Opinion
No. G012033
9-24-1992
Previously published at 15 Cal.App.4th 1079, 9 Cal.App.4th 1588 15 Cal.App.4th 1079, 9 Cal.App.4th 1588 Terry L. SCHNABEL et al., Petitioners, v. SUPERIOR COURT of Orange County, Respondent; Marilyn J. SCHNABEL, Real Party in Interest.
Roquemore, Pringle & Moore, John P. Pringle and Peter C. Anderson, Los Angeles, for petitioners. James C. Booth, Orange, for real party in interest.
Terry L. SCHNABEL et al., Petitioners,
v.
SUPERIOR COURT of Orange County, Respondent;
Marilyn J. SCHNABEL, Real Party in Interest.
Sept. 24, 1992.
Review Granted Nov. 30, 1992.
Roquemore, Pringle & Moore, John P. Pringle and Peter C. Anderson, Los Angeles, for petitioners.
No appearance for respondent.
James C. Booth, Orange, for real party in interest.
OPINION
SONENSHINE, Associate Justice.
I
After a 20-year marriage, Terry and Marilyn Schnabel separated in 1991. In her dissolution petition, Marilyn requested spousal support and attorney's fees. She alleged the full nature and extent of the parties' community and separate property was unknown and requested that their property rights be determined by the court. Terry's response also omitted a specific property delineation.
Thirty percent of the stock of Orange Container, Inc., Terry's employer, was issued to Terry but owned by the community. Marilyn hired a certified public accountant to verify this information, to appraise the corporation's value, and to ascertain Terry's actual remuneration and other benefits. The results of her efforts were less than satisfactory. Despite Marilyn's explanation that informal discovery is usually cheaper and easier and her offer of discovery safeguards, Orange refused to part with the requested information.
The corporation filed the underlying motion to quash after it was served with a subpoena duces tecum and deposition subpoena for production of business records. The trial court denied Orange's motion and we denied Orange's petition for writ. The Supreme Court granted Orange's petition for review and transferred the matter to us with directions to issue an alternative writ. We now turn to the merits of the petition. II
Orange agreed to produce some of the material. It refused, however, to turn over any of the tax returns or tax-related matters, bank statements and records, corporate books, accounts receivable and payable, ledgers, leases, credit card statements, and offers of purchase.
The corporation asserted the requested information was "irrelevant, privileged, confidential and an invasion of privacy of the non-party shareholder of the witness." Terry's accompanying declaration explained he is "the owner of 750 shares [30 percent] of Orange Container, Inc. The remaining shares [70 percent] of said corporation are owned by [someone else] who is the majority shareholder and controls the corporation. [p] It is my understanding that the financial statements for the corporation which have been prepared by the accountant for the corporation have already been produced to the agent for the Petitioner. Said financial statements are accurate and reflect the accurate income and expenses for the corporation during the periods in question. [p] Already produced are accurate records indicating all of my compensation from the corporation, all credit cards which I use, expenses, auto use and any other monies paid by the corporation for and on my behalf. [p] The balance of the information requested in the subpoena will not change any of the figures which have been previously shown, however, they may disclose personal information of the majority shareholder along with information of the corporation which has already been disclosed in the books and records."
Almost without exception those items which Orange was willing to disclose were in-house records incapable of independent verification. Even the proffered financial statements were unaudited. Conversely, the withheld documents were prepared by nonparty independent sources. Terry's declaration suggests that Marilyn did not really need the requested information. All she had to do was to trust his representations and those of the corporation for which he worked. The trial court did not agree and neither do we.
III
We first discuss the requested documents, other than the tax returns and related tax information. We note they are not absolutely privileged from disclosure. Neither litigants nor nonlitigants enjoy an absolute privilege against discovery of their financial papers. But the required information must be relevant and the need for it must be balanced against the privacy interests of the person or entity in possession of it. (Rifkind v. Superior Court (1981) 123 Cal.App.3d 1045, 177 Cal.Rptr. 82.)
