Case Number: BC595770 Hearing Date: March 14, 2018 Dept: 46

Case Number: BC595770
KENNETH D RICKEL VS MARTIN W. ENRIGHT ET AL

Filing Date: 09/25/2015
Case Type: Legal Malpractice

03/14/2018
MOTION – COMPEL FURTHER RESPONSES
5 Motions to Compel Continued from 2/21/18

TENTATIVE RULING

These motions were continued from 2/21/2018 to rule on the remaining disputed issue, application of the tax return privilege to the 1099 forms and commission statements, after further briefing. Having considered the new briefs, the court now rules as follows: the tax return privilege applies to the 1099 forms but it does not apply to the commission statements. Third parties are ordered to produce all commission statements within the time period requested together with a further declaration of compliance verifying the identity and completeness of the documents produced. Non-Party Respondent Alexander Davis, Non-Party Respondent Bruce Friedman, Non-Party Respondent Disruptive Technology Solutions, LLC; Non-Party Respondent Disruptive Technology Advisers, LLC, AND Non-Party Respondent DTA II, LLC are ordered to produce any and all commission statements as called for in the notice of deposition for the PMKs of each entity together with a declaration of compliance within 20 days. This motion is granted in part pursuant to CCP §1987.1 and CCP §2025.480. The partial denial is without prejudice – see discussion below. No sanctions are ordered as the motion is partially successful and partially unsuccessful.

DISCUSSION

Tax returns are the subject of a statutory privilege against forced disclosure. See Webb v. Standard Oil Co. of Cal. (1957) 49 C.2d 509; Schnabel v. Superior Court (1993) 5 C.4th 1117, 719-720 (collecting cases). “The privilege is not absolute… the privilege is waived or does not apply in three situations: “(1) there is an intentional relinquishment (Crest Catering Co. v. Superior Court (1965) 62 Cal.2d 274, 278), (2) the ‘gravamen of [the] lawsuit is so inconsistent with the continued assertion of the taxpayer’s privilege as to compel the conclusion that the privilege has in fact been waived’ (Wilson v. Superior Court, supra, 63 Cal.App.3d at p. 830), or (3) a public policy greater than that of confidentiality of tax returns is involved (Miller v. Superior Court, supra, 71 Cal.App.3d at p. 149).”” Schnabel, supra, 5 C.4th at 721. “A trial court has broad discretion in determining the applicability of a statutory privilege.” Weingarten v. Superior Court (2002) 102 C.A.4th 268.

IRS 1099 Forms

The tax return privilege protects not only the returns themselves, but the fact that certain information is on them. Sav-On Drugs, Inc. v. Superior Court (1975) 15 C.3d 1, 6-7. In Sav-On, the California Supreme Court barred an interrogatory which asked what deductions a party had taken with regard to sales tax; the Court held a party cannot go around the tax return privilege by discovering each specific line item separately and reconstructing the returns himself. Id. at 4. Seeking the mandatory IRS reporting forms which taxpayers use to fill out their returns falls afoul of the same policy. Obtaining the 1099 form will tell Plaintiff what is on Respondent’s tax return as surely as the return itself.

Waiver

There has been no waiver of the privilege here. The law provides for a waiver of the privileng when the party has intentionally waived it, when the lawsuit is inconsistent with the privilege, and when a greater public policy is involved. Intentional waiver plainly does not apply here. Inconsistency and greater public policy are discussed in turn below.

The Lawsuit is not Inconsistent with Privilege

The paradigm case here is Wilson v. Superior Court (1976) 63 C.A.3d 825, 830-831, where “establishment of all the essential elements of plaintiff’s case will be impossible without proof of statements and computations in her tax returns. To permit plaintiff to produce evidence of the contents of those returns [citation] while successfully resisting their disclosure on grounds of privilege would be manifestly unfair to defendants…Having initiated this action over her tax returns, plaintiff cannot interdict legitimate defenses thereto by asserting a privilege as to the very matters she has placed at issue in the litigation.” In sum, this exception applies where the plaintiff brings a case that requires the use of tax returns, but then tries to hog-tie the defense by refusing to produce them. C.f. John B. v. Superior Court (2006) 38 C.4th 1177, 1199 (party has greatly diminished expectation of privacy as to subjects raised in his own pleadings). That is not our situation here. This exception does not apply.

