Elia v. Roberts et al

Filing 72

ORDER re: Motions in Limine, signed by District Judge Anthony W. Ishii on 10/25/2017. (Kusamura, W)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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ARIEL ELIA, individually and as
Successor Trustee to the Alan Elia
Declaration of Trust Dated March 18,
2002,

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ORDER RE:MOTIONS IN LIMINE

Plaintiff

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CASE NO. 1:16-cv-0557 AWI EPG

v.
JOHN ROBERTS, and individual; TEXAS
ENVIRONMENTAL PRODUCTS, INC., a
Texas corporation; and TEXAS
ENVIRONMENTAL PRODUCTS, a
partnership, joint venture or other form of
business organization unknown, and DOES
1 through 20, inclusive,

(Docs. 34, 35, 36, 39, 40, 41, 42, and 43)

Defendants

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I. Background
Defendant John Roberts (“Roberts”) founded and owned Texas Environmental Products,

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Inc. (“TEP Inc.”) which manufactured and sold fertilizer. Alan Elia (“Alan Elia”) sold fertilizer in

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the Fresno area on behalf of Defendants starting in 2004. Defendants assert that Alan Elia was an

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independent contractor who worked on commission. Plaintiff asserts that Alan Elia formed a

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partnership with Roberts; the partnership conducted business as a new entity also named Texas

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Environmental Products (“TEP Partnership”). Alan Elia died in February 2015. Roberts

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continued the sale of fertilizer in this area and sold TEP Inc. in December 2015. Plaintiff Ariel

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Elia (“Ariel Elia” or “Plaintiff”) contends that this sale also encompassed TEP Partnership.

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Defendants contend that TEP Partnership does not exist.

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Alan Elia created a trust in 2002 (“Trust”) whose beneficiaries are his children Ariel and

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Britz Elia (“Beneficiaries”). Alan Elia’s interest in the business relationship with Defendants

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belongs to the Trust. Alan Elia was the original trustor/trustee. Robyn Esraelian was the attorney

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who represented the Trust. After Alan Elia’s passing, Harold Zinkin (“Zinkin”) became the

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trustee. In 2015, Zinkin and Esraelian communicated with Roberts about monies owed to the

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Trust. They attempted to reach a settlement based on an understanding that Alan Elia was an

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independent contractor. However, the Beneficiaries opposed the settlement, arguing that Alan

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Elia was a partner. Based on this difference of opinion, the Beneficiaries and Zinkin agreed that

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Ariel Elia would replaced Zinkin as the trustee.

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In February 2016, Ariel Elia, both in her personal capacity and as the trustee for the Trust,

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filed suit against Defendants on claims of accounting, breach of fiduciary duty (to the partnership),

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and declaratory relief. Additionally, Plaintiff seeks an additional double damages penalty under

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Cal. Prob. Code § 859 for a bad faith breach of fiduciary duty to a trust. Plaintiff proceeds under

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two theories of monetary relief. First, under the theory that Alan Elia was a partner, Plaintiff seeks

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50% of the profits from fertilizer sales in 2015 and 50% of the proceeds from the sale of TEP

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Partnership. Second, under the theory that Alan Elia was an independent contractor, Plaintiff

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seeks the commission on any sales he made in January and February of 2015.

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II. Legal Standard
Motions in limine may be “made before or during trial, to exclude anticipated prejudicial

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evidence before the evidence is actually offered.” Luce v. United States, 469 U.S. 38, 40 n.2

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(1984). Fed. Rule Evid. 403 states generally that, “The court may exclude relevant evidence if its

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probative value is substantially outweighed by a danger of one or more of the following: unfair

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prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly

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presenting cumulative evidence.” “Although the Federal Rules of Evidence do not explicitly

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authorize in limine rulings, the practice has developed pursuant to the district court’s inherent

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authority to manage the course of trials.” Luce v. United States, 469 U.S. 38, 41 n.4 (1984). The

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parties must abide by the court’s rulings but may ask for reconsideration as trial progresses. “[A]
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ruling on a motion in limine is essentially a preliminary opinion that falls entirely within the

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discretion of the district court. The district court may change its ruling at trial because testimony

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may bring facts to the district court’s attention that it did not anticipate at the time of its initial

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ruling.” United States v. Bensimon, 172 F.3d 1121, 1127 (9th Cir. 1999), citing Luce v. United

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States, 469 U.S. 38, 41-42 (1984).

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III. Discussion
A. Defendants’ Request for Bifurcation (Doc. 39)
The causes of action in this case are for accounting, breach of fiduciary duty, declaratory

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relief, and a request for special damages under Cal. Prob. Code § 859. Doc. 33, Pretrial Order,

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8:16-9:2 and Doc. 46, Defendants’ Trial Brief, 9:4-12. Defendants request that the trial be

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bifurcated in the following manner: the first phase would be a jury trial dealing with accounting,

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breach of fiduciary duty, and declaratory relief while the second phase would be a bench trial

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dealing with Section 859 bad faith claim. Doc. 39, 1:28-2:12. Plaintiff agrees to bifurcation in

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concept but argues that Section 859 must be further separated into liability and damages portions,

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with liability determined in the first phase by a jury. Doc. 54, 2:13-17.