These documents were unquestionably relevant. The declaration of William L. Mills, a certified public accountant and expert forensic financial evaluator, explains why. His statements indicated in graphic detail the relevancy of the documents to the court's determination of spousal support, attorney's fees and property valuation and division. Nothing more was needed to establish relevancy. But our inquiry does not end there.
"A constitutional amendment adopted in 1974 elevated the right of privacy to an 'inalienable right' expressly protected by force of constitutional mandate. (Cal. Const., art. I, § 1.)" (Valley Bank of Nevada v. Superior Court (1975) 15 Cal.3d 652, 656, 125 Cal.Rptr. 553, 542 P.2d 977.) And that right is particularly strong here, when the requested information is sought from a nonparty. We conclude, however, the trial court correctly found Marilyn's need to know outweighed Orange's privacy interests.
We first note that Orange did not advise the court of exactly how its right to privacy was to be impacted. The only declaration submitted in support of the motion to quash was Terry's, and it contained but one reference to Orange's privacy interests. He maintained the requested information "may disclose personal information of the majority shareholder along with information of the corporation...." More is needed. A bare allegation of invasion of privacy, particularly when made by a party other than the objecting party, is insufficient as a matter of law to tip the balance in the objecting party's favor.
Moreover, Orange fails to appreciate the significance of Marilyn's need and right to know. It points to specific language in Rifkind suggesting a shareholder's spouse has no right to inspect corporate records: "It is important to keep in mind that although a married person's stock in a corporation may be community property, knowledge of confidential corporate affairs is not necessarily to be shared with the spouse." (Rifkind v. Superior Court, supra, 123 Cal.App.3d 1045, 1049, 177 Cal.Rptr. 82.)
We question whether this was an accurate description of the law in 1981, but it certainly is not true today. As discussed hereafter, several recently enacted and amended statutes reflect a public policy that not only favors disclosure of community property business information, but mandates it. The trial court did not err in refusing to quash the subpoena.
IV
We now consider the tax returns and tax-related documents which Orange maintains are privileged. They are not. The rule is straightforward. No absolute privilege exists, although indiscriminate disclosure is to be discouraged. The need for an efficient tax collection system must be balanced against other public policy considerations.
The privilege issue was first addressed by our Supreme Court in Webb v. Standard Oil Co. (1957) 49 Cal.2d 509, 319 P.2d 621, where a fire insurance company sought to examine the state and federal tax returns of its insured, Webb. The court disallowed the production, finding the tax returns privileged against discovery under its facts. The court explained the public policy reason supporting its decision was not the individual taxpayer's right to privacy but was, rather, the compelling governmental need to effectively collect taxes: "The purpose of the amended statutory provisions prohibiting disclosure is to facilitate tax enforcement by encouraging a taxpayer to make full and truthful declarations in his [or her] return, without fear that his [or her] statements will be revealed or used against him [or her] for other purposes." (Id. at p. 513, 319 P.2d 621.)
Several years later the Supreme Court in Sav-On Drugs, Inc. v. Superior Court (1975) 15 Cal.3d 1, 6, 123 Cal.Rptr. 283, 538 P.2d 739, again considered whether disclosures made in tax returns were absolutely "privileged, and therefore not subject to discovery." It concluded no absolute privilege existed, but recognized "a clear legislative intent that disclosures made in tax returns shall not be indiscriminately exposed to public scrutiny." (Ibid.)
Appellate courts continue to utilize this public policy analysis. In Miller v. Superior Court (1977) 71 Cal.App.3d 145, 139 Cal.Rptr. 521, a wife sought to discover her former husband's federal and state income tax returns in a child support enforcement proceeding. The court held the father's returns were subject to discovery, noting "that the time has arrived when a policy favoring the confidentiality of tax returns must give way to the greater public policy of enforcing child support obligations." (Id. at p. 149, 139 Cal.Rptr. 521.)
In In re Marriage of Brown (1979) 99 Cal.App.3d 702, 709, 160 Cal.Rptr. 524, the court also considered the public policy arguments in deciding whether tax returns should be produced. It concluded discovery should be extended in such instances when it would aid in consideration of the advancement of a sound public policy and not be contrary to it.