The Greater Public Policy Exception Does Not Apply

This exception requires the court to balance the strength of the public policy in favor of tax return confidentiality against other public policies at play in any given case. The exception “is narrow and applies only “when warranted by a legislatively declared public policy.”” Weingarten, supra, 102 C.A.4th at 274 (quoting Schnabel, supra, 5 C.4th at 721. For example, in Miller v. Superior Court (1977) 71 C.A.3d 145, 148-149, the Court of Appeal found that “the foregoing statutes provide strong support for our conclusion, that the time has arrived when a policy favoring the confidentiality of tax returns must give way to the greater public policy of enforcing child support obligations.” Miller expressly limited itself to the child support context. Id.

Plaintiff relies here on Weingarten, supra, 102 C.A.4th 268. Weingarten arose in a unique factual and procedural situation; the case is an extensive chronicle of bad behavior, the more salient points of which are set forth below:

“Approximately nine months before [the liability phase of] trial, the trial court directed Weingarten to identify all witnesses and documents regarding her ”financial condition, “ presumably to permit plaintiffs to obtain necessary information in the event of a punitive damages finding. (See Civ. Code, § 3295, subd. (c).) In response, Weingarten produced an unverified December 2000 personal financial statement and some supporting account statements. However, at her deposition taken one month before trial, Weingarten acknowledged this financial statement was no longer accurate because all of her assets were “now tied up in this [residential development] project.“ Weingarten made no effort to produce additional information to explain this claimed change in her financial condition.

[Weingarten was found liable and the court found a basis for punitive damages, but left the amount to be tried in a second phase. Counsel for plaintiffs served discovery requests.]

Weingarten served a response to plaintiffs’ document requests in which she raised numerous objections and essentially refused to produce any additional documents relating to her financial circumstances, claiming she had already produced her full financial information. With respect to the request for tax returns, Weingarten objected on the “grounds of tax preparers and privacy privileges ….”

The next day, plaintiffs moved to compel production of the requested documents, arguing that Weingarten’s response was inadequate. Plaintiffs explained they had the burden of proving Weingarten’s “wealth and ability to pay,” but Weingarten continued to possess “all of the [relevant] information” … Plaintiffs supported their motion with the declaration of Jeffrey Sumpter, a certified public accountant, whom they retained to provide an opinion on Weingarten’s financial condition for purposes of determining the appropriate punitive damages amount. Sumpter stated the financial documents previously produced by Weingarten contained numerous “discrepancies” and raised substantial questions as to whether the information was complete. In particular, Sumpter stated that: (1) Weingarten excluded from her financial statement the current value of her residence, even though the residence appears to be a significant component of Weingarten’s wealth; (2) Weingarten failed to provide the current value of her long-term investments and relevant supporting information; (3) Weingarten failed to explain a large downturn in the assets of her wholly owned corporation from 1999 to April 2002; (4) Weingarten’s bank statement showed an unexplained “sizeable decline” from December 2001 to February 2002; (5) Weingarten failed to provide “reliable back up information regarding the values” she has assigned to her assets; and (6) Weingarten failed to explain her efforts to link “a significant amount of her net worth to the Pointe San Diego Residential project.”

In opposing the motion, Weingarten did not specifically address the issues raised by Sumpter.” Id. at 271-273.

The Court of Appeal refused to countenance Weingarten’s obvious intransigence. “[T]he fact that a complaint contains a punitive damages allegation or a fact finder has found a basis for imposing punitive damages does not, standing alone, constitute a basis for compelling the disclosure of tax return information. However, this case does not present a simple balance between the public policies underlying the tax return privilege and the public policies supporting an appropriate punitive damages award. Instead, this case involves a trial court’s discretionary authority to order the production of tax returns when a defendant who has been found to have acted with malice and fraud, has sole control of his or her financial records and is refusing to produce relevant nonprivileged documents.” Id. at 275.

However, as in Wilson, the Weingarten court carefully circumscribed the application of its holding. It set forth three factors to be used in future cases:

“In reaching our conclusion the trial court did not abuse its discretion, we caution against compelled disclosure of personal tax returns except in those rare instances where the public policy underlying the tax privilege is outweighed by other compelling public policies or where waiver principles apply. The fact that financial records are difficult to obtain or that a tax return would be helpful, enlightening or the most efficient way to establish financial worth is not enough. Likewise, standing alone, a finding of liability for punitive damages is insufficient. But disclosure may be ordered where a defendant has been found liable for punitive damages and the party requesting disclosure establishes (1) the defendant has refused to produce relevant nonprivileged financial records or has produced only meaningless and unreliable financial information in response to punitive damage discovery; (2) the defendant has engaged in a pattern of improperly obstructing efforts to obtain financial records through means that do not implicate the privilege and it is reasonable to assume this pattern of conduct will continue; and (3) less intrusive methods to obtain the financial records have been unsuccessful. Although the trial court did not specifically articulate these factors, upon reviewing the entire record before us, we are satisfied the trial court found each of these factors existed before ordering production of the tax returns.” Id. at 276-277.

