location where the corporate headquarters had been located.
Arxis Involvement
As can be expected, the newfound understanding and explanation of a debilitating disease that created a dramatic change in business fortunes and life circumstances for the owner (and others) resulted in a desire to be compensated for those losses. The plaintiff went from a vigorous and successful businessman to someone who was largely unable to work and overseeing the diminishment and loss of his business and income. The impact on his personal life was even more dramatic. A lawsuit was filed against the landlord, and others, seeking remuneration for substantial losses. Once the lawsuit was filed, Plaintiff’s attorneys contacted Arxis to prepare an expert opinion regarding the loss of profits from the business, should a jury find that the defendants were liable.
Challenges
When calculating lost profits, the formula is fairly simple: what profits would have been but for the damage event minus actual historical profits. Typically, the difficult part of that formula is establishing a reasonable projection of what earned profits would have been had the damage event not occurred. That was certainly difficult in this case, but finding 30-year-old business records to establish historical earned income was nearly impossible. Without those records, or a reasonable basis for estimating what actual profits and losses were, there was no way to quantify lost net income. Nobody, it seems, keeps financial records for 30-plus years. In this case, the personal life circumstances and passage of time made the process of locating records extraordinarily difficult.
The solution was to use the records we could find as a basis for filling in the gaps where no records existed. In this case, an audited financial statement for the business was located that was prepared over 30 years ago. That was a great discovery as there was potential that the CPA firm may have prepared similar reporting for subsequent years. Unfortunately, we found the firm was disbanded 20 years ago and no additional independent financial reporting was available. However, a financial statement prepared by an independent CPA firm, even if only for one year, was very authoritative and helpful. Additionally, tax returns were located covering several years as the business was clearly declining and terminated. After gathering what we could, there were about 20 years for which we had no historical financial reporting.
Arxis Conclusions
The key metric that was used to project financial results was warehouse square footage. Based on the records we had, reliable and consistent metrics (e.g. revenue per square foot, net income per square foot, etc.) were developed. The client was asked to provide records and estimates related to leased square footage for the entire period of the loss calculation (about 35 years). Based on those records (leases, etc.) and estimates, the projections were prepared as if square footage remained at levels of 30 years ago; the projections did not include any growth in the business from increased square footage. Based on this, and other assumptions, the projected lost net income was likely very conservative but would seem to be a reasonable basis of projection for the jury.
Results
The case went to trial, and a jury heard extensive medical evidence related to liability and financial damage evidence. Unfortunately for the Plaintiff, the verdict indicated the jury did not accept that the defendants bore any liability. Therefore, all the work calculating lost income and providing testimony about economic damage was not utilized by the jury in their deliberations (i.e., if there is no liability, there are no damages). This is not an unusual result and is one of the risks plaintiffs and their counsel consider when retaining a damages expert; in this case, it was considered prudent for the case development to understand the potential damages before pursuing further litigation. From an expert’s perspective, the circumstances of gathering data and building a loss calculation in this matter were quite unique and challenging; we were confident in our approach and resulting calculations, so it would have been interesting to see the actual economic damages awarded had the jury agreed with the Plaintiff’s liability premise.
