Opinion
NO. 01-16-00683-CV
10-03-2017
IN RE 7677 REAL STREET, LLC; 5805 WASHINGTON AVENUE TRUST; NITZAN BEN-NUN; and SONOMA APARTMENTS, LLC, Relators
Original Proceeding on Petition for Writ of Mandamus
MEMORANDUM OPINION
7677 Real Street, LLC, 5805 Washington Avenue Trust, Nitzan Ben-Nun, and Sonoma Apartments, LLC (collectively the "Property Owners") seek a writ of mandamus to compel the trial court to vacate its June 28, 2016 discovery order. We grant relief in part, and direct the trial court to vacate its order (1) deeming certain facts as true against Ben-Nun, Sonoma, and the 5805 Trust; (2) compelling production of the Property Owners' unredacted tax returns without holding an in camera review; and (3) ordering depositions in Houston of non-Texas residents, some of whom are not parties in this case.
The underlying case is Robert Hovel and Tania Hovel v. 7677 Real Street, LLC, Gal Batzri, 5805 Washington Avenue Trust, Nitzan Ben-Nun, Sonoma Apartments, LLC, B. Spencer & Associates, P.C., Bonnie E. Spencer, and 921 Birdsall, LLC, cause number 2013-43259, pending in the 234th District Court of Harris County, Texas, the Hon. Wesley Ward, presiding. The case was abated while the parties attempted to resolve their dispute.
Background
Robert and Tania Hovel sued 7677, the builder of their new home, in 2010, claiming DTPA violations, breach of contract, fraud, statutory fraud, fraudulent inducement, negligent misrepresentation, gross negligence, and unjust enrichment. 7677 failed to appear for trial, and a default judgment was signed in 2013. The judgment awarded the Hovels damages of $288,272.42, additional DTPA damages of $864,817.26, and mental anguish damages of $250,000, for a total of $1,403,089.68.
The Hovels began collection efforts. They learned that 7677, which is owned by Gal Batzri, had transferred its ownership interest in several real property assets to the Property Owners. The transfers left 7677 with a negative net worth. One property, located at 5805 Washington Avenue, was transferred to the 5805 Washington Avenue Trust (the 5805 Trust) for consideration of $10. Another real property located at 212 East 14th Street was transferred to Nitzan Ben-Nun for consideration of $10. Ben-Nun then transferred the 14th Street property to her corporation, Sonoma Apartments, LLC.
The Hovels then filed a separate suit, asserting that these transfers were fraudulent under the Texas Uniform Fraudulent Transfers Act (TUFTA). The Hovels named the 5805 Trust, Ben-Nun, and Sonoma as defendants, but did not name the trustee of the 5805 Trust, Gal Ullman, or the trust beneficiaries, Doron Bay, Naham Bay, and Inbal Sandel.
In January 2015, 7677 filed for Chapter 7 Bankruptcy. In October 2015, the bankruptcy trustee for 7677, Victoria L. Nelson, substituted into the lawsuit on behalf of the Hovels.
In the fraudulent transfer suit, the Property Owners responded to the Hovels' requests for production and admissions primarily by filing denials and objections. Some documents were produced, but the Hovels contended that few documents were produced concerning 7677's financial condition. The Hovels' attempts to depose corporate representatives of 7677 and the 5805 Trust were met either with motions to quash or non-appearances. A week before the scheduled deposition of Gal Batzri was to begin, Batzri filed suit against the bankruptcy trustee and the Hovels. One day before the scheduled deposition, the 5805 Trustee filed suit against the Hovels and their counsel.
The Hovels moved to compel answers to discovery and for discovery sanctions. On June 28, 2016, the trial court granted the motion, ordered the production of certain documents, and required the Property Owners to execute IRS forms so that the Hovels could obtain their tax returns for specified years. The trial court also ordered the Property Owners and the trustee of the 5805 Trust (Ullman) and beneficiaries (Doron Bay, Naham Bay, and Inbal Sandel) to appear for depositions in Houston. Finally, the trial court found abuse of the discovery process. The trial court found good cause to impose Rule 215 sanctions based on the failure of 7677 and Batzri to comply with previous orders for depositions and the production of documents. The trial court further found good cause to impose sanctions based on Batzri's and the 5805 Trust's suing the bankruptcy trustee, the Hovels, and the Hovel's counsel "to abuse the discovery process and to interfere with the Court's orders for the Batzri and 7677 depositions and for an improper purpose and to harass the Trustee and its counsel."
