VERONICA L. DUFFY, Magistrate Judge.
This matter is before the court on the basis of diversity jurisdiction, 28 U.S.C. § 1332, after defendants removed the matter from South Dakota state court.
The court states the following facts from plaintiffs' second amended complaint in order to evaluate movants' pending motion. Plaintiff Larson Manufacturing Company of South Dakota, Inc. (Larson) is the parent company of plaintiff Superior Homes, LLC (Superior).
Defendant Western Showcase Homes, Inc. ("Western") is a Nevada corporation in the business of purchasing, reselling, and financing modular homes.
The defendant entities purchased modular homes from Superior and then re-sold those homes to customers, sometimes arranging for delivery, set and completion of the home at the customer's location.
The second amended complaint recites that defendant entities placed orders for fourteen modular homes with plaintiffs. Plaintiffs constructed the homes. Of the homes that were delivered to defendants, full payment was never made even though the complaint alleges the ultimate customers who received these homes paid defendants. Other modular homes ordered by defendants were custom-built and never delivered because defendants never paid for the homes. As to the homes plaintiffs retain possession of, plaintiffs allege the custom nature of the homes makes resale of the homes at a reasonable value impracticable.
In addition, Larson entered into a loan agreement with Western which was guaranteed by AMHG, Inc. This loan agreement ultimately encompassed $14 million in funds. Larson alleges that Western defaulted on the loan and AMHG, Inc. refused to pay pursuant to its guarantee. For all these matters, plaintiffs assert three counts of breach of contract, two counts of fraud, two counts of conversion, one count each of debt and guarantee, and one count of piercing the corporate veil.
In their answer to the second amended complaint, defendants generally deny nearly all of plaintiffs' allegations.
The dates of the business transactions alleged by plaintiffs in their second amended complaint go back as far as April, 2012, and extend into the year 2016.
Counsel for movants/defendants submitted a declaration (Docket No. 90) attaching copies of the subpoenas served by the plaintiffs which are the subject of the motion to quash. They are as follows:
(Docket 90-6).
The subpoenas seek the following information:
The subpoenas also request the following:
Counsel for defendants, appearing on behalf of the movants (Salvatore Torresco, Laura Riffel individually, and Laura Riffel on behalf of Guardant Investments) moved to quash these subpoenas on June 4, 2018. Docket 86. The movants, through counsel, argue the subpoenas should be quashed because they are duplicative and because they are overbroad and burdensome.
The plaintiffs counter that Mr. Torresco and Ms. Riffel are both business associates of the named defendants—particularly Mr. Thomas—and that Mr. Torresco and Ms. Riffel administered funds and accounts for the defendants. The plaintiffs further argue the bank records provided by the discovery so far reveal "hundreds of thousands of dollars" worth of unexplained payments to Salvatore Torresco. The plaintiffs cite the following facts/evidence in support of their argument that the newly issued subpoenas, seeking the movants' personal financial dealings with the defendants, are necessary to the discovery process in this lawsuit:
The plaintiffs further argue that though the objection to the current round of subpoenas is ostensibly filed by Torresco, Riffel and Guardant, ("the movants") it is nothing more than further effort by the collective defendants to obstruct and delay the discovery of clearly relevant information.
Federal Rule of Civil Procedure 26(b)(1) sets forth the scope of discovery in civil cases pending in federal court:
The scope of discovery under Rule 26(b) is extremely broad.
"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.'"
Discoverable information itself need not be admissible at trial; rather, the defining question is whether it is within the scope of discovery.
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.
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.
"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." 9A Wright & Miller, § 2459 (3d ed. April, 2017). 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.
"When a non-party is subpoenaed, the court is particularly mindful of Rule 45's undue burden and expense cautions."
As explained above, Mr. Torresco, Ms. Riffel, and Guardant (the movants) assert the subpoenas should be quashed because: (1) they are duplicative to the subpoenas which have already been served in this case; and (2) they are overbroad.
