in Re Defy International, LLC ( 2019 )

Petition for Writ of Mandamus Conditionally Granted, in Part, and Denied, in
Part, and Memorandum Opinion filed November 26, 2019.
In The
Fourteenth Court of Appeals
NO. 14-19-00553-CV
IN RE DEFY INTERNATIONAL, LLC, Relator
ORIGINAL PROCEEDING
WRIT OF MANDAMUS
189th District Court
Harris County, Texas
Trial Court Cause No. 2018-32675
MEMORANDUM OPINION
On July 15, 2019, relator Defy International, LLC (“Defy”) filed a petition for
writ of mandamus in this court. See Tex. Gov’t Code Ann. § 22.221; see also Tex.
R. App. P. 52. In the petition, Defy asks this court to compel the Honorable Scot
Dollinger, presiding judge of the 189th District Court of Harris County, to set aside
his July 8, 2019 order directing Defy to produce financial information, including tax
returns, for third party Empower Pharmacy (“Empower”) to Richard Robbins and
Richard S. Robbins Investments, Ltd., LLP (the “Robbins Parties”). We
conditionally grant the petition, in part, and deny it, in part.
I. BACKGROUND
The underlying case involves an alleged breach of a lease agreement. The
Robbins Parties are the landlord of the Shepherd Commons shopping center and
Defy is a tenant. Defy alleges that it has not been able to occupy the lease space
because the Robbins Parties are unable to obtain a Certificate of Occupancy, among
other things. Defy is seeking $2 million in damages, including $75,000 per month
in lost profits, against the Robbins Parties and the other defendants.
The Robbins Parties, seeking financial and tax records from third party
Empower, served requests for production on Defy. The following are the Robbins
Parties’ request for production no. 17 for Empower’s financial information and tax
returns and Defy’s objections:
17. Documents sufficient to show Empower’s financial information
from January 2012 to the present, including but not limited to balance
sheets, profit and loss/income statements, and tax filings.
RESPONSE: Objection. Overbroad. Harassing. Objection the income
tax returns are neither material nor relevant. Income-tax returns are
discoverable only if they are relevant and material. Hall v. Lawlis, 907
S.W.2d 493, 494 (Tex.1995). If part, but not all, of an income-tax
return is discoverable, discovery must be limited to the relevant and
material parts. See Maresca v. Marks, 362 S.W.2d 299, 301
(Tex.1962). Defendant as the burden to show that all or part of the
return is relevant and material to the case. In re Williams, 328 S.W.3d
103, 116 (Tex. App.—Corpus Christi 2010, orig. proceeding); In re
Brewer Leasing, Inc., 255 S.W.3d 708, 713-14 (Tex. App.—Houston
[1st Dist.] 2008, orig. proceeding). Defendant must also show that the
relevant information cannot be obtained from another source. In re
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Williams, 328 S.W.3d at 116; El Centro del Barrio, Inc. v. Barlow, 894
S.W.2d 775, 780 (Tex. App.—San Antonio 1994, orig. proceeding); see
Wal-Mart Stores v. Alexander, 868 S.W.2d 322, 331 (Tex.1993)
(Gonzalez, J., concurring) (trial courts should not allow discovery of
tax returns if there are other adequate methods to determine net worth);
see, e.g., Sears, Roebuck & Co. v. Ramirez, 824 S.W.2d 558, 559
(Tex.1992) (trial court should not have ordered production of tax
returns because D had already produced audited, certified annual
reports containing D’s net worth and the tax returns were duplicative).
On June 14, 2019, the Robbins Parties moved to compel production,
addressing each objection in their motion to compel. The Robbins Parties asserted
that Defy had not provided basic information regarding (1) why or how Defy’s new
business at Shepherd Commons is alleging losing $75,000 in profits or (2) the
business details of the Lipshultz Clinic that Defy allegedly intended to operate at
Shepherd Commons.
