Judge Ralph C. Hofer, Case 21GDCV00845 2022-10-14 Tentative Ruling

Plaintiff CAC Motors dba ZR Investment brings this action against defendants X3 AST Consulting, Inc. (“X3 AST Consulting”), Sleiman A. Timani, and Marques Johnson, alleging that plaintiff is engaged in the automobile export business, and entered into a business relationship with defendant X3 AST Consulting pursuant to which plaintiff would request specific vehicles and X3 AST Consulting would locate, purchase and deliver those vehicles to plaintiff. Plaintiff alleges that defendant Timani, who is associated with X3 AST Consulting, contacted plaintiff and induced it to transfer money to defendants to secure a 2020 Mercedes Benz GL450, which was not in defendants’ possession. The complaint alleges that after plaintiff transferred the funds for the vehicle, defendants failed to satisfy the security interest associated with the vehicle in order to authorize the release of the lienholder, so that the vehicle was repossessed by Mercedes Benz Financial Services.

“(a) If a subpoena requires the attendance of a witness or the production of books, documents, electronically stored information, or other things before a court, or at the trial of an issue therein, or at the taking of a deposition, the court, upon motion reasonably made by any person described in subdivision (b), or upon the court's own motion after giving counsel notice and an opportunity to be heard, 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. In addition, the court may make any other order as may be appropriate to protect the person from unreasonable or oppressive demands, including unreasonable violations of the right of privacy of the person.”

With respect to limiting discovery, the burden is generally on the moving party to establish good cause for the relief requested. Emerson Electric Co. v. Superior Court (1997) 16 Cal.4th 1101, 1110. The granting or denial of relief is reviewed for abuse of discretion. See Meritplan Insurance Co. v. Superior Court (1981, 2nd Dist.) 124 Cal.App.3d 237, 242.

Defendants seek to quash a subpoena issued to third party Bank of America, arguing that the document request is overbroad and not limited in scope, that the subpoena improperly seeks financial condition information without obtaining an order permitting such discovery, and that the documents sought are protected by defendants’ right to financial privacy.

“A demand is made for any and all documents, notes or other stored materials memorizing, referring to, describing, or in any other way associated with any and all accounts held in the name of X3 AST Consulting, Inc., either individually, or with any other person, whether natural or corporate. Those documents shall include, but are not limited to, monthly statements, deposit and/or withdrawal slip images, copies of checks, including cashier’s checks, money orders, loan applications, wire information, signature card, account opening documents. This demand does not require production of documents referencing transactions made prior to December 1, 2018.”

Plaintiff in opposition argues that the parties in this case engaged in the beginning of 2019, and defendants have failed to submit any support for the argument that they engaged in late 2019. Plaintiff argues that the limitation in time to transactions made prior to December 1, 2018 is accordingly proper. Plaintiff evidently relies on defendant Timani’s responses to Requests for Production, in which it is stated defendant objects to producing bank statements from October of 2015 to October of 2021, “given that Plaintiff admittedly engaged Defendant beginning in 2019.” [Opposition, Ex. 6; Response to Request for Production of Documents, Set One, Response to Request No. 7]. There does not appear to be any overbreadth in the timeframe set forth in the subpoena, particularly as defendants have not submitted any evidence disputing the engagement in 2019.

Defendants also argue that the 4-years of financial records sought will contain private information pertaining to defendants’ other clients, which have nothing to do with the single transaction with plaintiff, and that because plaintiff is a licensed dealer itself which exports vehicles overseas, and a potential industry competitor, the requested information will also yield proprietary trade secrets of X3 AST Consulting, including the identity of other customers, buying agents, or exporters. There is no declaration or evidence supporting these factual representations concerning the records requested. As argued in the opposition, ordinarily, it is the party seeking to withhold documents as privileged trade secrets which has the burden of establishing the existence of the privilege, in effect, that the information involved is a trade secret and that the party is its owner. Bridgestone/Firestone, Inc. v. Superior Court (1992) 7 Cal.App.4th 1348, 1390. There is no evidence submitted by defendants to meet such a burden.

“Upon motion by the plaintiff supported by appropriate affidavits and after a hearing, if the court deems a hearing to be necessary, the court may at any time enter an order permitting the discovery otherwise prohibited by this subdivision if the court finds, on the basis of the supporting and opposing affidavits presented, that the plaintiff has established that there is a substantial probability that the plaintiff will prevail on the claim [for punitive damages].”

