Team Marketing Group Inc et al v. Hyde et al

MEMORANDUM in Opposition re MOTION to Compel Production of Documents

W.D. La.January 2, 2019

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF LOUISIANA TEAM MARKETING GROUP, INC., * et al. * CIVIL ACTION NO. 5:17-cv-01389 * Plaintiffs, * * JUDGE DOUGHTY VERSUS * * ROBERT DANIEL HYDE, et al. * MAGISTRATE JUDGE HORNSBY * Defendants. * DEFENDANTS’ OPPOSITION TO MOTION TO COMPEL WIENER, WEISS & MADISON A Professional Corporation By: _/s/ Marjorie L. Frazier__________________ Frank H. Spruiell, Jr. BR#1611 R. Joseph Naus BR#17074 Marjorie L. Frazier BR#32991 330 Marshall Street, Suite 1000 (71101) P. O. Box 21990 Shreveport, LA 71120-1990 Telephone: (318) 226-9100 Facsimile: (318) 424-5128 ATTORNEYS FOR DEFENDANTS, ROBERT DANIEL HYDE, III, BUDGET PREPAY, INC., AND BUDGET MOBILE, LLC Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 1 of 23 PageID #: 462 i TABLE OF CONTENTS Table of Contents ................................................................................................................. i Table of Authorities ............................................................................................................ ii I. Introduction ....................................................................................................................1 II. Background ....................................................................................................................3 A. Budget PrePay, Inc..................................................................................................3 B. The Marketing Agreements Between Budget PrePay, Team, and World Class ......5 C. Arrow Sales Group, LLC .........................................................................................6 III. Law and Argument ........................................................................................................7 A. Standard for Discovery ............................................................................................7 B. Defendants Have Provided the Requested Records of Arrow Sales Group, LLC ...9 C. Budget Mobile Has No Connection to this Lawsuit and Even if it Did, Has Never Conducted Business so Does Not Now Have, and Has Never Had, Any Responsive Records ....................................................................................................................9 D. Plaintiffs Cannot Show the Defendants’ Tax Returns Are Relevant or That There is a Compelling Need for Them .............................................................................10 1. Budget PrePay’s Tax Returns ......................................................................12 2. Hyde’s Personal Tax Returns.......................................................................13 E. Defendants’ Financing Applications are Not Relevant Nor is Production of Them Proportional to the Needs of This Case ...........................................................15 1. Budget PrePay’s Financial Records ...........................................................15 2. Defendants’ Financing Applications ...........................................................16 IV. Conclusion ...................................................................................................................17 Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 2 of 23 PageID #: 463 ii TABLE OF AUTHORITIES Federal Cases Page(s) Ari v. Archon Info. Sys., LLC, 2012 WL 13001425 (E.D. La. June 26, 2012 .............................................................................. 8 British Int’l Ins. Co., Ltd. v. Seguros La Republica, 200 F.R.D. 586 (W.D. Tex. 2000) ............................................................................................. 14 Butler v. Exxon Mobile Refining and Supply Co., No. 07-386-C-M2, 2008 WL 4059867 (M.D. La. Aug. 28, 2008) ............................................ 11 Coleman v. Am. Red Cross, 23 F.3d 1091 (6th Cir. 1994) ........................................................................................................ 8 Crosby v. La. Health Serv. & Indem. Co., 647 F.3d 258 (5th Cir. 2011) ........................................................................................................ 8 Freeman V. United States, 556 F.3d 326 (5th Cir. 2009) ........................................................................................................ 8 Federal Deposit Ins. Corp. v. LeGrand, 43 F.3d 163 (5th Cir. 1995) ........................................................................................................ 14 Hebert v. Lando, 441 U.S. 153, 177, 99 S.Ct. 1635, 60 L.Ed. 115 (1979) .............................................................. 7 Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947) ........................................................................ 8 Micro Motion, Inc. v. Kane Steel Co., 894 F.2d 1318 (Fed. Cir. 1990) .................................................................................................... 8 Natural Gas Pipeline Co. of America, et al v. Energy Gathering, Inc. et al, 2 F.3d 1397 (5th Cir. 1993) ........................................................................................................ 11 Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978) .................................................................. 8 Reed v. Tokio Marine and Nichido Fire Ins. Co., Ltd., No. 3:09-cv-00676, 2010 WL 420921 (E.D. La. Feb. 1, 2010) ................................................. 11 Russell v. Choicepoint Servs., Inc., 302 F.Supp.2d 546 (E.D. La. 2004) ............................................................................................. 