Opinion ID: 1938319
Heading Depth: 1
Heading Rank: 1

Heading: Admissibility of evidence of anticipated increases in net worth of closely held corporation.

Text: One of the elements of damage in a wrongful death action is the present worth or value of the estate which decedent would reasonably be expected to have saved and accumulated as a result of his or her efforts between the time of death and the end of his or her natural life had he or she lived. Haumersen v. Ford Motor Co., 257 N.W.2d 7, 16-17 (Iowa 1977); Schmitt v. Jenkins Truck Lines, Inc., 170 N.W.2d 632, 661 (Iowa 1969); Brophy v. Iowa-Illinois Gas & Electric Co., 254 Iowa 895, 897, 119 N.W.2d 865, 866 (1963); see ß 613.15, The Code. Relevant on this issue is evidence disclosing decedent's age and life expectancy, characteristics and habits, health, education or opportunity for education, general ability, other occupational qualifications, industriousness, intelligence, manner of living, sobriety or intemperance, frugality or lavishness, and other personal characteristics that are of assistance in securing business or earning money. Ehlinger v. State, 237 N.W.2d 784, 792 (Iowa 1976); Schmitt, 170 N.W.2d at 655. In this case plaintiff introduced expert testimony which projected decedents' corporate salaries over anticipated working years, with appropriate adjustments for taxes and present value, to assist the jury in arriving at an anticipated accumulation had they lived out normal lives. But of course this was not a true reflection of earning power, especially for James, as earnings were left in the family corporation for its expansion and growth. Plaintiff's expert economist attempted to meet this hiatus by projecting the net worth of ISC as [t]he future value of the ownership position in the company, based on James and Ellen Hauser continuing to operate the company . . . in the manner in which they'd operated it in the previous 25 years. The projected values, assuming a continuation of the past 8.15 percent annual company growth rate, were calculated to decedents' assumed ages sixty-five and seventy. Reduced to present value, these computations resulted in value increases for the combined estates of $256,934 and $346,202 to ages sixty-five and seventy, respectively. Plaintiff-executor makes no assertion the alleged error in admission of this testimony was not preserved by defendants' limine motion to exclude it, which was overruled. State v. O'Connell, 275 N.W.2d 197, 202 (Iowa 1979); see Nepple v. Weifenbach, 274 N.W.2d 728, 732 (Iowa 1979). These parties have found no authority for or against thus projecting growth of corporate net worth as bearing on the accumulation issue, nor has our research produced any. Both cite injury and death cases involving issues of profits as reflecting diminution or extinction of earning capacity. We agree the injury decisions are apposite here. The general rule as to profits, stated in an Annotation found at 45 A.L.R.3d 345, 353 (1972), is: [W]here the profits from a business enterprise result primarily from the personal endeavors, skill, and attention of the owner, rather than from his investment of capital or from the labor of other persons, such business profits are a proper factor to consider in the determination of the business owner's lost earnings or earning capacity in personal injury and wrongful death actions. The polestar injury case in Iowa is Mitchell v. Chicago, Rock Island & Pacific Railway, 138 Iowa 283, 290-91, 114 N.W. 622, 625 (1908), where this court wrote: The loss of future profits in plaintiff's business could not be taken into account in estimating the damages he had suffered. And evidence of past profits was not admissible as tending to show what his profits in the future would be likely to be, but for the injury. It does not follow, however, that proof of the character of business the person injured has been engaged in, and the amount of his yearly accumulations for a considerable period prior to the injury, when these mainly are due to his personal efforts, may not be shown for some other purpose. Often his earning capacity in the past can be proved in no other way. Where the party injured has worked for wages or on salary, evidence of the amount received is uniformly admitted. But plaintiff always had conducted a business of his own, attending to it personally and without any considerable assistance, and had never received wages. In such a case, how shall the financial loss due to the impairment of the earning capacity be shown? Quite naturally, as was done in the case at bar, by proving the character of the business, the amount of time given to it, what the returns had been, and from these, in connection with the capital invested, a fair idea of the party's earning power at the time of the accident may be inferred. Such evidence indicates the character and value of the service the party was capable of rendering immediately before the injury, precisely as proof of employment at some occupation at wages or a salary would have done. Of course, the fact that some capital is made use of is an important consideration, and must be taken into account in determining the earning power; and, on the other hand, the recognized fact that the earning capacity of a man operating his own business ordinarily is greater than that of an employÈ in the same line of service should not be overlooked. The