Summary
involving request for both Polish and U.S. tax returns
Summary of this case from Sec. & Exch. Comm'n v. RayatOpinion
99 Civ. 3014 (RMB)(DF).
June 21, 2004
MEMORANDUM AND ORDER
INTRODUCTION
Plaintiff Brassco, Inc. ("Brassco") moves to compel defendants Andrzej Klipo and Beata Klipo (collectively "the Klipos") to produce certain financial statements, tax returns, and information regarding real estate allegedly owned by the Klipos. Brassco additionally moves for an order allowing it to serve a subpoena duces tecum on Marine Midland Bank for information with respect to certain bank accounts in the Klipos' name. Brassco also requests that the Court issue a Request for International Judicial Assistance pursuant to the Hague Convention, 28 U.S.C. § 1781, so that certain documents held by financial institutions in Poland may be produced for use at trial in this case, in the United States. The Klipos oppose the motion to compel, but argue in the alternative that, should the motion be granted, production should be made pursuant to a protective order. The Klipos further request that Brassco pay all costs and expenses related to providing any discovery items that the Court orders produced.
Brassco's motion to compel is granted in part and denied in part. To the extent that it is granted, any information that is produced in accordance with this Order should be treated as confidential, pending issuance of a protective order, the form of which should be discussed between the parties and proposed to the Court. Brassco's further motion for a Request for International Judicial Assistance pursuant to the Hague Convention is also granted in part and denied in part, for the same reasons set forth herein. A Request reflecting the Court's ruling is being separately issued by the Court. Finally, the Klipos' request that their discovery costs be shifted to Brassco is denied.
BACKGROUND
Brassco brings this action against its two former employees for damages arising out of alleged fraud, breach of contract, breach of fiduciary duty, breach of the duty of loyalty, misappropriation, conversion, prima facie tort, and for an accounting. (Complaint ("Compl.") filed April 26, 1999 (Dkt. 1) at ¶ 1.) Between July 1, 1994 and July 31, 1998, Andrzej Klipo was the President and Treasurer of Brassco, and between August 1, 1994 and July 31, 1998, Beata Klipo was the President's assistant. ( Id.) The Klipos are married and are citizens of Poland, although, during the relevant periods, they resided in the state of New York, where Brassco maintains its executive offices. ( Id. ¶¶ 2-4; 14.)
Brassco alleges that the Klipos, without the knowledge of Brassco's Board of Directors, caused Brassco to deviate from its business strategy of marketing in the United States metal products produced in Poland ( Id. ¶ 1) Instead, the Klipos allegedly caused Brassco to purchase agriculture products and processed food in the United States ("food products"), for sale to companies in Poland and Canada ("the Foreign Companies"), which were run by the Klipos' friends. ( Id.) Brassco alleges that the Klipos recorded the food products sales as metal products transactions in Brassco's corporate ledger and that they caused Brassco to sell food products at or below cost, essentially extending interest-free credit to the foreign buyers. ( Id. ¶¶ 19-28.) Brassco further alleges that the Klipos failed to inquire as to the creditworthiness of any of the Foreign Companies, and continued to cause Brassco to sell the food products on very favorable terms, even when the Klipos knew that the Foreign Companies were behind in payment on the outstanding invoices. ( Id. at ¶¶ 24-26.) As a result of the food product transactions, Brassco allegedly suffered substantial actual and consequential damages. ( Id. ¶ 1.)
DISCUSSION
I. BRASSO'S MOTION TO COMPEL A. Legal Standards
Rule 26(b)(1) states that parties may obtain discovery "regarding any matter, not privileged, that is relevant to the claim or defense of any party. . . . Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence." Id.; see also Nat'l Cong. for Puerto Rican Rights ex rel. Perez v. City of New York, 194 F.R.D. 88, 92 (S.D.N.Y. 2000) ("In federal actions, discovery should be broad, and all relevant materials which are reasonably calculated to lead to the discovery of admissible evidence should be [discoverable].") (quotation marks and citation omitted). Limitations are imposed only "on discovery sought in bad faith, to harass or oppress the party subject to it, when it is irrelevant, or when the examination is on matters protected by a recognized privilege." In re Six Grand Jury Witnesses, 979 F.2d 939, 943 (2d Cir. 1992) (citing Hickman v. Taylor, 329 U.S. 495, 507-08, 67 S.Ct. 385, 391-92, 91 L.Ed. 451 (1947)).
When a party fails to respond to discovery requests, Rule 37 permits the requesting party to apply for an order compelling disclosure or discovery. Fed.R.Civ.P. 37(a). Specifically, a party may move to compel document production, disclosures required under Rule 26(a), or answers to interrogatories or deposition questions.
B. Financial Documents
Brassco requests that the Klipos be compelled to produce information related to several bank accounts, specifically: signature cards; new account forms; year-end or other periodic account summaries; monthly or other periodic account statements; computer printouts of all transactions; documents concerning wire transfers into or out of the accounts, instructions with respect to such transfers; and any other correspondence, for the time period from January 1, 1994 to December 31, 1999. (Letter Motion Pursuant to Rules 26(b) and 37 of the Federal Rules of Civil Procedure and under the Hague Convention ("Brassco Mot. to Compel") filed September 25, 2003 (Dkt. 48) at 1(a)-(f) (listing specifically numbered accounts).)