8 Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 3 of 23 PageID #: 464 iii Samsung Elecs. Am., Inc. v. Chung, 321 F.R.D. 250 (N.D. Tex. 2017) ................................................................................................ 8 Samsung Elecs. Am., Inc. v. Yang Kun “Michael” Chung, 325 F.R.D. 578 (N.D. Tex. 2017) ................................................................................................ 8 Zuk v. Eastern Pa. Psychiatric Inst. of the Med. College, 103 F.3d 294 (3d Cir. 1996) ......................................................................................................... 8 State Cases Dupuy v. Riley, 557 So.2d 703 (La. Ct. App. 1990) ............................................................................................ 14 Ware & Wingate Co., Inc. v. Wingate, 495 So.2d 1334 (La. Ct. App. 1986) .......................................................................................... 14 Federal Rules Fed. R. Civ. Pro. 26(b)(1) ............................................................................................................ 7-8 Fed. R. Civ. Pro. 26(b)(2) ............................................................................................................... 8 State Rules La. Code Civ. Pro.......................................................................................................................... 14 Other https://coraweb.sos.la.gov/CommercialSearch/CommercialSearchDetails.aspx?CharterID=86381 2_4A1C9359E1. .......................................................................................................................... 7 https://www.usac.org/li/tools/disbursements/default.aspx............................................................ 12 Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 4 of 23 PageID #: 465 1 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF LOUISIANA TEAM MARKETING GROUP, INC., * et al. * CIVIL ACTION NO. 5:17-cv-01389 * Plaintiffs, * * JUDGE DOUGHTY VERSUS * * ROBERT DANIEL HYDE, et al. * MAGISTRATE JUDGE HORNSBY * Defendants. * DEFENDANTS’ OPPOSITION TO MOTION TO COMPEL Defendants, Robert Daniel Hyde, III (improperly named in the First Amended Complaint as Robert Daniel Hyde) (“Hyde”), Budget PrePay, Inc. (“Budget PrePay”), and Budget Mobile, LLC (“Budget Mobile) (Hyde, Budget PrePay, and Budget Mobile collectively referred to as “Defendants”), hereby submit this Opposition to Plaintiff’s [sic] Motion to Compel Production of Documents. I. Introduction The Second Amended Complaint filed by Plaintiffs, Team Marketing Group, Inc. (“Team”) and World Class Marketing Services, LLC (“World Class”) (Team and World Class collectively referred to as “Plaintiffs”), asserts four causes of action: (1) breach of contract; (2) conversion; (3) quantum meruit/unjust enrichment; and (4) fraud. Plaintiffs’ breach of contract, conversion, and quantum meruit/unjust enrichment claims are all based on Plaintiffs’ contention that Budget PrePay failed to pay amounts owed to them for services they provided to Budget PrePay pursuant to marketing agreements between Budget PrePay and the Plaintiffs. Plaintiffs’ fraud claim is based on their contention that Hyde created a “sham” company, Arrow Sales Group, LLC (“Arrow”), and “forced” the Plaintiffs to execute agreements with Arrow by use of threats Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 5 of 23 PageID #: 466 2 and an oral promise to pay six-months of residual commissions so that Hyde could reset the Plaintiffs’ active subscriber base to zero, thereby defrauding them out of commissions that otherwise would have been owed to them by Budget PrePay for active subscribers. (Doc. No. 70). In the Plaintiffs’ Requests for Production of Discovery and in their Motion to Compel, Plaintiffs seek production of Arrow’s bank statements and all of the Defendants’: (1) federal and state tax returns; (2) balance sheets, profit and loss statements, statements of cash flow, income statements, quarterly reports, annual reports and audit reports; and loan, grant, credit, or financing applications submitted to any financial institution or public or private entity. (Doc. No. 76, Ex. 1). Plaintiffs’ Motion to Compel should be denied for the following reasons: • Defendants have produced all of Arrow’s bank statements for the period in question; • The tax returns of Budget PrePay and Budget Mobile are not relevant to whether Arrow was operated as a separate company and even if they were, Plaintiffs cannot show that there is a compelling need for their discovery because the information is available through Arrow’s records, which have been produced to Plaintiffs; • Similarly, the financial records of Budget PrePay and Budget Mobile are not relevant to whether Arrow was operated as a separate company and even if they were, their production is not proportional to the needs of the case as the information is available from Arrow’s records; • Hyde’s personal tax returns are not relevant to show whether Hyde misappropriated Plaintiffs’ unpaid commissions for his personal use and Plaintiffs’ request for the records to determine whether Hyde is the “proper entity to make them whole” is premature unless and until a judgment is entered in this matter against: (1) Hyde individually or (ii) against Budget PrePay or Budget Mobile and Plaintiffs pierce the corporate veil; • Plaintiffs’ request for Defendants’ financial applications is overbroad because it is: (i) not limited to the relevant time period and (ii) not limited to applications related to Budget PrePay or Arrow and thus, encompasses Hyde’s personal financing applications such as his home mortgages, personal vehicle financing, etc. which are clearly not relevant to this case. Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 6 of 23 PageID #: 467 3 • Further, Defendants’ financial applications, et al are not relevant because the accuracy of the Defendants’ financial records are not at issue in this case and Plaintiffs request for their production based solely on their unsubstantiated personal beliefs that the applications may not match Defendants’ other financial records is nothing more than a fishing expedition; and • None of Budget Mobile’s records are relevant in this matter. Budget Mobile shares no ownership, officers, business, or other connection to Budget PrePay, Hyde, or any of Budget PrePay’s other shareholders. It is not a named party to any contracts with the Plaintiffs. Since its organization in 2011, Budget Mobile has never had any assets or liabilities and has never engaged in any business, whatsoever, anywhere. II. Background A. Budget PrePay, Inc. Budget PrePay was incorporated in Louisiana in 1996. (Declaration of R. Daniel Hyde, III, ¶2).1 At all times relevant to this matter, Budget PrePay had five (5) shareholders – Hyde, R. Daniel Hyde, Jr., Stephen P. Hyde, Mary Elizabeth Hyde Donahue, and David Donahue. (Id. at ¶3). Budget Prepay was a licensed provider of telecommunications services and was an eligible telecommunications carrier (“ETC”) authorized to provide such services and associated products under the government’s Lifeline Program. (Id. at ¶4). During the period relevant to this lawsuit, (March 2014 through January 2017) (the “Relevant Period”), Budget PrePay’s primary business was in its capacity as an ETC, enrolling and providing services to eligible consumers of the federal government’s Lifeline Program. (Id. at ¶5). The Lifeline Program is a program administered by the Universal Service Administrative Company (“USAC”) and, in California, by the California Public Utilities Commission, designed to allow low-income consumers to receive discounts on initiating and maintaining telecommunications services to ensure that quality telecommunications services are available to eligible consumers at just, reasonable, and affordable rates. (Id. at ¶6). 1 The Declaration of R. Daniel Hyde, III is attached as Exhibit A and referred to herein as “Hyde Dec., ¶__”. Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 7 of 23 PageID #: 468 4 Under the program, the government reimburses Lifeline Program providers (like Budget PrePay) a specified amount for each eligible consumer the provider provides with a free phone and telephone service. (Id.). Eligible consumers can also purchase additional minutes and phone upgrades through the providers. (Id.). In addition, some states, like California and Kentucky, also offered additional per-phone Lifeline Program consumer reimbursement subsidies. (Id. at ¶7). During the Relevant Period, Budget PrePay conducted business in thirty-six states and Puerto Rico. (Id. at ¶11). In addition to its primary business as an ETC, Budget PrePay also sold products and services outside the Lifeline Program, including: (1) prepaid DSL (internet service), (2) prepaid wireless telephones and minute, (3) prepaid long-distance wireline (i.e. land line) minutes, (4) wireless handsets, and (5) pre-paid “top-up” wireless minutes for both regular subscribers and those in Lifeline Program (i.e. additional minutes when the original amount runs out). (Id. at ¶8). The Company also served as the customer service provider for CenturyLink, Inc. for its prepaid products. (Id.). In the Relevant Period, Budget PrePay marketed and sold its products and services through a variety of avenues including, its company website, brick-and-mortar company owned stores, third party store agents (e.g. gas stations, pawn shops, etc. that marketed and sold Budget PrePay products and services in their stores), and third-party Street Fleet agents (like Plaintiffs, who marketing and sold Budget PrePay’s Lifeline Program products and services in the community). (Id. at ¶9). At its peak, Budget PrePay had approximately fifty-seven (57) company owned stores, 4,000 active store agents, and 40 to 50 Street Fleet agents (Id. at ¶10). In or about February or March of 2016, Budget PrePay made the business decision to wind down and ultimately shut down its business.2 (Id. at ¶20). It quit adding new Lifeline Program 2 By that time, Budget PrePay had already made the business decision to move away from using company-owned stores and had closed or sold all such stores. (Hyde Dec., ¶20). Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 8 of 23 PageID #: 469 5 subscribers in California in early July of 2016 and in the rest of the country in early June of 2016. (Id. at ¶21). The company continued to provide handsets and Lifeline Program service access to all subscribers already enrolled in its Lifeline Program until it cut off service to all of its subscribers at the end of August 2017. (Id.). In or about the Spring of 2017, Budget began the process of relinquishing its ETC licenses throughout the country, relinquishing its first ETC license on April 25, 2017 in Kentucky and its last in California effective May 31, 2018. (Id. at ¶22). The relinquishment of its ETC licenses rendered Budget PrePay unable to market and enroll subscribers in the Lifeline Program or otherwise provide any Lifeline Program services. (Id.). B. The Marketing Agreements Between Budget PrePay, Team, and World Class Team and World Class are both third party marketing and sales organizations. Beginning in 2014, Budget PrePay contracted with both Team and World Class to serve as Street Fleet agents, marketing its Lifeline Program services to prospective subscribers, submitting subscriber applications using Budget PrePay’s online portal, and enrolling qualified persons in its Lifeline Program services. (Hyde Dec., ¶¶13-16, Exs. 1-4). Specifically, Budget PrePay entered into Marketing Agreements with Team and World Class covering services to be provided by the