Judge Lee W. Tsao, Case Number: 23NWCV00400, Date: 2024-01-02 Tentative Ruling

Judge: Lee W. Tsao, Case: 23NWCV00400, Date: 2024-01-02 Tentative Ruling

Case Number: 23NWCV00400 Hearing Date: January 2, 2024 Dept: C

The Windmill Co. Inc. vs Fayek Sedrak, et al.

Case No.: 21NWCV00400

Hearing Date: January 2, 2024 at 10:30 a.m.

Tentative Ruling

Plaintiff The Windmill Co., Inc.’s Motion to Compel Resumption of Deposition Testimony and Production of Documents from John Soldat is GRANTED. John Soldat is ORDERED to appear for resumption of deposition within 30 days or within such time as agreed upon by the parties.

The Court awards sanctions against Defendants and their counsel, jointly and severally, payable to Plaintiff and/or Plaintiff’s Counsel in the reduced sum of $2,785.00.

Moving Party to give notice.

Background

On June 21, 2021, Plaintiff The Windmill Co., Inc. (“Plaintiff”) filed an action against Fayez Sedrak and O&C Hillside Resources Management Co. (collectively “Defendants”) alleging Breach of Contract, Breach of Implied Covenant of Good Faith and Fair Dealing, and Declaratory Relief. Plaintiff alleged that on January 3, 2020, Plaintiff entered into a Sale of Business Agreement with Defendants to purchase the business known as ARCO AM PM located at 13550 Beach Blvd., La Mirada, CA 90638 (“Subject Property”) for $1,590,0000.00. Plaintiff alleges that Defendants failed to perform on the agreement and refused to sell the business to Plaintiff resulting in lost profits.

The instant motion is a Motion to Compel Further Deposition Testimony and Production of Documents from Third-Party Accountant John Soldat. Mr. Soldat is the tax preparer for Defendants and provides no other services other than tax return preparation.

Pursuant to a Deposition Subpoena issued on May 16, 2023, Plaintiff requested the production of documents relating to the Profit & Loss statements (“P&Ls”) for each year, including but not limited to bank records, credit card statements, and receipts that support the P&Ls, as well as documents pertaining to journal entries regarding any and all bookkeeping records pertinent to the Subject Property from 01/01/2015 to present date. Plaintiff also requested any and all email or phone call records (including but not limited to call logs) from Fayez Sedrak or any person on behalf of O&C Hillside to Mr. Soldat, pertaining to requests for tax returns, profit and loss statements, and journal entries related to bookkeeping, relating to sale of the Subject Property from 01/03/2020 to present date.

On May 22, 2023, the deposition of Mr. Soldat commenced but was suspended pending resolution of this discovery dispute. Plaintiff contends Mr. Soldat failed to produce any documents requested in the Subpoena and erroneously claimed every document is privileged.

Separate Statement

Any motion involving the content of a discovery request or the responses to such a request must be accompanied by a separate statement. The motions that require a separate statement include a motion:

(4) To compel answers at a deposition;

(5) To compel or to quash the production of documents or tangible things at a deposition

(Cal. Rules of Court 3.1345(a)(4) and (a)(5).)

Defendants argue that Plaintiff’s Separate Statement is not a Statement of Facts, but rather, it consists of arguments which duplicate those made in Plaintiff’s Memorandum in Support of Motion to Compel. Defendant argues that on that basis alone the Court should not consider the instant motion.

The Court is unpersuaded. The proper response in most instances, if the trial court is not prepared to address the merits of the motion in light of the deficient separate statement, is to give the opposing party an opportunity to file a proper separate statement rather than entering judgment against that party based on its procedural error. (Parkview Villas Assn., Inc. v. State Farm Fire & Casualty Co. (2005) 133 Cal.App.4th 1197, 1211.)

However, the Court determines that it may properly address the merits of the motion despite the inadequate separate statement.

Analysis

A. Whether the Documents May be Propounded by Plaintiff

On May 16, 2023, Plaintiff issued a Subpoena for the Deposition of Third-Party Accountant John Soldat which requested the following:

“a. Any and all DOCUMENTS relating to Profit & Loss statements (“P&Ls”) for each year (cash basis and accrual), audited (if applicable), including but not limited to bank records, credit card statements, and receipts that support the P&Ls; Any and all DOCUMENTS pertaining to journal entries regarding any and all bookkeeping record pertinent to O&C Hillside ARCO AMPM located at 13550 Beach Blvd., La Mirada, CA 90638 from 01/01/2015 to present date.

“b. Any and all DOCUMENTS YOU submitted to Tesoro relating to sale of the ARCO AMPM located at 13550 Beach Blvd., La Mirada, CA 90638 from 01/03/2020 to present date.

“c. Any and all DOCUMENTS YOU submitted to ABC relating to sale of ARCO AMPM located at 13550 Beach Blvd., La Mirada, CA 90638, from 01/03/2020 to present date.