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Bifurcation is appropriate in this case. The Section 859 claim should be heard separately

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from the underlying case to allow a wider set of evidence to be considered for determining bad

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faith or good faith. The parties have not fully fleshed out which claims (accounting, breach of

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fiduciary duty, declaratory relief, and Section 859) should be heard by a jury and which should be

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determined by the court. The parties are directed to file any additional briefing they have by noon

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Friday, October 27, 2017. The precise structure of the trial will be dealt with at 8:30 AM

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Tuesday, October 31, 2017.

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Defendants’ motion is granted in part and reserved in part.

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B. Defendants’ Motion to Exclude Witnesses From the Courtroom (Doc. 43)
Plaintiff does not oppose this motion. Doc. 55. Defendants’ motion is granted.

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C. Defendants’ Motion to Exclude Alan Elia’s Past Statements (Doc. 40)
Defendants seek to exclude certain statements made by Alan Elia as inadmissible hearsay,

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namely “statements of customers or friends that Alan Elia held himself out as a partner. In

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addition, Plaintiffs may offer assertive conduct by Elia such as his unilateral execution of

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assignments of interest in an effort to demonstrate that the relationship between Mr. Elia and Mr.

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Roberts and/or TEP was a partnership.” Doc. 40, 2:11-15, citations omitted. Defendants’ motion

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only seeks to exclude Alan Elia’s statements that Roberts was unaware of; Defendants concede

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that statements Roberts knew about or adopted are admissible. Doc. 40, 3:4. Plaintiff asserts that

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even statements Roberts was unaware of are admissible on three grounds: as verbal acts, as

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statements to Alan Elia’s state of mind, and as an admission of an agent. Doc. 51, 14:19-22,

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15:18-26, and 16:24-27.

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First, Plaintiff argues that Alan Elia’s statements asserting that he and Roberts operate TEP

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Partnership as a partnership are verbal acts not subject to the hearsay prohibition. Doc. 51, 14:19-

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15:3. The advisory committee notes to Fed. Rule Evid. 801 states “If the significance of an

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offered statement lies solely in the fact that it was made, no issue is raised as to the truth of

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anything asserted, and the statement is not hearsay. The effect is to exclude from hearsay the entire

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category of ‘verbal acts’ and ‘verbal parts of an act,’ in which the statement itself affects the legal

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rights of the parties or is a circumstance bearing on conduct affecting their rights.”

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Regarding partnerships, Plaintiff explains that under current California law,

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(a) the association of two or more persons to carry on as coowners a business for
profit forms a partnership, whether or not the persons intend to form a partnership.
....
(c) In determining whether a partnership is formed, the following rules apply:
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(3) A person who receives a share of the profits of a business is presumed
to be a partner in the business, unless the profits were received for any of
the following reasons:
....
(B) In payment for services as an independent contractor or of
wages or other compensation to an employee.

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Cal. Corp. Code § 16202. In addition to evidence of sharing profits, the conduct of the parties can

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demonstrate the existence of a partnership: “A partnership need not be evidenced by a writing. It

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may be oral. And where there is no writing evidencing the agreement, the existence of a

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partnership may be evidenced by the conduct of the parties.” Calada Materials Co. v. Collins, 184

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Cal. App. 2d 250, 253 (Cal. App. 2nd Dist. 1960). Plaintiff also explained that the intention of the

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parties regarding the business relationship as revealed by the form of their agreement is also

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relevant for determining whether a partnership exists, citing Commissioner v. Tower, 327 U.S.

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280, 286-87(1946). As a general rule, “undisclosed statements regarding intent or

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understanding...are irrelevant to contract interpretation under the objective theory of contracts.”

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Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc.,

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109 Cal. App. 4th 944, 960 (Cal. App. 4th Dist. 2003). Where the statements are known to both

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parties, that evidence “may shed light on the mutual intention of the parties.” Pac. Gas & Elec. Co.

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v. Zuckerman, 189 Cal. App. 3d 1113, 1141 (Cal. App. 3rd Dist. 1987). The key considerations

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for determining whether a partnership exists are the actual conduct of the relationship and the facts

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jointly known to the parties.