The Robbins Parties stated that, based on documents they had received, it
appeared that the following three entities/tenants have some connection to the space
at Shepherd Commons: Defy, Empower, and the Lipshultz Clinic. The Robbins
Parties contended that they could not identify the business arrangement among those
entities or how they intended to operate. Defy produced several profit and loss
statements bearing the name “Defy Medical Center,” which did not appear to be one
of the businesses intended to operate at Shepherd Commons, but no information for
Defy, Empower, or the Lipshultz Clinic. The Robbins Parties contended that they
cannot adequately understand Defy’s claim for lost profit damages without that
information.
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Defy responded that (1) the Robbins Parties’ counsel never communicated
with Defy’s counsel about all the discovery he contends should have been produced;
(2) Defy had produced “hundreds of documents”; (3) the Robbins Parties’ counsel
referred to documents that were obtained through subpoenas from third parties,
which were only shared with Defy on the date of the response to the motion to
compel and should have been produced weeks earlier; (4) Defy talked to the Robbins
Parties’ counsel and promised to “get with the clients to make sure all discoverable
documents are produced”; and (5) Defy is working on HIPPA concerns in
responding to the requests.
On July 8, 2019, the trial court held a hearing on the motion to compel and
signed the order. On July 11, 2019, relator filed a motion to reconsider, which was
pending when Defy filed its petition for writ of mandamus in this court. The trial
court signed the order overruling Defy’s objections to request for production no. 17
for Empower’s financial information and tax returns on August 19, 2019.
In this mandamus proceeding, Defy asserts that the trial court abused its
discretion by compelling Defy to produce financial information, including tax
returns, belonging to third party Empower and asks this court to compel the trial
court to vacate its July 8, 2019 order directing Defy to produce Empower’s records.
II. MANDAMUS STANDARD OF REVIEW
Generally, a relator seeking mandamus relief must demonstrate that (1) the
trial court clearly abused its discretion; and (2) the relator has no adequate remedy
by appeal. In re Dawson, 550 S.W.3d 625, 628 (Tex. 2018) (orig. proceeding) (per
curiam). A trial court clearly abuses its discretion if it reaches a decision so arbitrary
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and unreasonable as to amount to a clear and prejudicial error of law or if it clearly
fails to analyze the law correctly or apply the law correctly to the facts. In re H.E.B.
Grocery Co., L.P., 492 S.W.3d 300, 302–03 (Tex. 2016) (orig. proceeding) (per
curiam); In re Cerberus Capital Mgmt., L.P., 164 S.W.3d 379, 382 (Tex. 2005) (orig.
proceeding) (per curiam).
Courts are to assess the adequacy of an appellate remedy by balancing the
benefits of mandamus review against the detriments. In re Team Rocket, L.P., 256
S.W.3d 257, 262 (Tex. 2008) (orig. proceeding). Because this balancing depends in
large measure on the circumstances presented, courts look to principles rather than
simple rules that treat cases as categories. In re McAllen Med. Ctr., Inc., 275 S.W.3d
458, 464 (Tex. 2008) (orig. proceeding). Whether an appeal amounts to an adequate
remedy depends heavily on the circumstances. In re Garza, 544 S.W.3d 836, 840
(Tex. 2018) (orig. proceeding) (per curiam). Mandamus review may be necessary
to prevent the loss of substantive or procedural rights. In re Reece, 341 S.W.3d 360,
374 (Tex. 2011) (orig. proceeding). Appeal is not an adequate remedy when the
appellate court would not be able to cure the trial court’s discovery error. In re Dana
Corp., 138 S.W.3d 298, 301 (Tex. 2004) (orig. proceeding) (per curiam).