In evaluating whether Civil Code section 3295(c) bars discovery of all financial information, it has been held that this section does not bar pretrial discovery where finances are directly related to the substantive claim involved. Rawnsley v. Superior Court (1986) 183 Cal.App.3d 86, 91. In Rawnsley, plaintiff sought to establish alter ego and other claims with respect to a partnership in which he had an interest. The appellate court found that the trial court had abused its discretion in denying outright an order compelling the production of “detailed financial information” from defendants, reasoning:

“Unlike the situation in which a plaintiff seeks to discover defendant's financial status solely for the purpose of assessing a punitive damages claim, the documents sought by petitioner here are fundamental to his case. He alleges that assets have been converted and diverted from the entities in which he has an interest to the individual defendants or to corporations which are the alter egos of the individual defendants. The only way petitioner can prove his case is to obtain defendants' financial records.

Where 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 section 3295, including a protective order limiting access to such information. Where, however, the financial information goes to the heart of the cause of action itself, a litigant should not be denied access so easily.”

Here, as in Rawnsley, plaintiff has asserted that the individual defendants treat the corporate defendant as an alter ego, which would make bank records which could include evidence of comingling of funds or other irregularities in the handling of corporate accounts directly relevant to this matter. Defendants argue that plaintiffs will have difficulty proving any fraud in this matter, and the matter involves a single vehicle purchase that was unsuccessful. It appears defendants recognize that there is some direct relevance with respect to any transactions involving plaintiff but does not propose how the subpoena could be modified or limited in order to serve all interests involved here.

Plaintiff makes an argument that Timani’s request for protection of X3 AST Consulting’s bank records is essentially an admission that X3 AST Consulting is the alter ego of Timani, and that X3 AST Consulting’s bank records are effectively Timani’s bank records. Plaintiff argues that the fact that both defendants are objecting to the subpoena, which requests only documents involving X3 AST Consulting’s accounts further supports this alter ego admission. There does not appear to be any such admission here, and it is not clear how such an admission would further plaintiff’s position that it needs the documentation to establish an alter ego relationship which plaintiff is claiming has already been admitted. To the extent plaintiff in the opposition seeks that this court order that such an alter ego admission has occurred, this does not appear to be a proper order for the court to make in connection with an opposition to a discovery motion, and the evidence submitted does not support issuing such an order. The court will decline to issue such an order.

Plaintiff also argues that the court in an order made on a discovery motion in July of 2022 deemed inquiry into X3 AST Consulting’s financial condition to not relate to punitive damages, but a justified search for evidence fundamental to this case. A review of the July 1, 2022 minute order shows that the court ordered further responses to entirely different sets of discovery, directed only to defendant Timani, without objection, as the responses had been untimely so that objections had been waived. There was no broad order addressing the objections now timely asserted. At best, the previous minute order, in connection with responses to two requests for admissions requesting that defendant Timani earns the majority of his income from X3 AST Consulting, and that the company does not have assets exceeding $10,000 in value, stated:

However, in considering defendants’ argument in connection with financial condition, it appears that defendants have not established by any evidentiary showing that the admitted necessity for financial information in connection with the alter ego and fraud claims is outweighed by any intrusiveness with respect to the banking records of a corporation. It would appear that the concerns raised by defendants concerning the exposure of the financial condition of a corporate entity could be addressed by ordering that the subject records be produced pursuant to a protective order, limiting use of such records to this litigation.

First, a claimant must possess a “legally protected privacy interest.” Hill, at 35. Second, the claimant must have a reasonable expectation of privacy under the particular circumstances, including the customs, practices, and physical settings surrounding particular activities. Hill, at 36-37. Third, the invasion of privacy must be serious in nature, scope, and actual or potential impact. Trivial invasions do not create a cause of action. Hill, at 37. If there is a reasonable expectation of privacy and the invasion of privacy is serious, then the court must balance the privacy interest at stake against other competing or countervailing interests. Hill, at 37-40.