Factor One: Financial Information Produced

Plaintiff’s best argument is on this factor. Obtaining documentation from Defendants and Respondents in this case has been made extremely difficult, and Plaintiff apparently does not yet have the complete financial picture that he needs to prosecute his case. This factor weighs in Plaintiff’s favor.

Factor Two: Pattern of Improper Obstruction

“Weingarten had engaged in the same type of evasive and bad faith activities regarding her financial matters in the underlying case, and had repeated this conduct throughout the litigation by refusing to respond appropriately to discovery requests. For example, Weingarten refused plaintiffs’ requests to inspect the corporate books and records, withheld significant information regarding sales in the residential development, asserted unsupported privilege claims in response to a document request, attempted to evade and improperly limit her deposition, and refused to comply with a court-ordered accounting until plaintiffs filed a sanctions motion. Absent a valid objection, parties in a civil lawsuit are expected to comply with discovery requests and court orders compelling compliance. The trial court was aware that Weingarten repeatedly disregarded these fundamental principles, and acted as if she were exempt from discovery rules.” Weingarten, supra, 102 C.A.4th at 275-276.

Though this case has been hotly litigated, neither party has managed such an impressive record of misconduct as in Weingarten. The court has previously observed that Defendants and Respondents have been playing a game of evidentiary musical chairs with Plaintiff, who has had to go several rounds of ping-pong between the two sets of parties to overcome interlocking objections based on attorney-client privilege on the one hand and the obtainability of documents from other sources on the other. However, unlike the party in Weingarten, Respondents have yet to defy the court in all but name. Respondents’ behavior has elevated form over substance, and clearly caused Plaintiff extensive annoyance, but it has not yet gone beyond the pale of reason. This factor still weighs narrowly in favor of Respondents.

Factor Three: Less Intrusive Methods Have Been Unsuccessful

It cannot be said that less intrusive methods have been unsuccessful because less intrusive methods have not yet fully been tried. Discovery is ongoing, the parties are still in the middle of working out other objections on other issues. And if Plaintiff’s argument is to be credited, the other privilege issues should be resolved in his favor, either by meet and confer or by motion. (Plaintiff’s Supplemental Brief p. 6:10-19). Plaintiff himself tacitly concedes that the commission statements, discussed below, may give him the information he needs. (Plaintiff’s Supplemental Brief p. 5:21-25). Therefore, this factor weighs in favor of Respondents at this time. The result may be different as discovery wraps up and trial approaches, but that is a question for a later date.

Balancing

Two of the three factors weigh against finding a policy exception in this case; only one weighs in favor. The Weingarten decision as recited in detail above makes clear that the policies underlying discovery can only override the policies underlying the tax privilege as a matter of last resort. The reason is clear: if ordinary discovery policies could override the policy behind the privilege, this exception would swallow the rule. Only where it can clearly be said that one party’s conduct “not only interfere[s] with plaintiffs’ ability to prove their case, but it also undermine[s] the discovery process and the judicial system’s ability to ensure an ordered process designed to uncover the truth” can ordinary discovery concerns override the tax return privilege. In this case, we have not yet arrived at this point.

Commission Statements and Records

As discussed above, parties cannot make an end run on the tax return privilege by seeking specific items that will be on the returns and re-creating them piece by piece. Sav-On, supra, 15 C.3d at 4. However, on the other side of the argument, no authority suggests that information is undiscoverable simply because it might be on a tax return. Where the fact that a something might appear on a tax return (or add up to something on a tax return) is ancillary or irrelevant to the purpose of the question, the tax return privilege does not apply.

If this were not the case, the earnings and profits which are so often at issue in civil litigation would almost never be discoverable. As Plaintiff concedes, the value of the 1099 forms is derived from the fact that they are mandatory IRS tax forms, on which errors may carry the penalties of criminal fraud. In that sense, Plaintiff wants the 1099s because they are tax forms; Plaintiff believes he can rely on them as (he believes) he can rely on nothing else.

That is simply not the case with commission statements. Plaintiff wants those because he needs to prove his damages. He thinks he should have gotten half the profits from the stock deals, so he needs to know what the whole profits are. The fact that information from these statements may make its way onto a tax return is ancillary to Plaintiff’s purpose. The tax return privilege does not apply to commission statements and records.

Conclusion

P’s motion is GRANTED as to the commission statements and records, and DENIED as to the 1099 forms, without prejudice to a renewed motion after Plaintiff has followed all the way through with other modes of discovery.

IT IS SO ORDERED:

___________________________
Frederick C. Shaller, Judge