The sanction imposed by the trial court was the deeming of two facts as true against all defendants:
• 7677 was insolvent at the time of the transfers to Nitzan Ben-Nun and 5805 Washington Avenue Trust; and
• The transfers of the properties to Nitzan Ben-Nun and 5805 Washington Avenue Trust were substantially all of 7677's assets.
The Property Owners contend that the trial court abused its discretion in deeming these two facts as true, requiring the production of tax returns, and mandating that depositions be held in Houston.
Standard of Review
To be entitled to mandamus relief, a petitioner must show both that the trial court abused its discretion and that there is no adequate remedy by appeal. In re Prudential Ins. Co., 148 S.W.3d 124, 135 (Tex. 2004). The scope of discovery is a matter typically within the trial court's discretion. See Dillard Dept. Stores, Inc. v. Hall, 909 S.W.2d 491, 492 (Tex. 1995). Generally, appellate courts will hold that a trial court has abused its discretion if its actions were either "without reference to any guiding rules and principles" or "arbitrary or unreasonable." Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42 (Tex. 1985). In reviewing a sanctions order, appellate courts "are not limited to a review of the 'sufficiency of the evidence' to support the trial court's findings; rather, [they] make an independent inquiry of the entire record to determine if the court abused its discretion by imposing the sanction." Primo v. Rothenberg, No. 14-13-00794-CV, 2015 WL 3799763, at *17 (Tex. App.—Houston [14th Dist.] June 18, 2015, pet. denied). The entire record that we review includes any "evidence, arguments of counsel, the written discovery on file, and the circumstances surrounding the party's alleged discovery abuse." Id.
If a trial court's error on the scope of permissible discovery cannot be remedied on appeal, an adequate remedy by appeal does not exist. See In re Dana Corp., 138 S.W.3d 298, 301 (Tex. 2004).
The Deemed Facts
A. Rule 215 sanctions
The first sanction in the trial court's June 28, 2016 order requires that two facts—7677's insolvency and that the transfers to Ben-Nun and the 5805 Trust were substantially all of 7677's assets—be "taken as true and irrefutable against all Defendants." 7677 and Batzri contend the trial court abused its discretion in deeming these facts as true. They further contend the deeming of these facts constituted a merits-preclusive sanction.
Rule 215 allows a trial court to sanction parties for failing to comply with discovery. TEX. R. CIV. P. 215.2. It provides a wide "variety of sanctions for discovery abuse." Paradigm Oil, Inc. v. Retamco Operating, Inc., 372 S.W.3d 177, 184 (Tex. 2012). Discovery sanctions are imposed for three legitimate reasons: (1) securing compliance with the rules; (2) deterring abuse; and (3) punishing abuse. Nath v. Tex. Children's Hosp., 446 S.W.3d 355, 363 (Tex. 2014); Cire v. Cummings, 134 S.W.3d 835, 839 (Tex. 2004); Chrysler Corp. v. Blackmon, 841 S.W.2d 844, 849 (Tex. 1992). But a trial court must not impose sanctions that are not "just." Paradigm, 372 S.W.3d at 184.
1. The deemed-facts sanction must be just
To determine if a Rule 215 sanction is just, we apply the two-prong TransAmerican test. See TransAmerican Nat. Gas Corp. v. Powell, 811 S.W.2d 913, 917 (Tex. 1991); Scott Bader, Inc. v. Sandstone Prods., Inc., 248 S.W.3d 802, 812 (Tex. App.—Houston [1st Dist.] 2008, no pet.); Hoefker v. Elgohary, 248 S.W.3d 326, 330 (Tex. App.—Houston [1st Dist.] 2007, no pet.). First, there must be "a direct nexus between the offensive conduct, the offender, and the sanction award." Nath, 446 S.W.3d at 363 (citing TransAmerican, 811 S.W.2d at 917). "A just sanction must be directed against the abusive conduct with an eye toward remedying the prejudice caused to the innocent party, and the sanction must be visited upon the true offender." Nath, 446 S.W.3d at 363. Second, the sanction must not be excessive. TransAmerican, 811 S.W.2d at 917; Hoefker, 248 S.W.3d at 330. The punishment must be proportionate to the misconduct. Nath, 446 S.W.3d at 363. To satisfy this second prong, the punishment must fit the crime and the sanction must be "no more severe than necessary to satisfy its legitimate purposes." Paradigm, 372 S.W.3d at 187; TransAmerican, 811 S.W.2d at 917. In determining whether a sanction is more severe than necessary, we must review whether the trial court considered lesser sanctions and whether those less stringent sanctions would have promoted full compliance. TransAmerican, 811 S.W.3d at 917; Spohn Hosp. v. Mayer, 104 S.W.3d 878, 882 (Tex. 2003).
