Slojewski v. Allstate Insurance Company

Filing 58

ORDER RE MOTION FOR RECONSIDERATION re 52 Signed by Judge Nathanael M. Cousins on 03/18/2013. (nclc2, COURT STAFF) (Filed on 3/18/2013)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 SAN FRANCISCO DIVISION 11 12 Plaintiff, 13 14 15 16 No. 11-cv-03614 PJH (NC) SYLWESTER SLOJEWSKI, ORDER RE MOTION FOR RECONSIDERATION v. Re: Dkt. No. 52 ALLSTATE INSURANCE COMPANY, Defendant. 17 18 Before the Court is plaintiff’s motion for reconsideration of the Court’s discovery 19 order compelling production of tax returns, Dkt. No. 46. The Court finds that the 20 gravamen of this lawsuit is inconsistent with plaintiff’s assertion of privilege over rental 21 income information in his federal and state tax returns for years 2006-2007, and orders 22 plaintiff to produce these documents with appropriate redactions. 23 I. BACKGROUND 24 Defendant Allstate Insurance Company sought the production of plaintiff’s tax 25 returns on the ground that they were relevant to plaintiff’s homeowners’ insurance claim 26 for lost rental income. Dkt. No. 29 at 2. After holding a hearing, on January 17, 2013 the 27 Court ruled on the parties’ discovery dispute, ordering plaintiff to produce his federal and 28 state tax returns for years 2006-2009, redacting information unrelated to rental income and Case No. 11-cv-03614 PJH (NC) ORDER RE MOTION FOR RECONSIDERATION 1 expenses. Dkt. No. 46. 2 On February 8, 2013, Judge Hamilton issued an order granting in part and denying in 3 part defendant’s motion for partial summary judgment. Dkt. No. 50. Judge Hamilton 4 granted summary judgment in favor of defendant on plaintiff’s breach of contract claim for 5 rental income, finding that plaintiff provided no proof of actual loss of rental income, and 6 that there was insufficient evidence that his property was “held out for rental.” Id. at 2-3. 7 For the same reason, Judge Hamilton granted summary judgment on the bad faith claim to 8 the extent it was based on the claim for loss of rental income. Id. at 3:6-10. Because 9 defendant had not moved for summary judgment on the breach of contract claim for 10 coverage of the dwelling structure, id. at 1:23-24, the Court concluded that it was more 11 prudent to deny summary judgment as to the structural coverage element of the bad faith 12 claim until it can assess the breach of contract claim, id. at 3:11-17. 13 Following this summary judgment ruling, Slojewski applied ex parte for leave to file 14 a motion for reconsideration, arguing that as a result of the summary judgment on the loss 15 of rental income claim, the production of plaintiff’s tax returns is no longer justified. Dkt. 16 No. 52. Defendant opposed the motion for reconsideration, contending that there is no 17 basis for reconsideration and that the existence and extent of plaintiff’s lost rental income 18 are relevant to defendant’s affirmative defense of misrepresentation, defendant’s potential 19 right to an offset in the amount of benefits it paid but did not owe, and to plaintiff’s 20 credibility. Dkt. No. 55. II. DISCUSSION 21 22 After carefully considering the submissions by the parties, the Court finds that the 23 summary judgment ruling which eliminated the loss of rental income claim after the Court 24 issued its discovery order constitutes a change of law under Civ. L.R. 7-9(b)(2) and 25 therefore provides a basis for reconsideration. For the reasons explained in more detail 26 below, the Court finds that the balance of the relevant factors justifies a limited production 27 of plaintiff’s 2006 and 2007 tax returns, only, but not the 2008 and 2009 tax returns. 28 Because this action was removed to federal district court under diversity jurisdiction, Case No. 11-cv-03614 PJH (NC) 2 ORDER RE MOTION FOR RECONSIDERATION 1 see Dkt. No. 1, the substantive law of California applies, including on matters of privilege. 2 See Conestoga Services Corp. v. Executive Risk Indem., Inc., 312 F.3d 976, 980-81 (9th 3 Cir. 2002) (citations omitted); Star Editorial, Inc. v. U.S. Dist. Court for Cent. Dist. of 4 California, 7 F.3d 856, 859 (9th Cir. 1993); Fed. R. Evid. 501. 5 California courts have interpreted state taxation statutes as creating a statutory 6 privilege against disclosing tax returns. Schnabel v. Superior Court, 5 Cal. 4th 704, 718– 7 21 (1993); Weingarten v. Superior Court, 102 Cal. App. 4th 268, 274 (2002). The purpose 8 of the privilege is to encourage voluntary filing of tax returns and truthful reporting of 9 income, and thus to facilitate tax collection. Webb v. Standard Oil Co., 49 Cal. 2d 509, 10 513 (1957). This statutory tax return privilege, however, is not absolute. The privilege 11 will not be upheld when (1) the circumstances indicate an intentional waiver of the 12 privilege; (2) the gravamen of the lawsuit is inconsistent with the privilege; or (3) a public 13 policy greater than that of the confidentiality of tax returns is involved. Schnabel, 5 Cal. 14 4th at 721. 