Casa W. v. Super. Ct. CA2/7 ( 2014 )

Filed 11/19/14 Casa W. v. Super. Ct. CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
CASA W, LLC et al., B256155
Petitioners, (Super. Ct. No. BC459696)
v.
THE SUPERIOR COURT OF LOS
ANGELES COUNTY,
Respondent;
KYLE MADISON et al.,
Real Parties in Interest.
ORIGINAL PROCEEDING in mandate. Malcolm H. Mackey, Judge. Petition
granted.
Law Offices of Daniel J. Spielfogel and Daniel J. Spielfogel for Petitioner.
No appearance for Respondent.
Lyle R. Mink for Real Parties in Interest.
______________________
INTRODUCTION
Parties to a civil case in California have a privilege against forced disclosure of
their tax returns, subject to certain exceptions. The trial court in this case compelled
production of a limited liability company’s tax returns without considering whether any
of the exceptions applied. We cannot find any exception that applies, and conclude that
the tax returns the trial court ordered produced are privileged. Therefore, we grant the
petition for a writ of mandate and order the trial court to vacate its order requiring
production of the tax returns.
FACTUAL AND PROCEDURAL BACKGROUND
Real parties in interest Kyle Madison, his former wife Marjan Madison, and their
friend petitioner Michael Theodore were the members of Casa W, LLC, a limited liability
company that owned and operated a property known as Casa W in Cabo San Lucas,
Mexico. Theodore was the managing member. Theodore owned another limited liability
company, Casa Theodore, LLC, that owned the adjacent property known as Casa
Theodore. Theodore was the only member of Casa Theodore, LLC.
Pursuant to the Casa W, LLC operating agreement, the Madisons made a capital
contribution of $500,000 and Theodore made a capital contribution of $500,000. The
Madisons initially paid Theodore $250,000 in managerial fees and construction costs.
According to Kyle Madison, the parties subsequently “agreed to each pay an additional
$150,000 to Theodore for additional management fees. Thereafter, Theodore asked for
another $75,000. Because Madison trusted him implicitly, Madison paid Theodore the
$75,000 after borrowing the money from a third party.” Theodore then “demanded an
additional $172,932 from [Kyle] Madison allegedly for interest, expenses and still more
managerial fees, and threatened Madison that, unless and until these purported charges
were paid, Madison would not share in any of the rental income that was being generated
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by the Baja Property. Under this threat, Madison paid an additional $172,932 to
Theodore.”
On April 15, 2011 Kyle Madison, who in 2010 had purchased Marjan Madison’s
interest in Casa W, LLC as part of their divorce, filed this action against Theodore and
Casa W, LLC.1 Kyle Madison alleged that Theodore had engaged in “abuse of authority,
self-dealing and pervasive fraud” as the managing member of Casa W, LLC. Kyle
Madison alleged that, despite repeated requests over the years, Theodore never provided
any records of rental income, expenses, and other costs for the Casa W property. Nor,
Kyle Madison alleged, did Theodore furnish any records documenting his disbursements,
expenditures, and loans on behalf of Casa W, LLC.
The Madisons propounded discovery to obtain financial records of Theodore and
Casa W, LLC. At some point the Madisons discovered a November 1, 2009 email from a
staff member at Casa Theodore, LLC stating: “All rentals for Casa W and Casa
Theodore will now go through Casa Theodore, LLC. Please mark your records
accordingly.” Kyle Madison then sought discovery, and ultimately moved to compel
production, of the financial records of Casa Theodore, LLC, including its tax returns. At
the hearing on Kyle Madison’s motion to compel, the trial court, Hon. Frederick Schaller,
ruled that the tax returns of Casa Theodore, LLC were privileged, and denied the motion
to compel their production.
On January 11, 2013 the court and counsel participated in a discovery conference
in connection with an ex parte application by the Madisons “regarding trial, discovery,
and expert issues.” The parties, perhaps at the suggestion of the court, agreed that the
court could appoint Pamela Wax-Semus, a certified financial examiner, as an expert
under Evidence Code section 730 to analyze the financial transactions of Casa W, LLC
and Casa Theodore, LLC. The court ordered the parties to submit by January 22, 2013 “a
1 Marjan Madison is not a plaintiff. She is a party to this action only as a cross-
defendant named in Theodore’s cross-complaint.
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separate statement of requests for the court order regarding the scope of the [Evidence
Code section] 730 expert’s . . . work to be done on the case.”
