Colonial Funding Network, Inc. v. Genuine Builders, Inc. et al
Filing
62
ORDER denying #40 Motion to Modify Subpoenas. Signed by US Magistrate Judge Veronica L. Duffy on 5/30/2018. (CG)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
COLONIAL FUNDING NETWORK, INC.,
4:17-CV-04119-LLP
Plaintiff,
vs.
GENUINE BUILDERS, INC., GENUINE
BUILDERS, LLC, GENUINE BUILDERS
CONCRETE, LLC, SOUTHERN
MISSOURI CONTRACTING, LLC, JB
CONCRETE CO., MIDWEST POURED
FOUNDATIONS, INC., FALLS
FLATWORK, LLC, JPB PROPERTIES,
LLC, WATERS EDGE CONCRETE, LLC,
JAMES PAUL BUNKER,
ORDER DENYING DEFENDANTS’
MOTION TO MODIFY SUBPOENAS
DOCKET NO. 40
Defendants.
INTRODUCTION
This matter is before the court on the complaint of plaintiff Colonial
Funding Network, Inc. (“Colonial”), invoking this court’s diversity jurisdiction.
See Docket No. 1. On March 15, 2018, Colonial served four subpoenas duces
tecum on third-party banks at which various defendants have accounts. See
Docket No. 42-1 through 42-4. The banks on which the subpoenas were
served have not objected to producing the documents requested, but
defendants themselves have filed a motion to modify the subpoenas. See
Docket No. 40. The district judge, the Honorable Lawrence L. Piersol, referred
defendants’ motion to this magistrate judge for resolution. See Docket No. 44.
FACTS
For purposes of providing some context for the instant motion, the court
sets forth some basic facts gleaned from Colonial’s complaint and its pending
partial summary judgment motion so as to sketch out the claims asserted
herein. See Docket Nos. 1 & 32. By doing so, the court does not endorse the
verity of those facts or claims.
Colonial is a servicing provider for Strategic Funding Source, Inc. and
Direct Merchants Funding, LLC, doing business as Flash Advance. Because
neither Strategic Funding nor Direct Merchants Funding are parties to this
lawsuit, the court refers to them collectively as “Colonial,” even though the
court realizes Colonial itself did not provide funding. From June 23, 2016, to
January 12, 2017, Colonial entered into six separate funding transactions
whereby $1.760 million dollars were provided to defendants.
Prior to making these loans,1 Colonial conducted a physical site visit to
ensure the defendants were actual legitimate businesses with a physical
presence and employees. Defendants assert that Colonial never met face-toface with James Bunker, however. Colonial also conducted a background
check on James Bunker, the owner or predominate owner of the defendant
entities. Colonial also alleges that prior to each of these loans, it conducted a
Colonial calls these “funding transactions.” The court simply refers to them
as loans, though the parties may be aware of distinctions between the two
terms.
1
2
recorded “funding call” with James Bunker to verify the material terms of each
of the loans prior to any funds being disbursed—an allegation defendants deny.
Recordings of these phone calls are on file with the court in connection with
Colonial’s partial summary judgment motion. See Docket Nos. 37-36, -48, -54,
-80, -115, and -127. Although a male voice is heard answering on behalf of
James Bunker in these recordings, the court is not aware whether the male is
in fact defendant Bunker. After the recorded phone calls were made, Colonial
then disbursed the funds into defendants’ bank accounts.
The terms of the contracts required defendants to repay the funds
through periodic electronic funds transfers out of their various bank accounts.
Through these transfers, defendants paid Colonial $1,161,567. In late
January, 2017, however, defendants instructed their banks not to honor the
electronic transfers with the result that no further payments were made to
Colonial on the loans. At this time, defendants still owed Colonial
approximately $1,158,932 in unpaid balances plus approximately $46,810 in
fees.
Defendants notified Colonial they disputed the validity of the six
transactions. Defendants asserted that defendants’ employee, James Bunker’s
sister, Sandra Tawzer, forged Mr. Bunker’s name to the contracts. Ms. Tawzer
held the position of controller within Mr. Bunker’s companies. Colonial asserts
Ms. Tawzer had a prior felony conviction for embezzlement before defendants
hired her.