Brassco argues that this information is relevant to prove its claims of malfeasance by the Klipos, in light of discovered information tending to show that the Klipos were deriving personal financial benefit from Brassco's sale of food products to their friends at the Foreign Companies, by receiving money directly into their personal accounts from at least one of the Foreign Companies. ( Id. at 6.) Brassco argues that any personal gain by the Klipos at Brassco's expense would support Brassco's claims of fraud, and would also constitute a breach of the Klipos' employment contract, breach of the duty of loyalty, misappropriation, and conversion. (Brassco Mot. to Compel at 7; see Compl. ¶¶ 44-116.) Brassco further argues that disclosure of the financial information it seeks will help it to calculate its actual damages resulting from the Klipos alleged improper activity. (Brassco Mot. to Compel at 8.) The Klipos oppose production of their personal financial information on the basis that it is purportedly irrelevant, overbroad, and privileged, and that production would be unduly burdensome. (Defendants' Response to Letter Motion Dated 9/23/03 by Plaintiff Brassco, Inc. ("Defs' Opp.") dated November 19, 2003 at 4.)
Except for a time-frame restriction discussed below, the motion to compel the Klipos to produce the above-described financial documents is granted. If the requested financial information shows that the Klipos received a personal financial gain from the allegedly improper food products transactions, this would support Brassco's claims regarding the impropriety of the transactions, and would also suggest a reason why the Klipos may have engaged in such transactions. The information sought may also lead to other, discoverable information relevant to Brassco's allegations that the Klipos committed fraud and misappropriation. Moreover, the production of this information should not be overly burdensome. For the most part, Brassco is seeking summary information, such as account statements or transaction summaries, regarding the bank accounts at issue. No showing has been made by the Klipos that the quantity of documents sought is unduly large, or that the production of these documents would be unduly difficult.
Further, although the Klipos argue that the information sought is privileged, they do not cite any applicable privilege, maintaining only that the information relates to their "private information." (Defs' Opp. at 4.) This is insufficient to protect the requested information on the basis of privilege, although, given the personal nature of the information at issue, the Court accepts the Klipos' alternative request that the documents be produced pursuant to a protective order. The parties are therefore directed to confer regarding the form of a protective order, and to submit a proposed order to the Court for consideration.
The Court notes that, with their papers, the Klipos have already submitted a proposed Protective Order. After a further good faith conference, however, counsel may be able to submit a jointly-proposed order, and the Court thus directs counsel to try to negotiate a mutually-acceptable form of order for the Court's consideration.
As for the relevant time frame for the requested production, the Court notes that Klipos' employment with Brassco ended in July 1998. Although Brassco contends that the Klipos may have continued to receive payments from the Foreign Companies beyond that date ( see Brassco Mot. to Compel at 9), Brassco has shown no support for its argument that production should be required for a period covering an extra year and a half. In the Court's view, a reasonable time frame for the produced documents would extend to the end of 1998. If the produced documents reveal that the Klipos continued to receive payments from the Foreign Companies well into the end of that year, then Brassco may renew its application for further production. At this time, however, the requested financial information should be produced for the period from January 1, 1994 through December 31, 1998.
Finally, for the same reasons discussed above, Brassco may proceed to serve a subpoena duces tecum on Marine Midland Bank, seeking the same type of information for the Klipos' account(s) as described above, with the same time period limitation.
C. Tax Returns
Brassco also requests copies of the Klipos' tax returns, filed in Poland and the United States, for the years 1994 through 1999. (Brassco Mot. to Compel at 2.) While tax returns are not privileged, courts are generally reluctant to require their production. S.E.C. v. Militano, No. 89 Civ. 0572 (JFK), 1991 WL 270449, at *3 (S.D.N.Y. Dec. 12, 1999) (citing U.S. v. Bonanno Organized Crime Family, 19 F.R.D. 625, 627 (S.D.N.Y. 1985)). Before ordering disclosure, the Court must find that the tax returns are relevant and that the information contained therein is not otherwise obtainable. Id. (citing S.E.C. v. Cymaticolo Corp., 106 F.R.D. 545, 547 (S.D.N.Y. 1985)).
Brassco asserts that there is no way for it to know the total amount of the money the Klipos were purportedly funneling from the fraudulent transactions, because the Klipos could have put some of the money in undisclosed bank accounts. (Brassco Mot. to Compel at 8.) Brassco argues that only an examination of the tax returns would demonstrate the extent of the payments to the Klipos, and thus the extent of the alleged fraud. ( Id.) Brassco also argues that, if the tax returns reveal that the Klipos received any other outside income, this may further evidence their disloyalty to Brassco. ( Id.)
