Opinion
No. 05-16-01410-CV
03-21-2017
IN RE HOSSEIN S. NAMDARKHAN AND BRAD NAMDAR, Relators
Original Proceeding from the 193rd Judicial District Court Dallas County, Texas
Trial Court Cause No. DC-16-00853
MEMORANDUM OPINION
Before Justices Lang-Miers, Evans, and Schenck
Opinion by Justice Evans
In this original proceeding, relators complain about a discovery order compelling production of federal tax returns and a sanction order for failure to comply with the discovery order. We conditionally grant relief.
The trial court signed the discovery order after it signed the sanctions order.
Factual and Procedural Context
The underlying case is a law firm's collection case and the former client's counterclaims for breach of fiduciary duty, legal malpractice, breach of contract, and DTPA violations. Real party in interest Glast, Phillips & Murray, P.C. ("GP&M") represented relator Brad Namdar ("Brad") in a grievance against DISD after Brad was placed on administrative leave from his teaching and coaching position at North Dallas High School. Brad's father, relator Hossein Shawn Namdarkhan ("Shawn"), paid some of GP&M's bills for his son. Those payments came from Shawn's business, Kid's Depot, not Shawn's personal bank account. GP&M sued to collect unpaid fees. As part of their DTPA claim, Brad and Shawn assert that the rates charged by GP&M were exorbitant and unreasonable when compared to Brad's small income as a teacher.
In light of that income disparity argument, GP&M requested production of Brad's and Shawn's federal tax returns. Brad and Shawn objected to the discovery requests, and GP&M moved to compel production of the tax returns. Brad produced his tax returns and other income-related documents, but Shawn stood on his objections. Shawn did, however, produce a K-1 and tax documents concerning Kid's Depot, which reflected Shawn's sole source of income. GP&M moved for sanctions, which the court granted. The court's sanctions order prohibits Shawn and Brad from mentioning or discussing their income disparity argument relating to GP&M's fees as a sanction for Shawn's failure to produce his tax return. Brad and Shawn argue that the prohibition on their use of the income disparity argument is a death penalty sanction because it bars relators from raising a critical defense.
The scope and timing of the trial court's rulings and orders are relevant here. Brad and Shawn served their objections to the requests for production on October 24, 2016, real parties filed an amended motion to compel on October 26, 2016 to address relators' discovery objections, and the court heard the amended motion to compel on October 31, 2016. During the hearing, the court expressed concerns about allowing production of complete, unredacted tax returns. The court suggested relators redact the tax returns "the way you feel it should be redacted" and then real parties could complain if the redactions were excessive or otherwise inappropriate. The trial court stated it wanted to avoid an in camera review. The trial court also stated that Shawn should not redact the numbers and financial information because the court wants "the numbers on there." But the court also said to "redact what you want. But if you redact those numbers, you're going to complain and I'm going to say, yeah, unredact them." The trial court told Shawn's counsel he had until noon the upcoming Friday, November 4, 2016, to produce the returns.
Shawn's deposition was scheduled for November 7, 2016. At a hearing the morning of that deposition, real parties complained that relators had not produced the tax returns. They argued that the court verbally ruled that Sean must produce the returns by November 4, 2016. But relators argued that there was a dispute regarding what portions of the returns had to be produced. They also told the court that they had been trying to obtain a copy of the transcript from the October 31, 2016 hearing to determine exactly what the court ruled they should produce. They produced a K- 1 and the tax documents concerning Kid's Depot, which reflected Shawn's sole source of income. But Shawn argued that his personal tax returns were irrelevant and potentially misleading because his income was solely from the Kid's Depot business, Shawn's wife files jointly with Shawn so the individual returns would not accurately represent Shawn's income, and relators were not sure what had to be produced beyond Shawn's income information. The court told the parties that the Kid's Depot documents were not adequate and verbally ruled Shawn must produce his tax returns before the deposition "or there's a risk that he'll be excluded as a witness."
Shawn did not produce the tax returns before his deposition. Real parties moved for sanctions for failure to comply with the verbal ruling to produce the tax returns. Then, on November 17, 2016, the court granted real parties' motion for sanctions and signed the written order at issue here prohibiting relators from discussing, mentioning, or arguing the income disparity issue.
