Judge Lee W. Tsao, Case Number: 23NWCV02824, Date: 2023-10-05 Tentative Ruling

Judge: Lee W. Tsao, Case: 23NWCV02824, Date: 2023-10-05 Tentative Ruling

Case Number: 23NWCV02824 Hearing Date: February 28, 2024 Dept: C

PASSPORT FOODS USA, LLC v. PASSPORT FOODS (SVC) LLC, ET AL.

CASE NO.: 23NWCV02824

HEARING: 2/28/24 @ 9:30 AM

TENTATIVE RULING

Plaintiff Passport Foods USA, LLC’s Motion to Compel Further Documents is GRANTED as set forth below. Monetary sanctions are denied for both parties.

Moving Party to give NOTICE.

Plaintiff Passport Foods USA, LLC moves to compel Defendant Passport Foods (SVC) to produce its tax documents pursuant to the court order of November 21, 2023. Defendant has only produced its income tax returns from 2020 and 2021 and Plaintiff requests payroll records. Plaintiff also requests monetary sanctions.

Background

Plaintiff alleges that Defendant Passport Foods (SVC) fraudulently represented to its senior secured lender, Continental Republic, that it had accounts receivable worth $1,759,669 when the accounts receivable was worth only $25,000. Continental Republic then foreclosed on Passport Foods (SVC)’s assets. Continental Republic later sold the assets to Plaintiff. One of the assets allegedly sold was the Employee Retention Tax Credit. Plaintiff sues for fraud, conversion, money had and received, tortious interference with contract, breach of contract, and declaratory relief.

Legal Standard

A motion to compel further production of documents applies to discovery. (Code Civ. Proc., § 2031.310, subd. (a).) The instant motion did not arise out of a discovery dispute. Hence, the court applies a different law.

Courts have inherent power, as well as power under section 187 of the Code of Civil Procedure,to adopt any suitable method of practice if the procedure is not specified by statute or by rules adopted by the Judicial Council. (Tide Water Associated Oil Co. v. Super. Ct. of L.A. County. (1955) 43 Cal.2d 815, 825.)

Plaintiff requests payroll records, but Defendants argue payroll records lie outside the court’s prior order concerning “tax documents.” Defendants assert that they complied with the court’s prior order and turned over all documents related to its tax refunds. (Decl. J. Fazio, ¶ 2.) Defendants also request monetary sanctions. In reply, Plaintiff argues that the payroll records lie within the court’s order.

On November 21, 2023, the Court ordered Passport Foods (SVC) to turn over its tax documents on the grounds that it had agreed to do so in its asset purchase agreement. The agreement states, “All of Debtor’s rights in…tax refunds and tax refund claims, as well as Debtor’s books and records relating to any of the foregoing.” (Compl., Ex. A, Sale Assets ¶ 9.)

The issue arose in the context of Plaintiff’s September 29, 2023 Ex Parte Application for a Temporary Restraining Order and an Order to Show Cause Why a Preliminary Injunction Should Not Issue. Plaintiff sought a temporary restraining order directing funds derived from the ERTC received by Defendants into an escrow account or, in the alternative, an order that Defendants provide tax documents to Plaintiff so Plaintiff can file an amended tax return on behalf of SVC.

In their Response filed on November 1, 2023, Defendants argued that they never applied for the ERTC and therefore no tax credits were received. Defendants contended that SVC had no intention of applying for the ERTC and potentially opening itself up to civil and/or criminal liability. Defendants also argued that Plaintiff has no right to file for the ERTC on behalf of SVC, as SVC was well within its rights to refuse to file for this optional tax relief program and Plaintiff cannot now force SVC to apply for this program.

As the parties have noted, the Court’s November 21, 2023 order explicitly did not authorize Plaintiff to file an amended tax return. Yet, Plaintiff argues that the Court did not prohibit Plaintiff from doing so. Clearly, Plaintiff is seeking the discovery at issue in order to file an amended tax return, and Defendants dispute Plaintiff’s ability to do so.

Plaintiff’s ability to file an amended tax return was addressed, but arguably not decided, by the Court in its November 21, 2023 order. Although the Court may have left the issue unresolved, the Court did order Defendant SVC to turn over its tax documents in accordance with the Asset Purchase Agreement. The agreement provided for the sale of “All of Debtor’s rights in…tax refunds and tax refund claims, as well as Debtor’s books and records relating to any of the foregoing.” (Compl., Ex. A, Sale Assets ¶ 9.) The Court determines that the discovery at issue is within the scope of the Court’s November 21, 2023 order and Defendants are required to comply. Defendants are not foreclosed from separately filing a request to enjoin Plaintiff from filing an amended tax return.

Therefore, the Court orders Defendants to produce the following: (1) documents evidencing the wages, salaries, and other compensation paid between March 13, 2020, and December 31, 2021; (2) if there was a gross decline of receipts in 2019, 2020, and through the third quarter of 2021, documents evidencing such; and (3) the number of full-time employees from 2019 to quarter three of 2021. The above aligns with Plaintiff’s requests as stated in its reply brief and does not identify personal information.

The Court declines to impose sanctions on either party.