“d. Any and all email or phone call records (including but not limited to call logs) from Fayez Sedrak or any person on behalf of O&C Hillside to YOU, pertaining to request for tax returns, profit and loss statements, and journal entries related to bookkeeping, relating to sale of ARCO AMPM located at 13550 Beach Blvd., La Mirada, CA 90638, from 01/03/2020 to present date. TAX RETURNS ARE NOT DEMANDED TO BE PRODUCED.”

Mr. Soldat did not have responsive documents for Items “b” and “c.” He produced a Privilege Log and then a Supplemental Privilege Log for Items “a” and “d” which identified documents and emails utilized to prepare tax returns for Defendants. Mr. Soldat’s Privilege Log claimed four (4) privileges: Tax Preparer Privilege; Tax Return Privilege; Financial Information Privilege with no court Order Under Civil Code section 3295; Invasion of Privacy.

i. Tax Preparer Privilege

As to the tax preparer privilege claim, Defendants rely upon California Revenue & Taxation Code § 7056.6 for the proposition that Mr. Soldat could not disclose any information he received to facilitate the preparation of tax returns. However, a close reading of California Revenue & Taxation Code § 7056.6 shows that the Section “shall not apply to disclosure of information if that disclosure is made pursuant to the person's consent or pursuant to a subpoena, court order, or other compulsory legal process.”

Here, it is undisputed that Mr. Soldat was subpoenaed to appear for deposition. Accordingly, the argument that Mr. Soldat would be in violation of the Tax Preparer Privilege if he were to disclose the information requested is without merit.

ii. Tax Return Privilege

Secondly, Defendants argue Mr. Soldat may not turn over tax return information because of the tax return privilege.

Under Revenue and Taxation Code section §§ 19542 and 7056, taxpayers have a privilege against any forced disclosure of their taxpayer information. (Save-On Drugs v. Superior Court, (1975) 15 Cal. 3d 1, 6.) The privilege protects tax returns as well as specific entries in the returns. (Id. at 7.) Moreover, the “California tax privilege applies to tax returns and records that are an 'integral part' of the tax returns, such as W -2 and 1099 forms. (Brown v. Super. Ct. of the City & Cnty. of San Francisco, (1977) 71 Cal.App.3d 141, 143-44.)

Plaintiff acknowledges that the tax return itself is privileged. In fact, Plaintiff explicitly stated in correspondence with Defendants that it does not seek the production of tax returns. (Mot., Ex. 1 and Ex. E.) Upon review, the Court differentiates W-2’s and 1099 forms from the emails, phone calls, and logs pertaining to tax returns in Mr. Soldat's possession and is unpersuaded by Defendant’s claims that the latter materials are privileged. Plaintiff does not seek “specific entries” in Defendants’ tax returns, nor does Plaintiff seek any documents that are normally attached to a tax return, such as a W-2 or Form 1099. Accordingly, the court determines that the requested information is not an “integral part” of a tax return and does not fall within the scope of the Tax Return Privilege.

iii. Financial Information Privilege with no court Order Under Civil Code section 3295

Defendant cites Civil Code § 3295 to support the proposition that a protective order may be granted to require Plaintiff to “produce evidence of a prima facie case of liability for damages pursuant to Section 3294, prior to the introduction of evidence of… the financial condition of the defendant.” (Cal. Civ. Code, § 3295(a)(2).) Section 3294 requires clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” (Cal. Civ. Code, § 3294.)

It is true that “[w]here the only reason for seeking such financial information is to give a tactical edge to the party who has obtained discovery of the information by allowing that party the benefit of pressure in settlement negotiations by threat or implication of disclosure, the party against whom the discovery is sought should be afforded the full benefit of Civil Code § 3295, including a protective order limiting access to such information.” (Rawnsley v. Superior Court (1986) 183 Cal.App.3d 86, 91 (internal quotations and citations omitted).) Where, however, “the financial information goes to the heart of the cause of action itself, a litigant should not be denied access so easily.” (Id.)

Unlike the situation in which a plaintiff seeks to discover a defendant's financial status solely for the purpose of assessing a punitive damages claim, the documents sought by Plaintiff are fundamental to its case. Plaintiff argues that the only way to prove loss of profit, punitive damages, and alter ego liability is by obtaining such financial documents. Since the financial information requested goes “to the heart of the cause of action itself” Plaintiff should be granted access to the financial documents. Accordingly, the Court determines Civil Code § 3295 does not preclude disclosure of the information Plaintiff seeks.

iv. Privacy Rights

Finally, Defendants argue that their records are subject to privacy protections. However, as a corporation, Defendant O&C Hillside has “lesser privacy rights than natural persons assuming such rights exist at all.” (See State Water Resource Control Bd. v. Baldwin & Sons, Inc. (2020) 45 Cal.App.5th 40, 63 & fn. 29; Roberts v. Gulf Oil Corporation (1983) 147 Cal.App.3d 770, 798.). “In general, corporate financial records are discoverable.” (See Schnabel v. Superior Ct. (1993) 5 Cal. 4th 704, 723.)