If the sanction imposed is the most extreme sanction—a death penalty sanction that adjudicates the merits of a party's claims or defenses—it also must satisfy constitutional due process. TransAmerican, 811 S.W.2d at 918; Paradigm, 372 S.W.3d at 184. Due process forbids "trial by sanctions." TransAmerican, 811 S.W.2d at 918. Accordingly, sanctions "so severe as to preclude presentation of the merits of the case should not be assessed absent a party's flagrant bad faith or counsel's callous disregard for the responsibilities of discovery under the rules." Id.
The Property Owners contend that the sanction of deemed facts is unjust because the conduct the trial court found sanctionable did not concern any requests for admission. The Property Owners maintain that they responded to requests for admission and produced documents in response to discovery requests.
In response, the Hovels point to the Property Owners' repeated refusal to provide discovery of their financial information and abuse of the discovery process. The Hovels adduced evidence that the Property Owners: (1) issued blanket objections and denials in response to the Hovels' discovery requests that required the Hovels to file motions to compel discovery responses from 7677 and to order 7677's representative Batzri to appear; (2) failed to produce financial documents despite a trial court order compelling production and ordering 7677's objections waived; (3) refused to verify 7677 financial information obtained from other parties; (4) sued the Hovels in an attempt to prevent a deposition from going forward; and (5) admitted in deposition testimony that some of the information in those financial documents obtained from third parties was false.
2. The sanction deeming facts as true against 7677 was not an abuse of discretion
A party is entitled to discovery of relevant, responsive, and non-privileged documents to test an opposing party's testimony about factual events. Cf. In re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998) (per curiam). When a party refuses to produce responsive records despite a court order, the opposing party is hampered in proving its case or rebutting the other party's assertions. See Chrysler Corp., 841 S.W.3d at 849-50.
If a party seeks sanctions for another party's failure "to produce a document within its possession, custody or control, the movant has the burden to prove the assertion." GTE Commc'ns Sys. Corp. v. Tanner, 856 S.W.2d 725, 729 (Tex. 1993). A party seeking sanctions for a failure to produce records must show the documents currently exist or they did exist but no longer do because the opposing party destroyed them. See Colonial Pipeline, 968 S.W.2d at 942; In re Jacobs, 300 S.W.3d 35, 46-47 (Tex. App.—Houston [14th Dist.] 2009, orig. proceeding); Arkla, Inc. v. Harris, 846 S.W.2d 623, 629 (Tex. App.—Houston [14th Dist.] 1993, orig. proceeding).
In their first request for production, the Hovels requested "all documents reflecting 7677's assets, liabilities, net worth, contingent liabilities, capital surplus, and cash flow at the time each of the Properties was . . . transferred . . . to any of the Defendants." In response, 7677 claimed to possess no responsive documents. The Hovels filed a motion to compel, and the trial court granted the motion, ordering 7677 to produce all responsive documents within 10 days of the date of the order. Apparently, 7677 did not produce any records.
We address the portion of the order requiring production of tax returns in the next section.
In their second request for production, the Hovels requested all of 7677's balance sheets for the last ten years. 7677 objected to this request as "overly broad, unduly burdensome, and not reasonably limited in time or scope." Again, 7677 did not produce any responsive documents. Eventually, 7677 produced some documents just before the Hovels' third (and finally successful) attempt to depose 7677's corporate representative, Gal Batzri. However, the Hovels contend that the only documents produced at this deposition were not responsive to the request and were, instead, supportive of 7677's defense, primarily with respect to 7677's transfer of assets to Ben-Nun. 7677 did not produce any of the requested missing financial documents.