III. SCOPE OF DISCOVERY
A trial court generally has discretion to determine the scope of discovery. In
re Nat’l Lloyds Ins. Co., 532 S.W.3d 794, 802 (Tex. 2017) (orig. proceeding). “Our
procedural rules define the general scope of discovery as any unprivileged
information that is relevant to the subject of the action, even if it would be
inadmissible at trial, as long as the information sought is reasonably calculated to
lead to the discovery of admissible evidence.” In re Nat’l Lloyds Ins. Co., 507
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S.W.3d 219, 223 (Tex. 2016) (orig. proceeding) (per curiam) (internal quotation
marks and citations omitted). Information is relevant if it tends to make the existence
of a fact that is of consequence to the determination of the action more or less
probable than it would be without the information. Tex. R. Evid. 401. What is
“relevant to the subject matter” is to be broadly construed. In re Nat’l Lloyds Ins.
Co., 449 S.W.3d 486, 488 (Tex. 2014) (orig. proceeding). Discovery requests must
be reasonably tailored to include only matters relevant to the case. In re Am. Optical
Corp., 988 S.W.2d 711, 713 (Tex. 1998) (orig. proceeding) (per curiam). A trial
court abuses its discretion if it orders discovery that exceeds what the rules of civil
procedure permit. In re N. Cypress Med. Ctr. Operating Co., 559 S.W.128, 130–31
(Tex. 2018) (orig. proceeding).
IV. LAW ON DISCOVERY OF TAX RETURNS
Generally, in cases concerning the production of financial records, the burden
rests on the party seeking to prevent production. In re Jacobs, 300 S.W.3d 35, 40
(Tex. App.—Houston [14th Dist.] 2009, orig. proceeding [mand. dism’d]). On the
other hand, the party seeking discovery of tax returns has the burden of showing that
they are relevant and material to the issues in the case. In re Croft, No. 14-10-00106-
CV, 2010 WL 3721870, at *2 (Tex. App.—Houston [14th Dist.] Sept. 22, 2010, orig.
proceeding) (mem. op.); see also Hall v. Lawlis, 907 S.W.2d 493, 494 (Tex. 1995)
(original proceeding) (per curiam) (“Income tax returns are discoverable to the
extent they are relevant and material to the issues presented in the lawsuit.”).
The Texas Supreme Court has expressed its “reluctance to allow uncontrolled
and unnecessary discovery of federal income tax returns.” Hall, 907 S.W.2d at 494–
95. Tax returns are treated differently from other discovery requests of financial
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matter because federal income tax returns are considered private and protection of
that privacy is determined to be of constitutional importance. In re Brewing Leasing,
Inc., 255 S.W.3d 708, 714 ((Tex. App.—Houston [1st Dist.] 2008, orig. proceeding
[mand. denied.]) (citing Maresca v. Marks, 362 S.W.2d 299, 301 (Tex. 1962) (orig.
proceeding)).
A trial court abuses its discretion by ordering production of tax returns without
a showing of relevance in the case. Croft, 2010 WL 3712870, at*2; see also Hall,
907 S.W.2d at 495 (holding that the trial court abused its discretion by ordering the
production of tax returns where the requesting party offered no explanation as to
how the tax returns were relevant to their claims.). Also, tax returns are not subject
to discovery if the relevant information sought through the returns can be obtained
from another source such as a financial statement. In re ClearVision Techs., No. 07-
16-00210-CV, 2016 WL 3452760, at *2 (Tex. App.—Amarillo June 21, 2016, orig.
proceeding) (mem. op.); Croft, 2010 WL 3712870, at*2; In re House of Yahweh,
266 S.W.3d 668, 674 (Tex. App.—Eastland 2008, orig. proceeding). The requesting
party must show that the relevant information sought cannot be obtained from
another source. In re Patel, 218 S.W.3d 911, 919 (Tex. App.—Corpus Christi 2007,
orig. proceeding); see also Sears, Roebuck & Co. v. Ramirez, 824 S.W.2d 559, 559
(Tex. 1992) (orig. proceeding) (per curiam) (holding that discovery of tax returns
was unnecessarily duplicative because information had been produced in other
documents).
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V. ANALYSIS
In its petition, Defy asserts that the Robbins Parties did not present any
evidence concerning the relevance of Empower’s tax returns or that the requested
information was not available from another source.