15 Disclosure has been found justified despite the assertion of privilege where tax 16 returns were placed at issue by a plaintiff’s claim. See e.g., Wilson v. Superior Court, 63 17 Cal. App. 3d 825, 830 (1976) (waiver by placing at issue contents and consequences of tax 18 returns in lawsuit against tax accountants); Barrous v. BP P.L.C., No. 10-cv-02944, 2011 19 WL 1431826, at *3-4 (N.D. Cal. Apr. 14, 2011) (compelling production of tax returns in 20 suit seeking damages for contamination where plaintiffs claimed that but for defendant’s 21 conduct they could have received financing to develop their property, and failed to identify 22 other financial documents or records that would supply the relevant information); Small v. 23 Travelers Prop. Cas. Co. of Am., No. 8-cv-1160, 2010 WL 2523649, at *2 (S.D. Cal. June 24 21, 2010) (assertion of privilege as to federal and state tax returns was inconsistent with 25 plaintiff’s insurance claim for loss of income and profits from the destruction of avocado 26 trees as a result of fire). 27 Similarly, plaintiff’s insurance claim for lost rental income in this case, combined 28 with the absence of evidence of such income despite the discovery conducted by defendant, Case No. 11-cv-03614 PJH (NC) ORDER RE MOTION FOR RECONSIDERATION 3 1 is inconsistent with the privilege and constitutes sufficient basis for compelling the limited 2 production of the tax returns. The only question presented by the motion for 3 reconsideration is whether, as a result of the summary judgment ruling on the loss of rental 4 income claim, there is still sufficient justification for the production of tax returns. While 5 plaintiff acknowledges that the production of his tax returns “may have been appropriate 6 when plaintiff was asserting a lost income claim,” he contends that neither defendant’s 7 “small claim to setoff overpayments,” nor its desire “to impeach plaintiff’s testimony, and 8 prove that his lost rent claim was too high” are sufficient to justify the invasion of privacy. 9 Dkt. No. 57 at 2:16-22, 3:2-4. This argument overlooks the importance of the tax returns 10 in proving defendant’s allegation that plaintiff made a material misrepresentation by 11 claiming benefits for lost rental income that did not exist, which could result in voiding the 12 policy. 13 Under California law, if an insured knowingly conceals or misrepresents a material 14 fact in connection with a claim for insurance benefits with an intent to deceive the insurer, 15 that conduct voids the insurance policy in accordance with the policy’s fraud and 16 concealment provision. Cummings v. Fire Ins. Exch., 202 Cal. App. 3d 1407, 1415–19, n.7 17 (1988); Baldwin v. Bankers & Shippers Ins. Co. of N. Y., 222 F.2d 953, 953-54 (9th Cir. 18 1955); Safeco Ins. Co. of Am. v. Bass, No. 93-cv-3378, 1994 WL 238300, at *3-4 (N.D. 19 Cal. May 19, 1994). Defendant here has asserted a defense of misrepresentation, alleging 20 that “[t]he complaint, and each and every cause of action therein, is barred and/or 21 plaintiff’s recovery should be reduced to the extent plaintiff has misrepresented facts as 22 part of his claim.” Dkt. No. 25. The policy contains a “Concealment Or Fraud” provision 23 which states “This policy is void if it was obtained by misrepresentation, fraud or 24 concealment of material facts.” Dkt. No. 28-4 at 16. Defendant does not address the 25 privilege issue, but argues that plaintiff’s rental income is relevant to the defenses of 26 misrepresentation and setoff in that “plaintiff’s tax returns likely reflect he had (or 27 disclosed) no rental income for the years preceding the storm.” Dkt. No. 55 at 4:9-10. 