Judge James C. Chalfant, Case Number: 23STCP04047, Date: 2024-04-09 Tentative Ruling

Anthony Dennis v. Tony Tseng et al., 23STCP04047

Tentative decision on motion for protective order: granted

Respondents Tony Tseng (“Tseng”), Snapwize, Inc. (“Snapwise”), and Totencarry, Inc. (“Totencarry”) moves for a protective order with respect to discovery sought by Anthony Dennis (“Dennis”). The court has read and considered the moving and opposition papers (no reply was filed) and renders the following tentative decision.

Dennis commenced this lawsuit on November 2, 2023, against Respondents Tony Tseng, individually, Snapwize, Inc., a corporation, and Totencarry Inc., a corporation. The operative pleading is t he First Amended Petition (“FAP”), which was filed on January 26, 2024 and seekig mandamus to permit inspection of corporate records. The FAP alleges in pertinent part as follows.

Dennis filed this action because Respondents’ co-founder, Tseng, has been hiding books, withholding dividends, and running the business afoul with disregard of fiduciary duties owed to the stockholders—namely, Petitioner Dennis.

On July 20, 2023 and September 13, 2023, pursuant to Corporations Code section 1601, Petitioner Dennis demanded in writing that Respondents permit Petitioner or his agents to inspect and copy the books and records of Snapwize and Totencarry. Respondents refused and continue to refuse to provide the requested books and records.

Dennis requests (1) a writ of mandamus commanding Respondents permit Petitioner or his agent to inspect and copy the demanded corporate records; (2) an alternative writ of mandamus for the demanded corporate records or to appear before this court and show cause why Respondents have not done so; (3) costs of proceeding, including attorney’s fees; and (4) any other and further relief that the Court considers proper.

The accounting books and records of a corporation and minutes of proceedings of the board of directors, committees of the board, and shareholders shall be open to inspection upon the written demand of any shareholder for a purpose reasonably related to such holder’s interests as a shareholder. §1601(a). A shareholder of more than five percent of the corporation also has a right to “inspection and copy the record of shareholders’ names, addresses, and percentage of ownership.” Id. The inspection may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Id. The right of shareholders to inspect corporate records may not be limited by a corporation’s articles or bylaws. §1601(b). A corporation also must keep at its principal executive or business office in California the original or a copy of its bylaws, which shall be open for inspection by shareholders. §213.

A shareholder has only a limited right to access to corporate financial records. Thomas v. Gordon, (2000) 85 Cal.App.4th 113, 122. Shareholder status does not entitle and individual to unfettered access to corporate confidences and secrets. Id. (Citation omitted.) Section 1601 does not impose an affirmative duty on the corporation to respond to written requests falling outside the statute. Singhania v. Uttarwar, (“Singhania”) (2006) 136 Cal.App.4th 416, 431.

A shareholder’s statutory right to inspect corporate records is supplemented by a common law right to inspect any corporate record or property if a proper and reasonable purpose is shown. Schnabel v. Superior Court, (“Schnabel”) (1993) 5 Cal.4th 704, 72223. A court has discretion to limit this common law discovery. Id. A shareholder does not have expanded rights to demand access to corporate records for the purpose of deciding whether to exercise his or her dissenters’ right under section 1312 to require the corporation to purchase his or her shares when the corporation merges or undergoes reorganization. Singhania, supra, 136 Cal.App.4th at 427. Shareholder inspection demands should be denied when it appears the shareholder is merely on a fishing expedition. Dandini v. Superior Court, (1940) 38 Cal.App.2d 32, 35.

A shareholder has recourse to the courts if a corporation does not comply with a lawful demand for inspection of corporate records. §1603. Upon refusal of a lawful demand for inspection, the court may enforce the right of inspection with just and proper conditions. §1603(a); Singhania, supra, 136 Cal.App.4th at 431, 432 (citing §1603, CCP §1085); Johnson v. Langdon, (1902) 135 Cal. 624, 626 (mandamus is the appropriate remedy of a stockholder who is refused his statutory right to inspect corporate documents); Webster v. Bartlett Estate Co. (1917) 35 Cal.App. 283, 285 (stockholder’s right to inspect corporate books may be enforced by writ of mandate). A court may award reasonable expenses including attorneys’ fees against a corporation where a shareholder must resort to court action as a result of a corporation’s unjustified failure to comply with a proper demand. §1604.