The request to compel disclosure of the Klipos tax returns is denied. The bank records that are to be produced pursuant to this Order should reveal the extent to which the Foreign Companies transferred funds to the Klipos' accounts, and Brassco's argument that the Klipos' tax returns may reveal additional accounts, concealed in discovery, is supported by nothing other than Brassco's vague suspicions. The Court also notes that Brassco has not asserted any claim in this case charging the Klipos with breach of their corporate duties by, in general, having supplemented their income from outside sources. Rather, Brassco's allegations all relate to the Klipos' role in causing Brassco to enter into food product transactions with the Foreign Companies. While any evidence that the Klipos received kickbacks from those transactions would be relevant to the claims asserted, a broader review of the Klipo's personal income is not warranted by the claims and defenses asserted in this action. See Fed.R.Civ.P. 26(b)(1) (limiting discovery to matters relevant to "the claim or defense of any party").
D. Real Estate Transactions
Brassco additionally requests that the Klipos be compelled to produce a great deal of information regarding three pieces of real estate located in Poland (Brassco Mot. to Compel at 2.) Brasso maintains that the Klipos bought and developed these parcels of real estate, which were located in a "fancy, American-style development" in Warsaw. ( Id. at 9.) Brassco contends that since together the Klipos earned less than $100,000 annually from Brassco, the mere fact that they were able to purchase this property indicates that they must have had some other source of personal income. ( Id.) According to Brassco, this other source of personal income was likely to have been the allegedly improper food products transactions. ( Id.)
With respect to these pieces of property, Brassco requests all documents and/or information regarding any: contract of sale; title evidencing ownership; payment for each parcel; contract with any construction company and/or supplier for construction, installation, and/or provision of any supplies and home furnishing; payment of any amount agreed to in any contract and for the provision of any supplies or home furnishings; and evidence of an assignment or gift of any property by the Klipos to third persons. (Brassco Mot. to Compel at 2, ¶ 3(a)-(f).)
Brassco's request to compel disclosure of information relating to these parcels of real estate is denied, as the discovery sought is overly broad, and the connection between these parcels of land and the allegations advanced in this case is overly tenuous. Further, as noted above, the Klipos' bank records should contain the information Brassco claims to seek, i.e., the extent to which the Klipos received direct payments from the Foreign Companies. II. THE KLIPOS' REQUEST THAT BRASSCO PAY THEIR DISCOVERY COSTS
In their proposed Protective Order ( see supra n. 1), the Klipos have included language that Brassco be required to pay "all costs and expenses related to responding and obtaining the discovery items demanded by [Brassco]." (Proposed Protective Order submitted November 19, 2003, at 2.) Although it is unclear what the Klipos mean by this language, it seems that the Klipos are seeking an order requiring Brassco to reimburse them for their attorneys' fees and any out-of-pocket expenses incurred in gathering and reviewing the documents sought. Based on this reading of the Klipos' request, the request is denied.
Under the Federal Rules, a party need only make requested documents available for inspection and copying; it need not pay copying costs. Fed.R.Civ.P. 34; see Dew v. 39th Street Realty, No. 99 Civ. 12343 (WHP) (JCF), 2001 WL 388053, at *1 (S.D.N.Y. Apr. 16, 2001) (responding party is only required to produce original documents for the requesting party's inspection, to be copied at the requesting party's cost). Otherwise, the costs of responding to discovery demands are generally paid for by the responding party, and, in the absence of any showing of extraordinary burden or other good cause for deviating from that rule, the Court will not shift costs. See, e.g., Zubulake v. UBS Warburg LLC, 216 F.R.D. 280, 283 (S.D.N.Y. 2003) (noting that the presumption is that the responding party must bear the expense of complying with discovery requests, and that cost-shifting is generally only appropriate when requests run afoul of Rule 26(b)(2) and only for good cause shown). Brassco has not provided the Court with a sufficient basis for ordering cost-shifting in this case, and, in the absence of good cause, the Court declines to do so. III. Expert Deadlines
Finally, Brassco requests an extension of the expert discovery deadlines in this case. (Brassco Mot. to Compel at 3.) As stated by the Court in a telephone conference held with the parties and the Court on May 10, 2004, expert discovery is hereby extended as follows: Brassco's expert report shall be produced no later than June 30, 2004; the Klipos' expert report shall be produced no later than July 31, 2004; and the close of all expert discovery shall be no later than August 31, 2004. No further extensions will be granted.
CONCLUSION
For the foregoing reasons, it is hereby ORDERED that:
1. No later than thirty (30) days from the date of this Order, the Klipos shall produce the financial documents listed in Brassco's motion to compel at paragraph 1(a)-(f) for the period from January 1, 1994 to December 31, 1998, and Brassco shall hold those documents in confidence, pending the Court's entry of a Protective Order;
2. No later than thirty (30) days from the date of this Order, the parties shall submit a jointly-proposed Protective Order to the Court for its consideration;
3. Brassco's motion for leave to serve a subpoena on Marine Midland Bank is granted, to the extent set forth herein;
4. The motion to compel production of tax returns and information relating to three parcels of land in Poland is denied;
5. The request that Brassco be ordered to pay for the costs associated with the ordered discovery is denied;
6. Expert discovery is extended pursuant to the schedule outlined above.
7. Brassco's motion for a Request for International Judicial Assistance pursuant to the Hague Convention is granted, to the extent set forth in the Request being separately issued by the Court.
SO ORDERED.