3
Colonial asserts claims against defendants of breach of contract,
promissory estoppel, unjust enrichment, quantum meruit, and money had and
received. Defendants deny that they entered into the contracts in question and
assert a litany of affirmative defenses, including equitable defenses of unclean
hands and estoppel. See Docket No. 17 at pp. 20-21.
On March 15, 2018, Colonial served subpoenas duces tecum on Richland
State Bank of Bruce, South Dakota (see Docket No. 42-1); Frontier Bank of
Rock Rapids, Iowa (see Docket No. 42-2); Citizens State Bank of Arlington,
South Dakota (see Docket No. 42-3); and Fishback Financial Corporation, First
Bank & Trust of Sioux Falls, South Dakota (see Docket No. 42-4). Each of the
subpoenas requested all documents relative to any bank account for any
defendant for the period from January 1, 2016, to the date of compliance with
the subpoena, which was April 2, 2018. See, e.g. Docket No. 42-1 at p. 4.
Four days later, Colonial filed a motion for partial summary judgment against
defendants [Docket No. 32], which motion is currently still pending.
Criminal charges against Sandra Tawzer have been filed in South Dakota
state court, but those charges are not based on the transactions between
defendants and Colonial which are at issue in this case. The chief investigating
agent in the Sandra Tawzer case testified one year ago (May 31, 2017), before a
state grand jury that Ms. Tawzer was using two men to represent themselves to
be James Bunker and to approve of the loans over the phone with the loan
companies. See Docket No. 36-14 at pp. 21, 24. The telephonic loans were
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with out-of-state entities. Id. The court assumes this testimony refers at least
in part to Colonial’s loans to defendants.
The one loan discussed at length before the grand jury, and apparently
the sole basis for the state criminal charges against Ms. Tawzer, was a loan
made by a South Dakota bank, Citizens State Bank of Arlington, South
Dakota, on which Ms. Tawzer forged Mr. Bunker’s signature. Id. at p. 3-5.
That loan was entirely paid back to the bank out of defendants’ bank accounts.
Id. at pp. 5-6. As to the telephonic loans, the investigating agent did not ask
for a grand jury indictment as to those funds because “[t]he loans were made
out to the business and cashed in the business’s name, but there was so much
going on within passing checks and moving checks around that at this point I
have not determined where the money’s final destination was.” Id. at pp. 2425. A grand juror asked specifically if the agent could say whether the money
went to defendants or to Ms. Tawzer. Id. at p. 25. The agent testified, “I can’t
show that the money went into [Ms. Tawzer’s] pocket at this point.” Id.
Nevertheless, defendants have represented in this lawsuit that all of the
money from Colonial was purloined by Sandra. Defendants have produced no
documents in discovery, according to Colonial, not even their required Rule 26
initial disclosures. Hence, Colonial has no documents that show where the
funds they gave to defendants went.
Following the events of January, 2017, defendant James Bunker sought
certificates of dissolution from the South Dakota Secretary of State as to
defendants Midwest Poured Foundations, Inc. and Waters Edge Concrete, LLC.
5
Defendants now move to modify the four bank subpoenas. See Docket
No. 40. They allege the time frame for the subpoenas are too broad. Because
the first funding transaction was consummated June 23, 2016, and the last
such transaction was consummated January 12, 2017, defendants want the
court to limit the banks’ production of documents to that approximately sixmonth time period. They point out that the subpoenas cover time periods after
Colonial filed its complaint in this matter (on August 28, 2017), and they argue
that providing financial information about defendants during the pendency of
this lawsuit places them at a strategic and negotiating disadvantage.
Defendants also assert a claim that the subpoenas are unduly
burdensome, but none of the banks have asserted that claim. In fact, Frontier
Bank has already compiled the documents and made them available to
Colonial. Colonial has declined to receive those documents until the instant
motion is resolved.
