Damage Calculations

Case Studies: Damage Calculations

#1:  Lost Income, Damages, Business Valuation, Forensic Accounting, Settled

Several years ago, several fires raced through Southern California pushed to the ocean by fierce Santa Ana winds.  In the path of the fire storm were hundreds of homes and businesses.  Some of the fires were either started or fed by the alleged negligence of various parties.  The result was claims filed against the negligent parties and Arxis was contacted by the law firms handling the plaintiff’s litigation.  Arxis was retained to calculate lost income damages and, for completely destroyed businesses, valuations of the business immediately prior to the destruction of the business.

Each of the cases was settled successfully without requiring lengthy litigation.  Arxis, by preparing accurate, complete, and reasonable damage calculations assisted the parties in resolving the dispute.

#2:  Forensic Accounting, Damage Calculations, Expert Testimony

Arxis was retained to provide forensic accounting and damage calculation analysis in a breach of contract matter and a shareholder dispute involving several companies.  After analysis of accounting and financial records Arxis proposed a theory of damages and evidence presentation.  The client and counsel agreed to the approach.

After the damage analysis was done, extensive testimony was provided at deposition and trial.  The result was a verdict in favor of the client.  The court noted in the decision the following regarding the work of Arxis: “It should be said that Mr. Hamilton, especially under cross-examination, exhibited good knowledge of the companies in the dispute…”

#3:  Elder Abuse, Fraud, Forensic Accounting, Expert Testimony

Plaintiff’s counsel contacted Arxis for assistance in an elder abuse case.  Over the period of several years several real properties and cash had been stolen and re-titled.  Arxis was retained to recreate the accounting for several years, quantify the loss, and provide testimony in support of the conclusions and opinions reached as a result of our work.  Trial was held in Superior Court and the testimony from Arxis was a central element of the case that was presented in a bench trial.

The court ruled in favor of the elderly couple and ordered a return of the stolen assets.

#4: Loan Agreement and Conversion to Equity – Fraud and Business Valuation

Summary of issue: Arxis was hired by defendant in a case alleging fraud and related claims.  The case revolved around a loan agreement that provided for a conversion to equity under certain conditions.  Our client loaned the money and, eventually, all of those conditions were met and our client exercised the conversion provision of the agreement.  Plaintiffs (borrower) immediately sued for fraud and other claims surrounding related to the formation of the original agreement. Defendant counter-sued for damages associated with being “locked out’ of the business and not participating in dividend distributions.

Money involved:  The business was valued at several million dollars.  Alleged damages against our client was the value of the business as well as additional tort damage claims.

Arxis work:

Discovery – Plaintiffs refused to provide most of the financial discovery making the case highly forensic, meaning that there were very few records available that would normally be relied upon to express a value.

Valuation – The valuation work was based entirely on tax returns and other random information intentionally and inadvertently provided by Plaintiff.  Opinion of value was based on distributions from the business (S- corporation) to the plaintiffs adjusted for reasonable compensation, taxes, and estimated capital investment required in the business.  The result was a value that was likely conservative due to the inability to adjust draws for personal expenses paid through the business since that information was not available.

Testimony – A bench trial was held involving expert testimony of several hours.

Result:   The court ruled in favor of the defendant and on the issues and deferred ruling on the damages.  This allowed the parties to settle the remaining issues.

#5: Restaurant Economic Damages Litigation

Issue: Civil litigation was initiated in a property dispute between the owners of a restaurant and the owners of a neighboring piece of real estate. Arxis Financial was hired to quantify the financial impact of a parking injunction on the value of a restaurant. The injunction would prevent the restaurant from using a driveway that provided access to a parking lot at the rear of the restaurant. There was no other access to the parking lot and loss of that access would require the restaurant to initiate a parking valet service. This service would require additional cost to patrons and would necessarily limit the restaurant hours to dinner only since surrounding parking lots were fully utilized during daytime business hours. Breakfast and lunch business represented 40% of the profits of the business and would be impossible.

Arxis work: Two business valuations were prepared: A business valuation was prepared as-if the injunction did not happen and a second appraisal was prepared reflecting the permanent diminution in value had the injunction been made permanent. Because of the type of litigation, Arxis Financial was required to consider alternative uses of the building that might mitigate the loss of revenue. Cash flow and economic analysis was prepared for conversion to a smaller sized structure to make room for a driveway and the conversion of the existing space to either a smaller restaurant, walk-up retail, or a combination of both. When comparing the two valuations Arxis Financial was required to establish the “permanent” loss in value as opposed to temporary reduction in income. All of this was done in less than a week since the temporary injunction was filed and it was effectively choking the life from the business. There was an urgency to getting the valuations and declarations done so relief could be sought in court.

Result: The case settled with terms that preserved a landmark restaurant. A key aspect of the settlement was the valuation work, which demonstrated that the loss of business income was so significant that the driveway access issue had to be resolved. This caused the two parties to mutually resolve the matter in a way that was satisfactory to both, avoiding additional litigation.

#6: Bad Faith – Damages for Fire and Business Failure

Type of Matter: An insurance claim for a fire that destroyed one of two store locations was the catalyst for potential litigation against the insurance company.

Facts: In the middle of the Christmas shopping season, a high-end retail location was destroyed by fire in the early hours of the morning. Fortunately the store was closed so there were no injuries. However, the store was a total loss. Not only were holiday sales lost but there would be extensive repairs and remodeling to do before the store could be reopened. The rotten timing of the disaster was heightened by the fact that the store, like most other in its industry, was just beginning to recover from a deep and prolonged recession. A strong holiday season was needed to survive.