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Plaintiff asserts that Alan Elia’s statements to other people that he and Roberts were

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partners in the sale of fertilizer is “conduct of the parties” that is relevant to determining whether a

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partnership existed. Specifically, Plaintiff argues that “statements and conversations as to the

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making and terms of an oral agreement may be testified to by any person who heard them and the

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prohibition against hearsay does not preclude relevant testimony as to what one or both of the

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contracting parties said with respect to the making of or terms of an oral agreement.” Doc. 51,

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12:28-13:4. The two cases Plaintiff cites for this broad proposition only state that the spoken

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words making a contract constitute verbal acts; they do not say that words which help in

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interpreting the terms of the contract qualify. See Cal. Trucking Asso. v. Bhd. of Teamsters &

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Auto Truck Drivers, 679 F.2d 1275, 1291 n.20 (9th Cir. 1981) (statement was not hearsay as it

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was rejection of a contract); NLRB v. H. Koch & Sons, 578 F.2d 1287, 1290 (9th Cir. 1978)

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(statement was not hearsay as it was acceptance of an offer). Verbal acts are not hearsay because

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their utterance has the independent effect of creating legal obligations. They are different than

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evidence in the form of statements which shed light on the existence of underlying legal

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obligations but do not create them.

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In this case, the statements Plaintiff wish to offer do not have the independent legal effect
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of creating a partnership but must rather be considered evidence of a partnership. Alan Elia telling

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someone that he is in a business partnership with Roberts does not create the partnership; it adds to

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the body of evidence that suggest the partnership exists. As such, the statements Plaintiff seeks to

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use are offered for the truth of the matter asserted and are generally hearsay. Among the evidence

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Defendants seek to exclude is a document signed by Alan Elia which transferred his “rights, title

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and interest in and to the business known as ‘TEXAS ENVIRONMENTAL PRODUCTS’” to the

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Trust. Doc. 40, Ex. 2, RLE075. This document does qualify as a verbal act. The document has

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independent legal effect which is outside of hearsay. However, it is not relevant as it goes neither

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to the conduct of the relationship or is a fact jointly known to Alan Elia and Roberts. It must be

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excluded on that ground.
Second, Plaintiffs argue that Alan Elia’s statement’s to third parties show his state of mind

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and are exceptions to hearsay under Fed. Rule Evid. 803(3). The relevant language reads: “The

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following are not excluded by the rule against hearsay, regardless of whether the declarant is

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available as a witness:.... (3) Then-Existing Mental, Emotional, or Physical Condition. A statement

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of the declarant’s then-existing state of mind (such as motive, intent, or plan) or emotional,

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sensory, or physical condition (such as mental feeling, pain, or bodily health), but not including a

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statement of memory or belief to prove the fact remembered or believed unless it relates to the

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validity or terms of the declarant’s will.” Fed. Rule Evid. 803. In key part, the hearsay exception

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does not include “a statement of memory or belief to prove the fact remembered or believed unless

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it relates to the validity or terms of the declarant’s will.” While a statement as to motive, intent, or

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plan is an exception to hearsay, a statement as to belief is not. There is a distinct separation

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between intention or motive and belief. In one case where there was a dispute over the existence

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of a partnership agreement, the court found certain statements admissible as it reflected a

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declarant’s intent as to what kind of agreement he wanted to enter into. The court admitted

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testimony “by Ross Dagata, that Manual Sherman expressly disclaimed any ownership interest in

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the shows. RIBA [argues] that the Dagata testimony came within an exception to the hearsay rule,

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since Dagata testified as to Manual Sherman’s state of mind or intent in signing a contract which

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contained the word ‘partners.’....The district court acted well within its discretion in finding that
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Manual Sherman, a sophisticated businessman, likely would have made his statement to Dagata,

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regarding his understanding of a contract, before he executed the contract.” Southex Exhibitions,

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Inc. v. R.I. Builders Ass'n, 279 F.3d 94, 103 n.8 (1st Cir. 2002), emphasis in original. In Southex,

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the statement was not proffered for what Manual Sherman believed the contract to be but rather

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what he intended to contract for in the future. In contrast, an equivalent statement about past

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events is not admissible. United States v. Hayat, 710 F.3d 875, 895 (9th Cir. 2013) (“the statement

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‘I never intended on going to a camp’ is backward-looking, expressing Hayat’s memory of his

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earlier states of mind, and so is not admissible under Rule 803(3)”). The advisory committee

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notes to Fed. Rule Evid. 803 explains, “The exclusion of ‘statements of memory or belief to prove

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the fact remembered or believed’ is necessary to avoid the virtual destruction of the hearsay rule

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which would otherwise result from allowing state of mind, provable by a hearsay statement, to

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serve as the basis for an inference of the happening of the event which produced the state of

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mind.” The Ninth Circuit explains that the Rule 803(3) exception does not apply (statements

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remains hearsay) “when the statements are offered to prove the truth of the fact underlying the

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memory or belief.” Wagner v. Cty. of Maricopa, 747 F.3d 1048, 1053 (9th Cir. 2013).