Colonial points out that, in conducting its due diligence prior to sending
funds to defendants pursuant to the contracts, Colonial requested and
received, inter alia, financial documents, tax returns, bank statements, balance
sheets, and profit and loss statements for various defendants spanning the
time period from 2013 up through 2016. Thus, the bank records subpoenaed
partially cover the due diligence period. Finally, Colonial points out that the
district court entered a protective order in this matter [Docket No. 30] so that
confidentiality of any documents received pursuant to the subpoenas in
question would be protected.
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DISCUSSION
A.
Scope of Discovery
Federal Rule of Civil Procedure 26(b)(1) sets forth the scope of discovery
in civil cases pending in federal court:
Unless otherwise limited by court order, the scope of discovery is
as follows: Parties may obtain discovery regarding any
nonprivileged matter that is relevant to any party=s claim or
defense and proportional to the needs of the case, considering the
importance of the issues at stake in the action, the amount in
controversy, the parties’ relative access to relevant information, the
parties’ resources, the importance of the discovery in resolving the
issues, and whether the burden or expense of the proposed
discovery outweighs its likely benefit. Information within the scope
of discovery need not be admissible in evidence to be discoverable.
See FED. R. CIV. P. 26(b)(1). Rule 26 contains specific limitations relative to
electronic discovery and other objections to providing discovery:
(B)
Specific Limitations on Electronically Stored Information. A
party need not provide discovery of electronically stored
information from sources that the party identifies as not
reasonably accessible because of undue burden or cost. On
motion to compel discovery or for a protective order, the
party from whom discovery is sought must show that the
information is not reasonably accessible because of undue
burden or cost. If that showing is made, the court may
nonetheless order discovery from such sources if the
requesting party shows good cause, considering the
limitations of Rule 26(b)(2)(C). The court may specify the
conditions for the discovery.
(C)
When Required. On motion or on its own, the court must
limit the frequency or extent of discovery otherwise allowed
by these rules or by local rule if it determines that:
(i)
the discovery sought is unreasonably cumulative or
duplicative, or can be obtained from some other source
that is more convenient, less burdensome, or less
expensive;
(ii)
the party seeking discovery has had ample opportunity to
obtain the information by discovery in the action; or
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(iii)
the proposed discovery is outside the scope permitted by
Rule 26(b)(1).
See FED. R. CIV. P. 26(b)(2)(B) and (C).
The scope of discovery under Rule 26(b) is extremely broad. See 8
Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure ' 2007, 3637 (1970) (hereinafter "Wright & Miller"). The reason for the broad scope of
discovery is that "[m]utual knowledge of all the relevant facts gathered by both
parties is essential to proper litigation. To that end, either party may compel
the other to disgorge whatever facts he has in his possession." 8 Wright &
Miller, ' 2007, 39 (quoting Hickman v. Taylor, 329 U.S. 495, 507-08, 67 S. Ct.
385, 392, 91 L. Ed. 2d 451 (1947)). The Federal Rules distinguish between
discoverability and admissibility of evidence. FED. R. CIV. P. 26(b)(1), 32, and
33(a)(2) & (c). Therefore, the rules of evidence assume the task of keeping out
incompetent, unreliable, or prejudicial evidence at trial. These considerations
are not inherent barriers to discovery, however.
“Relevancy is to be broadly construed for discovery issues and is not
limited to the precise issues set out in the pleadings. Relevancy ...
encompass[es] ‘any matter that could bear on, or that reasonably could lead to
other matter that could bear on, any issue that is or may be in the case.’ ”
E.E.O.C. v. Woodmen of the World Life Ins. Society, 2007 WL 1217919 at *1
(D. Neb. March 15, 2007) (quoting Oppenheimer Fund, Inc. v. Sanders, 437
U.S. 340, 351 (1978)). The party seeking discovery must make a “threshold
showing of relevance before production of information, which does not
reasonably bear on the issues in the case, is required.” Id. (citing Hofer v.
