Judge: H. Jay Ford, III, Case: 21SMCV01770, Date: 2023-05-02 Tentative Ruling

Case Number: 21SMCV01770    Hearing Date: May 2, 2023    Dept: O

Case Name:  Lawrence, et al. v. Life Insurance Company of the Southwest, et al.

SUBJECT:                 MOTION FOR PROTECTIVE ORDER

MOVING PARTY:   Plaintiffs Philip M. Lawrence, Philip M. Lawrence, in his capacity as Trustee of the PLII Living Trust and Urbana Chapa Lawrence

RESP. PARTY:         Defendants Stan Magnus Insurance Agent, Inc. and Stanley Magnus

TENTATIVE RULING

Plaintiffs’ Motion for Protective Order is DENIED as to information pertaining to those assets that are currently pledged as collateral for the loan and Plaintiffs’ tax information and GRANTED as to all other discovery requests.  Plaintiff is to file supplemental responses to each discovery request to which this protective order was denied.

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            Plaintiffs move for a protective order pursuant to CCP §2031.060.  The requested protective order would apply to all discovery identified in Exhibit 1 of the Declaration of Jason B. Komorsky.  Plaintiffs argue these requests seek Plaintiffs’ financial and business documents from January 1, 2012 to the present.  Plaintiffs argue the discovery requests are wholly irrelevant and contain private and personal financial information, because nothing in their Third Amended Complaint implicates their present finances.

            “The court, for good cause shown, may make any order that justice requires to protect any party or other person from unwarranted annoyance, embarrassment, or oppression, or undue burden and expense. This protective order may include, but is not limited to, one or more of the following directions:  (1) That all or some of the items or categories of items in the demand need not be produced or made available at all…”  CCP §2031.060(b). 

            “Where a party must resort to the courts, the burden is on the party seeking the protective order to show good cause for whatever order is sought.”  Nativi v. Deutsche Bank National Trust Co. (2014) 223 Cal.App.4th 261, 318.  “The issuance and formulation of protective orders are to a large extent discretionary.  Ruling on motions for protective orders will not be disturbed absent an abuse of discretion.”  Id. at 316-317.  “The trial court is in the best position to weigh fairly the competing needs and interests of parties affected by discovery.  A trial court must balance the various interests in deciding “whether dissemination of the documents should be restricted.”

I. Relevance

            A.  Applicable Law

            “Unless otherwise limited by order of the court in accordance with this title, any party may obtain discovery regarding any matter, not privileged, that is relevant to the subject matter involved in the pending action or to the determination of any motion made in that action, if the matter either is itself admissible in evidence or appears reasonably calculated to lead to the discovery of admissible evidence. Discovery may relate to the claim or defense of the party seeking discovery or of any other party to the action.”  CCP §2017.010.

            “The statutory phrase ‘subject matter’ is ‘broader than the issues’ and is not limited to admissible evidence.  For discovery purposes, information is relevant if it might reasonably assist a party in evaluating the case, preparing for trial, or facilitating settlement.  Admissibility is not the test and information unless privileged, is discoverable if it might reasonably lead to admissible evidence.  These rules are applied liberally in favor of discovery, and (contrary to popular belief), fishing expeditions are permissible in some cases.”  Lopez v. Watchtower Bible & Tract Society of New York, Inc. (2016) 246 Cal.App.4th 566, 590–591. 

            However, “[a]lthough the scope of civil discovery is broad, it is not limitless. Section 2017, subdivision (a) provides matters are subject to discovery ‘if the matter either is itself admissible in evidence or appears reasonably calculated to lead to the discovery of admissible evidence.’ The burden rests upon the party seeking the discovery to provide evidence from which the court may determine these conditions are met.”  Calcor Space Facility, Inc. v. Superior Court (1997) 53 Cal.App.4th 216, 223; see also Stewart v. Colonial Western Agency, Inc. (2001) 87 Cal.App.4^th 1006, 1013

              “One of the principal purposes of the Discovery Act (Code Civ.Proc. §§ 2016–2035) is to enable a party to obtain evidence in the control of his adversary in order to further the efficient, economical disposition of cases according to right and justice on the merits.  Its purpose is not ‘to provide a weapon for punishment, forfeiture and the avoidance of a trial on the merits.’”  Caryl Richards, Inc. v. Superior Court In and For Los Angeles County (1961) 188 Cal.App.2d 300, 303. 

            B.  Plaintiffs demonstrate the requested financial information is irrelevant, with the exception of those assets used as collateral for the loan and tax information

The Court is not persuaded by Plaintiffs’ argument that their present financial situation is entirely irrelevant to this action, including current asset holdings and tax information.  Plaintiffs’ Third Amended Complaint alleges that their current financial situation has been damaged, because (1) their current assets have been encumbered as collateral for the loan they obtained to pay for the policy premiums (TAC, ¶58) and (2) they are somehow facing current tax ramifications due to loan interest (TAC, ¶69).  Even as to the Plaintiffs’ current assets, the only relevant assets are those that have allegedly been pledged as collateral for the loan used to finance the policy premiums. 