“The state Constitution expressly grants Californians a right of privacy. (Cal. Const., art. I, § 1.) Protection of informational privacy is the provision's central concern. (Hill v. National Collegiate Athletic Assn. (1994) 7 Cal.4th 1, 35, 26 Cal.Rptr.2d 834, 865 P.2d 633.) 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. (Id. at pp. 35–37, 26 Cal.Rptr.2d 834, 865 P.2d 633.) 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. (Id. at pp. 37–40, 26 Cal.Rptr.2d 834, 865 P.2d 633.).”

“Marshalls argues Hill v. National Collegiate Athletic Assn., supra, 7 Cal.4th 1, 26 Cal.Rptr.2d 834, 865 P.2d 633 did not overrule the compelling interest/compelling need test, but only concluded such an interest need not be shown in every case. This is correct so far as it goes. A threatened invasion of privacy can, to be sure, be extremely grave, and to the extent it is, to conclude in a given case that only a compelling countervailing interest and an absence of alternatives will suffice to justify the intrusion may be right. (See, e.g., American Academy of Pediatrics v. Lungren (1997) 16 Cal.4th 307, 340–342, 66 Cal.Rptr.2d 210, 940 P.2d 797.) But the flaw in the Court of Appeal's legal analysis, and in the cases it relied upon, is the de facto starting assumption that such an egregious invasion is involved in every request for discovery of private information. Courts must instead place the burden on the party asserting a privacy interest to establish its extent and the seriousness of the prospective invasion, and against that showing must weigh the countervailing interests the opposing party identifies, as Hill requires. What suffices to justify an invasion will, as Marshalls recognizes, vary according to the context. Only obvious invasions of interests fundamental to personal autonomy must be supported by a compelling interest. (Hill, at p. 34, 26 Cal.Rptr.2d 834, 865 P.2d 633.) To the extent prior cases require a party seeking discovery of private information to always establish a compelling interest or compelling need, without regard to the other considerations articulated in Hill v. National Collegiate Athletic Assn., supra, 7 Cal.4th 1, 26 Cal.Rptr.2d 834, 865 P.2d 633, they are disapproved.”

The court must determine whether the privacy right of a business entity is outweighed by the relevance of the information sought to the subject matter in the pending action, and “doubts as to relevance should generally be resolved in favor of permitting discovery.” Hecht, Solberg, Robinson, Goldberg & Bagley v. Superior Court (2006) 137 Cal.App.4th 579. Where the trial court has conducted this balancing, its determination with respect to protection of financial information is reviewed for abuse of discretion. Hecht, at 600.

Here, the moving papers make no attempt to establish an objectively reasonable expectation of privacy in the given circumstances, or a threatened intrusion that is serious. The moving papers instead argue that plaintiff cannot merely rely on its generic alter ego allegation in the complaint but must demonstrate a minimal showing to justify the disclosure of highly sensitive financial information of defendant dating back several years without any limit as to scope. Defendants cite case authority under which the party asserting a privilege has the initial burden of establishing that the privilege exists, but then fail to argue specific facts or circumstances to meet defendant X3 AST Consulting’s initial burden here of showing an objectively reasonable expectation of privacy or a threatened intrusion that is serious.

In any case, even assuming that defendant corporation would have an objectively reasonable expectation of privacy in banking records dating back to early 2019, such expectation would be limited on the part of a corporate entity, and defendant has submitted no evidence showing that anything other than a generalized privacy concern is at issue here. As noted above, although there is brief mention of proprietary information to be gleaned from particular transactions, defendants have failed to submit any evidence to support such an argument.

Defendants instead argue at length that plaintiff will be unable to prove the elements to establish the existence of an alter ego relationship between the parties. This argument recognizes that the information sought could include information which would be directly relevant to discovering whether there is a basis for pursuing the alter ego theory. Defendants also argue that since plaintiff has sued the individuals for their direct participation in the alleged transactions, there is no need to invoke the alter ego doctrine to pierce the corporate veil. This is not necessarily the case, and a matter that may ultimately resolve once discovery is conducted to explore the facts in connection with the legal basis upon which defendants and in which capacity such defendants may be pursued in this litigation.

