Judge: Daniel S. Murphy, Case: 22STCV38566, Date: 2023-11-15 Tentative Ruling

Case Number: 22STCV38566    Hearing Date: March 1, 2024    Dept: 32

BACKGROUND

            On December 12, 2022, Plaintiff and Cross-Defendant Service Management Group Holdings, LLC (SMG Holdings) filed this action against Defendant and Cross-Complainant SMG Mountain Intermediate Holdings, LLC (SMG Mountain), asserting a single cause of action for breach of contract.

            The complaint alleges that SMG Holdings and an individual named Andrew Fromm (the Sellers) entered into an Equity Purchase Agreement (EPA) with SMG Mountain (the Buyer). Under the EPA, SMG Mountain agreed to purchase all outstanding membership interests in SMG Holdings. As part of the transaction, the parties agreed to set aside $860,000 in an Indemnity Escrow Account. Under the EPA, the Sellers were required to indemnify the Buyer for covered losses related to the transaction. If no indemnifiable loss occurred by the one-year anniversary of the closing date, the escrow amount was to be distributed to SMG Holdings. SMG Mountain has refused to distribute the escrow amount to SMG Holdings despite allegedly never making any valid claim for indemnity within the time limit.

            On December 23, 2022, SMG Mountain filed a cross-complaint against Fromm and SMG Holdings. The operative First Amended Cross-Complaint was filed on August 25, 2023. The FACC asserts ten causes of action in the following manner: (i) breach of contract as to Customers 1 and 2; (ii) fraud by misrepresentation as to Customers 1 through 4; and (iii) fraud by omission as to Customers 1 through 4.  

            The FACC alleges that Fromm lied and concealed information from SMG Mountain to inflate the price of his company, SMG Holdings. The FACC alleges that Fromm knew of at least four customers who were dissatisfied with the services provided by SMG Holdings. The customers ultimately did not renew their contracts with SMG Holdings. The loss of these customers affected SMG Holdings’ future earnings, which in turn affected the fair price of the transaction described above. Fromm allegedly made false representations and concealed information about SMG Holdings’ relationships with these four customers. Because of Fromm’s deception, SMG Holdings was allegedly sold at an inflated price, approximately $60 million above fair value.

            On January 24, 2024, Fromm filed the instant motion to quash a subpoena issued by SMG Mountain to U.S. Bank. SMG Mountain filed its opposition on February 16, 2024. Fromm filed his reply on February 23, 2024.

LEGAL STANDARD

“If a subpoena requires the attendance of a witness or the production of books, documents, electronically stored information, or other things …, the court, upon motion reasonably made by [a party] . . . may make an order quashing the subpoena entirely, modifying it, or directing compliance with it upon those terms or conditions as the court shall declare, including protective orders.” (Code Civ. Proc., § 1987.1, subd. (a), (b).) Good cause must be shown to compel a nonparty to produce documents. (See Calcor Space Facility, Inc. v. Superior Court (1997) 53 Cal.App.4th 216, 224.)  

DISCUSSION

I. The Subpoena at Issue

The subpoena at issue seeks “[a]ny and all DOCUMENTS pertaining to or reflecting any and all accounts of any kind, whether presently open or closed, held in the name of or on behalf of a Trust, whether held individually or held jointly with any other person(s) or entity(ies) for the period from April 1, 2021 to and including the date of production.” (Sayers Decl., Ex. A.) The Trusts are identified as the Laurie Bomba Irrevocable Trust and Andrew Fromm Revocable Trust. (Ibid.) SMG Mountain issued the subpoena to U.S. Bank after Fromm testified in deposition that he is a beneficiary of the two trusts, which received funds from the sale of SMG Holdings. (Rapore Decl., Ex. A, p. 31.)

II. Civil Code Section 3295

            Civil Code section 3295 precludes discovery of a defendant’s financial information until the plaintiff establishes entitlement to punitive damages. However, Section 3295 does not preclude discovery where the information sought is fundamental to the case and is not used solely for assessing punitive damages. (Rawnsley v. Superior Court (1986) 183 Cal.App.3d 86, 91.)

            SMG Mountain argues that it seeks the information for a reason beyond punitive damages. Specifically, SMG Mountain seeks evidence that Fromm financially benefitted from the sale, which it claims is related to Fromm’s motive and intent to commit fraud. (See Deloitte LLP v. Flanagan (Del. Ch., Dec. 29, 2009) 2009 WL 5200657, at *8 [“Plaintiffs can establish scienter with facts establishing a motive and an opportunity to commit fraud”].) SMG Mountain also claims to need the information to demonstrate “Fromm’s bias, interest, and other motive affecting credibility.”

However, SMG Mountain fails to explain how the precise distribution or location of the funds is probative to fraudulent intent or Fromm’s credibility. The defendant’s personal benefit is not an element of fraud. To the extent that Fromm’s financial benefit is probative of fraudulent intent, Fromm already testified that Fromm Family Holdings received approximately $82 million from the sale, and the two Trusts received over $40 million. (See Rapore Decl., Ex. A at pp. 230-31.) Delving into the precise extent of Fromm’s profit or his financial condition serves no purpose other than one that violates Section 3295.     

III. Privacy

“The party asserting a privacy right must establish a legally protected privacy interest, an objectively reasonable expectation of privacy in the given circumstances, and a threatened intrusion that is serious.” (Williams v. Sup. Ct. (2017) 3 Cal.5th 531, 552.) If the court finds a privacy interest, the court must balance the privacy concerns against the need for the information. (Id. at p. 552.) Discovery of private information is governed by the more stringent standard of direct relevance in order to prevent a fishing expedition of “tangentially pertinent sensitive information.” (Boler v. Sup. Ct. (1987) 201 Cal.App.3d 467, 472.) “The burden is on the party seeking the constitutionally protected information to establish direct relevance.” (Davis v. Superior Court (1992) 7 Cal.App.4th 1008, 1017.)

“[A] bank customer has a constitutionally protected right to privacy in financial information provided to a financial institution for banking purposes . . . .” (Garrabrants v. Erhart (2023) 98 Cal.App.5th 486, 500.) Here, SMG Mountain’s need for the information does not outweigh Fromm’s privacy interests. Fromm’s financial condition is not probative to fraud such that it warrants the intrusion into private financial information.   

IV. Relevance

As discussed above, SMG Mountain has not established that the records are relevant for the fraud claim. Additionally, the subpoena is overbroad on its face because it seeks all documents on all accounts held by the Trusts. (Sayers Decl., Ex. A.) This necessarily includes information irrelevant to assessing Fromm’s financial benefit from the sale, even if the records could be properly sought for that purpose (which they cannot).  

V. Meet and Confer and Separate Statement

            SMG Mountain argues that the motion should be denied because Fromm failed to meet and confer prior to filing it, and Fromm failed to include a separate statement. However, Code of Civil Procedure section 1987.1 does not impose a meet and confer requirement for a motion to quash. The lack of a separate statement does not affect the merits of the motion. The parties’ positions are clear from their respective briefs.   

CONCLUSION

            Andrew Fromm’s motion to quash is GRANTED. Sanctions are denied as the parties acted with substantial justification.