All other damages, however, are based on the difference between what Plaintiffs believed they were being sold and what they were actually sold.  As to these damages, the Court agrees that Plaintiffs’ present financial information is irrelevant.  Plaintiffs are not arguing that the policies are subject to rescission or fraudulently induced based on their present ability to pay.   

Plaintiffs fail to demonstrate that the discovery regarding the assets that have been pledged as loan collateral and tax information are irrelevant.   Plaintiffs demonstrate the irrelevance of all other business and financial information sought. 

II. Privacy interests in assets and tax information

            A.  Right of Privacy

“In Hill, we established a framework for evaluating potential invasions of 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.  The party seeking information may raise in response whatever legitimate and important countervailing interests disclosure serves, while the party seeking protection may identify feasible alternatives that serve the same interests or protective measures that would diminish the loss of privacy. A court must then balance these competing considerations.”  Williams v. Superior Court (2017) 3 Cal.5th 531, 552 (citing Hill v. National Collegiate Athletic Assn. (1994) 7 Cal.4th 1, 35).

            “In general, the court should not proceed to balancing unless a satisfactory threshold showing is made. A defendant is entitled to prevail if it negates any of the three required elements. A defendant can also prevail at the balancing stage. An otherwise actionable invasion of privacy may be legally justified if it substantively furthers one or more legitimate competing interests. (Hill, at p. 40, 26 Cal.Rptr.2d 834, 865 P.2d 633.) Conversely, the invasion may be unjustified if the claimant can point to “feasible and effective alternatives” with “a lesser impact on privacy interests.” County of Los Angeles v. Los Angeles County Employee Relations Com. (2013) 56 Cal.4th 905, 926.

            Personal financial information comes within the zone of privacy protected by article I, section 1 of the California Constitution. See Valley Bank of Nevada v. Superior Court (1975) 15 Cal.3d 652, 656.  However, the constitutional right of privacy is not absolute.  See City of Santa Barbara v. Adamson (1980) 27 Cal.3d 123, 131. 

            B. Taxpayer privilege

In addition, to the right of privacy, tax records are also protected by the taxpayer privilege.  There is clearly a privilege against forced disclosure of federal and state tax returns.  See Schnabel v. Supr. Ct. (1993) 5 Cal.4th 704, 720.  Federal and state tax returns are privileged pursuant Rev.& Tax.C. §19542.  See Webb v. Standard Oil Co. (1957) 49 Cal.2d 509, 513–514.  The taxpayer privilege does not merely protect against disclosure of copies of the return, it also protects disclosure of specific information entered on the return, such as the amount of income and deductions taken.  See Sav-On Drugs, Inc. v. Sup.Ct. (Botney) (1975) 15 Cal.3d 1, 6.  The section 19542 privilege also extends to other documents or information that are an ‘integral part of the [tax] return’ such as W–2 forms (showing the taxpayer's earnings), which are required to be attached to a taxpayer's state and federal income tax returns.”  Brown v. Superior Court (1977) 71 Cal.App.3d 141, 143.

The purpose of the privilege is to facilitate collection of taxes. Allowing discovery could discourage taxpayers from making full and truthful tax returns, out of concern their returns could be used against them for other purposes.  See Sav-On Drugs, Inc., supra, 15 Cal.3d at 6. 

However, “[t]he privilege is not absolute….[T] he privilege is waived or does not apply in three situations: “(1) there is an intentional relinquishment, (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, or (3) a public policy greater than that of confidentiality of tax returns is involved.”  Schnabel, supra, 5 Cal.4th at 721 (citations omitted)(in marital dissolution, wife entitled to discovery of corporate tax returns relevant to husband's payroll; husband required to produce corporate tax of close corporation relevant to determination of parties’ financial status and community property interests). 

C.  Plaintiffs fail to demonstrate their privacy interest in the information regarding assets that have been pledged as collateral and their tax information must be balanced against the Defendants’ right to discovery

            Plaintiffs have clearly demonstrated a legally protected interest in the information.  Plaintiffs financial information is protected by the right of privacy and their tax returns are additionally protected by the taxpayer’s privilege. 

            However, Plaintiffs fail to demonstrate a reasonable expectation of privacy regarding the assets that have been pledged as collateral for the loans.  Plaintiffs explicitly allege encumbrance of these assets as damage resulting from the policies.  Likewise, Plaintiffs could not have a reasonable expectation of privacy over their tax returns when they claim they have suffered tax liability due to the policies. 

            Moreover, Plaintiffs fail to demonstrate a threatened intrusion that is serious.  The date range of January 2012 to the present is too broad for allowable discovery into Plaintiffs’ encumbered assets and tax returns.  The production should only cover the dates from the policies inception to the present.  In addition, Defendants have offered to execute a protective order, which will mitigate the threatened invasion. 

            Plaintiffs’ motion for protective order is denied as to information pertaining to those assets currently pledged as collateral for the loan used to pay the policy premiums.  Plaintiffs’ motion for protective order is also denied as to Plaintiffs’ tax information from the date the policies went into effect to the present.  This information is directly relevant to Plaintiffs’ claims and objection based on privacy interest or taxpayer privilege is inconsistent with the maintenance of this action.