What followed was a fairly typical give-and-take between an insurance company, that wanted to pay as little as possible, and an insured, who wanted to get back up-and-running as quickly as possible. Eventually, the insurance company stopped paying on the policy because policy limits had been reached. The business needed more cash to effectively open the store.

The insured contacted an attorney whom in turn, contacted Arxis Financial to assess what, if any, damages may be recoverable.

Arxis Work: We confirmed that, under the policy, the contractual funds had been paid. However, it became obvious that the company had been starved of cash to the point that recovery was now impossible. An analysis of historical cash flow required to maintain the business was prepared and then compared to the cash flow available after the fire. This analysis showed that within 30 days of the fire cash was sufficient. However, within 60 days of the fire the cash deficit was over $100,000 and by the end of the first 12 months post-fire the cash deficit was well over $1,000,000. We prepared an analysis that clearly showed that if the insurance company had made timely payments, the business could have survived. In short, there were two disasters: first, the fire, and second, the bureaucratic delay and obstruction of the adjuster.

Unfortunately, the business was not able to recover from these disasters and ultimately failed. As noted above, the business actually consisted of two locations. One was destroyed by fire and the other remained open and was instrumental in helping to overcome the delay of the insurance company. Ultimately, the double disaster of the burned store took down the entire business as there was simply not enough cash flow to maintain inventory and get the store open. Arxis Financial prepared damage calculations showing the cumulative losses incurred after the fire, including the significant post-fire cash infusions provided by the owners.

Result: The insurance company rejected the premise that the business was lost because of their delay in paying on the loss. The case was heading towards litigation and seemed to be destined for a jury decision. At the eleventh hour a settlement was reached that closed the case. The insurance company paid a sum agreed upon in the settlement (terms cannot be disclosed), implicitly acknowledging that our theory of damages was credible.

#7: Lost Income via Facilities Management Company

Type of Matter: The owner of a parking structure contracted out the management of the facility. The management services included collecting the parking fee and remitting the appropriate amount to the owners.  At some point the owners began to suspect that money was being stolen. They did an investigation that included reviewing video surveillance evidence and determined that there was reason to proceed with a more formal investigation. They reviewed surveillance videos for several days and determined rather precisely how many cars entered the facility that were not reported as paying cars. With that evidence in hand they replaced the management company and called an attorney who contacted Arxis.

Arxis Work: Arxis Financial initially reviewed the sampling of days that had been reviewed by management. There was little doubt that the amount of revenue actually collected on those days was materially understated. Based on the sampling we determined the methodology of the theft and, at least on those days, the amount of the theft. The methodology was confirmed by review of additional surveillance and documentation.

The next concern was to determine the period of time the theft took place so that the under-reported revenue could be quantified. Documents were reviewed and we found that the same company held the contract for several years and, additionally, the personnel hired by the management company to work at the parking structure had not changed since the beginning of the contract. The conclusion was that the loss period extended over the entire period of the contract.

Arxis Financial determined a ratio of reported cars to actual paying cars identified on the video surveillance and applied that ratio across the entire contact period to determine an amount of lost income. We compared our results with the actual results of income reported by the new management company and were satisfied that we had accurately estimated the lost income.

Result: A jury trial was conducted at which we provided expert witness testimony. The jury came back with a verdict against the defendants and awarded damages based on the lost income calculations prepared by Arxis Financial.

#8: Impact of Tainted Food Product – Lost Profits

Type of Matter: A food processing company was notified by Federal and state agencies that Listeria had been traced to their facility. This began a process of sourcing the Listeria and commencing extraordinary measures to recall tainted food, eradicate the contamination and try to recover the business. The result was a lawsuit against the food supplier that shipped the Listeria to the plant.

Background: Arxis was retained to determine lost profit damages associated with the events surrounding the Listeria contamination, including shutting the facility for a period of time, recalling product, and overcoming the incredibly negative publicity associated with food poisoning. The source of Listeria was never in doubt. The litigation was almost entirely related to the question of economic damages.

Arxis Work: Initially our analysis considered the prospect that there would be a permanent loss of some or all of the value of the company since, at best, the recovery would likely require several years. The certainty of the Listeria contamination and the appearance to the marketplace of negligence or other failings on the part of the company made the prospect of recovery very difficult. After extensive discussions with management we were persuaded that it was reasonable to assume that the company could eventually recover in spite of substantial loss of income, reputation, and goodwill in the industry in the interim.

The next step was to calculate the amount of damages required to compensate the injured party for the injury sustained, and nothing more; such as simply make good or replace the loss caused by the wrong or injury. Because our work was being done before the business had fully recovered, two projections were required. First, we projected financial results for the company as if there has been no Listeria contamination. The second projection involved looking at actual financial results since the damage event and projecting into the future until results matched the “without Listeria” projections signaling the end of the “loss period.”

The difference between financial results as-if the Listeria event did not happen minus the results (actual and projected) after the Listeria contamination was the lost income damages. Finally, the projected lost income was discounted to arrive at a damage amount as of the date of trial. 

Result: After extensive discovery and deposition testimony, the case settled on the eve of trial. Arxis’ work in clearly and independently identifying the lost income was compelling and that factor, along with others, drove the parties to a pre-trial settlement.