companies in California dated March 12, 2014, and June 17, 2014, respectively (the “Initial California Agreements”). (Id. at ¶¶13-14, Exs. 1-2). Budget Prepay also entered into Marketing Agreements with Team and World Class covering services to be provided by the companies in 33 other states and Puerto Rico effective March 14, 2014 and April 29, 2014 respectively (the “NLAD Agreements”). (Id. at ¶¶15-16, Exs. 3, 4). Approximately a year and a half after the Initial California Agreements, Budget PrePay entered into Agreements for Marketing Services in California with Team and World Class dated August 31, 2015 and September 29, 2015 respectively (the “Second California Agreements”). (Id. at ¶¶17-18, Exs., 5, 6) (collectively, the Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 9 of 23 PageID #: 470 6 Initial California Agreements, NLAD Agreements, and Second California Agreements referred to as the “Marketing Agreements”). Per their terms, the Second California Agreements superseded the Initial California Agreements. (Id. at ¶¶17-18, Exs. 5, 6). As noted by Plaintiffs in their Motion to Compel, they were compensated for their services under the agreements with Budget PrePay based on the number of subscribers they enrolled in Budget’s Lifeline Program. (Doc. No. 76, p. 2). More specifically, they were paid a set amount for each first-time subscriber they enrolled in Budget’s Lifeline Program plus a set, residual amount each month for each active subscriber on-line in Budget’s Lifeline Program for more than thirty (30) days. (Hyde Dec., ¶¶13-18, Exs. 1-6). The compensation was in no way tied to Budget’s production or sales. Id. C. Arrow Sales Group, LLC Arrow Sales Group, LLC is a Louisiana limited liability company that was organized by Hyde and his brother, Stephen P. Hyde (collectively, the “Hydes”) on March 31, 2016. (Hyde Dec., ¶26). The Hydes were the only two members of Arrow. (Id. at ¶27). Arrow was a company that, like Plaintiffs, was merely a third-party agent (like Plaintiffs), set up to market and enroll potential subscribers in the Lifeline Program for licensed ETCs. (Id. at ¶28). Unlike Budget PrePay, Arrow could not, and did not, provide any telecommunications services or associated products of its own (whether in the Lifeline Program or otherwise). (Id.). It was not an ETC or an otherwise licensed telecommunications provider. (Id.). On May 16, 2016, Arrow contracted with TracFone Wireless, Inc. (“TracFone”), a third party ETC, to market and enroll customers in TracFone’s wireless Lifeline program (known as Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 10 of 23 PageID #: 471 7 “Safelink®”).3 (Id. at ¶29). Telecommunications services and access to the Lifeline Program for all subscribers enrolled by Arrow (and by Arrow’s subcontractors) were provided by TracFone.4 (Id.). Plaintiffs both executed Agreements for Marketing Services with Arrow effective May 31, 2016, pursuant to which the Plaintiffs agreed to provide their services (through Arrow), to enroll qualified low-income subscribers in SafeLink®. (Id. at ¶30). The Hydes sold 100% of their membership interest in Arrow to a third party out of Bellevue, Washington effective February 1, 2017. (Id. at ¶31). III. Law and Argument A. Standard for Discovery Federal Rule of Civil Procedure 26 governs the scope of discovery. In pertinent part, Rule 26(b)(1) provides: [u]nless otherwise limited by court order, ... [p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable. The discovery rules are accorded broad and liberal treatment to achieve their purpose of adequately informing litigants in civil trials. See Herbert v. Lando, 441 U.S. 153, 177, 99 S.Ct. 1635, 60 L.Ed.2d 115 (1979). “Control of discovery is committed to the sound discretion of the trial 3 TracFone Wireless, Inc. is a Delaware corporation with its principal place of business in Miami, Florida. See Louisiana Secretary of State website, Louisiana business filings search at https://coraweb.sos.la.gov/CommercialSearch/CommercialSearchDetails.aspx?CharterID=863812_4A1C9359E1. 4 While working for Budget PrePay, Plaintiffs marketed, submitted applications for, and enrolled customers in Budget PrePay’s Lifeline Program Service and telecommunications services and access to the Lifeline Program for those subscribers was provided by Budget PrePay. (Hyde Dec., ¶19). Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 11 of 23 PageID #: 472 8 court.” Freeman v. United States, 556 F.3d 326, 341 (5th Cir. 2009). See also Coleman v. Am. Red Cross, 23 F.3d 1091, 1096 (6th Cir. 1994). Discovery does, however, have “ultimate and necessary boundaries.” Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978) (quoting Hickman v. Taylor, 329 U.S. 495, 507, 67 S.Ct. 385, 91 L.Ed. 451 (1947)). See also Ari v. Archon Info. Sys., LLC, 2012 WL 13001425, *2–3 (E.D. La. June 26, 2012). Under Rule 26(b)(1), discoverable matter “must be both relevant and proportional to the needs of the case – which are related but distinct requirements.” Samsung Electronics Am., Inc. v. Chung, 321 F.R.D. 250, 279 (N.D. Tex. 2017) (emphasis added). Further, under Rule 26(b)(2)(C), the court “must” limit discovery if it determines that: (1) the discovery sought is unreasonably cumulative or duplicative, or is obtainable from another, more convenient, less burdensome, or less expensive source; (2) the party seeking discovery has had ample opportunity to obtain the discovery sought; or (3) the proposed discovery is outside the scope permitted by Rule 26(b)(1). FED. R. CIV. PRO. 26(b)(2)(C). Thus, under Rules 26(b)(1) and 26(b)(2)(C), a court can—and must—limit discovery that it determines is not proportional to the needs of the case — even in the absence of a motion. See Crosby v. La. Health Serv. & Indem. Co., 647 F.3d 258, 264 (5th Cir. 2011); Samsung Elecs. Am. Inc. v. Yang Kun "Michael" Chung, 325 F.R.D. 578, 591–92 (N.D. Tex.2017). Finally, “Discovery is not intended as a fishing expedition.” Russell v. Choicepoint Servs., Inc., 302 F.Supp.2d 654, 671 (E.D. La.2004) citing Zuk v. Eastern Pa. Psychiatric Inst. of the Med. College, 103 F.3d 294, 299 (3d Cir.1996). Rather, “[t]he discovery rules are designed to assist a party to prove a claim … not to find out if it has any basis for a claim.” Russell, 302 F. Supp.2d at 671 citing Micro Motion, Inc. v. Kane Steel Co., 894 F.2d 1318, 1327 (Fed Cir. 1990). Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 12 of 23 PageID #: 473 9 B. Defendants Have Provided the Requested Records of Arrow Sales Group, LLC In their Motion to Compel, Plaintiffs state that they are seeking “Defendants’ bank statements (Request No. 11)”. (Doc. No. 76, p. 2). This is not, however, what Plaintiffs’ Request for Production No. 11 seeks. Rather, Request No. 11 states: Produce all bank statements of Arrow Sales Group, LLC from the date of organization until the date of sale to a third party. (Id. at Ex. 1). Thus, this request does not seek the bank statements of Budget Mobile, Budget PrePay, or Hyde but rather, only those of Arrow, which is not a defendant in this matter. Prior to the filing of this Opposition, Defendants have produced the requested bank statements from Arrow’s inception on March 31, 2016 through its sale on February 1, 2017 to an unrelated third party. Moreover, although not requested by Plaintiffs, Defendants have also produced Arrow’s 2016 federal tax return, 2016 balance sheet, 2016 income statement, line of credit fee and loan statements, Articles of Organization, and Initial Report as well as a copy of the SafeLink Marketing Agreement between Arrow and TracFone Wireless, Inc. dated May 16, 2016. In addition, Defendants previously produced the Membership Interest Purchase Agreement dated February 1, 2017 whereby the Hyde’s sold their membership interest in Arrow to a third party, Moxee Technologies, LLC (responsive to request No. 12). C. Budget Mobile Has No Connection to this Lawsuit and Even if it Did, Has Never Conducted Business so Does Not Now Have, and Has Never Had, Any Responsive Records. The sole basis for Plaintiffs’ claims against Budget Mobile is the wholly unsubstantiated assertion in their Second Amended Complaint that “there is no legal or functional difference between Budget PrePay, Inc. and Budget Mobile, L.L.C. Each is an alter ego of the other and they are jointly and severally liable for damages”. (Doc. No. 70, ¶15). Nothing could be further from the truth. Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 13 of 23 PageID #: 474 10 John M. Frazier (“Frazier”), an attorney with the law firm of Wiener, Weiss, & Madison, APC in Shreveport, Louisiana, organized Budget Mobile, LLC in October of 2011. (Affidavit of John M. Frazier, ¶2-3).5 Frazier was, and remains, the sole member of Budget Mobile. (Id. at ¶4). Since its organization, Budget Mobile has never had any assets or liabilities and has never engaged in any business, whatsoever, anywhere. (Id. at ¶5). Despite the similarity in names, Budget Mobile shares no ownership, officers, business, or other connection to Budget PrePay, Hyde, or any of Budget PrePay’s other shareholders. (Id. at ¶8). Further, Budget Mobile is not a named party to any contracts with the Plaintiffs, much less that between Plaintiffs and Budget PrePay, Inc. at issue in this case.6 (Id. at ¶7; Hyde Dec., ¶¶13- 18, Exs. 1-6). Thus, as Defendants explained to Plaintiffs in their Response to Plaintiffs Requests for Production and in subsequent correspondence, because Budget Mobile shares no connection to Budget PrePay, Hyde, or any of Budget PrePay’s other shareholders, none of its records are relevant to this case. Moreover, even if its records are relevant, which they are not, Budget Mobile has never filed tax returns, submitted financing applications, or prepared any other financial activities because it never had any assets or liabilities and never engaged in any business. (Frazier Dec., ¶6). Thus, Budget Mobile does not have any such records to produce. D. Plaintiffs Cannot Show the Defendants’ Tax Returns Are Relevant or that There is a Compelling Need For Them Plaintiffs’ Requests for Production numbers 1 and 2 seek the following: 5 The Affidavit of John M. Frazier is attached as Exhibit B and referred to herein as “Frazier Aff., ¶__)”. 6 Plaintiffs’ confusion seems to arise from the fact that the named party to the NLAD Agreements and the Initial California Agreements is “Budget PrePay, Inc., doing business as Budget Mobile”. (Hyde Dec., ¶¶13-16, Exs. 1-4). This is not Budget Mobile, LLC. Rather, Budget PrePay, Inc. sometimes used the trade name Budget Mobile. (Hyde Dec., ¶12). Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 14 of 23 PageID #: 475 11 (1) all federal and state tax returns for each of the Entities filed during the Relevant Period7; and (2) Produce all federal and state tax returns for Robert Daniel Hyde during the Relevant Period. (Doc. No. 76, Ex. 1). Defendants’ objected to both requests on the grounds that the tax returns are irrelevant and nothing in these highly sensitive documents bears any relationship to the Plaintiffs’ claims Defendants’ defenses or Plaintiffs’ purported damages. (Id.). Defendants’ position has not changed. As the Fifth Circuit Court of Appeals has acknowledged, tax returns are highly sensitive documents. See Natural Gas Pipeline Co. of America, et al. v. Energy Gathering, Inc. et al, 2 F.3d 1397, 1411 (5th Cir. 1993). “Not only are the taxpayer’s privacy concerns at stake, but unanticipated disclosure also threatens the effective administration of our federal tax laws given