Plaintiff argues that the information is necessary to discover facts in support of the alter ego allegations in the complaint and emphasizes the case law which applies to corporate parties, providing only a limited privacy protection. Plaintiff also relies on case law which places the burden on the moving party to establish a privacy privilege. Plaintiff argues that in connection with any alleged trade secrets, the burden is on defendants to show, for example, that the names of defendants’ affiliates are trade secrets, including that those names have been kept secret. Plaintiff argues that this showing has not been made, and defendants have further failed to show how their business would be damaged if disclosure is made. Plaintiff submits documents defendant served in response to discovery in this matter, in which plaintiff indicates defendant in fact identified the names of various buying agents and buyers. [Kouprine Decl., Exs. 7, 8].

In sum, there appears to be a limited privacy interest of the corporation here, particularly given the failure of the moving papers to address the scope of any privacy expectation and the seriousness of any claimed intrusion. It also appears that disclosure of the records sought would have limited intrusiveness due to the previous disclosure of information through direct discovery. The opposition has shown how the documents requested through the subpoena serve an important countervailing interest in determining the conduct of the daily business of the corporate defendant in connection with alter ego allegations in this matter.

The balance here favors permitting discovery and disclosure. The motion to quash accordingly is denied, but the court will order that the documents be produced by the deponent subject to a protective order. The parties are ordered to meet and confer with respect to entering a protective order, and to use the Stipulated Confidentiality Order Form provided by the Los Angeles Superior Court as a model. The parties are ordered to provide to the Court within five days a redlined or compare copy of the proposed order as compared to the Stipulated Confidentiality Order Form, as required by the model, and the order will be entered by the Court as appropriate.

Under CCP § 2023.010, misuse of the discovery process includes “(a) Persisting, over objection and without substantial justification, in an attempt to obtain information or materials that are outside the scope of permissible discovery; (b) Using a discovery method in a manner that does not comply with its specified procedures; (c) Employing a discovery method in a manner or to an extent that causes unwarranted annoyance, embarrassment, or oppression, or undue burden and expense.”

Where there has been misuse of the discovery process, under CCP section 2023.030(a), the court “may impose a monetary sanction ordering that one engaging in the misuse of the discovery process, or any attorney advising that conduct, or both pay the reasonable expenses, including attorney’s fees, incurred by anyone as a result of that conduct.” Plaintiff argues that sanctions are appropriate under CCP section 2023.030 (a), which further provides that, “The court may also impose this sanction on one unsuccessfully asserting that another has engaged in misuse of the discovery process, or on any attorney who advised that assertion, or both.” Under subdivision (a) the court may impose such a sanction unless the court “finds that the one subject to the sanction acted with substantial justification or that the other circumstances make the imposition of the sanction unjust.”

Pursuant to Hill v. National Collegiate Athletic Assn. (1994) 7 Cal.4th 1, the Supreme Court held that in 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. Defendants have not met their burden to establish an objectively reasonable expectation of privacy by the corporate entity X3 AST Consulting, Inc. in the material requested, or a threatened intrusion that is serious. Even if such a showing had been made, plaintiff in opposition has established a legitimate and important interest in pursuing relevant information in connection with plaintiff’s alter ego allegations in this action. The request is limited in time, and once subject to a protective order, the privacy intrusion will be minimal, and the Court finds the need for the information outweighs any privacy invasion argued by defendants.

The parties are ordered to meet and confer with respect to entering a protective order, and to use the Stipulated Confidentiality Order Form provided by the Los Angeles Superior Court as a model. The parties are ordered to provide to the Court within five calendar days a redlined or compare copy of the proposed order as compared to the Stipulated Confidentiality Order Form, as required by the model, and the order will be entered by the Court as appropriate.

Please make arrangement in advance if you wish to appear via LACourtConnect/Microsoft Teams by visiting www.lacourt.org to schedule a remote appearance. Please note that LACourtConnect/Microsoft Teams offers free audio and video appearance. Counsel and parties (including self-represented litigants) are encouraged not to personally appear. With respect to the wearing of face masks, Department D recognizes that currently, the Los Angeles Department of Public Health strongly recommends masks indoors, especially when interacting with individuals whose vaccination status is unknown; for individuals who have a health condition that puts them at higher risk for severe illness; individuals who live with someone who is at higher risk; and for individuals who are around children who are not yet eligible for vaccines. In accordance with this guidance, it is strongly recommended that anyone personally appearing in Department D wear a face mask. The Department D Judge and court staff will continue to wear face masks. If no appearance is set up through LACourtConnect/Microsoft Teams, or otherwise, then the Court will assume the parties are submitting on the tentative.