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In this case, Plaintiff seeks to introduce testimony from third parties that Alan Elia told

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them he was in a partnership with Roberts. Plaintiffs argue that this shows Alan Elia’s belief as to

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the nature of his business relationship with Roberts. These statements would be used to prove the

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truth of the matter underlying the belief, namely that a partnership existed. Thus, the statements

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do not qualify for the hearsay exception under Rule 803(3). A claim that Alan Elia’s statements

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recounting his thought process concerning his past decision to enter into business with Roberts is

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similarly barred as past intent does not qualify for the hearsay exception under Rule 803(3).

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Additionally, there is a lack of relevance if the evidence shows only the subjective belief of Alan

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Elia that was not communicated to Roberts in some way.

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Third, Plaintiff makes the argument that Alan Elia was either a partner and thus an agent of

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the TEP Partnership or an employee of Roberts. Rule 801 states that a statement by an agent or

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employee (on a matter within the scope of the agent/employee relationship) of a party opponent

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may be offered against that party opponent as an exclusion form hearsay. Fed. Rule Evid.
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801(d)(2)(D). However this exclusion does not apply when the agent/employee and the party

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opponent have conflicting litigation positions. United States v. King, 134 F.3d 1173, 1176 (2nd

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Cir. 1998). In one case, third party Abramov was a former officer and director of defendant

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Close-Up; while in that position, Abramov told plaintiff’s attorney Berkovich that there was no

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agreement restricting his right to sell his ownership stake in Close-Up. Vardanyan v. Close-Up

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Int'l, Inc., 2007 U.S. Dist. LEXIS 94942, at *2 (E.D.N.Y. Dec. 28, 2007). The court found the

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“conversations with Berkovich were intended to encourage this lawsuit against Close-Up.

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Abramov, who hoped to receive a percentage of any judgment against defendants, was essentially

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an adversary to Close-Up in this litigation....The purpose of this evidentiary rule is to allow a

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party’s own admissions to be used against that party in court. Such statements are admissible

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because a litigant’s own admissions are presumed to be trustworthy, and because a party should

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have no trouble explaining its own prior statements during the course of litigation. This rule is not

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applicable here, however, because Abramov was not acting as a representative or agent of Close-

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Up at the time of his conversation with Berkovich. Rather, he was acting in his own interest,

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which was opposed to that of Close-Up.” Vardanyan v. Close-Up Int'l, Inc., 2007 U.S. Dist.

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LEXIS 94942, at *4 and *3 (E.D.N.Y. Dec. 28, 2007). In another case, a third party employee

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included details of racial discrimination in hiring practices in a letter of resignation; the Seventh

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Circuit found that the hearsay exclusion did not apply as “Olson was not speaking as an employee

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on behalf of Green when he resigned from his employment and accused Green of racial

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discrimination; to the contrary, in a very overt manner, Olson was acting not only independently

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of Green but also as its adversary. Because Olson’s out-of-court statement was made in the context

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of terminating his employment (and placing himself in an adversarial relationship with Green), the

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justification for Rule 801(d)(2)(D) does not exist.” Young v. James Green Mgmt., Inc., 327 F.3d

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616, 622-23 (7th Cir. 2003). “Once [the principal’s and agent’s] interests deviated, the statements

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can no longer be found to be made during the course of the agency relationship.” United States v.

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Petraia Mar. Ltd., 489 F. Supp. 2d 90, 97 (D. Me. 2007). No court within the ambit of the Ninth

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Circuit has yet applied this rule, but the Northern District identified a similar requirement for

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using an agent’s invocation of the Fifth Amendment right against self incrimination as the basis
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for an adverse inference applicable to the principal in a civil case. In re Tableware Antitrust Litig.,

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2007 U.S. Dist. LEXIS 21243, at *14 (N.D. Cal. Mar. 13, 2007) (an “identity of interests” before

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the inference can be made). The rule as explained by the Second and Seventh Circuits is logical

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and will be applied here.

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In making claims of ownership over the business that go against the interests of

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Defendants, Alan Elia created a legally adversarial relationship between himself and Defendants.

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The Rule 801(d)(2)(D) exclusion from hearsay does not apply.

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Defendants’ motion is granted.

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D. Plaintiff’s Motion to Exclude Testimony of Experts (Doc. 34)
Plaintiff seeks to exclude the expert testimony of Susan Thompson and William Civiello,

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accountants, on the basis that their opinions constitute inadmissible legal conclusions. Doc. 34,

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2:2-8. “An opinion is not objectionable just because it embraces an ultimate issue.” Fed. Rule

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Evid. 704. The advisory committee notes to Rule 704 warns that “Under Rules 701 and 702,

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opinions must be helpful to the trier of fact, and Rule 403 provides for exclusion of evidence

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which wastes time. These provisions afford ample assurances against the admission of opinions

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which would merely tell the jury what result to reach, somewhat in the manner of the oath-helpers

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of an earlier day. They also stand ready to exclude opinions phrased in terms of inadequately

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explored legal criteria. Thus the question, ‘Did T have capacity to make a will?’ would be

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excluded, while the question, ‘Did T have sufficient mental capacity to know the nature and extent

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of his property and the natural objects of his bounty and to formulate a rational scheme of

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distribution?’ would be allowed.” One court found, “expert testimony that purports to explain the

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legal meaning of a term is forbidden...but testimony defining a term of art as it is used within a

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given field may be allowed. In addition, testimony that a specific item or event fits within the

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meaning of a statutory term may be admissible under Federal Rule of Evidence 702 even if it

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embraces an ‘ultimate issue.’” Ways v. City of Lincoln, 206 F. Supp. 2d 978, 991 (D. Neb. 2002).