28 The Court finds that the 2006 and 2007 tax returns, to the extent they show Case No. 11-cv-03614 PJH (NC) 4 ORDER RE MOTION FOR RECONSIDERATION 1 disclosure of rental income, or lack thereof, remain at issue. Discovery, which closed in 2 November 21, 2012, see Dkt. No. 20, has yielded no support for plaintiff’s claim for lost 3 rental income. As Judge Hamilton found in her summary judgment order, “[u]nder the 4 terms of the policy, plaintiff was required to produce records supporting any claim for loss 5 of rental income, and he has failed to do so.” Dkt. No. 50 at 2:15-3:4. Because the tax 6 returns for the two years preceding the loss would show whether or not plaintiff disclosed 7 any rental income, they constitute important evidence relevant to defendant’s 8 misrepresentation defense and its potential right to an offset of amounts paid by defendant 9 on the claim. See, e.g., Baldwin, 222 F.2d at 954 (considering income tax returns as part of 10 evidence that insured misrepresented the value of the property lost in affirming trial court’s 11 judgment that the policy was voided by fraud). 12 If defendant succeeds in establishing the defense of misrepresentation, its coverage 13 obligations would be voided, providing a complete defense to the remaining breach of 14 contract and bad faith claims. Accordingly, the Court finds that the gravamen of the 15 lawsuit is inconsistent with plaintiff’s assertion of privilege over his federal and state tax 16 returns for years 2006-2007, and that discovery of this information is necessary to a fair 17 resolution of the remaining claims. See Fremont Indem. Co. v. Sup.Ct. (Sharif), 137 Cal. 18 App. 3d 554, 560 (1982) (“[P]laintiff’s filing of an action to recover on the fire insurance 19 policy operated to waive his constitutional privilege against self-incrimination with 20 reference to any factual issues, particularly as to the applicability of the arson exclusion, 21 tendered by the complaint. . . . [I]t is the plaintiff who has claimed the privilege as to his 22 own behavior which is vitally relevant to a coverage exclusion contained in the very fire 23 insurance policy upon which he seeks recovery.”); see also Abdelhamid v. Fire Ins. Exch., 24 182 Cal. App. 4th 990, 1001 (2010) (“Where the insurer has reason to suspect arson, it is 25 relevant and material to inquire into the financial condition of the insured because an 26 insurer is entitled to develop circumstantial evidence of the insured’s involvement in the 27 suspected arson.”) (citations omitted); Ram v. Infinity Select Ins., 807 F. Supp. 2d 843, 859 28 (N.D. Cal. 2011) (“where an insured [sic] has reason to suspect fraud in relation to a theft Case No. 11-cv-03614 PJH (NC) ORDER RE MOTION FOR RECONSIDERATION 5 nquiries into the insure financi status are relevant a materia o ed’s ial e and al”). 1 claim, in 2 Fu urthermore, the disclos , sure of the tax returns a issue her is suppor by the p t at re rted public n ng, ing nishing insu urance fraud in Californ See Ga d nia. arcia 3 policy in uncoverin preventi and pun ressive Cho Ins. Co. No. 11-cv oice ., v-466, 2011 WL 43562 1 209, at *4 ( (S.D. Cal. S Sept. 4 v. Progr 1) ourt hat n ng, ing nishing 5 16, 2011 (“The Co finds th this public policy in uncoverin preventi and pun ce s e w the policy excep ption 6 insuranc fraud is significant enough to warrant application of t public p ornia’s priv vilege regard ding tax ret turns.”). 7 to Califo 8 On the other hand, becau the loss occurred i January 2 n use s in 2008, and p plaintiff doe not es ental income in 2008 an 2009, th Court fin ds that defe e nd he endant has n provide a not ed 9 claim re nt ion pel duction of p plaintiff’s 20 and 2009 tax retur 008 rns. 10 sufficien justificati to comp the prod 0 kt. a 11 See Dkt. No. 50 at 1:16-17; Dk No. 57 at 1:25-27. 1 III. CONCLUSI C ION 12 2 13 3 Pl laintiff is he ereby ordere to produ his 2006 ed uce 6-2007 tax r returns. In the interest of t ing ssary disclo osure of priv vileged info ormation, th Court ord plaintif to he ders ff 14 preventi unneces 4 rom y on d income and expenses. The d 15 redact fr the tax returns any informatio unrelated to rental i 5 rns e d FIDENTIAL under th Court’s m L” his model Stipu ulated 16 tax retur must be designated as “CONF 6 ve or o er protective o order to which the 17 Protectiv Order fo Standard Litigation or such othe form of p 7 w ulate and pr resent to the Court. 18 parties wish to stipu 8 19 9 In light of the trial date set for May 20, 2013 a other ap n e s y and pproaching deadlines, see iff oduce the ap ppropriately redacted 2 y 2006-2007 tax returns by no 20 Dkt. No. 20, plainti must pro 0 an 2 21 later tha April 5, 2013. 1 22 2 An party ma object to this nondispositive pr ny ay o retrial order within 14 days of the filing r e t S 23 date of this order. See Civ. L.R. 72-2. 3 24 4 IT IS SO OR T RDERED. 25 5 Date: March 18, 2013 26 6 ____ __________ __________ _____ Nath hanael M. C Cousins Unit States M ted Magistrate J Judge 27 7 28 8 Case No. 11-cv-036 PJH (N 614 NC) ORDER RE MOTIO FOR R ON RECONSIDERATIO ON 6

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