8
Mack Trucks, Inc., 981 F.2d 377, 380 (8th Cir. 1993)). “Mere speculation that
information might be useful will not suffice; litigants seeking to compel
discovery must describe with a reasonable degree of specificity, the information
they hope to obtain and its importance to their case.” Id. (citing Cervantes v.
Time, Inc., 464 F.2d 986, 994 (8th Cir. 1972)).
Discoverable information itself need not be admissible at trial; rather, the
defining question is whether it is within the scope of discovery. See FED. R. CIV.
P. 26(b)(1). Additionally, the court may limit the frequency and extent of
discovery. See FED. R. CIV. P. 26(b)(2); see also Roberts v. Shawnee Mission
Ford, Inc., 352 F.3d 358, 361 (8th Cir. 2003) (“The rule vests the district court
with discretion to limit discovery if it determines, inter alia, the burden or
expense of the proposed discovery outweighs its likely benefit.”); Continental
Illinois Nat=l Bank & Trust Co. of Chicago v. Caton, 136 F.R.D. 682, 684-85
(D. Kan. 1991) (“All discovery requests are a burden on the party who must
respond thereto. Unless the task of producing or answering is unusual, undue
or extraordinary, the general rule requires the entity answering or producing
the documents to bear that burden.”).
B.
Provisions of Rule 45
Rule 45 of the Federal Rules of Civil Procedure allows a party to serve a
subpoena for the production of documents on a nonparty, with notice to the
other parties in the litigation. See FED. R. CIV. P. 45(a). The nonparty on whom
the subpoena is served must be protected from undue burden or expense. Id.
at subsection (d)(1).
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A subpoena must be quashed or modified if it requires the disclosure of
privileged or other protected matter if there is no exception or waiver
applicable, or if the subpoena subjects a person to undue burden. Id. at
subsection (d)(3)(A). A subpoena may be quashed or modified to protect a
person affected by a subpoena if the subpoena requires disclosure of a trade
secret or other confidential research, development, or commercial information.
Id. at subsection (d)(3)(B).
"Ordinarily a party has no standing to seek to quash a subpoena issued
to someone who is not a party to the action, unless the objecting party claims
some personal right or privilege with regard to the documents sought." Charles
A. Wright, Arthur R. Miller, Mary K. Kane, Richard L. Marcus, A. Benjamin
Spencer, and Adam Steinman, 9A Fed. Prac. & Proc. Civ. § 2459 (3d ed. April,
2017) (hereinafter "Fed. Prac. & Proc. Civ."). As with other discovery, the
relevancy issue at the time a subpoena is served is broad—the court does not
evaluate whether the evidence sought is admissible, but rather whether the
information is relevant to a claim or defense and is nonprivileged. Id. The
court also considers whether the information is likely to lead to the discovery of
admissible evidence. Id. The party seeking to quash a subpoena bears the
burden of demonstrating grounds for quashing it. Id.
C.
Whether the Subpoenas Should Be Modified
1.
Standing
Generally, a party to a lawsuit does not have standing to seek to quash a
subpoena directed to a non-party—that power lies with the non-party. See
10
Smith v. Frac Tech Servs., Ltd., 2010 WL 3522395 at *1 (E.D. Ark. Sept. 1,
2010); Herff Jones, Inc. v. Oklahoma Graduate Servs., Inc., 2007 WL 2344705
at *3 n.4 (W.D. Ok. Aug. 15, 2007). However, when the party seeking to
challenge the subpoena has a personal right or privilege in the subpoena, an
exception has been made. Smith, 2010 WL 3522395 at *1; Herff Jones, Inc.,
2007 WL 2344705 at *3 n.4. Here, defendants clearly have a personal right in
the confidential financial information sought. See, e.g. Schmulovich v. 1161
Rt. 9 LLC, 2008 WL 4572537 *4 (D.N.J. 2008); In re REMEC, Inc. Secs.
Litigation, 2008 WL 2282647 *1 (S.D. Ca.. 2008); Terwillegar v. Offshore
Energy Servs., Inc., 2008 WL 2277879 *3 (E.D. La. 2008). Accordingly, the
court concludes they have standing to challenge the subpoena.
