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.