In Sammut v. Sammut (1980) 103 Cal.App.3d 557, 560, 163 Cal.Rptr. 193, the court relying on Sav-On, acknowledged that production of tax returns is only mandated when "a public policy greater than that of a confidentiality of tax returns is involved [citation]." Such is the case here.
Marilyn is seeking the tax returns and tax-related documents in order to determine the amount of spousal support to be paid to her, the amount Terry should pay toward her attorney fees and costs and to aid in the assessment of Orange's worth. There can be no serious question as to the relevancy of these documents. They may be the most important documents of all that were subpoenaed. As Mills' declaration explains, they are the starting and ending points of all other discovery. They allow Marilyn to determine what she needs to discover and to verify that which is produced.
We recognize Orange's desire for and right to privacy. We appreciate our mandate to avoid indiscriminate production of tax documents, and we understand this is particularly true when a nonparty's rights are at issue. But, are these considerations enough to outweigh production? Simply stated, the answer is no.
Recently enacted Civil Code sections leave no doubt as to the public policy mandates. The Legislature's words are right on point. "Sound public policy further favors the reduction of the adversarial nature of marital dissolution and the attendant costs by fostering full disclosure and cooperative discovery. [p] In order to promote this public policy, a full and accurate disclosure of all assets and liabilities in which one or both parties have or may have an interest must be made in the early stages of the dissolution of marriage action, regardless of the characterization as community or separate, together with a disclosure of all income and expenses of the parties. Moreover, each party has a continuing duty to update and augment that disclosure so that at the time the parties enter into an agreement for the resolution of any of these issues, or at the time of trial on these issues, each party will have as full and complete knowledge of the relevant underlying facts as is reasonably possible under the circumstances of the case." (Civ.Code, § 4800.10, subd. (a).)
The legislative thrust could not be clearer. Both spouses are entitled to know what is going on. Each has a legal duty to disclose everything to the other. As section 4800.11, subdivision (a)(2) notes, "division of property or the award of support ... are [occasionally] inequitable when made due to the nondisclosure ... of the parties." The court will not countenance game-playing, which results in increased costs and unfairness. Subterfuge is to be discouraged. Disclosure is to be encouraged. Civil Code sections 4800.10, 4800.11, 5103, and 5125, subdivision (e), when read together, disclose a straightforward message. "The Legislature finds and declares that it is the public policy of this state that marriage is an equal partnership and that spouses occupy a confidential and fiduciary relationship with each other, whereby each spouse places trust and confidence in the integrity, honesty, and fairness of the other spouse." (Stats.1991, ch. 1026, § 1, (S.B. 716), emphasis added.) Husbands and wives while married and until the bonds are dissolved, must be fair and honest with one another. They each have a legal right to full access to their business information.
These rights would be meaningless if Terry were allowed to hide behind the majority shareholder's corporate veil. We cannot ignore such a strong legislative mandate.
While the corporation may not be a party, Marilyn is a substantial shareholder. Disclosure will not eviscerate Orange's privacy interests. Conversely, nondisclosure will prohibit Marilyn from protecting any of her marital legal rights. If Orange were to prevail, spouses would be able to maintain community assets in a closely-held corporation without ever having to account for them. The trial court did not err in allowing for production of the tax material.
V
In summary, the legal history of the rights of spouses in a dissolution action to access the nonparties' financial papers reveals these documents are subject to production under certain circumstances. In tax matters, the public policy supporting an efficient tax collection process and the nonparties' privacy interests are still the points at which deliberations must begin. (Webb v. Standard Oil Co., supra, 49 Cal.2d 509, 319 P.2d 621.) But, other public policy considerations may supersede the judicially-crafted aversion to production of tax returns and other financial documents. (Miller v. Superior Court, supra, 71 Cal.App.3d 145, 139 Cal.Rptr. 521.) A subpoena should only be issued after a litigant establishes the relevancy of the requested documents. (Rifkind v. Superior Court, supra, 123 Cal.App.3d 1045, 177 Cal.Rptr. 82.) Beyond this, the judge is required to carefully balance the privacy interests of the person being compelled to produce the financial information against the needs of the litigant who is seeking that information. (Ibid; Premium Service Corp. v. Sperry & Hutchinson Co., supra, 511 F.2d 225.) All of the above tests have been met here.