7677 claimed to have no financial documents responsive to the Hovels' requests, but the Hovels did obtain production of some 7677 financial documents from Texas Gulf Bank and Spirit of Texas Bank. These banks produced balance sheets, dated 2009-2010, which 7677 had submitted to them in connection with loan applications. The banks' financial documents show that 7677 had possessed financial documents, at least at the time they were submitted to the banks in 2009-2010. 7677 offered no explanation—in the face of a motion for sanctions—for its non-production. When asked about these financial documents during his deposition, Batzri claimed ignorance, said he did not recall submitting balance sheets to the banks, and testified that 7677's former chief financial officer would have knowledge about them. Batzri also testified that he did not keep 7677's accounting records and he could not answer whether 7677 carried any "loans" on its books that it allegedly made to Ben-Nun, Ullman, Bay, and Sandel. Finally, Batzri claimed that he did not handle 7677's financial records and he did not know if any of the 7677 entities had financial statements.
When direct evidence that a party is withholding existing, responsive documents is not available, the complaining party may rely on circumstantial evidence. See Global Servs., Inc. v. Bianchi, 901 S.W.2d 934, 938 (Tex. 1995); Butan Valley, N.V. v. Smith, 921 S.W.2d 822, 830 (Tex. App.—Houston [14th Dist.] 1996, no writ). Based on our review of the circumstantial evidence in the record, 7677 has not established that the trial court abused its discretion in concluding that 7677 blocked the discovery process by failing to produce available financial documents.
The requested documents directly related to the Hovels' fraudulent-transfer claims. Absent any discovery regarding 7677's financial condition at the time of the property transfers, the Hovels are hampered in their ability to prove, for example, some of the indicia of fraudulent intent in Section 24.005(b). See TEX. BUS. & COM. CODE § 24.005(b)(1)-(11). The sanction chosen by the trial court deemed two of these indicia of fraudulent intent as true, a sanction that bears a direct relationship to 7677's discovery abuse and serves the purpose of providing a remedy for that abuse. See Paradigm Oil, 372 S.W.3d at 184, 187 (sanctions must bear direct relationship to offensive discovery conduct and should be tailored to serve remedial purpose of providing remedy for discovery abuse).
7677 argues that the trial court should have considered a lesser sanction. The trial court had previously ordered all of 7677's objections to requests for production waived and ordered 7677 to produce documents. Beyond compelling production, the trial court might have assessed attorney's fees and costs, but the imposition of monetary sanctions would have limited value since 7677 had filed for bankruptcy and this case involves the transfer of its assets. TEX. R. CIV. P. 215.2(b)(2); Vela v. Wagner & Brown, Ltd., 203 S.W.3d 37, 53, 61-62 (Tex. App.—San Antonio 2006, no pet.).
The court-imposed sanction is one authorized under Rule 215.2(b)(3), which allows a trial court to order that "designated facts shall be taken to be established for the purposes of the action in accordance with the claim of the party obtaining the order." TEX. R. CIV. P. 215.2(b)(3). Considering the record and the lack of other lesser sanctions that would have promoted compliance or served the remedial purpose of a sanction, the trial court's deemed-facts sanction was just.
3. The deemed facts are not merits preclusive
7677 next argues that the trial court's deemed-facts sanction is merits preclusive and, therefore, improper. If sanctions are merits preclusive, there must be a showing of "flagrant bad faith or counsel's callous disregard for the responsibilities of discovery under the rules." TransAmerican, 811 S.W.2d at 918. To determine if the deemed facts constitute a merits-preclusive sanction, we must consider the elements of the Hovels' TUFTA causes of action.
a. The Hovels' intentional fraudulent transfer claim
The Hovels' first TUFTA claim is made under Section 24.005(a)(1). A transfer is fraudulent under that section if the debtor made the transfer with the "actual intent to hinder, delay, or defraud" any of the debtor's creditors. TEX. BUS. & COM. CODE § 24.005(a)(1). To establish their actual-intent claim, the Hovels had to prove that (1) they are creditors of 7677; (2) 7677 transferred assets shortly before or after their creditor's claim arose; and (3) 7677 made the transfer with the "actual intent to hinder, delay, or defraud" them. See id.; Nwokedi v. Unlimited Restoration Specialists, Inc., 428 S.W.3d 191, 203 (Tex. App.—Houston [1st Dist.] 2014, pet. denied). To support the third element of actual intent, the Hovels rely on several facts, including that 7677's lack of other assets showed it was insolvent or became insolvent shortly after the transfers.
TUFTA identifies eleven factors, sometimes called "badges of fraud," that are circumstantial evidence for determining whether the debtor made the transfer with the requisite actual intent. Id. § 24.005(b)(1)-(11); Janvey v. Golf Channel, Inc., 487 S.W.3d 560, 566 (Tex. 2016) (referring to each of eleven findings as sign or "badge of fraud"). "Evidence of a single 'badge of fraud' does not conclusively demonstrate intent, but a confluence of several presents a strong case of fraud." Id. at 566-67.