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Thus, courts seek to avoid having an expert state the ultimate legal conclusion, preferring to allow

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them to opine on facts that support the elements of the ultimate legal issue.
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Civiello was Alan Elia’s accountant for many years and will also testify as a percipient

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witness. In key part, he wrote a letter to Belinda Elia, Alan Elia’s widow, how the taxes he

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prepared for Alan Elia supported a finding that he was an independent contractor and not a

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partner. Doc. 38, Ex. A. Civiello does not appear to have produced any expert report. Thompson

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was retained to “provide an Expert Report and testimony regarding the business relationship

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between Roberts and Alan Elia.” Doc. 38, Ex. B, at 1. Thompson came to the conclusion that

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there was no partnership between Alan Elia and Roberts based upon the tax forms filed,

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depreciation schedules, the structure of payments to Alan Elia, and the overall running of the

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company. Doc. 38, Ex. B.

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Defendants assert that these opinions are permitted as they do not touch on the ultimate

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legal issue: “Neither expert will offer an opinion that Roberts and Elia did not intend to enter into

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a partnership. Instead, they will offer testimony explaining that the way the financial records were

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kept indicated that Elia was an independent contractor and did not have an ownership interest in

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TEP. They will walk the jury through the accounting significance of booking payments as an

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officer salary, versus commission. They will explain the significance of reporting income paid on

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a 1099 or K-1 for tax purposes. Further, Ms. Thompson specifically will discuss how she would

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expect the TEP books to have been kept if a separate partnership was in fact formed between

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Roberts and TEP on the one hand and Elia and Cosgrove on the other.” Doc. 48, 3:9-16.

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Defendants suggest that the ultimate legal issue is whether Roberts and Alan Elia intended to enter

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into a partnership. That is not quite correct; the ultimate legal issue to be determined by the jury is

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whether Roberts and Alan Elia actually did enter into a partnership, not just if they intended to.

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As a general matter, accounting is a field in which expert testimony can aid the trier of facts. See

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United States v. Morales, 108 F.3d 1031, 1039 (9th Cir. 1997). The significance of certain tax

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forms, the meaning of technical organizational documents, and whether the conduct of a business

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deviated from that organization would also be topics in which expert opinion would be useful.

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Thompson and Civiello may neither give an opinion as to whether a partnership was

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formed nor to Alan Elia’s and Roberts’s intent regarding formation. They may only use their

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expertise to give an explanation as to TEP Inc’s and/or TEP Partnership’s accounting, taxes,
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organizational structure, and the general manner in which the business was run. They may also

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opine on whether these practices (accounting, taxes, etc.) are consistent or inconsistent with a

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partnership relationship or a commission relationship.

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Plaintiff’s motion is granted in part and denied in part.

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E. Defendants’ Motion to Exclude Testimony of Expert (Doc. 41)
Defendants seek to exclude the testimony of expert witness Gordon Saito, an accountant.

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Doc. 41. In the joint pretrial statement, the parties agreed “Defendant, John Roberts, was the sole

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shareholder of the corporation named Texas Environmental Products, Inc.” Doc. 32, 2:14-15.

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Defendants argue that Saito states Alan Elia was part owner of TEP Inc which would be confusing

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to the jury. Doc. 41, 2:1-4. Additionally, Defendants argue Saito’s opinion lacks foundation and is

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irrelevant.

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First, Saito’s understanding as to the relationship of the parties is not inconsistent with

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Plaintiff’s position. It appears that Plaintiff is arguing Roberts owned TEP Inc but the true entity

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that was conducting business was TEP Partnership which used TEP Inc as the conduit through

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which to process payments and orders. Doc. 52, 4:5-11. Saito reviewed the records of TEP Inc to

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determine who received payments from the business and in what proportions and concluded that

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Alan Elia and Roberts were sharing profits; his expert report makes separate references to TEP

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Partnership and TEP Inc. Doc. 41, Ex. 2. Though there may be some confusion over

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nomenclature as Plaintiff asserts that one entity is called Texas Environmental Products, Inc. while

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the other is Texas Environmental Products, that will be a distinction that Plaintiff will have to

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establish through their presentation of evidence.