The court did not sign a written order setting out what Shawn was required to produce until November 21, 2016. And that order was much more specific regarding what Shawn could and could not redact from the returns than the court's statements at the October 31 hearing. In that written order, the court ordered relators to produce the tax returns with only basic, personal information redacted:
A complete 2015 tax return will be produced with redactions of only personal and identifying information redacted such as social security number, personal address or identifying identity and location of information regarding assets. No financial numbers or figures are to be redacted.Unlike the court's statements at the hearing, the court did not allow relators to redact how they believed the returns should be redacted and did not permit an in camera review or further hearing to address any objections to Shawn's redactions. And, although the order was not signed until November 21, 2016, it required production by noon on November 4, 2016.
Mandamus Standard
To be entitled to mandamus relief, a relator must show both that the trial court has clearly abused its discretion and that relator has no adequate appellate remedy. In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135-36 (Tex. 2004) (orig. proceeding). A trial court abuses its discretion if a decision is so arbitrary and unreasonable as to amount to a clear and prejudicial error of law. Wheeler v. Methodist Hosp., 95 S.W.3d 628, 644 (Tex. App.—Houston [1st Dist.] 2002, no pet.).
Applicable Law
If a person designated to testify on behalf of a party fails to comply with proper discovery requests, a trial court may make an order prohibiting the disobedient party from introducing designated matters into evidence. TEX. R. CIV. P. 215.2(b)(4). Whether the exclusion of evidence constitutes a death penalty sanction is determined on a case-by-case basis. State Farm Fire & Cas. v. Rodriguez, 88 S.W.3d 313, 326 (Tex. App.—San Antonio 2002, pet. denied) (citing Revco, D.S., Inc. v. Cooper, 873 S.W.2d 391, 396 (Tex. App.—El Paso 1994, no writ)). Where the exclusion of testimony is only an inconvenience that impairs the presentation of a party's case but does not preclude a trial on the merits, the exclusion of evidence is not a death penalty sanction. See id. A death penalty sanction is any sanction that adjudicates a claim and precludes the presentation of the merits of a case. See TransAmerican Nat'l Gas Corp. v. Powell, 811 S.W.2d 913, 918 (Tex. 1991); Perez v. Murff, 972 S.W.2d 78, 81 (Tex. App.—Texarkana 1998, pet. denied). Any sanction that is "case determinative" may constitute a death penalty sanction. Perez, 972 S.W.2d at 81.
None of the parties raised Rule 193.6 as a basis for the discovery order and sanctions order in the trial court or in this proceeding. We, therefore, analyze the case solely under rule 215.2 of the Texas Rules of Civil Procedure. See Ashmore v. JMS Constr., Inc., 05-15-00537-CV, 2016 WL 7217256, at *6-7, n. 8 (Tex. App.—Dallas Dec. 13, 2016, no. pet. h.).
Although a trial court has broad discretion in entering sanctions, discovery sanctions must be just. TransAmerican, 811 S.W.2d at 917. A trial court must take into account the availability of less stringent sanctions and whether such sanctions would fully promote compliance. TransAmerican, 811 S.W.2d at 917. But sanctions imposed under Rule 215 must be just under the circumstances. In re Ford Motor Co, 988 S.W.2d 714, 718 (Tex. 1998). Sanctions are just if there is a direct relationship between the offensive conduct and the sanction imposed, and the sanction is not excessive. TransAmerican, 811 S.W.2d at 917; State Farm Fire & Cas., 88 S.W.3d at 326. "A death penalty sanction is justified when counsel callously disregards the responsibilities of discovery under the rules." Id. at 327; see also TransAmerican, 811 S.W.2d at 918.
Tax returns enjoy special protections. Federal law requires tax returns be kept confidential, except in limited circumstances. See In re Irvin, 05-98-01771-CV, 1998 WL 908955, at *4 (Tex. App.—Dallas Dec. 31, 1998, orig. proceeding) (citing I.R.C. §§ 6103, 7431 (West Supp. 1998)). Texas law requires proof of a special need for the production of a tax return in a civil action. See id.; see also Maresca v. Marks, 362 S.W.2d 299, 301 (Tex. 1962) (orig. proceeding). The requesting party must show sufficient information that financial status cannot be obtained elsewhere before a court will order production of tax returns. See Sears, Roebuck & Co. v. Ramirez, 824 S.W.2d 558, 559 (Tex. 1992) (orig. proceeding); El Centro Del Barrio v. Barlow, 894 S.W.2d 775, 780 (Tex. App.—San Antonio 1994, orig. proceeding). The trial court must weigh the privacy interests of a party in its financial records and the need for the evidence. El Centro Del Barrio, 894 S.W.2d at 779. The burden of establishing relevancy and materiality of a tax return is on the party seeking production. Id.
