Credit Damages Fundamentals for Litigation

When one party takes an action that reduces the ability of another party to obtain credit or to obtain credit on as favorable terms as they would have been able to obtain but for the action of the other party, then Credit Damages may result.

This article explains the process that is used to quantify the amount of this loss, known as Credit Damages.

Overview of the Process for Establishing Credit Damages

Recognizing, establishing and effectively demonstrating Economic Damages in litigation requires a holistic comparative view of the damaged person’s or entity’s situation prior to and after the proximate cause event, a realistic and reasonable multi-year projection of how the damages will affect the damaged person or entity in the future, and a net present-value calculation to provide a current credit damages estimate that will also incorporate future damages.

Recognizing that that’s a mouth full, let’s break it down into its comprehensible components:

Step 1. Establishing the Economic Situation Before the Proximate Cause Event.

Step 2. Demonstrating the Most Likely Future Economic Situation Without the Proximate Cause Event.

Step 3. Defining the Proximate Cause Event and Tying it to the Damages It Caused.

Step 4. Establishing the Most Likely Future Economic Situation After the Proximate Cause Event.

Step 5. Demonstrating the Difference Between the Most Likely Future Situation Without the Proximate Cause Event and the Most Likely Future Situation After the Proximate Cause Event.

Step 6. Calculating the Net Present-Value of the Difference in the Two Projections.

Now, let’s take them one at a time:

Step 1. Establishing the Economic Situation Before the Proximate Cause Event.

The best way to do this is to establish a profile of what the person’s or entity’s ability to obtain credit was prior to the introduction of the proximate cause. This is accomplished by examining a
financial “snapshot” of the person’s or entity’s financial situation as it was immediately prior to the proximate cause event, typically by using past financial statements and tax returns.

The person’s or entity’s good or bad credit should be evident based upon an examination of their financial profile and the credit terms that they were able to obtain prior to the proximate cause.

Step 2. Demonstrating the Most Likely Future Credit Situation Without the Proximate Cause.

Having established the economic situation before the proximate cause, you should then project that same trend into the future so as to establish a realistic and reliable estimate of future credit costs that would have been available to the person or entity but for the introduction of the proximate cause.

The projection should be carried out for as many years as it is felt the projection can be accurately made. That projection may be five years, and it may be twenty-five years depending on how reliable you feel a projection can be made.

In addition, if there was any known unusual factor, or factors, present that could positively or negatively impact future financial performance, then that factor, or factors, should be included in the analysis.

Note that the factors had to be known before the proximate cause event because the damages calculation will be as of the date of the proximate cause event. Otherwise, the factors should be thrown out since they were unknowns at the time of the proximate cause.

Step 3. Defining the Proximate Cause Event and Tying it to the Credit Damages It Caused.

The proximate cause event could be just about anything that negatively impacts a person or entity and their ability to obtain credit at all or their ability to obtain credit on favorable terms but for the proximate cause event. Some proximate causes are:

● An erroneous credit report issued to a credit bureau.

● An erroneous credit reference issued to any other credit granting entity.

● A wrongful repossession that appears on a credit report or that is otherwise reported to another party.

● A wrongful foreclosure that appears on a credit report or that is otherwise reported to another party.

● A divulging of personal confidential financial information that leads to a person becoming a victim of identity theft.

● A loss to a person or other entity because of increased borrowing costs due to their credit being impaired as a result of the erroneous or careless actions or inactions of another person or entity.

● Any of many other factors.

Step 4. Establishing the Most Likely Future Economic Situation After the Proximate Cause Event.

This is the same process as described above in Step 2 except that it includes the negative influence of the proximate cause event. The number of years projected into the future should be the same as used in Step 2 above. In some cases, you will have financial statements or other financial records such as credit card statements, promissory notes, etc., that clearly reflect the impaired borrowing ability or the negative impact on their cost of borrowing.

In extreme cases, the person’s or entity’s ability to obtain reasonably priced credit may go away completely, causing the bankruptcy or other failure of a business or individual to continue to generate income. In those cases, the loss is the present value of the entire income stream projected in Step 2 above.

Step 5. Demonstrating the Difference Between the Most Likely Future Situation Without the Proximate Cause Event and the Most Likely Future Situation After the Proximate Cause Event.

Once you have established the most likely future credit availability and cost projections before (Step 2) and after the proximate cause event (Step 4), the difference in these two projections is the gross amount of the loss for the projection period, not taking time into consideration. That is your base number that you carry forward into the next step.

Step 6. Calculating the Net Present-Value of the Difference in the Two Projections.

This is a mathematical exercise that involves net present-valuing the difference in the two projections (Steps 2 and 4) in order to arrive at a Credit Damages value as of the date of the proximate cause event.

Range of Values

It is acceptable to produce a Credit Damages value that is a range of values. Due to the level of judgment and speculation that is involved in estimating Credit Damages, it is sometimes necessary to recognize that a particular factor could just as easily be one figure as another figure. In a case like this, it is acceptable to calculate the future financial performance using both factors, and then state the Credit Damages estimate as a range.

Tree Falling in the Woods

It is very important to keep in mind that the very fact that incorrect information is provided to a credit bureau or to a credit grantor does not necessarily produce a Credit Damages situation for the person or entity. Just like the proverbial tree that falls in the woods yet makes no sound if no one hears it, the mere existence of incorrect information on a credit report does not necessarily cause Credit Damages.

However, if the person or entity is denied credit or is required to pay higher costs for credit as a result of an incorrect credit reporting incident, then that does indicate an element of Credit Damages.

Likewise, if it can be proven that Credit Card B increased a person’s interest rate or lowered their credit limit because of what was erroneously reported by Creditor A, then that also indicates an element of Credit Damages.

Expert Strategy

If you are involved in litigation that involves Credit Damages, then hire a professional that is familiar with Credit Damages calculation techniques, and that is highly experienced in providing supporting testimony at deposition and at trial. You can be assured that the expert will be questioned thoroughly regarding every step and factor of their methodology.

This methodology of calculating an estimation of Credit Damages is Daubert compliant since it assists the trier of fact to understand the evidence or to determine a fact at issue, is widely published and peer reviewed, is generally accepted as an accurate procedure, and is capable of being replicated by another competent professional.

It is extremely valuable for both sides to engage a Credit Damages expert since usually the Plaintiff’s expert will provide a Credit Damages opinion and the Defendant’s expert will either provide an alternate Credit Damages estimate or a critical review of the estimate provided by the Plaintiff’s expert. Both sides should be heard in order for a fair conclusion to be reached.

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ABOUT THE AUTHOR: Banking and Economic Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.

Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.

B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.