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Second, Defendants argue that Saito can not draw any conclusions about TEP Partnership

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by looking only at the records of TEP Inc, rendering his opinion irrelevant and based on no

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foundation. Doc. 41, 3:19-4:24. Under Plaintiff’s theory of events, the financial records of TEP

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Inc would be the basis for determining whether TEP Partnership exists. As the alleged partnership

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used the TEP Inc form to conduct business, explaining the financial records of TEP Inc and what

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they revealed as to payments to Alan Elia and Roberts is relevant. Saito is not opining as to the
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ultimate issue, whether a partnership was formed. Instead, he is using his expertise to calculate

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the sums and giving an opinion on whether the payments to Alan Elia are consistent with a

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commission structure or a profit sharing structure.

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Defendants also argue that Saito’s explanation is not necessary as Roberts will admit that

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he gave approximately 50% of the profits to Alan Elia each year. Doc. 58:2:9-14. As with

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Thompson and Civiello, the expertise of Saito is useful for explaining not just the mechanics of

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the business, but whether those workings are consistent or inconsistent with a partnership

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relationship or a commission relationship. Saito may neither give an opinion as to whether a

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partnership was formed nor to Alan Elia’s and Roberts’s intent regarding formation. He may use

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his expertise to opine on whether the payment practices are consistent or inconsistent with a

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partnership relationship or a commission relationship.

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Defendants’ motion is granted in part and denied in part.

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F. Plaintiff’s and Defendants’ Motions to Exclude Evidence Relating to Settlement

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Negotiations (Doc. 35 and 42)

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Plaintiff seeks to exclude any testimony, reference, or argument relating to settlement

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negotiations between Plaintiff and Defendants. Doc. 35. Defendants agree that the material should

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be excluded with respect to the first phase of trial; however, they assert that it should not be

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excluded with respect to the Section 859 claim. Doc. 42. In key part, Cal. Prob. Code § 859 states,

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“If a court finds that a person has in bad faith wrongfully taken, concealed, or disposed of property

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belonging to a conservatee, a minor, an elder, a dependent adult, a trust, or the estate of a

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decedent, or has taken, concealed, or disposed of the property by the use of undue influence in bad

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faith or through the commission of elder or dependent adult financial abuse, as defined in Section

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15610.30 of the Welfare and Institutions Code, the person shall be liable for twice the value of the

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property recovered by an action under this part.” Defendants also assert that “the settlement

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correspondences include emails that outline the various TEP items Plaintiff (the Trust) retained

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(for example see Constanzo Decl. Ex. E at ‘RLF018’”)[. T]he documents should be admitted in

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the event they are needed to prove that the value of TEP equipment retained by Plaintiff offsets
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any amount potentially owed to Elia for unpaid commissions.” Doc. 48, 2:8-12.

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Federal Rule of Evidence 408 states

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(a) Prohibited Uses. Evidence of the following is not admissible—on behalf of any
party—either to prove or disprove the validity or amount of a disputed claim or to
impeach by a prior inconsistent statement or a contradiction:

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(1) furnishing, promising, or offering—or accepting, promising to accept, or
offering to accept—a valuable consideration in compromising or attempting
to compromise the claim; and
(2) conduct or a statement made during compromise negotiations about the
claim—except when offered in a criminal case and when the negotiations
related to a claim by a public office in the exercise of its regulatory,
investigative, or enforcement authority.
(b) Exceptions. The court may admit this evidence for another purpose, such as
proving a witness’s bias or prejudice, negating a contention of undue delay, or
proving an effort to obstruct a criminal investigation or prosecution.

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The Ninth Circuit explains that “Rule 408 is designed to ensure that parties may make offers

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during settlement negotiations without fear that those same offers will be used to establish liability

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should settlement efforts fail. When statements made during settlement are introduced for a

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purpose unrelated to liability, the policy underlying the Rule is not injured.” Rhoades v. Avon

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Prods., 504 F.3d 1151, 1161-62 (9th Cir. 2007).

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Plaintiff argues straightforwardly that the contents (and even the fact that settlement

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negotiations took place) would be used to “prove or disprove the validity or amount of a disputed

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claim,” in this case bad faith under Section 859, and is thus prohibited. Defendants argue that in

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determining whether liability exists under Section 859, “the Court would be tasked with

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determining a different issue—namely, whether Mr. Roberts acted in ‘bad faith’ or ‘wrongfully’ in

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refusing to pay any amount to Mr. Elia’s estate...the information would be highly relevant to show

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Mr. Robert’s state of mind at the time following Mr. Elia’s death and demonstrate that there was a

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good faith dispute between the parties that Mr. Roberts truly was trying to sort through to treat the

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decedent as fairly as possible.” Doc. 42, 3:20-26.

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There is a great deal of disagreement among the federal courts as to whether the

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prohibition of Rule 408 applies when a party wishes to use the details of settlement to show good

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faith or bad faith. Some find that it falls within the general prohibition while others find that the
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“another purpose” exception applies. See, e.g. Clevenger v. Bolingbrook Chevrolet, Inc., 401 F.