object of such evidence is to show the capacity to earn values, and for this purpose it is quite as pertinent to the issue, even though not as definite as proof of wages or salary. The word earnings means the fruit or reward of laborÄîthe price of services performed. Profits represent the net gain made from an investment, or from the prosecution of some business. (Citations omitted.) Our subsequent decisions have not departed materially from Mitchell. The distinction has been maintained between loss of earnings, upon which evidence is admissible, and loss of profits, which ordinarily is so speculative as to be inadmissible as a direct measure of damages in a tort action for injury or death. Shewry v. Heuer, 255 Iowa 147, 157, 121 N.W.2d 529, 535 (1963). On the other hand, we have allowed proof of past profits in a business mainly dependent on the injured person's efforts as bearing on his or her earning power prior to the injury. Amelsburg v. Lunning, 234 Iowa 852, 855, 14 N.W.2d 680, 681-82 (1944); Alitz v. Minneapolis & St. Louis Railroad, 196 Iowa 437, 443, 193 N.W. 423, 425-26 (1923); see Trushcheff v. Abell-Howe Co., 239 N.W.2d 116, 123 (Iowa 1976); Shewry v. Heuer, 255 Iowa at 157, 121 N.W.2d at 535; Nicholson v. City of Des Moines, 246 Iowa 318, 327-28, 67 N.W.2d 533, 538-39 (1954); Annot., 45 A.L.R.3d 345 (1972); 22 Am. Jur.2d Damages ß 175 (1965); 22 Am.Jur.2d Death ß 155 (1965). The evidence in this case dramatically details James' full-time efforts and success in making a volatile business prosper and grow over a twenty-four year period. We think it was within trial court's discretion to permit lay and expert testimony relating to that growth, and the past profits of the operation, as bearing upon his earning ability. See Schmitt, 170 N.W.2d at 656; Klingbeil v. Truesdell, 256 Minn. 360, 369, 98 N.W.2d 134, 141 (1959). We hold the unusual circumstances here remove this case from the general rule even though earnings left in the business may have paid employees and generated capital which enhanced those profits. After all, decedents were supervising daily the capital and employees used in ISC operations. Overall, this evidence tended to prove frugality and tendency to save money, drive, business acumen, managerial ability, and the size and contours of the enterprise decedents were capable of operating. See Nicholson v. City of Des Moines, 246 Iowa 318, 325-26, 67 N.W.2d 533, 537-38 (1954) (admission of evidence decedent had conveyed residential property to daughter two years prior to death upheld as evidence of accumulations of property made by the deceased during his lifetime); Spaulding v. Chicago, St. Paul & Kansas City Railway, 98 Iowa 205, 213, 219, 67 N.W. 227, 230, 232 (1896) (prior gifts and investment in life insurance competent as tending to show [decedent's] ability to earn money, and his habits with respect to saving it; instruction permitting jury to consider the amount of property which [decedent] had accumulated at the time of his death in measurement of damages in death case upheld). See also Kelly v. Chicago, Rock Island & Pacific Railway, 138 Iowa 273, 277, 114 N.W. 536, 538 (1908) ( Spaulding instruction stated to have been proper). But this does not mean that evidence should have been admitted to show projected corporate growth under James and Ellen's management for years into the future. Such expert projections, reduced to present value, may have influenced the jury to make dollar awards which not only reflected the earning ability of these decedents, but income resulting from invested capital and the markup on hired labor. No attempt was made by plaintiff's expert to factor out these elements. Aside from the Mitchell definition of earning capacity vis-a-vis profits, trial court's instructions did not inform the jury how the specific sums computed by the expert, reflecting present value of projected corporate net worth, were to be treated. We hold projected net worth of the corporation was inadmissible for the same reasons that projected profits ordinarily are inadmissible: It is too speculative and based on too many variables. See Trushcheff v. Abell-Howe Co., 239 N.W.2d at 122-23 (defendant not permitted to show post-accident profits from plaintiff's business which exceeded his pre-accident wages); Annot., 45 A.L.R.3d 345 (1972); 22 Am.Jur.2d Damages ß 175 (1965). Our above holding does not mean that plaintiff may not introduce expert testimony on the reasonable value of decedents' services to their corporation as bearing on their earning capacity. See Trushcheff v. Abell-Howe Co., 239 N.W.2d at 123 (Moreover, Abell-Howe was not precluded from offering evidence as to the value of Trushcheff's services to the business, as opposed to related profits or income. ) (emphasis in original); Escher v. Carroll County, 146 Iowa 738, 739, 125 N.W. 810, 811 (1910); Klingbeil v. Truesdell, 256 Minn. at 369-70, 98 N.W.2d at 141-42. It is plain that plaintiff's evidence should not be limited to the salaries they took out of the corporation they controlled if those salaries were not a fair reflection of the amounts they earned by their own efforts. We hold trial court erred in admitting the evidence relating to the present value of the projected net worth of ISC. Because the case must be remanded for new trial, we treat the remaining issues only to the extent they may arise again.