The two deemed facts are two of the eleven designated badges of fraud. See TEX. BUS. & COM. CODE § 24.005(b)(5), (9). But they are not, based on this record, per se sufficient to establish the actual intent element of a Section 24.005(a)(1) fraudulent transfer. See Tex. Custom Pools, Inc. v. Clayton, 293 S.W.3d 299, 314 (Tex. App.—El Paso 2009, orig. proceeding) (holding that evidence of three badges of fraud was legally insufficient to prove actual intent to defraud creditor). The two deemed facts, thus, are not merits preclusive.
b. The Hovels' constructive fraudulent transfer claims
A constructive fraudulent transfer occurs without proof of actual intent when "the transferor was financially vulnerable at the time of the transaction and the 'value' exchanged was not reasonably equivalent." Janvey, 487 S.W.3d at 562. The Hovels assert constructive fraudulent transfer claims under two TUFTA sections: Sections 24.005(a)(2) and 24.006(a). Under Section 24.005(a)(2), a transfer is constructively fraudulent when it is made "without receiving a reasonable equivalent value in exchange for the transfer" and the "remaining assets of the debtor were unreasonably small" or the debtor intended to incur or would incur "debts beyond the debtor's ability to pay as they became due." TEX. BUS. & COM. CODE § 24.005(a)(2). Under Section 24.006(a), a transfer is constructively fraudulent when the debtor made the transfer "without receiving a reasonably equivalent value in exchange for the transfer" and "the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer." Id. § 24.006(a).
Both of these claims require a showing of (1) a transfer made without receiving a "reasonably equivalent value" in return for the transfer and (2) an insolvency or inability to pay debts. See KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 89 (Tex. 2015). While the deemed facts relate directly to the second element of insolvency, they do not establish the first element of these two claims—that the transfers were made without receiving reasonably equivalent value. Yet, based on the record before us, it appears that this is the element that the Property Owners seriously dispute. The trial court observed after hearing argument concerning 7677's financial condition, the balance sheet, assets, and Batzri's testimony: "So you have a balance sheet that indicates insolvency. You confront the corporate representative with that balance sheet, and he is unable to provide any information about the balance sheet." In contrast, Batzri alternatively disputed the reasonably equivalent value issue in his deposition testimony. The court's order leaves that issue, which is the heart of the parties' dispute, for the jury. Under these circumstances, we do not find the deemed facts to be merits preclusive.
Cf. Spohn Hosp. v. Mayer, 104 S.W.3d 878 (Tex. 2003) (sanctions were excessive when they essentially directed verdict on causation).
4. Deeming facts as true against Ben-Nun, Sonoma, and the 5805 Trust was improper
The Hovels' request for sanctions in the trial court lumped all four defendants together collectively and listed ten examples of claimed discovery abuse. The trial court's sanction order forbade "all Defendants" from contesting the two deemed facts.
Absent evidence of piercing the corporate veil or some other legal doctrine or reason that the parties should be treated as one for discovery purposes, a trial court must consider discovery sanctions against each party separately when the basis for the sanction is separate misconduct by each of the parties. See Bodnow Corp. v. City of Hondo, 721 S.W.2d 839, 840 (Tex. 1986). It does not further the purposes of discovery sanctions to impose sanctions against a party due to a co-party's misconduct. See id. We therefore must separately examine the conduct of 7677, Ben-Nun, Sonoma, and the 5805 Trust.
The Hovels argue that the deemed facts were proper because these three parties also failed to produce documents and associated data. They complain that Ben-Nun failed to produce metadata for an e-mail guaranty agreement that Ben-Nun claimed was no longer available. But the trial court did not find that this metadata was in fact available, let alone enter any prior order compelling its production. And the record reveals no prior order compelling production of discovery from the 5805 Trust. Although a prior motion to compel was filed against Ben-Nun, the record does not contain an order on the motion. On this record, it was excessive for the trial court's first sanction order against these parties to be deemed facts against them.
The Tax Returns
The Property Owners next assert that the trial court abused its discretion in ordering them to execute IRS form 4560 so that the Hovels could obtain their tax returns for certain specified years.
7677 was ordered to produce returns for years 2006-2013. The other parties and nonparties were ordered to produce returns for years 2006-2011.
