Freaner v. Lutteroth Valle et al

Filing 62

ORDER denying 56 Joint MOTION for Discovery to Compel Documents. As provided herein, Defendants' motion to compel production of Plaintiff's tax returns is denied. Signed by Magistrate Judge Mitchell D. Dembin on 9/28/12. (Dembin, Mitchell)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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ARIEL FREANER

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Plaintiff,
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v.
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ENRIQUE MARIN LUTTEROTH
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VALLE, et al.,
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Defendants.
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__________________ )

Case No. 11cv1819-JLS (MDD)
ORDER ON JOINT MOTION FOR
DETERMINATION OF
DISCOVERY DISPUTE RE: TAX
AND RELATED DOCUMENT
PRODUCTION
[ECF NO. 56]

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Background

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Before the Court is the joint motion of the parties, filed on September 7,

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2012, for a determination of a discovery dispute. (ECF No. 56). The dispute

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involves Plaintiff’s refusal to produce federal and state tax records pursuant to

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discovery demands made by Defendants. Plaintiff objects to production on the basis

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of the California privilege against disclosure of tax returns, privacy and relevance.

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(ECF No. 56-3). Defendants assert that this case is governed by federal privilege

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law which does not contain a privilege protecting tax returns and that the returns

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are relevant. The dispute essentially is a motion to compel production by

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Defendants.

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Plaintiff has sued Defendants alleging, among other things, that he was not
paid for certain services rendered beyond the scope of a contractual agreement

11cv1819-JLS (MDD)

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between the parties. Defendants have counterclaimed alleging that Plaintiff failed

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to perform certain contractual duties. (ECF Nos. 1, 7). As provided below,

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Defendants’ motion to compel, as presented in this joint motion, is DENIED.
Discussion

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Courts in California have created an implied privilege against disclosure of

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tax returns. Webb v. Standard Oil Co., 49 Cal.2d 509, 513 (1957). The privilege is

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not absolute; it must be balanced against other public policy considerations.

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Schnabel v. Superior Ct., 5 Cal.4th 704, 718-21 (1993). “The privilege will not be

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upheld when (1) the circumstances indicate an intentional waiver of the privilege;

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(2) the gravamen of the lawsuit is inconsistent with the privilege; or (3) a public

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policy greater than that of the confidentiality of tax returns is involved.”

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Weingarten v. Superior Ct., 102 Cal.App.4th 268, 274 (Cal.Ct.App. 2002).
Discovery of tax returns is not privileged under federal law. Deployment

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Medicine Consulants, Inc., v. Pipes, 2010 WL 4853814 *2 (S.D.Cal. Nov. 23, 2010).

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In the Ninth Circuit, “discovery of tax returns is allowed when ‘they are relevant

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and there is a compelling need for the returns because their information is not

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otherwise readily attainable from an alternative source.’” Id. (citations omitted).

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The initial inquiry in the instant case is whether to apply California or

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federal law to the question of whether the requested tax returns are privileged. The

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answer will turn on the application of Fed.R.Evid. 501 which provides, in pertinent

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part:

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[I]n civil actions and proceedings with respect to an element of a claim
or defense as to which State law supplies the rule of decision, the
privilege of a witness . . . shall be determined in accordance with State
law.

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Defendants assert that the instant case presents a federal question with pendant
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state law claims and that federal privilege law should apply. (ECF No. 56-2 at 5).
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Plaintiff does not address the choice of law question; he assumes that state law
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applies and that none of the exceptions to assertion of the privilege is extant in this
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case. (ECF No. 56-3). It is rarely so simple.
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11cv1819-JLS (MDD)

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In Young v. United States, 149 F.R.D. 199 (S.D.Cal. 1993), the court

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addressed whether state or federal privilege law applied to a lawsuit brought under

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the Federal Tort Claims Act. In that case, the plaintiff asserted that because the

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Federal Tort Claims Act requires the court to look to the law of the state where the

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injury occurred in determining liability, that state privilege law applied. Defendant

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argued that in federal question cases, federal privilege law applies. The court found

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that in Federal Tort Claims Act cases, federal law absorbs or incorporates state law

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so that federal privilege law applies. The court stated:

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The law governing suits in federal court may be state law operative of
its own force, state law incorporated or adopted as the federal law, or
specific federal law uniform throughout the United States. . . . Where
state law operates of its own force, it is clear that state law provides
the rule of decision. However, where the state law becomes, in effect,
the federal law by incorporation, then federal law supplies the rule of
decision.
Id. at 201-202.

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Most cases applying federal privilege law are cases based primarily on

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federal law with pendant state law claims. See Eagle Precision Technologies, Inc., v.

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Eaton Leonard Robolix, Inc., 2005 WL 6453567 *3-4 (S.D.Cal. May 12, 2005) and

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cases cited therein. This does not necessarily mean that state privilege law applies

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only when the case is based solely on diversity of citizenship. The court stated:

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In determining what law to apply when there is neither pure diversity
jurisdiction nor pure federal question jurisdiction, most courts use the
law that supplies the rule of decision for the element at issue.
Id. at 4.

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The instant case involves an alleged breach of a contract. The case was filed

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by Plaintiff in the Superior Court of the State of California but was removed to this

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Court by Defendants based, in part, upon the Convention on the Recognition and

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Enforcement of Foreign Tribunal Awards. See 9 U.S.C. § 205. (ECF No. 1).

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Following removal, Plaintiff sought remand to the state court. (ECF No. 11). The

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district court denied to remand the case finding that federal jurisdiction was

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appropriate pursuant to 9 U.S.C. § 205, because of the international impact of
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11cv1819-JLS (MDD)

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enforcing the arbitration clause contained in the contract between Plaintiff and

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Defendants. (ECF NO. 23). In addition to the arbitration clause, the contract

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expressly provided that California law is to govern in any dispute over enforcement

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of the contract. (Id. at 2).
The Court finds that the federal question in this case is limited to the issue of

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the availability of federal jurisdiction. The rule of decision for the claims and

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defenses, outside of the question of whether this case may be maintained in federal

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court, is state law. Accordingly, California privilege law applies to the current

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dispute.
Applying California’s privilege against disclosure of tax returns, the Court

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finds that there has been no waiver by Plaintiff, that the gravamen of the lawsuit is

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not inconsistent with the privilege and that there is no public policy that mitigates

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against enforcement of the privilege in this case. Defendants argue that Plaintiff

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has put his tax returns in issue by claiming that he did not receive certain

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payments from Defendants and his tax returns may provide some evidence in that

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regard. The Court finds that Plaintiff has not sufficiently put his tax returns at

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issue.

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Even if federal privilege law applied, the Court would be hard-pressed to find
the level of relevance necessary to order the disclosure of Plaintiff’s tax returns.

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Conclusion

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For the foregoing reasons, Plaintiff need not produce his tax returns in

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response to Defendants’ discovery demands. Defendants’ motion to compel is

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DENIED.

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IT IS SO ORDERED:

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DATED: September 28, 2012

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Hon. Mitchell D. Dembin
U.S. Magistrate Judge

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11cv1819-JLS (MDD)