Richter et al v. CC-Palo Alto, Inc. et al

Filing 136

ORDER by Magistrate Judge Virginia K. DeMarchi re 135 Joint Discovery Letter Brief. (vkdlc2S, COURT STAFF) (Filed on 7/30/2018)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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BURTON RICHTER, ET AL.,
Plaintiffs,

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United States District Court
Northern District of California

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Case No.14-cv-00750-EJD (VKD)
ORDER RE JOINT DISCOVERY
LETTER BRIEF

v.
CC-PALO ALTO, INC., et al.,

Re: Dkt. No. 135

Defendants.

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The parties in this action dispute whether defendants CC-Palo Alto, Inc. (“CC-PA”) and

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CC-Development Group, Inc. (“CC-DG”) (collectively, “Corporate Defendants”) should be

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required to produce in discovery their corporate tax returns and certain documents related to their

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disputes with local and federal tax authorities. The parties jointly submitted a discovery letter

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brief on July 23, 2018. Dkt. No. 135.

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For the reasons set forth below, the Court denies plaintiffs’ request for an order compelling
the production of the disputed tax-related documents from the Corporate Defendants.
According to the operative complaint, plaintiffs are residents of the Vi at Palo Alto, a

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residential retirement community owned by CC-PA. Dkt. No. 89, ¶ 1. CC-DG is CC-PA’s

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corporate parent. Id., ¶¶ 35-36. The Vi residents pay a one-time entrance fee, as well as recurring

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monthly fees, pursuant to a continuing care contract with CC-PA. Id., ¶¶ 15, 24. The entrance fee

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is characterized as a “loan” to CC-Palo Alto. A portion of the entrance fee is to be repaid to the

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resident or the resident’s estate when the contract ends. Id., ¶ 15. The contract terminates when

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the resident leaves the Vi or when the resident passes away. Id., ¶ 6.

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Plaintiffs claim that they have collectively loaned defendants over $462 million in entrance

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fees since the Vi’s opening in 2005. Dkt. No. 89, ¶ 15. They say that, instead of safeguarding the

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fees in a reserve, CC-PA transferred over $216 million of the entrance fees to CC-DG, without

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obtaining any security or repayment promise. Id., ¶¶ 21-22. As a result, plaintiffs claim that CC-

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PA is insolvent and will be financially incapable of honoring its debts to plaintiffs and others who

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reside or resided at the Vi. Id., ¶ 21.
As relevant to this dispute, plaintiffs ask that the Corporate Defendants be required to

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produce three categories of documents:

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(1) corporate tax returns (Dkt. No. 135, Exs. A, C (Request No. 80));

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(2) all documents and communications involving CC-PA or CC-DG, on the one hand, and
the County of Santa Clara’s Tax Assessment Board, on the other hand, relating to the

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United States District Court
Northern District of California

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Vi, including documents relating to the matter CC-Palo Alto, Inc. v. County of Santa

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Clara et al., Civ. No. 12-cv-231685 (Santa Clara Superior Court) (id. (Requests Nos.

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77-79)); and
(3) all documents and communications involving CC-PA or CC-DG, on the one hand, and

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the Internal Revenue Service, on the other hand, relating to the Vi, CC-PA, CC-DG or

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defendant Classic Residence Management Limited Partnership (id. (Requests Nos. 81-

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83)).

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Plaintiffs contend that the tax returns and related documents they seek are relevant to the question

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of whether defendant CC-PA is insolvent, including whether it has improperly transferred funds to

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its parent company CC-DG. Dkt. No. 135 at 3. According to plaintiffs, CC-PA has represented

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that it treats the entrance fee repayments as “liabilities.” Id. at 2.1 It is not clear whether plaintiffs

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seek these tax-related documents because they suspect the Corporate Defendants have treated the

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entrance fee repayments as something other than liabilities for tax purposes, or whether they

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contend that the tax-related documents will reflect an improper transfer of funds from CC-PA to

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CC-DG, or both. Id. at 3.
The Corporate Defendants contend that the three categories of documents plaintiffs seek do

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In support of this statement, plaintiffs cite to discovery documents that are not before the Court.
Id. at 3 n.7.
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not bear on the question of CC-PA’s solvency and so are not relevant to any claim or defense in

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the case. Id. at 6. The Corporate Defendants further object that plaintiffs’ requests are overbroad

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and encompass documents protected from disclosure by the tax return privilege, the attorney-client

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privilege and the attorney work product doctrine, although they have not identified any such

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documents in a privilege log. Id.

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Here, plaintiffs have the burden to show that the discovery they seek is both relevant to a

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claim or defense and proportional to the needs of the case. Fed. R. Civ. P. 26(b)(1). They have

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not made this showing. The Corporate Defendants represent that they have already produced CC-

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PA’s audited financial statements, which reflect CC-PA’s assets and liabilities, including its tax
liabilities. Id. at 7. The say that the audited financials also show the financial accounting

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United States District Court
Northern District of California

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treatment of the entrance fees paid by the Vi residents. Id. The Corporate Defendants further

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represent that they have already produced detailed documents summarizing the transfers of funds

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between CC-PA and CC-DG. Id. Plaintiffs do not dispute that they have these documents or that

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the documents contain the information the Corporate Defendants say they do. Critically, plaintiffs

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do not identify any information relevant to the issues of CC-PA’s solvency or the alleged improper

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transfer of funds to CC-DG that they believe may be found in the tax-related documents and that

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has not already been provided in other documents produced by the Corporate Defendants. In

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addition, to the extent plaintiffs contend that the information in the discovery they have received is

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inaccurate or misleading, they have not made any showing to that effect in the joint submission.

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Citing Aliotti v. Vessel Senora, 217 F.R.D. 496 (N.D. Cal. 2003), plaintiffs argue that they

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have a compelling need for discovery of the Corporate Defendants’ tax returns and related

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documents because they have exhausted less intrusive means of obtaining the same documents.

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But that argument is misplaced. At least for tax returns, the question is not whether plaintiffs have

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exhausted less intrusive means for obtaining the same documents, but rather whether the

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information that they say is contained in those documents is not otherwise available. Aliotti, 217

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F.R.D. at 497-98. Because plaintiffs have not shown that there is any relevant information

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contained in the Corporate Defendants’ tax returns or related documents that plaintiffs do not

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already have, plaintiffs have not shown a compelling need for the information contained in those
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documents.
Given the Court’s conclusion that plaintiffs have not made the requisite showing of

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relevance, the Court does not reach the question of whether plaintiffs’ discovery requests are

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overbroad or impose an undue burden on the Corporate Defendants. Likewise, the Court does not

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reach the question of whether or to what extent any responsive, tax-related documents would be

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protected from disclosure by the tax return privilege, the attorney-client privilege, and/or the

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attorney work product doctrine.

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IT IS SO ORDERED.
Dated: July 30, 2018

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United States District Court
Northern District of California

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VIRGINIA K. DEMARCHI
United States Magistrate Judge

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