The petition for writ of prohibition is denied and the alternative writ is dissolved.
SILLS, P.J., and WALLIN, J., concur. --------------- 1 Terry's counsel stipulated at oral argument that the stock was community property. 2 The apparent conflict of interest caused by dual legal representation of Terry and the corporation by the same attorney was addressed at oral argument, and he assured us that both parties had waived any conflict. 3 Marilyn sought to discover the following: "1. Corporate tax returns prepared and/or filed for fiscal years ending September 30, 1990, covering the period of 1986 to 1990. "2. Copies of all profit and loss statements and financial statements relative to said corporation for the period commencing with the end of the period for which the last corporate tax return was prepared and/or filed (to include but not limited to such financial records for period ending May 28 to June 30, 1991). "3. Bank activity statements, check registry setting forth nature of payment and payee (or canceled checks in lieu of check registry) for all bank depository accounts maintained in behalf of said corporation for the period of January 1, 1991 to date. "4. Records of said corporation setting forth charges made by Terry Lee Schnabel through business credit cards for the period of January 1, 1991 to present. "5. Records of all expenses reimbursements made to Terry Lee Schnabel for the period of January 1, 1991 to present (setting forth nature of expense and amount). "6. Records of all perquisites [sic ] or benefits provided to Terry Lee Schnabel by said corporation for the period of January 1, 1991 to the present, including, but not limited to, auto expense allowance, insurance (life, medical and auto). "7. Records of all officer loans made to or from Terry Lee Schnabel setting forth activity thereon (distribution and payments) for the period of January 1, 1990 to the present. "8. Records of all pension, retirement, 401K savings, stock options offered or maintained by the corporation in which Terry Lee Schnabel has an interest. Said records to include from the inception of said plans, copies of the plans, participant account records, annual federal reports such as form 50000C if any. "9. Compensation records of Terry Lee Schnabel for the period of January 1, 1990, to the present, setting forth wages, commissions, bonuses or other compensation paid by said corporation to Terry Lee Schnabel (said records to show gross compensation, deductions, and net payments). "10. Records of all monies paid to third parties in behalf of Terry Lee Schnabel, or for his benefit, for the period of January 1, 1991, to the present. "11. Corporate books for all business and/or professional savings for a period of October 1, 1989 to date. "12. Detailed aged listing of accounts receivable and accounts payable at the date of the latest financial statement of May 31, and/or July 1, 1991. "13. General ledgers, cash receipts, cash disbursements, daily charge sheets, sales and purchase registers and journals for period November 1, 1989 to date for general and trust accounts. "14. Federal and California quarterly payroll tax returns for period of October 1, 1989 to date. "15. Corporate Minute and Stock record books for all Corporate entities. "16. Leases on all real or personal property owned and/or rented out by said corporation. "17. Business credit card statements, and receipts such as Bank of America Mastercharge, American Express, etc., for October 1, 1989 to date. "18. Copies of all Corporate bank loan documents and applications for all loans active or applied for relative to period of October 1, 1989 to date (to include any records for loan guarantees). "19. Copies of any pending or prior offers to purchase or business assets such as patients [sic ] or otherwise." 4 The corporation agreed to turn over items numbered 2 and 4-10. It refused to produce items 1, 3, and 11-19. 5 We discuss the tax returns and tax-related documents hereafter. 6 The accountant's declaration states in part: "3. BANK STATEMENTS, CHECK REGISTRY, ETC. Such records are relevant and material to verify numbers contained in the profit and loss and other financial statements to be furnished and to determine payments of "perks" to the officers, all of which will be used extensively to establish trends which ultimately will impact the evaluation of the corporation. "11. CORPORATE BOOKS OR BUSINESS AND PROFESSIONAL SAVINGS. These records are relevant and material to determine accurately the liquidity of this corporation. From the limited records provided there was a drop in the cash deposits from 1989, recorded at $432,000.00, down to current balance of $149,874.00. Thus there has been apparently a drop of some $300,000.00 in a brief period of time relative to the liquidity of this corporation, while at the same time there has been a drop of only $130,000.00 in accounts receivables. Once again these records are deemed to be necessary as a back up and verification for other general