On January 22, 2013 the parties filed a document entitled “Joint Statement re
Scope of Appointed Expert’s Assignment,” which listed 17 proposed assignments for Ms.
Wax-Semus, nine proposed by the Madisons and eight proposed by Theodore. Although
the parties did not agree on the wording of the assignments proposed by the Madisons
and the Madisons objected to all of the assignments proposed by Theodore, the
assignments essentially were to analyze and determine the income, expenses, and bank
account deposits and withdrawals of Casa W, LLC and Casa Theodore, LLC, and to
calculate the balances due among the parties and the two limited liability companies.
On January 24, 2013 the court issued an order stating it had “received and
reviewed the parties’ relative proposals concerning the scope of the [Evidence Code
section] 730 expert review and opinion,” and adopting all nine of the Madisons’
proposals and all eight of Theodore’s proposals. The court ordered the parties “to
prepare a joint letter to the expert and forward necessary materials to her as soon as
possible after receipt of this order . . . .”
Over a year later, in March 2014, the Madisons filed a motion to compel Theodore
to produce documents that Ms. Pamela Wax-Semus said she needed to complete her
examination and report. The motion included a declaration by Ms. Wax-Semus
identifying various documents she had requested from Theodore but had not received.
Among the documents Ms. Wax-Semus requested were “US Partnership Tax Returns
from 2005 through 2013 for Casa Theodore LLC,” as well as documents during the same
period of time relating to new bank accounts opened, Casa Theodore LLC’s Bank of
America line of credit, and rental calendars.
On April 11, 2014 the trial court, Hon. Malcolm H. Mackey, granted the motion to
compel and ordered Casa Theodore, LLC to produce its tax returns (subject to a
protective order limiting access to Ms. Wax-Semus and counsel for the Madisons), even
though Judge Schaller had previously ruled that the tax returns were privileged. When
counsel for Theodore argued at the hearing that any commingling between Casa W, LLC
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and Casa Theodore, LLC would be reflected in the bank statements, counsel for the
Madisons stated, “But we’re not getting the bank accounts.” The court stated, “You’re
not getting the bank accounts. I’m going to order these returns. . . . This is an expert
appointed and she said she needs these documents.” The court’s minute order states:
“Motion to Compel Defendants to Produce Documents for Court Appointed Expert is
argued and granted, as fully reflected in the notes of the court reporter and incorporated
by reference. The Court’s ruling, in brief, [is] as follows: Motion to Compel Defendants
to Produce Documents for Court Appointed Expert is granted. The Court orders the Tax
Returns produced, (subject to the protective order) and the documents requested in the
declaration of the expert contained in the motion.”
Theodore filed a petition for writ of mandate challenging only the portion of the
trial court’s order requiring the production of Casa Theodore, LLC’s tax returns. We
issued a stay and an order to show cause why we should not order the trial court to vacate
that part of the order requiring Casa Theodore, LLC to produce its tax returns.
DISCUSSION
We review discovery orders involving privilege issues under the abuse of
discretion standard. (Seahaus La Jolla Owners Assn. v. Superior Court (2014) 224
Cal.App.4th 754, 766; accord, Kerner v. Superior Court (2012) 206 Cal.App.4th 84,
110.) “In this context, ‘“[t]he trial court’s determination will be set aside only when it
has been demonstrated that there was ‘no legal justification’ for the order granting or
denying the discovery in question.”’ [Citation.] A trial court has abused its discretion in
determining the applicability of a privilege when it utilizes the wrong legal standards to
resolve the particular issue presented.” (Seahaus La Jolla Owners Assn., supra, at p.
766.) “‘“‘[W]here the petitioner seeks relief from a discovery order that may undermine
a privilege, we review the trial court’s order by way of extraordinary writ. [Citation.]’”
[Citation.]’” (Doe v. Superior Court (2011) 194 Cal.App.4th 750, 754.)
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As a preliminary matter, we doubt the trial court had the authority to order Casa
Theodore, LLC to produce any documents, let alone privileged tax returns. Casa
Theodore, LLC is not a party to the lawsuit. Under Code of Civil Procedure section
2020.010, subdivision (b), “the normal ‘process by which a nonparty is required to
provide discovery is a deposition subpoena.’ [Citation.]” (Terry v. SLICO (2009) 175
Cal.App.4th 352, 357.) None of the parties, however, ever served Casa Theodore, LLC
with a subpoena seeking the production of its tax returns or any other documents, nor was
there any request for production of documents directed to Theodore requesting
documents of or relating to Casa Theodore, LLC. The Madisons’ motion to compel was
not based on any discovery request or failure to comply with a discovery request. The
basis of the motion to compel that the trial court granted appears to have materialized out
of pretrial thin air.