2.
Relevancy
Despite recent changes to the rules of civil procedure, courts agree the
scope of discovery under the Federal Rules of Civil Procedure is extremely
broad. See 8 Fed. Prac. & Proc. Civ. § 2007. As indicated above, when a party
resists discovery on the grounds of relevancy, it is up to the requesting party to
first establish a threshold relevance of the discovery requested. It then falls to
the resisting party to establish grounds not to provide the discovery.
After defendants made their initial argument that the scope of
documents prior to June 23, 2016, and after January 12, 2017, were not
relevant, Colonial came forward with detailed and convincing arguments for the
relevancy of each category of documents it is requesting in the subpoenas. In
their reply brief, defendants do not counter these arguments. The court finds
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Colonial has satisfied its initial burden to demonstrate the relevancy, for
purposes of discovery, of the documents requested. Specifically, even if
Colonial were to accept at face value defendants’ representation that
Ms. Tawzer obtained the loans by fraud, both parties have pleaded equitable
theories of recovery and defense. It necessarily, therefore, brings into question
whether defendants benefitted from the loans by being the ultimate recipient of
the funds or benefitted in some other way. The documents will bear out who
has the greater equitable right to the money. Colonial has a right to “follow the
money” to see where it went. The documents requested are at the center of the
claims and defenses presented in Colonial’s lawsuit.
3.
Overbroad
Defendants also argue that the scope of the subpoenas are overbroad in
that they cover too long a time frame. Defendants would like the subpoenas
modified to include only documents from June 23, 2016, to January 12, 2017,
the dates covering when Colonial advanced funds to defendants. As discussed
in the “relevancy” section of this opinion immediately above, given the amount
of money loaned and, apparently, the complexity of defendants’ interdealings
with each other (according to the investigating agent’s grand jury testimony),
the time period requested by Colonial does not appear to be overbroad to this
court. The burden is on defendants as the resisting party to establish a basis
to quash or modify the subpoenas and they have not done so. Penford Corp. v.
National Union Fire Ins. Co., 265 F.R.D. 430, 433 (N.D. Iowa 2009); St. Paul
12
Reinsurance Co. v. Commercial Financial Corp., 198 F.R.D. 508, 511 (N.D.
Iowa 2000).
In PHE, Inc. v. Does 1-27, 2013 WL 3225811 at *1 (E.D. Mo. June 25,
2013), a plaintiff filed suit alleging certain John/Jane Does had violated
plaintiff's copyrights by downloading plaintiff's movie using an internet-based
application known at Bit Torrent. The only identifying information plaintiff had
about the Does was their Internet Protocol ("IP") addresses. Id. Plaintiff served
a subpoena on the internet service providers for the IP addresses seeking the
subscription information for each of the IP addresses. Id. The Does moved to
quash the subpoena, asserting, among other things, that the IP addresses
might not correspond to the person who downloaded the movie. Id. at *3. The
Does argued that the responsible person might be a visitor, a neighbor, or
someone using the wireless signal from a car parked on the street. Id. The
Does also argued their reputations would be damaged by having their names
released to plaintiff. Id.
The court rejected these concerns, noting that the information sought
need not be admissible in court as long as it was reasonably likely to lead to
the discovery of admissible evidence. Id. By finding out the identity of the
owner of the IP addresses, plaintiff could begin to track down the actual users
who downloaded plaintiff's movie. Id. As to the embarrassment factor, the
court concluded that was unfortunate, but that was a fact faced by "countless
litigants in our legal system." Id. The court denied the motions to quash. Id.
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Similarly, here, the documents requested by Colonial’s subpoena may
include some documents not directly related to the claims and defenses in this
lawsuit. But they have great potential to lead to the discovery of admissible
evidence, i.e. showing where the funds advanced by Colonial went. It may be
potentially embarrassing to defendants to have these documents explored. It
may affect defendants’ negotiation stance in this case vis-à-vis Colonial. Such
are the vagaries of litigation. They are unavoidable. Defendants cannot assert
that the loans were obtained by fraud and that they received none of the loan
proceeds without allowing Colonial to prove (or disprove) those assertions.