the self-reporting, self-assessing character of the income tax system.” Id. Courts are, therefore, reluctant to order the routine disclosure of tax returns. Id. See also Reed v. Tokio Marine and Nichido Fire Insurance Company, Ltd., No. 3:09-cv-00676, 2010 WL 420921 at *1 (E.D. La. Feb. 1, 2010). Thus, a party seeking to compel the disclosure of tax returns must demonstrate (1) that the returns are relevant to the subject matter of the action; and (2) a compelling need for the returns because the information contained therein is not otherwise readily obtainable through alternative forms of discovery. Reed, 2010 WL 420921 at *1; Butler v. Exxon Mobile Refining and Supply Co., No. 07-386-C-M2, 2008 WL 4059867, at *2 (M.D. La. Aug. 28, 2008). Here, Plaintiffs cannot show that any of the requested tax returns are relevant or that there is a compelling need for them. 7 Plaintiffs defined the “Entities” to be Budget PrePay, Inc. and Budget Mobile, LLC and the “Relevant Period” to be January 1, 2014 until December 31, 2017 (even though the earliest agreement between Budget PrePay and the Plaintiffs was not until March 12, 2014). (Doc. No. 76, Ex. 1; Hyde Dec., ¶13, Ex. 1). Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 15 of 23 PageID #: 476 12 1. Budget PrePay’s Tax Returns Plaintiffs contend that Budget PrePay’s tax returns are relevant solely to show whether Arrow was a sham company created to defraud Plaintiffs out of commissions. (Doc. No. 76, p. 4; Second Amended Complaint, Doc. 70, ¶33, 38, 41). “[T]he commingling of funds or lack of an independent accounting for Arrow are evidence that Plaintiffs’ allegations are correct.” (Doc. No. 76, p. 4). Plaintiffs do not, and have never, argued that Budget is a sham corporation. (See Id.; Second Amended Complaint, Doc. No. 70). By extension, Plaintiffs do not, and have never, argued that Budget PrePay did not prepare or maintain tax returns or other separate financial records in its own name. Id. Rather, the issue is whether Arrow was a separate company that maintained its own accounts, financials, records, etc. Budget PrePay’s tax returns bear little to no relevance to whether Arrow operated as a separate entity. Rather, Arrow’s records, or lack thereof, would provide this information.8 Moreover, even if Budget PrePay’s tax returns were relevant (which they are not), there is no compelling need for production of the tax returns as the information is obtainable through alternative forms of discovery. As noted in Section III(B) above, Defendants have given Plaintiffs 8 Although not asserted by Plaintiffs as a basis for relevance, it should be noted that nothing in Budget PrePay’s tax returns or other financial records are relevant to demonstrate the commissions Plaintiffs’ allege they are owed for services provided to Budget PrePay. The tax returns show nothing more than the lump sum total income received by the Company from all of its lines of business (e.g. prepaid wireless, prepaid DSL, long distance prepaid wireline minutes, Lifeline Program wireless, Lifeline Program wireline, top-up minutes, handset sales, and customer service for CenturyTel’s prepaid products), and through its multitude of sales avenues (i.e. street vendors, website sales, agent store sales, company-owned brick and mortar store sales). (Hyde Dec., ¶24). Budget PrePay’s other financial records show, at best (for purposes of this suit), the total lump sum amounts received by the Company from USAC, the California Lifeline Fund, and the Kentucky Lifeline Program for all active wireless and wireline Lifeline Program customers enrolled in the Lifeline Program through all of its enrollment avenues (website, company stores, Street Fleet agents, etc.). (Id. at ¶25). There is no way to determine from these lump sum payments the portion of each payment attributable to Street Fleet agents versus company stores or the website, much less that attributable to specific agents. (Id.). Moreover, the same lump sum payment information found in Budget PrePay’s financial records for payments received from USAC for all subscribers enrolled in the Lifeline Program throughout the United States and Puerto Rico is publicly available through the USAC website. Using the website’s disbursement tool, users can see the total disbursement amounts paid to each service provider (including Budget PrePay) by state and by month going back to August of 2012. See https://www.usac.org/li/tools/disbursements/default.aspx. Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 16 of 23 PageID #: 477 13 copies of all of Arrow’s bank statements and other related records (even though not requested) for the period during which the Hydes owned the company, including the company’s 2016 federal tax return, 2016 balance sheet, 2016 income statement, line of credit fee and loan statements, Articles of Organization, and Initial Report as well as a copy of the SafeLink Marketing Agreement between Arrow and TracFone Wireless, Inc. dated May 16, 2016 and the Membership Interest Purchase Agreement dated February 1, 2017 whereby the Hyde’s sold their membership interest in Arrow to a third party. These records provide Plaintiffs with the information necessary to determine whether or not Arrow was a separate company during the period in question. Indeed, even under the lesser, general discovery standard, in light of the minimal relevance, if any, of Budget’s tax returns, and the availability of Arrow’s records, production of these highly sensitive documents is certainly not proportional to the needs of this case. 2. Hyde’s Personal Tax Returns Plaintiffs argue that Hyde’s personal tax returns are relevant for two reasons: (1) to show that Hyde was using corporate funds for his own benefit; and (2) to determine the extent to which Hyde is the