Accordingly, the Court is unpersuaded by the privacy rights claim.

B. Whether Plaintiff May Compel Deposition

On May 22, 2023, Plaintiff began to take the deposition of Mr. Soldat. Plaintiff argues that Mr. Soldat did not produce the requested records and did not answer questions, resulting in the suspension of the deposition.

CCP § 2025.450(a) provides, “If, after service of a deposition notice, a party to the action or an officer, director, managing agent, or employee of a party, or a person designated by an organization that is a party under Section 2025.230, without having served a valid objection under Section 2025.410, fails to appear for examination, or to proceed with it, or to produce for inspection any document, electronically stored information, or tangible thing described in the deposition notice, the party giving the notice may move for an order compelling the deponent's attendance and testimony, and the production for inspection of any document, electronically stored information, or tangible thing described in the deposition notice.” CCP § 2025.450 requires the Court to compel the deposition unless it finds a valid objection was served under §2025.410. The objecting party has the burden to justify objections asserted, (See Denari v. Superior Court (1989) 215 Cal.App.3d 1488, 1494-95.) Code of Civil Procedure § 2025.480, subdivision (a) permits parties to bring a motion to compel the appearance of a deponent that failed to answer any question or produce documents. Code of Civil Procedure § 2025.610, subdivision (b) also permits a party to take a further deposition of a person upon the order of the Court for “good cause shown.” (McCoy v. Gustafson (2009) 180 Cal.App.4th 56, 97.)

Further, “the scope of questioning at a deposition is very broad. Objections for ‘irrelevancy’ are difficult to sustain and instructions not to answer on that basis are never proper.” (Cal. Prac. Guide Civ. Pro. Before Trial (The Rutter Group 2011) ¶ 8:704, quoting Code Civ. Proc., § 2017.010.) California Code of Civil Procedure § 2025.480 states in pertinent part: “(a) If a deponent fails to answer any question or to produce any document, electronically stored information, or tangible thing under the deponent’s control that is specified in the deposition notice or a deposition subpoena, the party seeking discovery may move the court for an order compelling that answer or production. (b) This motion shall be made no later than 60 days after the completion of the record of the deposition, and shall be accompanied by a meet and confer declaration under Section 2016.040.” (See also Unzipped Apparel v. Bader, (2007) 156 Cal.App.4th 123, 127.)

When attempting to pause the initial deposition Plaintiff’s Counsel stated: “Okay. I would like to state this on the record that although we are adjourning this deposition, this deposition is not over, because I was not given the opportunity to ask the questions that I would have gleaned from the documents that Mr. Soldat should have produced.” (Mot., Ex. 5.)

Plaintiff’s counsel argues that he was deprived of the opportunity to ask questions regarding non-privileged documents due to the erroneous claim that the documents were privileged. Given the analysis above, the Court agrees.

Therefore, the motion to compel is granted. (CCP § 2025.450(a).) John Soldat is ordered to resume his deposition testimony within 30 days or within such time as agreed upon by the parties. His objections based upon privilege are OVERRULED as set forth above.

C. Sanctions

CCP § 2025.450(g)(1) requires the Court to impose sanctions unless it finds the deponent acted with substantial justification or there are circumstances that render imposition of sanctions unjust.¿ The Court may also impose sanctions for misuse of the discovery process, including employing a discovery method in a manner or to an extent that causes undue burden or expense, and making, unsuccessfully and without substantial justification, a motion to compel or limit discovery. (Code Civ. Proc. §§ 2023.010, 2023.030.)

A court has discretion to award sanctions that are “suitable and necessary to enable the party seeking discovery to obtain the objects of the discovery he seeks” but they should not be punitive in nature or levied for the purposes of punishing an offending party. (Vallbona v. Springer (1996) 43 Cal.App.4th 1525, 1545.)

Plaintiff requests sanctions in the amount of $4,010.50 (consisting of five hours to prepare the instant motion and three hours to appear at the hearing at a rate of $400.00 per hour. Plaintiff also requests a filing fee of $90.00 and the Court reporter fee of $720.50 for the initial deposition.)

The Court finds the requested sanctions excessive. As a preliminary matter the filing fee associated with this motion is $60.00. Taking into account the e-filing service fees for the motion and reply, the total would not amount to more than $64.50. The Court also recognizes that Plaintiff does not cite any controlling authority which explicitly permits the disclosures it requests. However, the Court finds that Defendants failed to act with substantial justification when they refused to provide any documents in response to Plaintiff’s demand. Therefore, the Court awards sanctions in the reduced total amount of $2,785.00, inclusive of fees, against Defendants and Counsel, jointly and severally, payable within 30 days.