Though the movants do not overtly argue the subpoenas are irrelevant, the court briefly addresses this requirement. As pointed out in the FACTS section of this opinion, supra, plaintiffs have made multiple allegations that defendant Thomas has converted monies to his own personal use that were supposed to be routed to plaintiffs. Mr. Thomas is the principal agent and owner of Western Showcase and both AMHG entities.
The movants assert the plaintiffs should be able to determine the merits of their claims from obtaining access to the defendants' corporate financial records, and the records already obtained from the movants in the previous subpoenas which detail the plaintiffs' corporate interactions with the defendants. The movants therefore assert plaintiffs need not delve into the movants' own financial dealings with the defendants.
The plaintiffs counter that they should be allowed to examine not only the defendants' corporate financial records, but also the movants' financial dealings with the defendants. In support of their position, the plaintiffs urge that the corporate records unearthed to date show at least $587,836.79 was transferred from Western Showcase to Salvatore Torresco's personal account. It also appears that Ms. Riffel deposited funds into Western Showcase's account, both from the Guardant account and from her own account, during the relevant time frame. Defendants have indicated in their answers to plaintiffs' interrogatories that Ms. Riffel administered an account for defendants Western Showcase and AMHG during the relevant time frame. Mr. Torresco admits he received large checks into his personal account from Mr. Thomas, and in turn used "cashier's checks from that account" to pay bills for Paul Thomas.
Among the obvious questions that come to mind are (1) what was the origin of the money Ms. Riffel deposited into Western Showcase's account, i.e. was it money that should have been distributed to plaintiffs under the relevant loan/credit agreements?; (2) why was Mr. Torresco paying Mr. Thomas' bills? and (3) what portion of the money which was deposited into Mr. Torresco's accounts from Western Showcase was for services rendered by Mr. Torresco, and what portion was used to pay Mr. Thomas' bills? (4) of that portion of the money deposited into Mr. Torresco's accounts from Western Showcase that was used to pay Mr. Thomas' bills, what portion of Western Showcase money was used to pay Mr. Thomas' personal bills, and what portion was used to pay the bills of Western Showcase/AMHG entities? These inquiries, among others, are relevant to the issues in this lawsuit.
The movants assert that because they are non-parties to this action, the information the plaintiffs seek is disproportionate/overburdensome because "plaintiffs now seek to obligate Salvatore, Laura and Guardant to gather documents relating to every transaction between them and the defendants over the past six years. Not only do plaintiffs demand that Salvatore, Laura and Guardant Investments produce all records showing the purpose of each payment, but they also demand production of every bank statement, processed check, deposit slip, and receipt for any account that transferred or received money from the defendants or otherwise did business with defendants over the last six years."
The plaintiffs explain that although a portion of this pending lawsuit has been resolved, there is still a substantial amount of money ($14,000,000.00) at stake. The plaintiffs' service of the subpoenas upon Mr. Torresco, Ms. Riffel and Guardant is, the plaintiffs explain, an effort to determine where exactly the money advanced to Mr. Thomas under the credit agreement went.
The plaintiffs assert the documents they seek via the current subpoenas will assist in either proving or disproving their fraud, conversion, and piercing the corporate veil claims by showing how Mr. Thomas used the money and whether plaintiffs' funds were diverted in the way plaintiffs allege. The subpoenas the plaintiffs have served upon Mr. Torresco, Ms. Riffel, and Guardant, the plaintiffs assert, are therefore proportionate to the needs of the case pursuant to FED. R. CIV. P. 26(b)(1).
The proportionality reference in Rule 26(b)(1) explains that the court should decide whether a discovery request is proportional "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 information in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit . . .
Over fourteen million dollars in damages and ten causes of action remain in plaintiffs' second amended complaint. Though thirteen causes of action and $1,402,407 in damages have been resolved, the defendants and the movants have access to the requested information and the plaintiffs do not. The need for ongoing discovery is not entirely diminished or markedly narrowed.