proper party to make them whole.9 Neither of these are valid arguments for production of Hyde’s personal tax returns. As an initial matter, Plaintiffs have not sued Hyde for misappropriating corporate funds. (Second Amended Complaint, Doc. 70). In fact, they have no standing to do so as the only proper parties with standing to sue Hyde for misappropriation of Budget PrePay’s corporate funds is the 9 In their Motion to Compel, Plaintiffs also contend that Hyde’s personal bank statements are relevant and should be produced. (Doc. 76, p. 4). Plaintiffs’ Requests for Production do not, however, seek production of Hyde’s bank statements. (Id. at Ex. 1). Thus, their production cannot be compelled at this time. Even if Plaintiffs’ had requested these documents, Hyde’s bank statements are not relevant to this case for the same reasons his tax returns are not relevant. Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 17 of 23 PageID #: 478 14 corporation itself or its shareholders in a derivative action. See Dupuy v. Riley, 557 So.2d 703, 708 (La. Ct. App. 1990) (directors or other officers who misappropriate funds are liable to the corporation); Ware & Wingate Co., Inc. v. Wingate, 495 So.2d 1334, 1336 (La. Ct. App.1986) (an action to recover losses sustained by a corporation as a result of fraud is an asset of the corporation); La. C.C.P. art. 611 (providing for shareholder derivative suits when a corporation refuses to enforce a right of the corporation). Hyde’s personal tax returns cannot, therefore be relevant for this purpose. It is possible that Plaintiffs meant that Hyde’s personal tax returns might show that he received distributions from Budget PrePay. Hyde was (and is) a shareholder of Budget PrePay and as such, was entitled to receive distributions from the Company. (Hyde Dec., ¶3). Thus, the mere fact that Hyde may have received distributions from Budget PrePay during the period in question has no relevance to Plaintiffs’ claims. Moreover, to the extent the tax returns do show distributions to Hyde, there is nothing in the returns that would evidence whether the funds for that distribution were attributable to commissions that were allegedly due and owing to Plaintiffs.10 Second, Plaintiffs’ argument that Hyde’s personal tax returns are relevant to show whether he is the proper party to make them whole is more properly classified as post-judgment discovery authorized by Rule 69 of the Federal Rules of Civil Procedure. As explained by the Western District of Texas, “the purpose of post-judgment discovery is to learn information relevant to the existence or transfer of the judgment debtor’s assets”. British Int'l Ins. Co., Ltd. v. Seguros La Republica, S.A., 200 F.R.D. 586, 589 (W.D. Tex.2000). See also Federal Deposit Insurance Corp. v. LeGrand, 43 F.3d 163, 172 (5th Cir.1995) (“The scope of post-judgment discovery is very broad to permit a judgment creditor to discover assets upon which execution may be made”). Hyde’s 10 Similarly, at all times relevant hereto, Hyde was a member of Arrow. (Hyde Dec., ¶27). Thus, he would have been entitled to receive distributions from Arrow as well. Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 18 of 23 PageID #: 479 15 personal tax returns are not relevant or discoverable in this matter for the purpose of determining if he is the proper party to make Plaintiffs whole unless and until a judgment is entered in this matter (i) against Hyde individually or (ii) against Budget PrePay and/or Budget Mobile and Plaintiffs pierce the corporate veil. E. Defendants’ Financing Applications are Not Relevant Nor is Production of Them Proportional to the Needs of this Case Plaintiffs’ Requests for Production numbers 3 and 16 seek the following: (3) For each of the Entities, … each of the following prepared, generated, or maintained at any time during the Relevant Period: Balance Sheets, Profit and Loss Statements, Statements of Cash Flows, Income Statements, Quarterly Reports, Annual Reports, and Audit Reports. (16) all loan, grant, credit, or financing applications submitted by Defendant Hyde or either of the Entities to any financial institution or other public or private entity. (Doc. No. 76, Ex. 1). Defendants objected to both requests on the grounds that the requested information is irrelevant and bears no relationship to Plaintiffs’ claims, Defendants’ defenses, or Plaintiffs’ purported damages. (Id.). Defendants further objected to Request No. 16 on the grounds that it was overbroad to the extent it was not limited to the Relevant Period. Id. These objections still hold true. 1. Budget PrePay’s Financial Records Plaintiffs contend that Budget PrePay’s financial records, like its tax returns, are relevant solely to show whether Arrow was a sham company created to defraud Plaintiffs out of commissions. (Doc. No. 76, p. 3; Second Amended Complaint, Doc. 70, ¶33, 38, 41). “[T]he commingling of funds or lack of an independent accounting for Arrow are evidence that Plaintiffs’ allegations are correct.” (Doc. No. 76, p. 3). Budget PrePay’s financial records are not relevant for the same reason that its tax returns are not relevant. As explained in more detail in Section III(D)(1) above, Plaintiffs have never argued that Budget PrePay was a sham corporation but Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 19 of 23 PageID #: 480 16 rather, that Arrow was. (See Id.; Second Amended Complaint, Doc. 70). Thus, the existence of Budget PrePay’s financial records is not in question and bears little to no relevance as to whether Arrow was operated as a legitimate, separate company. Arrow’s records, or lack thereof, would provide this information. Moreover, even if Budget PrePay’s financial records were relevant (which they are not), production of these sensitive records is not proportional to the needs of this case because, as described in Section (III)(B) above, Defendants have provided Plaintiffs with copies of all of Arrow’s bank statements and other related records for the period during which the Hydes owned the company, giving the Plaintiffs all of the information they need to determine whether or not Arrow was a separate company during the period in question. 