Discovery requests must be reasonably customized to include only those matters relevant to the case. Texaco, Inc. v. Sanderson, 898 S.W.2d 813, 815 (Tex. 1995). In financial-records production cases, the burden generally lies with the party seeking to prevent production to show that the records are not relevant or are subject to a privilege. See In re Beeson, 378 S.W.3d 8, 11 (Tex. App.—Houston [1st Dist.] 2011, orig. proceeding); In re Brewer Leasing, Inc., 255 S.W.3d 708, 712 (Tex. App.—Houston [1st Dist.] 2008, orig. proceeding [mand. denied]). But tax returns "are treated differently than other types of financial records." Beeson, 378 S.W.3d at 12. The reason for this difference is that the Texas Supreme Court is reluctant "to allow uncontrolled and unnecessary discovery of federal income tax returns," Sears, Roebuck & Co. v. Ramirez, 824 S.W.2d 558, 559 (Tex. 1992), because federal income tax returns are considered private and the protection of that privacy is of constitutional importance. Maresca v. Marks, 362 S.W.2d 299, 301 (Tex. 1962). "Accordingly—unlike when other types of financial records are sought—after a resisting party objects to the production of tax returns, the burden shifts to the party seeking to obtain the documents to show that the tax returns are both relevant and material to the issues in the case." Beeson, 378 S.W.3d at 12; see Maresca, 362 S.W.2d at 301 (stating that only relevant and material financial information must be produced).
Materiality requires a finding that the same information cannot be obtained from an alternate source. In re Sullivan, 214 S.W.3d 622, 624-25 (Tex. App.—Austin 2006, orig. proceeding); see In re Doctors' Hosp., 2 S.W.3d 504, 506 n.1 (Tex. App.—San Antonio 1999, orig. proceeding) ("Even when financial records are relevant . . . privacy concerns require a trial court to explore other methods of obtaining the information."). The party seeking the production must show why the discovery it has conducted and other potential follow-up discovery cannot reveal the requested information. Sullivan, 214 S.W.3d at 625. Materiality is not shown by merely expressing frustration with the produced discovery, see id., or distrust of the other party. Beeson, 378 S.W.3d at 15.
B. 7677 tax returns
7677 contends that the Hovels failed to satisfy their burden to demonstrate relevance and materiality. See El Centro del Barrio, Inc. v. Barlow, 894 S.W.2d 775, 779 (Tex. App.—San Antonio 1994, orig. proceeding) (after objection to request for tax returns, burden shifts to party seeking returns to establish their relevance and materiality). 7677 contends that its income is irrelevant to the trustee's claims and that the information was available from another source—7677's accountant.
The Hovels respond that the tax returns are relevant and material because the Property Owners raised the defense that the property transfers were in exchange for forgiveness of debts, were deferred compensation, or were a buy-out of a partnership interest from SoapRanos or the 7677 Group, non-party entities closely-related to 7677. The Hovels reason that the returns would show whether the Property Owners reported such transactions.
We reject the Hovels' argument for three reasons. First, even assuming that the income is relevant, the tax returns include other information. The Hovels did not request only those portions of the returns concerning these claimed transactions or any other transactions with 7677 Group or the SoapRanos entities. Thus, the request and the trial court's order were overly broad.
Second, the Hovels obtained an undisclosed amount of tax return information from 7677's accountant, Loren Cook. The Hovels had the burden to demonstrate they could not obtain the relevant and material information from the accountant, and they did not offer any evidence to satisfy that burden.
Third, even if the Hovels had satisfied that burden, the trial court would have been required to order 7677 to submit its tax returns for an in camera review before ordering the tax returns produced. The trial court must review the returns to determine if they show the transactions in question (and therefore are relevant and material) and, if they do, redact the irrelevant or immaterial portions. See Maresca, 362 S.W.2d at 300-01. For the protection of privacy, a trial court is required to segregate the relevant and material portions of the returns from the portions that are not. Id. at 301. "Subjecting federal income tax returns of our citizens to discovery is sustainable only because the pursuit of justice between litigants outweighs protection of their privacy." Id.
It appears that the Hovels contend that the absence of the transactions on the tax returns is what would be relevant and material. The trial court did not need to require the production of the entire tax return to establish this point. It could review the tax return in camera and, if no such entries are found, take a number of actions to establish this point before ordering the production of the entire return, such as ordering 7677 and the 5805 Trust to produce the limited portion of the tax returns on which such transactions should have been shown or to respond to requests for admissions establishing this fact.