information previously provided. "12. DETAILED AGING LIST OF ACCOUNTS RECEIVABLES/PAYABLES. Such documentation will indicate how fast the dollar income of this corporation is turning over. It will further indicate how current this corporation is in paying its bills, its relationship with suppliers, and finally whether or not adequate reserves are being maintained, all of which have a direct and substantial bearing on determining the net worth and therein the market evaluation of the corporation. "13. GENERAL LEDGERS, CASH RECEIPTS, DISBURSEMENTS, ETC. Once again this is additional information needed to determine the accuracy of the liquidity of this corporation, which in turn has a direct bearing on the net worth. Such information will further highlight any unsupported 'write offs" done in order to potentially reduce the value of the corporation. These documents will confirm amounts shown in the financial statements and tax returns. "... "15. CORPORATE MINUTE AND STOCK RECORDS FOR ALL CORPORATE ENTITIES. This request is standard in these situations in order to confirm the number of shares and percentage of ownership maintained in the corporation. It will thus determine what outstanding stock options there may be together with loans against the stock. Such information is further necessary to determine whether or not this corporation maintains any subsidiary corporations which in turn should be included in the all over value of this corporation. The corporation minutes will set forth corporate direction and internal information about the company and its policies. "16. CORPORATE LEASES ON REAL OR PERSONAL PROPERTY. These records are relevant and material to redefine, and discover any hidden income that the principals of this corporation derive from the corporation, in order to avert recording same as wages. Such records are also used to determine whether or not there are additional assets personally owned by the Respondent, and leased to the corporation. The data will also indicate the status of [the] business premises being used. "17. BUSINESS CREDIT CARDS STATEMENTS RECEIPTS ETC. These records are necessary and material to determine the extent and nature of the "perks" paid to key employees, such as the Respondent. "18. COPIES OF ALL CORPORATE BANK LOANS DOCUMENTS AND APPLICATIONS FOR LOANS. These records are necessary and material to verify and otherwise determine more accurately the accounts payable on short and long term basis. Loan applications will set forth ... the nature and value of assets. Such information is further relevant to evaluate whether or not there are any individual or other corporate guarantees relative to the obligations of the corporation. This information has a direct bearing on the all over value of the corporation. "19. COPIES OF ANY PENDING OR PRIOR OFFERS OF PURCHASE OF BUSINESS OR BUSINESS ASSETS. These records are highly relevant to determine the full nature and purported current value of the various assets, again directly impacting the all over value of this corporation. "While I have tried to specifically indicate the relevancy of the various records requested as above noted, all of such records request [sic] are standardly requested and furnished in these circumstances, in order to effectuate a full and fair evaluation of the community interest in this asset. Without such availability of records, assumptions will have to be made by my office in reaching the market value of this corporation, which might serve to be unfair to the Respondent without such records, I am unable to provide the court and the Petitioner with a fair and full evaluation. In my experience I have further found many times that while production of these records are refused, they are made readily available to the forensic accountant for the other party, thus placing this Petitioner at a distinct disadvantage in her trial preparation." 7 Orange also asserts the court's failure to issue a written opinion indicates it failed to carefully weigh all the evidence. It is wrong. Orange never asked the court for a written opinion. Moreover, "A judgment or order of a lower court is presumed to be correct on appeal, and all intendments and presumptions are indulged in favor of its correctness." (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133, 275 Cal.Rptr. 797, 800 P.2d 1227, emphasis added.) A review of the record indicates the court did specifically consider Orange's privacy interests. Indeed, Orange argued these very issues to the trial court, urging it to carefully balance their rights. The court did not fail to consider Orange's privacy interests; it just rejected its arguments. 8 In Heathman v. United States Dist. Ct. for Cent. Dist. of Cal. (9th Cir.1974) 503 F.2d 1032, the state and federal tax returns of a corporate litigant were subpoenaed to establish a securities law violation. The court held federal law "only restricts the dissemination of tax returns by the government [but] ... this ... does not otherwise make copies of tax returns privileged." (Id. at p. 1035.) 