Similarly, there is nothing in the Joint Statement re Scope of Appointed Expert’s
Assignment or the court order governing the court-appointed expert’s assignment that
authorized her to obtain documents by discovery directed to, or motions to compel
production of documents from, non-parties. The court approved the scope of the expert’s
assignment and ordered the parties to send her “necessary materials,” but the court did
not authorize her to compel production of documents from a third party. Nor, as
Theodore argued in opposition to the motion, is there any statutory or case law authority
allowing an expert appointed under Evidence Code section 730 to take third party
discovery. A “‘court appointed expert is expected to serve three purposes: to investigate
the subject involved, to prepare and render a report as may be ordered by the court, and to
give expert-opinion testimony at the trial.’ [Citation.]” (State of California ex rel. Dept.
of Motor Vehicles v. Superior Court (1998) 66 Cal.App.4th 421, 440.) Conducting
discovery from third parties is not part of a court-appointed expert’s functions.
In any event, putting aside the procedural irregularities of the motion to compel,
the trial court erred by compelling Casa Theodore, LLC to produce its tax returns.
California recognizes a “privilege against forced disclosure of tax returns” in “civil
discovery proceedings.” (Schnabel v. Superior Court (1993) 5 Cal.4th 704, 719, 720.)
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“[T]he privilege arises from California statutes that generally prohibit California tax
authorities from disclosing tax return information, subject to certain exceptions.”
(Firestone v. Hoffman (2006) 140 Cal.App.4th 1408, 1419, italics omitted; see Fortunato
v. Superior Court (2003) 114 Cal.App.4th 475, 479 [“Revenue and Taxation Code
section 19282, which prohibits disclosure of tax returns, implicitly creates a privilege
against the disclosure of income tax returns”].) The purpose of the privilege “is to
facilitate tax enforcement by encouraging a taxpayer to make full and truthful
declarations in his return, without fear that his statements will be revealed or used against
him for other purposes.” (Webb v. Standard Oil Co. (1957) 49 Cal.2d 509, 513.) “‘If the
information can be secured by forcing the taxpayer to produce a copy of his return, the
primary legislative purpose of the secrecy provisions will be defeated. The effect of the
statutory prohibition is to render the returns privileged, and the privilege should not be
nullified by permitting third parties to obtain the information by adopting the indirect
procedure of demanding copies of the tax returns.’” (Schnabel, supra, at p. 719.) The
tax return privilege applies to both state and federal tax returns “because ‘forcing
disclosure of the information in the federal tax return would be equivalent to forcing
disclosure of the state returns and would operate to defeat the purposes of the state
statute.’” (Firestone, supra, at p. 1420.)
The privilege against forced disclosure of tax returns, however, is not absolute.
(Schnabel v. Superior Court, supra, 5 Cal.4th at p. 721.) “[T]he privilege is waived or
does not apply in three situations: ‘(1) there is an intentional relinquishment [citation],
(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” [citation], or (3) a public policy greater than that of confidentiality of tax returns
is involved [citation].’” (Ibid.; see Weingarten v. Superior Court (2002) 102 Cal.App.4th
268, 274.)
The trial court did not mention or discuss any of the exceptions to the privilege.
The court’s only apparent concern was that the expert wanted the tax returns. The fact
that an expert, even a court-appointed one, desires to see a tax return does not fall under
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any of the exceptions to the privilege. Indeed, 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” to justify production of tax return information.
(Weingarten v. Superior Court, supra, 102 Cal.App.4th at p. 276; see Fortunato v.
Superior Court, supra, 114 Cal.App.4th at p. 483 [“[p]ublic policy favoring discovery in
civil litigation is not, by itself, sufficiently compelling to overcome the privilege”].)
Thus, to the extent the trial court applied any legal standard, it abused its discretion by
applying an incorrect one. (See Seahaus La Jolla Owners Assn. v. Superior Court, supra,224 Cal.App.4th at p. 766.)
Moreover, none of the exceptions to the taxpayer privilege applies. Kyle Madison
does not argue or suggest that Casa Theodore, LLC waived the privilege, either
intentionally (exception 1) or because the gravamen of the action is consistent with
assertion of the privilege (exception 2). In fact, Casa Theodore, LLC vigorously and
successfully asserted the privilege in response to the Madisons’ prior motion to compel
disclosure of its tax returns. The parties’ Joint Statement re Scope of Appointed Expert’s
Assignment says nothing about the tax return privilege or a waiver. And the gravamen of
the action is the conduct of Theodore, not Casa Theodore, LLC.