Thus, the trial court abused its discretion in ordering the production of 7677's tax returns.
"It is well-established that there is no adequate remedy by appeal for the erroneous compelling of a person to disclose tax records." In re Wharton, 226 S.W.3d 452, 458 (Tex. App.—Waco 2005, orig. proceeding); see Hall v. Lawlis, 907 S.W.2d 493, 495 (Tex. 1995) (orig. proceeding); Sullivan, 214 S.W.3d at 625. Because the trial court abused its discretion in compelling production of these tax returns and that order leaves 7677 without an adequate remedy by appeal, it is entitled to mandamus relief.
C. The tax returns for Ben-Nun and the 5805 Trust
For the same reasons, the trial court's order requiring Ben-Nun and the 5805 Trust to sign IRS forms to allow the Hovels to obtain their tax returns was an abuse of discretion. The Hovels did not limit their request to those portions of the returns showing particular transactions or items, and the trial court did not conduct an in camera review. Thus, the request and the trial court's order were overly broad.
Furthermore, Ben-Nun and the 5805 Trust have no adequate remedy by appeal. See In re Bullin, No. 10-15-00423-CV, 2016 WL 934010, at *2 (Tex. App.—Waco 2016, orig. proceeding) (holding there is no adequate remedy by appeal for erroneously compelling disclosure of tax records).
D. Non-parties' tax returns
The trustee—Gal Ullman—and the individual beneficiaries—Doron Bay, Naham Bay, and Inbal Sandel—are not parties to the lawsuit. Nor did they file a motion for protection in the trial court or a petition seeking a writ of mandamus in this Court. Therefore, we are without jurisdiction to address the Property Owners' complaints regarding this portion of the trial court's order.
Depositions
In their final issue, the Property Owners complain of the trial court's order that they must appear for their depositions in Houston and pay all court reporter costs. Batzri and Ben-Nun reside in California, and the trustee and beneficiaries of the 5805 Trust (Gal Ullman, Naham Bay, Doron Bay, and Inbal Sandel) reside in Israel. Batzri, Ben-Nun, and the 5805 Trust are named defendants in the fraudulent transfer lawsuit; Ullman, the Bays, and Sandel are not.
"A party may compel discovery from a non-party—that is, a person who is not a party or subject to a party's control—only by obtaining a court order" under the applicable discovery rules or by serving a subpoena compelling an oral deposition. TEX. R. CIV. P. 205.1. A trial court abuses its discretion when it compels a witness to appear for a deposition in a location other than that allowed in Rule 199.2. See Wal-Mart Stores, Inc. v. Street, 754 S.W.2d 153, 155 (Tex. 1988); TEX. R. CIV. P. 199.2(b)(2).
The Hovels respond that they never sought to enforce this portion of the sanction order. During the hearing on the motion to compel and for sanctions, counsel for the Hovels stated that he had reached an agreement with the 5805 Trust, beneficiaries, and trustee for the taking of their depositions and that he would travel to Israel to take their depositions. Even though there is an indication that the Hovels will not enforce this portion of the sanction order, because this sanction is an abuse of discretion, we direct the trial court to vacate its order requiring the individuals, Ullman, the Bays, and Sandel, to appear for depositions in Houston and to pay the travel costs. See Street, 754 S.W.2d at 155.
Conclusion
In conclusion, we hold that the trial court did not abuse its discretion in deeming certain facts admitted against 7677. But the record does not support its order (1) deeming certain facts as true against Ben-Nun, Sonoma, and the 5805 Trust, (2) ordering the production of tax returns without an in camera hearing and redaction of information that is not relevant and material to the Hovels' claims, and (3) ordering depositions of the out-of-state residents in question to be held in Houston. Accordingly, we conditionally grant the petition and direct the trial court to (1) vacate the portion of its order that deems facts as true and irrefutable against Ben-Nun, Sonoma, and the 5805 Trust; (2) vacate the portion of its order requiring relators and nonparties to produce income tax returns to the other party; and (3) vacate the portion of the order requiring Gal Ullman, Naham Bay, Doron Bay, and Inbal Sandel to appear for deposition in Houston, Texas. We are confident the trial court will comply with this opinion and the writ will issue only if it does not. See TEX. R. APP. P. 52.8.
Harvey Brown
Justice Panel consists of Justices Higley, Bland, and Brown.