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Supp. 2d 878, 882 (N.D. Ill. 2005) (prohibited); Armenian Assembly of Am., Inc. v. Cafesjian,

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746 F. Supp. 2d 55, 64 (D.D.C. 2010) (permitted).

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Of note, Rule 408 was amended in 2006 and the advisory committee’s notes specifically

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state “The amendment retains the language of the original rule that bars compromise evidence

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only when offered as evidence of the ‘validity,’ ‘invalidity,’ or ‘amount’ of the disputed claim.

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The intent is to retain the extensive case law finding Rule 408 inapplicable when compromise

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evidence is offered for a purpose other than to prove the validity, invalidity, or amount of a

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disputed claim. See, e.g., Athey v. Farmers Ins. Exchange, 234 F.3d 357 (8th Cir. 2000) (evidence

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of settlement offer by insurer was properly admitted to prove insurer’s bad faith)...” Athey dealt

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with South Dakota law and found that under state court rulings, “an insurer’s attempt to condition

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the settlement of a breach of contract claim on the release of a bad faith claim may be used as

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evidence of bad faith. Evidence of Farmers’ conduct during the settlement conference was not

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inadmissible under Rule 408 because it was ‘offered for another purpose,’ and the district court

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did not abuse its discretion by admitting it.” Athey v. Farmers Ins. Exch., 234 F.3d 357, 362 (8th

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Cir. 2000), citations omitted. Several cases dealing with bad faith in the insurance context have

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reached the same conclusion. See, e.g. Milhouse v. Travelers Commer. Ins. Co., 982 F. Supp. 2d

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1088, 1105 n.10 (C.D. Cal. 2013); Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475, 483 (5th Cir.

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1969) (approving jury instructions which read “only a decision made by an insuror who exercises

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diligence in apprising himself of the material facts is entitled to consideration as having been made

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in good faith. Therefore, you may consider on this question of good or bad faith whether the

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investigation made by the insurance company was thorough enough to permit it to come to some

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fair, honest, and intelligent decision regarding the settlement opportunities in the light of the then

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existing probabilities”). In a recent Northern District case, the court was faced with a

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counterclaim that “AGLIC breached its duty of good faith and fair dealing by improperly seeking

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release from liability as to the $166,675 paid to Melissa James in exchange for forgoing attorneys’

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fees and costs associated with the interpleader action....The court finds that the settlement

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communications contained within the challenged portions of the Counterclaim are not offered to
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prove the validity or amount of a disputed claim, but rather for another purpose, namely, as

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evidence of AGLIC’s course of conduct. Therefore, those communications do not fall within the

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ambit of Rule 408.” Am. Gen. Life Ins. Co. v. James, 2015 U.S. Dist. LEXIS 20768, at *6 and *16

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(N.D. Cal. Feb. 19, 2015). In the non-insurance context, courts have also allowed evidence of

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settlement negotiations to be used to show bad faith in the negotiation process itself. See

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Grigoryants v. Safety-Kleen Corp., 2014 U.S. Dist. LEXIS 72190, at *9 (W.D. Pa. May 28, 2014)

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(court rejected argument that Rule 408 prohibition applied when the issue was sanctions for failure

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to attend court ordered mediation with a good faith interest in settlement). In these cases, the bad

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faith in question was separable from the underlying liability issue.

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In other circumstances, courts have found that the question of bad faith can be so

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intertwined with the underlying issue of liability that the general prohibition should apply. The

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Eighth Circuit has stated, “The policy concerns underlying Rule 408 are strongly implicated where

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an offer of compromise is used to prove an element of the claim the compromise offer was meant

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to settle.” Weems v. Tyson Foods, Inc., 665 F.3d 958, 966-67 (8th Cir. 2011). In one case, the

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underlying liability issue was ownership of an internet domain name under conflicting claims of

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cybersquatting and reverse domain name hijacking. Powell v. Powell, 2017 U.S. Dist. LEXIS

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110067, at *3 (D. Ariz. Feb. 22, 2017). As part of a sanctions motion, the plaintiff sought to use

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evidence of settlement negotiations: “Plaintiff argues that the settlement offer was not submitted to

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prove or disprove the validity of a claim, but was submitted to show that Defendants knew they

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did not own the Domain Name and were therefore proceeding in bad faith....The issues of whether

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Defendants were proceeding on their counterclaims in bad faith and the validity of the

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counterclaims are so intertwined that the Court concludes that submitting the settlement offer was

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effectively an attempt to disprove the validity of Defendants’ Counterclaims in violation of Rule

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408.” Powell v. Powell, 2017 U.S. Dist. LEXIS 110067, at *19-20 (D. Ariz. Feb. 22, 2017).

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Where the assertion of bad faith is closely tied to the underlying issue of liability, the general

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prohibition arguably should apply as a matter of policy since a jury is likely to use the evidence in

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an improper manner.