As to the time frame set forth in the subpoena, the court finds it is not
overbroad. Colonial has a right to determine if the financial condition when it
granted its first loan was as represented to it. Colonial is only seeking
documents stretching back six months from the first loan date. That is
reasonable. Likewise, Colonial has a right, given defendants’ defenses and
factual representations in this lawsuit, to attempt to unravel defendants’
financial entanglements and determine if any of the defendants themselves
ended up with the loaned funds in their pockets or benefitted in some other
way from the funds. The post-loan time period requested by the subpoenas
exceeds what defendants have requested by only 15 months. That does not
seem excessive given the large amounts of money loaned and Mr. Bunker’s
application for and receipt of articles of dissolution for two of the companies. It
also seems a reasonable time period given the investigatory agent’s testimony
at the grand jury.
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4.
Unduly Burdensome
Defendants contend that the subpoenas are unduly burdensome to
comply with for the non-party banks on which they were served. Only the
banks themselves can raise this objection, see FED. R. CIV. P. 45(d)(3), and none
of the banks have done so. Furthermore, at least one bank had already
compiled the documents and made them available to Colonial in advance of the
April 2, 2018, production date. This also belies any argument that the
subpoenas are unduly burdensome for the banks to comply with.
5.
Confidentiality/Privacy
The last wrinkle in this discovery dispute concerns protecting the privacy
of the documents. When the parties submitted their Form 52 report to the
district court, they indicted they were discussing stipulating to the terms of a
protective order. See Docket No. 29 at p. 6, ¶ k(1). The final terms of that
stipulation had not yet been agreed upon by the parties. Id. However, a form
of a protective order that was agreeable to Colonial, but not to defendants, was
attached to the Form 52 report. Id.; see also Docket No. 29-1. After waiting a
month and hearing nothing further from the parties, the district court entered
the protective order submitted by Colonial. See Docket No. 30.
Following this action by the district court, defendants never moved to
vacate the order or to modify it. In the context of this motion to modify
Colonial’s bank subpoenas, defendants represent that the protective order was
unsatisfactory to them. However, defendants never explain in what particulars
the existing order is unsatisfactory. Nor do defendants suggest additional
15
specific protections they wish to have applied to the bank records which are the
subject of Colonial’s subpoenas. The court finds defendants have had ample
opportunity to amend or adjust the terms of the protective order—in general, or
as applied to the current subpoenas—and defendants have sat on their hands.
The court finds the existing protective order entered by the district court
adequately protects the subpoenaed documents. Accordingly, confidentiality is
not a valid basis for modifying or quashing the subpoenas.
CONCLUSION
Based on the foregoing law, facts, and analysis, it is hereby
ORDERED that defendants’ motion to modify the four subpoenas issued
by Colonial [Docket No. 40] is denied. All such documents produced by the
non-party recipients of the subpoenas shall be considered confidential under
the district court’s protective order and handled accordingly. It is further
ORDERED that defendants’ request for oral argument [Docket No. 57] is
denied.
NOTICE OF RIGHT TO APPEAL
Pursuant to 28 U.S.C. ' 636(b)(1)(A), any party may seek reconsideration
of this order before the district court upon a showing that the order is clearly
erroneous or contrary to law. The parties have fourteen (14) days after service
of this order to file written objections pursuant to 28 U.S.C. ' 636(b)(1)(A),
unless an extension of time for good cause is obtained. See FED. R. CIV. P.
72(a); 28 U.S.C. ' 636(b)(1)(A). Failure to file timely objections will result in
the waiver of the right to appeal questions of fact. Id. Objections must be
16
timely and specific in order to require review by the district court. Thompson
v. Nix, 897 F.2d 356 (8th Cir. 1990); Nash v. Black, 781 F.2d 665 (8th Cir.
1986).
DATED this 30th day of May, 2018.
BY THE COURT:
VERONICA L. DUFFY
United States Magistrate Judge
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