That leaves the existence of a public policy that outweighs the public policy of the
tax return privilege (exception 3). The public policy exception to the tax-return privilege,
however, “‘is narrow, and only applies “when warranted by a legislatively declared
public policy.” [Citation.]’ [Citation.] Further, the public policy must be a compelling
one, and exceptions on this ground will be declared only rarely. [Citation.] Public policy
favoring discovery in civil litigation is not, by itself, sufficiently compelling to overcome
the privilege. [Citation.] Indeed, such an exception would swallow the rule.” (Fortunato
v. Superior Court, supra, 114 Cal.App.4th at p. 483; see Weingarten v. Superior Court,
supra, 102 Cal.App.4th at pp. 275-276.) Kyle Madison has not identified any such
legislatively declared public policy that would justify the production of Casa Theodore,
LLC’s tax returns in this case, other than the policy of discouraging and punishing
egregious discovery conduct.
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Repeated discovery abuse that precludes a party from obtaining discoverable
financial information by alternative means may justify production of tax returns in certain
circumstances. In Weingarten v. Superior Court, supra, 102 Cal.App.4th 268, the court
held that the public policy exception to the tax return privilege applied because the
defendant repeatedly failed to produce nonprivileged documents containing the relevant
information. (Id. at pp. 275-276.) The court concluded that a plaintiff may overcome a
defendant’s assertion of the privilege “when the defendant, without a valid basis, refuses
to comply with legitimate discovery requests that seek nonprivileged financial
information.” (Id. at p. 276.) The trial court here, however, did not mention refusal by
Theodore, Casa Theodore, LLC, or Casa W, LLC to produce financial documents or a
failure to comply with court orders that might justify production of Casa Theodore,
LLC’s tax returns under Weingarten, and the record does not show any such discovery
misconduct.
Kyle Madison argues that Theodore has “repeatedly refused to produce relevant
nonprivileged financial records or has produced only meaningless and unreliable
financial information in response to discovery requests designed to find out the rental
income he collected and the expenses he claims to have paid.” Kyle Madison asserts that
“Theodore has engaged in a pattern of improperly obstructing efforts to obtain financial
records through means that do not implicate the privilege.” The record does not support
Kyle Madison’s assertions. There is no court finding or evidence of repeated refusals to
produce documents, improper obstruction of discovery, violation of a discovery order, or
even of a motion to compel by the Madisons. Kyle Madison acknowledges that
Theodore produced over 10,000 documents, although he complains they were
“scrambled.”2
2 Kyle Madison points to deposition testimony by Theodore stating that he did not
know how the documents he produced were collated, but that his attorney does. If Kyle
Madison needs to question a knowledgeable witness about the documents, he can depose
the person most qualified for Casa W, LLC, Casa Theodore, LLC, or the attorney
Theodore testified has knowledge about the documents.
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Kyle Madison claims that he filed an ex parte application “for orders relating to
discovery and management of the case” and that the “application was granted in part.”
What actually happened was that the court granted the ex parte application only to the
extent of ordering the parties “to contact the court to set up an informal discovery”
conference and extending the deadline to file motions to compel. There is no evidence
that the Madisons filed a motion to compel pursuant to this court order, other than the one
at issue in this writ proceeding.3 This record falls far short of the kind of discovery
misconduct that justified production of tax returns in Weingarten under the public policy
exception.
3 The Superior Court docket reveals that the Madisons subsequently filed a motion
for issue and evidence sanctions on July 18, 2014, based on Theodore’s alleged failure to
produce documents in discovery. On October 3, 2014 the trial court denied the motion
without prejudice. The docket also reveals that Theodore filed several motions to quash
subpoenas served by counsel for the Madisons, but there is no evidence (as opposed to
argument) that Theodore violated any rulings by the trial court on those motions.
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DISPOSITION
The petition for writ of mandate is granted. Let a peremptory writ of mandate
issue directing the trial court to vacate its April 11, 2014 order compelling the production
of Casa Theodore, LLC’s tax returns for 2005-2013, and to issue a new order denying the
Madisons’ motion to compel production of the tax returns. The stay issued on May 12,
2014 will be vacated when the opinion of this court becomes final. Theodore is to
recover his costs.
SEGAL, J.*
We concur:
PERLUSS, P. J.
ZELON, J.
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
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