A. Whether the Trial Court Abused its Discretion
In response to the mandamus petition, the Robbins Parties contend that Defy
did not present any of the arguments it raises in the petition to the trial court and that
Defy presented these arguments to the trial court for the first time in its motion for
reconsideration. The Robbins Parties’ assertion is without merit. In that motion,
Defy quoted its objections to request for production no. 17 and argued that (1) it
does not have “the power” to produce the requested documents; (2) the lease contract
at issue is with Defy; (3) Empower is not a party to the lawsuit; and (4) the
documents are not relevant. Defy asked the trial court to reconsider its ruling and
sustain its objections, which were based in part on relevance. In a written order, the
trial court expressly overruled Defy’s objection to request for production no. 17. See
Tex. R. App. P. 33.1(a) (providing that to preserve a complaint for appellate review,
a party must present to the trial court a timely objection and obtain a ruling from the
trial court). Defy reasserts in this mandamus proceeding that the tax returns are not
relevant.
It was the Robbins Parties’ burden to establish the relevance of Empower’s
tax returns. See In re Croft, 2010 WL 3721870, at *2 As discussed above, the
Robbins Parties asserted in their motion to compel that Defy had not produced
information regarding (1) why or how Defy’s business at Shepherd Commons is
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losing $75,000 in profits or (2) the business details of the Lipshultz Clinic that Defy
intended to operate at Shepherd Commons. The Robbins Parties further stated that
they cannot identify the business arrangements among Defy, Empower, and the
Lipshultz Clinic. However, the Robbins Parties did not explain how the tax returns
will provide the information they seek or why that information is not available from
other sources. See Patel, 218 S.W.3d at 919. Therefore, the Robbins Parties failed
to meet their burden, and the trial court abused its discretion by ordering Defy to
produce Empower’s tax returns. See In re Croft, 2010 WL 3721870, at *3
Request for production no. 17 also asks for “balance sheets [and] profit and
loss/income statements” to show Empower’s financial information since January
2012. Defy, as the party seeking to prevent production, had the burden to show that
the requested financial documents should be excluded from production. See Jacobs,
300 S.W.3d at 40 (stating that, in cases concerning the production of financial
records, the burden rests on the party seeking to prevent production). In its objection
to request for production no. 17, Defy asserted: “Objection. Overbroad. Harassing.”
The rest of the objection specifically concerned the request for Empower’s tax
returns. Defy’s response to the motion to compel does not address the financial
records. Defy’s motion to reconsider generally contends that it does not have “the
power” to produce the documents and they are not relevant. However, Defy did not
raise these arguments in its mandamus petition. Therefore, Defy has waived any
complaint that the trial court ordered it to produce Empower’s financial records. Cf.
San Jacinto River Auth. v. Duke, 783 S.W.2d 209, 209–10 (Tex. 1990) (per curiam)
(“[G]rounds of error not asserted by points of error or argument in the courts of
appeal are waived.”).
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B. Whether Defy Has an Adequate Remedy by Appeal
Defy has also shown that it does not have an adequate remedy by appeal
because the trial court’s discovery error ordering the production of Empower’s tax
returns cannot be cured after trial. See Hall, 907 S.W.2d at 495 (compelling
production of tax return left the relator without an adequate remedy by appeal); see
also Reece, 341 S.W.3d at 374 (explaining that mandamus may be available to
prevent the loss of substantive or procedural rights); Dana Corp., 138 S.W.3d at 301
(explaining that appeal is not an adequate remedy because the appellate court would
not be able to cure the trial court’s discovery error).
VI. Conclusion
The trial court abused its discretion by ordering Defy to produce Empower’s
tax returns, and Defy does not have an adequate remedy by appeal. Accordingly,
we conditionally grant Defy’s petition for writ of mandamus, in part, and direct the
trial court to vacate its July 8, 2019 order to the extent that it compels production of
Empower’s tax returns. We deny the remainder of the petition. The writ will issue
only if the trial court fails to act in accordance with this opinion.
PER CURIAM
Panel consists of Justices Wise, Jewell, Hassan.
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