2. Defendants’ Financing Applications As an initial matter, Plaintiffs failed to limit their request to the Relevant Time Period, when Plaintiffs were under contract with Budget PrePay and/or Arrow. There can be no question that applications submitted by Defendants outside of this period do not have any relevance to any claims or defenses in this case. Moreover, this request for all applications submitted by Hyde in his individual capacity would encompass personal financing applications submitted for reasons wholly unrelated to Budget PrePay, Arrow, or this case – for example, financing of personal vehicles, home mortgages, etc. This is certainly not relevant. More importantly, none of the loan, grant, credit, or financing applications submitted by Defendants, even if related to the business of Budget PrePay or Arrow, possibly have any bearing, whatsoever, on this case. Plaintiffs contend that the financing applications are relevant “because they confirm the accuracy of the books records, and tax returns. Discrepancies between what Defendants represented to third parties and their internal accounting go to the issues of credibility Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 20 of 23 PageID #: 481 17 and the reliability of information provided.” (Doc. No. 76, p. 5). Defendants fail to understand how the accuracy of Hyde’s or Budget PrePay’s financial records are in any way relevant to this case. First, as explained in detail above, the Defendants’ financial records themselves are not relevant to this case. Accordingly, the accuracy of those records cannot be relevant. Second, even if the financial records were relevant (which they are not), the accuracy of those records is certainly not relevant. Indeed, Plaintiffs do not assert that the accuracy of the Defendants’ financial records has any relevance to their claims or Defendants’ defenses but rather, contend only that the accuracy of the records goes to the issue of Defendants’ credibility. (Doc. No. 76, p. 5). Plaintiffs’ Second Amended Complaint does contain any allegation whatsoever relating to the accuracy of the Defendants’ financial records. (Doc. No. 70). Plaintiffs have no reason, other than their unsubstantiated personal belief, that the Defendants’ financing applications, if any, do not match the Defendants’ financial records. Rather, they simply want to dig into Defendants’ records to see if they can find anything that they believe might impugn Defendants’ credibility.11 This is the very definition of a fishing expedition and should not be permitted. IV. CONCLUSION For the foregoing reasons, Defendants’ respectfully request that this Court: 1. Deny Plaintiffs’ Motion to Compel; 11 In their Motion to Compel, Plaintiffs inexplicably discuss allegations made by the California Public Utilities Commission (“CPUC”) that Budget PrePay improperly enrolled and collected Lifeline funds for ineligible or otherwise improper subscribers. (Doc. No. 76, p. 5). Whether Budget PrePay enrolled and obtained Lifeline funds for ineligible or improper subscribers bears no relevance whatsoever to whether it failed to pay Plaintiffs all amounts they were entitled to or whether Hyde fraudulently induced Plaintiffs to contract with a sham company to defraud them out of commissions. To the extent Plaintiffs argue that the CPUC’s allegations are relevant to Budget PrePay’s and Hyde’s credibility, the reality is that these allegations actually go more to the Plaintiffs’ credibility. As noted above, pursuant to the Marketing Agreements, Plaintiffs marketed and enrolled subscribers in the Lifeline Program for Budget PrePay in California. (Hyde Dec., ¶¶13-18, Exs. 1-6). Many of the improperly enrolled subscribers, if not the majority of them, were, therefore, enrolled in the Lifeline Program by the Plaintiffs. (Id. at 23). Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 21 of 23 PageID #: 482 18 2. Enter a Protective Order pursuant to Federal Rule of Civil Procedure 26(c)(1) forbidding Plaintiffs’ discovery of the information requested in Request Numbers 1, 2, 3, and 16 of Plaintiffs’ Requests for Production of Documents; 3. Limiting the scope of Plaintiffs discovery as this Court deems proper his Court grant its Motion and deny Plaintiff’s Motion to Compel at Plaintiff’s cost; 4. Award Defendants their reasonable attorneys’ fees and expenses incurred in opposing Plaintiffs’ Motion to Compel; and 5. Award Defendants such other relief as the Court deems proper. Respectfully submitted, WIENER, WEISS & MADISON A Professional Corporation By: _/s/ Marjorie L. Frazier_____________________________ Frank H. Spruiell, Jr. BR#1611 R. Joseph Naus BR#17074 Marjorie L. Frazier BR#32991 330 Marshall Street, Suite 1000 (71101) P. O. Box 21990 Shreveport, LA 71120-1990 Telephone: (318) 226-9100 Facsimile: (318) 424-5128 ATTORNEYS FOR DEFENDANTS, ROBERT DANIEL HYDE, III, BUDGET PREPAY, INC., AND BUDGET MOBILE, LLC Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 22 of 23 PageID #: 483 19 CERTIFICATE OF SERVICE I HEREBY CERTIFY that on the 2nd day of January, 2018, the undersigned electronically filed the foregoing with the Clerk of Court through the CM/ECF system, which will send notification of such filing to all counsel of record. /s/ Marjorie L. Frazier_________________ Marjorie L. Frazier Case 5:17-cv-01389-TAD-MLH Document 82 Filed 01/02/19 Page 23 of 23 PageID #: 484