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In the circumstance at hand, there is no danger of that since Defendants only propose using
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the evidence in the second phase of the trial. There is no danger that a jury would hear the

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evidence and weigh it in favor of finding that there was no partnership. Given that the posture of

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this case eliminates a core policy concern underlying the Rule 408, evidence relating to settlement

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negotiations between Defendants and the Trust will be admissible in the second phase of the trial.

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Plaintiff has not completely described what the asserted bad faith is in this case. Plaintiff

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only provide citation to one case which states “‘bad faith’ can be many different things, depending

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on the context. For example: The general rule is that an agent is not liable on a written contract in

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the name of the principal. So, if the agent has no authority to make the contract, the usual remedy

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of the third party is on the warranty of authority. But if, in addition to the lack of authority, there is

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‘bad faith’—that is, the agent enters into the contract without believing, in good faith, that he or

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she has authority to do so—the California rule makes the agent liable on the contract as a

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principal.” Hill v. Superior Court, 244 Cal. App. 4th 1281, 1287-88 (Cal. App. 1st Dist. 2016).

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The court understands that Plaintiff’s Section 859 claim is limited to the assertion that Roberts

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acted in bad faith because he subjectively believed that a partnership existed and decided to deny

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the Estate the proceeds of the partnership anyway. In line with this framing of bad faith,

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Defendants state that their reason for seeking to introduce evidence of the settlement negotiations

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to show “Mr. Roberts’s state of mind at the time following Mr. Elia’s death and to demonstrate

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that there was a good faith dispute between the parties and that Mr. Roberts truly was trying to sort

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through to treat the decedent as fairly as possible.” Doc. 42, 3:23-26. Based upon this framing of

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bad faith, statements by Zinkin and Esraelian to Roberts regarding the Trust’s position regarding

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the existence of a partnership is relevant to determining Roberts’s state of mind. Such evidence

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may be presented in the second phase of the trial. As to Defendants second point about using

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settlement correspondences to establish the value of certain equipment belonging to TEP that the

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Trust has retained, this evidence does not speak to Roberts’s state of mind regarding his belief as

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to the existence of a partnership; it may not be presented.

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Defendants’ motion is granted in part and denied in part. Plaintiff’s motion is granted in
part and denied in part.

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G. Plaintiff’s Motion to Exclude Evidence Related to Discussions Within the Trust (Doc. 36)

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Plaintiff seeks to exclude evidence of: (1) settlement agreement and negotiations between

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Beneficiaries and the Trustee, (2) questions requiring the assertion of attorney client privilege and

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any comment on the assertion of privilege, and (3) a note by Robyn Esraelian dated April 1, 2015.

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Doc. 36. Defendants do not oppose exclusion of the April 1, 2015 note but opposes the motion

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overall. Doc. 49, 2:27-28. The first two bases that Plaintiff raises cover the same material. The

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specific documents provided by Plaintiff (Doc. 37, Exs. B, C, and D) relate to the decision by

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Zinkin to resign the position of trustee in favor Ariel Elia to avoid becoming entangled in

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litigation he did not believe the Trust would win. Zinkin asked for a release of liability from the

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Beneficiaries which was granted as part of the overall agreement. Doc. 37, Exs. C and D.

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Defendants argue that “the documents Plaintiff seeks to exclude will show the jury that former

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Trustee, Harold Zinkin, and his attorney Robyn Esraelian, each disagreed with the positions

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Plaintiff has taken in this lawsuit and in fact, believed that Alan Elia had no ownership interest in

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TEP.” Doc. 49, 2:9-12. In addition to raising Rule 408, Plaintiff asserts that attorney client

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privilege applies for communication between the Zinkin and Ariel Elia (as the trustees) and

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Esraelian (as the Trust’s attorney) and seek to prevent any comment on the assertion of privilege.

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Doc. 36, 7:6-11.

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The same reasoning that applied to evidence of settlement negotiations between Roberts

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and the Trust applies to negotiations between the Trustee and the Beneficiaries. Insofar as there is

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actual communication to Roberts, the evidence is relevant to determining whether he had a

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subjective belief in the existence of a partnership which informs the Section 859 bad faith claim.

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Rule 408’s general prohibition will not apply in that circumstance. Similarly, communication with

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Roberts would not be subject to attorney client privilege as it would not be a confidential. Of the

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documents specifically cited by Plaintiff, (Doc. 37, Exs. B, C, and D), only one (Ex. B) appears to

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have been communicated to Roberts. The other documents were not communicated to Roberts

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and are thus irrelevant to his state of mind; they are excluded.

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Plaintiff’s motion is granted in part and denied in part.

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IV. Order
The parties’ motion in limine are granted, denied, and reserved as explained above in the
discussion.

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IT IS SO ORDERED.
Dated: October 25, 2017
SENIOR DISTRICT JUDGE

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