Discussion
Brad produced his tax returns and it is his salary Brad and Shawn argue was disparate to the fees charged. Discovery sanctions must be just, and a trial court must take into account the availability of less stringent sanctions and whether such sanctions would fully promote compliance. TransAmerican, 811 S.W.2d at 917. Sanctions are just if there is a direct relationship between the offensive conduct and the sanction imposed, and the sanction is not excessive. TransAmerican, 811 S.W.2d at 917; State Farm Fire & Cas., 88 S.W.3d at 326. The sanctions are unjust as to Brad because he did not fail to comply with a verbal discovery ruling and, as such, the sanction has no relationship to Brad's conduct. The trial court abused its discretion by sanctioning Brad and prohibiting him from presenting income disparity defensively.
The trial court also abused its discretion by sanctioning Shawn because the trial court did not impose lesser sanctions first, or explain why lesser sanctions would be ineffective. Moreover, although Shawn did not produce the tax returns by November 4, 2016 or before the November 7, 2016 deposition, the record shows at least some confusion by Shawn following the October 31, 2016 hearing as a result of the court's verbal statements during the hearing as to what portions of the returns had to be produced. Shawn argues that he attempted to comply with the request for production and the court's verbal ruling by producing the Kid's Depot documents instead, which showed Shawn's income and, thus, provided the information real parties sought. He also offered to produce other financial information, including profit and loss statements, the Schedule C to the tax return, and income statement that would have provided the income information real parties sought without requiring Shawn to produce a tax return filed jointly with his wife that included confidential and irrelevant information. Yet, despite those efforts, the court sanctioned Sean by precluding him from arguing or introducing evidence of income disparity. The timing of the verbal rulings and latter issuance of the written order added to the confusion and resulted in Shawn and Brad being sanctioned for failing to comply with a written order that was not yet in effect. On this record we find that the trial court abused its discretion by sanctioning Shawn.
The trial court also abused its discretion by ordering Shawn to produce his personal tax returns because real parties did not meet their burden of establishing relevancy and materiality of Shawn's personal tax return. See El Centro Del Barrio, 894 S.W.2d at 779 (holding that the burden of establishing relevancy and materiality of a tax return is on the party seeking production). Real parties also failed to show that sufficient information of financial status could not be obtained from other information. See Ramirez, 824 S.W.2d at 559; El Centro Del Barrio, 894 S.W.2d at 780. Shawn offered to provide financial records other than his personal tax return. And he did produce the Schedule K-1 from Kid's Depot. He stated that the business was his sole source of income at the time. Further, the business, not Shawn personally, paid real parties' fees during the relevant time period. Real parties did not explain why that information was insufficient and the court did not review the information to determine whether it sufficiently disclosed Shawn's income information. It was real parties' burden to establish relevance and materiality of the tax returns. They did not meet that burden and were, therefore, not entitled to production of the tax returns.
Conclusion
The trial court abused its discretion by ordering Shawn to produce his individual tax returns and sanctioning Shawn and Brad for Shawn's failure to produce the returns. Accordingly, we conditionally grant relators' petition for writ of mandamus. We direct the trial court to vacate the November 17, 2016 sanctions order prohibiting Shawn and Brad from "mentioning, discussing, or arguing anything regarding income disparity relating to fees, the fairness of fees, or whether the fees were reasonable and necessary in relation thereto." We also direct the trial court to vacate the portion of the November 21, 2016 order requiring Shawn to produce his personal tax returns. A writ will issue only in the event the trial court fails to issue the orders as directed herein within fifteen days of the date of this opinion. We lift the stay imposed by this Court on December 7, 2016 so the trial court may issue the orders as directed herein.
/David Evans/
DAVID EVANS
JUSTICE 161410F.P05