Document Requests

A typical document request could ask for: income tax returns; sales tax returns; franchise tax returns; payroll tax returns; financial statements (audited annual and reviewed quarterly ones, if available); detailed general ledgers; adjusted trial balances; accounts receivable ledgers; accounts payable ledgers; depreciation schedules and other fixed asset reports; business plans and financial forecasts; prior valuation reports for tangible and intangible assets and, depending upon the volume, bank statements and related items. The request may also cover contracts with employees, leases, sales contracts and corporate minutes.

Receiving this data as hard copy, especially the ledgers, makes analysis more difficult and expensive. Most general ledgers allow export of their data including account codes, in a form amenable to database programs. Having the data electronically allows queries and sums to be quickly processed.

Something not shown above, and in our experience missing from data requests, is the journal entry detail. Journal entries are the means by which accruals and adjustments are made to general ledgers. Recently, after a number of experts had been through a certain general ledger and had not been able to explain how allocations were made among different interests, we requested the detailed journal entry for one account for one month. While there were hundreds of line items, we could isolate one line and finally understand the methodology that had eluded others. Only by drilling down into the greater detail of the journal entry from the general ledger could one understand the nature of the transactions. Ask for journal entry detail in electronic form during discovery.

During the discovery process, it is important to determine what data you will request, how you will retrieve it, and what will be required to make use of it. Almost any electronic device containing a memory chip can be a source of information. Standard or common sources of information are listed below. These are sources that most offices will possess and are easily accessible.

I. Data Sources:

2. PDAs, USB storage devices, Phone Tapes

Electronic data can be copied from the source to a clean media device by utilizing functions existing within the hardware and software. For a more extensive recovery, forensic tools can be used to retrieve electronic data in a manner that leaves no footprint from the recovery process and captures the entire hard drive, including "deleted" files.

II. Methods to recover data:

Export/Import -- Extract data using an existing feature of the software. Import at your location. Effectively translates files from one format to another. (e.g. Microsoft SQL Server ™ to Microsoft Access ™). (Databases or emails)

Copy -- Use the subject's hardware and software to copy files that exist allowing review or restoration at your location. (Servers, desktops or laptops.)

Forensic Copy -- Use specialized software and hardware to completely copy hardware disks allowing review or restoration at your location. Results in bit-by-bit copy of hardware device allowing review of "deleted" items. (Servers, desktops or laptops.)

Backup tapes (copy) -- Restore at your location original data tapes from the backup process. This will require the creation of a similar hardware and software environment at your location or restoration can be done at their location using their backup software.

If you have any questions regarding electronic discovery, please contact Mike Howard or Jeff Compton of this firm.

A recent Texas Court of Appeals opinion provides a summary of the factual elements for a single business enterprise. Firestone and Bridgestone argued they were not a single business enterprise but rather Firestone was simply a subsidiary of Bridgestone. The court found they were a single business enterprise.

The Court analyzed whether the corporations have "common employees; common offices; centralized accounting; payment of wages by one corporation to another corporation's employees; common business name; services rendered by the employees of one corporation on behalf of another corporation; undocumented transfers of funds between corporations; and unclear allocation of profits and losses between corporations." The opinion references El Puerto, 82 S.W.3d at 637 and Paramount, 712 S.W.2d at 536.

By way of distinction, according to the Court, "single business enterprise" theory is not synonymous with the doctrine of "alter ego." Although the "alter ego" theory and "single business enterprise" theory are both equitable doctrines, an important distinction is that the "alter ego" theory generally involves proof of fraud, i.e., proof that the corporation is organized and operated as merely a tool or business conduit of another corporation. Single business enterprise theory relies on equity analogies to partnership principles of liability.

With regard to the use of common personnel, the Court observed that although officers did not serve the same position in both companies, the companies regularly traded or shared employees, officers, and directors.

As to common facilities, the Court noted Bridgestone's website described "Bridgestone/Firestone's proving ground in Texas".

Regarding the unclear allocation of profits and losses, it appears to be relevant that Bridgestone's after-tax earnings reflect a 750 million dollar "special provision which includes the provisions at Bridgestone/Firestone for recall costs and possible legal liabilities" and accordingly Bridgestone's sales and profit will be lower than expected.

Moreover, the consolidated financial statements include the accounts of both companies such that Bridgestone considered Firestone's profits and losses as its own. Also, there was a pattern of assigning advisors from Bridgestone to different departments at Firestone. The two corporations shared "Bridgestone" as a common business name.

J.A. Compton & Co. is pleased to announce the relocation of its offices to:

Two Houston Center

909 Fannin Street

Suite 3150

Houston, TX 77010-1011

Telephone (713-659-5080) and telecopier (713-659-8730) numbers remain the same.

Jeff Compton has joined the board of directors of Trees for Houston, a non-profit organization improving Houston through tree planting. Learn more about Trees for Houston: <http://www.treesforhouston.org/>