9 We have found only one reported case which found tax returns to be absolutely privileged. In Rifkind v. Superior Court, supra, 123 Cal.App.3d 1045, 1048, 177 Cal.Rptr. 82, the court held "[e]ver since Webb v. Standard Oil Co. [, supra,] 49 Cal.2d 509 , it has been the law of California that the disclosure of the contents of an income tax return may not be coerced for the benefit of a private litigant." The Rifkind court, however, omitted any reference to Sav-On, making one wonder whether it simply chose to ignore this Supreme Court case or merely misunderstood it. In Wilson v. Superior Court (1976) 63 Cal.App.3d 825, 828, 134 Cal.Rptr. 130, the court accepted the parties' stipulation that the returns were privileged. It did not specifically address the privilege issue but only analyzed whether it had been waived. 10 His declaration states: "1. Corporate Tax Returns: Corporate Tax Returns for a period of not less than five years is highly customary in the industry where forensic accountants are retained to review prior history of the operations of a corporation to assist in the ultimate determination of the value of said entity. Various items in said corporate returns have direct bearing on the financial direction of this corporation and therein valuation of the good will. It has already been determined from the limited financial documents provided that this corporation is purportedly carrying $113,383.00 of deferred tax payables without any independent indication what year these are being assessed for and arising out of what transactions. It is assumed that detail provided by way of corporate tax returns will be of great assistance in determining the validity of such corporate obligations. Further it is anticipated that a "Schedule E" should be attached to such corporate returns, which will clearly designate the individual officers compensation paid, which in turn may have a bearing on whether or not excess wages are being paid, impacting the value of good will. Further the limited financial declarations previously provided, make no attempt to delineate between the various officers, which would include the Respondent. I would contemplate the corporate returns would be of great assistance in this regard, not only as to actual income paid, but as to valuation assessed against these officers by way of "perks" paid on their behalf. "Additionally, with what limited financial documents have been provided, it would appear that the financial statements are done on a [sic ] accrual basis, wherein it is anticipated that the corporate returns may be on a cash basis. Thus the corporate returns are required to facilitate a test of the accruals in order to make a fair and full evaluation of market value of this corporation. "... "14. FEDERAL AND CALIFORNIA QUARTERLY PAYROLL TAX RETURNS: This information is further necessary to verify and cross check or to otherwise confirm compensation paid to the various officers which include the Respondent." 11 However, as discussed, supra, Orange and its major shareholder failed to address its specific concerns. 12 A nonparty does not have an absolute right to prevent disclosure of its tax returns. In Premium Service Corp. v. Sperry & Hutchinson Co. (9th Cir.1975) 511 F.2d 225, the court recognized the "need for [the] documents [must be] sufficient to outweigh the burden and invasion of corporate privacy which would have resulted to [the third party corporation]...." (Id. at p. 229.) 13 Amended in 1991, Civil Code section 5125, subdivision (e) reads: "Each spouse shall act with respect to the other spouse in the management and control of the community property in accordance with the general rules governing fiduciary relationships which control the actions of persons having relationships of personal confidence as specified in Section 5103, until such time as the property has been divided by the parties or by a court. This duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest ... and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request." (Emphasis added.) Civil Code section 5103, subdivision (b), also amended in 1991, states in part: "[A] husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners ... including the following: "... "(2) Rendering upon request, true and full information of all things affecting any transaction which concerns the community property." (Emphasis added.) Civil Code sections 4800.10 and 4800.11, recently enacted, become effective January 1, 1993. 14 Penalties for dishonesty in discovery are harsh. Civil Code section 5125.1, subdivisions (g) and (h) allow "Remedies for breach of fiduciary duty by one spouse ... shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney's fees and court costs.... [p] Remedies for breach of the fiduciary duty by one spouse when the breach falls within the ambit of Section 3294 shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed or transferred in breach of the fiduciary duty."