Finally, the movants assert the information the plaintiffs seek through the subject subpoenas are overbroad because (1) plaintiffs seek to learn the purpose for every penny ever paid to or from defendants to the movants and; (2) the plaintiffs seek many categories of documents spanning an extended period of time. The court rejects both of these arguments.
The court has already explained why the information plaintiffs seek is discoverable. The subpoenas were dated May 17, 2018, and requested financial information from January 1, 2012, "to the present." The last time plaintiffs allege they extended credit to the defendants was March 31, 2016. The second amended complaint also alleges, however, that as a result of the defendants' fraud, deceit, and default, over fourteen million dollars remains due and owing to the plaintiffs, with interest continuing to accrue. The complaint also alleges Paul Thomas converted money intended for the plaintiffs to his own use. There is no "end date" on these allegations. The court concludes the information the plaintiffs seek through the subpoenas to the movants is not overbroad.
The movants assert that because the plaintiffs served subpoenas upon them in August, 2017, which sought information relating to documentation in their possession regarding financial transactions between the plaintiffs and the defendants during the relevant time frame, the plaintiffs have enough — and are therefore not entitled to also obtain information regarding financial transactions between themselves and the defendants during the relevant time frame.
As explained above, however, the information the plaintiffs have discovered to date reveals the movants have information which is relevant to the plaintiffs' claims. This is so because the plaintiffs allege they loaned defendants over fourteen million dollars, which they allege defendants used for improper purposes and then failed to repay. The documentation discovered through the first round of subpoenas indicates the defendants paid Mr. Torresco over several hundred thousand dollars during the relevant time frame. The defendants may assert this money was paid to Mr. Torresco for purposes properly envisioned by the loan and credit agreements, but that is not readily apparent absent the documentation the plaintiffs seek from Mr. Torresco through the currently disputed subpoenas. The same holds true for the documentation the plaintiffs currently seek from Ms. Riffel and Guardant Investments.
Some of the documents the plaintiffs seek to discover through the disputed subpoenas are likely to be "confidential" as that term is contemplated under the protective order entered by the court dated March 6, 2018. Confidential documents produced as a result of the disputed subpoenas should be protected from unfettered public dissemination.
The movants and the parties are directed to ¶ 5 of the March 6, 2018, protective order for the procedure to determine which documents produced pursuant to the disputed subpoenas shall be designated as "confidential" pursuant to the protective order.
In their resistance to the movants' motion to quash, the plaintiffs requested the court to award them their attorney's fees against the defendants in the event the plaintiffs prevailed in their position that they are entitled to discover the documents requested by the disputed subpoenas. In support of their request for fees, the plaintiffs argue that this court has already determined similar documents were relevant and discoverable.
As the plaintiffs aptly noted in their opposing brief, however, the earlier subpoenas—and this court's earlier ruling—pertained to documents that were relevant because they contained information about transactions by or between the parties to this lawsuit. The currently disputed subpoenas seek documents that are in the possession of the movants (as were some of those subject to the first subpoenas), but are different documents altogether, as they seek information about transactions that are one step removed from those directly between the parties. And while these newly requested documents are relevant for some of the same reasons as the previously subpoenaed documents, their relevance is more attenuated than those requested by the previous subpoenas.
More importantly, the plaintiffs have cited no authority that would allow the court to award sanctions against the defendants for a motion filed by movants—who are not parties to this lawsuit. Though the movants are represented by the same lawyer as the defendants, the defendants did not move to quash the subpoenas—the movants did. The court will not sanction the defendants for a motion filed by someone else.
For all of these reasons, the court will not award the plaintiffs' attorney's fees against the defendants.
It is hereby
ORDERED that movants' motion to quash [Docket No. 86] is DENIED, with the caveat that the information provided to the plaintiffs as a result of the disputed subpoenas may be subject to the protective order entered by the court on March 6, 2018.