The court shall limit the scope of discovery if it determines that the burden, expense, or intrusiveness of that discovery clearly outweighs the likelihood that the information sought will lead to the discovery of admissible evidence. CCP §2017.020(a). The court may make this determination pursuant to a motion for protective order by a party or other affected person. Id. A protective order cannot be granted ex parte. St Paul Fire & Marine Ins. Co. v. Superior Court, (1984) 156 Cal.App.3d 82, 85-86. CCP sections 2025.420, 2030.090, 2031.060, 2032.510, and 2033.080 provide that a party upon whom interrogatories, inspection demands or request for admissions have been propounded may promptly move for a protective order. This motion shall be accompanied by a declaration stating facts showing a good faith attempt at an informal resolution of each issue presented by the motion. CCP §§ 2017.020(b), 2016.040.

The court shall restrict the frequency or extent of use of the discovery methods listed in CCP section 2019.010 if it determines either of the following: (1) The discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (2) The selected method of discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, and the importance of the issues at stake in the litigation. CCP §2019.030(a). The court may then make any order as may be appropriate to protect the parties, the witness, or the consumer from unreasonable or oppressive demands including unreasonable violation of a witness's or consumer's right of privacy. CCP §1987.1(a).

Respondents seek a protective order to prevent Petitioner Dennis from obtaining discovery on the merits of the shareholder’s suit.

On February 2, 2024, Dennis propounded two discovery requests, (1) Petitioner’s Request for Production of Documents to Snapwize—Set One; and (2) Petitioner’s Request for Production of Documents of Totencarry, Inc.—Set One.

On March 12, 2024, Scott C. Lee, Esq. (“Lee”) Respondents’ attorney, filed a declaration stating that he spoke with Dennis’s counsel on the telephone and over email in an attempt to resolve the issue prior to filing the motion. Lee Decl., ¶3. Lee’s office will continue to meet and confer until the date of the proposed hearing. Lee Decl., ¶5. If a resolution is found, Lee will appropriately withdraw the motion. Lee Decl., ¶6. Lee reviewed the propounded discovery requests and concluded the documents being requested include documents that would only be provided if the Petition were granted in favor of Dennis. Lee Decl., ¶7. Respondents have complied with their obligations under CCP sections 2017.020(b), 2016.040.

Respondents argue that Petitioner Dennis has propounded discovery in an attempt to receive any and all of the documents that he would only be entitled to receive if the Petition were ultimately granted and Petitioner was declared a shareholder and/or owner of the responding business entities. Petitioner has always been paid as an independent contractor and has never had any ownership rights. Tseng Decl., ¶5.

Petitioner Dennis responds that it should be uncontested that Petitioner Dennis is a shareholder of every company associated with Tote & Carry brand, including but not limited to Snapwize and Totencarry. Opp. at 6. The court should deny the requested protective order because Respondents do not delve into any information demonstrating why the requested discovery requests may be too sensitive to share with the public. Id. Petitioner believes that the corporate books are being intentionally withheld to conceal Respondents’ mis-dealings, and it would be preferred if the court would issue an injunction on any future dealings. Additionally, the court can enter a protective order stipulated between the parties (similar to Non-Disclosure Agreement) to keep any produced documents under the designation of “confidential” or “attorneys-eyes-only.” Opp. at 7.

Dennis’ Discovery Requests for Snapwize, Inc. and Totencarry, Inc. each contain identical requests for production of documents. Mot. Pro. Order, Ex A. RFP Nos. 1-3 request documents pertaining to the operating agreements of each company, along with their original corporate bylaws, articles of incorporation, and amendments; RFP Nos. 4-9 request documents pertaining to the corporations’ finances, such as accounting records, and profit and loss statements, QuickBooks, bank and credit card statements, and tax returns; RFP Nos. 1-11 request equipment or office space leases; RFP Nos. 12-19 request further financial documents, including tax liabilities, mortgage payables, debt, deferred tax liabilities, current liabilities, working capital, payrolls, expenses and net and gross income; RFP Nos. 20-21 request corporate filings and corporate check registers; RFP No. 22 requests records of all real property; RFP No. 23 requests financial statements; and lastly, RFP Nos. 24-25 request the minute records of corporate and shareholder meetings, along with documents evidencing any corporate resolutions.

These requests are at best overbroad. Dennis may not obtain through discovery the very documents he seeks for the merits of this shareholder action. Such documents are not reasonably calculated to lead to the discovery of admissible evidence on whether he is a shareholder. There may be some documents pertinent to the shareholder issue in the documents sought, but the RFPs clearly are not designed to unearth that information.

The motion for a protective order is granted. Respondents need not respond further to the RFPs or produce any responsive documents.