Opinion
01 Civ. 7677 (SAS)
October 10, 2002
Gregory La Sorsa, Esq., La Sorsa Beneventano, Attorneys at Law, White Plains, NY, For Plaintiffs:
Dongxing Sun, Rego Park, NY, For Third Party Defendant Sun (Pro Se).
Ted S. Helwig, Esq., Ross O. Silverman, Esq., Gil M. Soffer, Esq., Katten Muchin Zavis, Chicago, IL, Craig J. Bruno, Esq., Bruno Gerbino Macchia, LLP Melville, NY, For Defendant/Counterplaintiff.
MEMORANDUM OPINION AND ORDER
I have reviewed the July 16, 2002 Discovery Order (the "Order") of United States Magistrate Judge Henry B. Pitman. Universal Acupuncture Pain Services, P.C. ("Universal") and Dr. Nandi (collectively, "plaintiffs") object to Judge Pitman's Order to the extent that it: (1) compels third-party defendant Dr. Dipak Nandi to appear for a further deposition regarding a July 3, 2001 letter sent by Nandi's former attorney, Richard Quadrino, to Sterling National Bank; (2) requires both Universal and Dr. Nandi to prepare and produce tax returns to State Farm; and (3) directs Triborough Healthcare Management ("Triborough"), a nonparty, to produce federal income tax returns, check ledgers, Form 1099s and W-2s, for the years 2000 and 2001. See Plaintiffs' Objections to the Discovery Order of Judge Pitman ("Objections"). For the reasons stated below, Judge Pitman's Order is affirmed in part, and reversed in part.
I. STANDARD OF REVIEW
In reviewing a magistrate judge's ruling on a pre-trial nondispositive matter, a district judge shall "modify or set aside any portion of the magistrate's order found to be clearly erroneous or contrary to law." Fed.R.Civ.P. 72(a). See also 28 U.S.C. § 636(b)(1)(A) ("A judge of the court may reconsider any pretrial matter . . . [where] the magistrate's order is clearly erroneous or contrary to law."). Matters involving pretrial discovery are generally considered "nondispositive of the litigation" and thus are subject to the "clearly erroneous or contrary to law standard." Thomas E. Hoar, Inc. v. Sara Lee Corp, 900 F.2d 522, 525 (2d Cir. 1990) (citation omitted) Pursuant to this highly deferential standard of review, magistrates are afforded broad discretion in resolving discovery disputes and reversal is appropriate only if their discretion is abused. See Lanzo v. City of New York, No. 96 Civ. 3242, 1999 WL 1007346, at *2 (E.D.N.Y. Sept. 21, 1999) (citation omitted).
II. DISCUSSION
A. Further Deposition of Nandi Regarding July 3, 2001 Letter from Richard Quadrino to Sterling National Bank
On July 3, 2001, Nandi's former attorney, Richard Quadrino, faxed a letter to Monica Lercher of Sterling National Bank ("the Bank"). See State Farm's Response to Objections to Magistrate Judge Pitman's July 16, 2002 Discovery Order ("Def. Opp."). The letter advised the Bank that Nandi had "long been the owner of Universal pursuant to a fully executed stock transfer document delivered by Dr. Sun to Dr. Nandi"; that the Bank "has a long history with Dr. Nandi wherein [the Bank] . . . has been aware that Dr. Nandi is the owner, and has been in complete control, of all of his acupuncture corporations"; and that the Bank has "always known that Dr. Nandi was in complete control of those corporations and that he had acted in a manner that demonstrated that he possessed all of the incidents of ownership. The same is true with regard to Universal." 7/3/01 Letter from Quadrino to the Bank ("Quadrino Letter"), Ex. 1 to Def. Opp. At a deposition on April 11, 2002, Nandi was questioned about the Quadrino Letter. See 4/11/02 Deposition of Dipak Nandi ("Nandi Dep.") at 527-38.
At a July 15, 2002 hearing, Judge Pitman stated in reference to the Nandi deposition that "there were inappropriate instructions to Nandi not to answer [questions posed by State Farm's counsel about the Quadrino Letter], the remedy for which is to continue Nandi's deposition with respect to the July 3 letter." Id. at 32. Following the hearing, Judge Pitman ruled that "Doctor Nandi is directed to appear for the continuation of his deposition on a mutually convenient date. The scope of the continuation of the deposition shall be limited to Mr. Quadrino's July 3, 2001 letter to Monica Lercher of Sterling National Bank and appropriate foundation questions necessary to test the assertion of any privilege." Order ¶ 6.
Plaintiffs argue principally that Judge Pitman's ruling was based on his "erroneous" belief that Quadrino objected at the deposition on the basis of attorney-client privilege, when "in actuality," Quadrino objected because the court-ordered time limit for questions about "other medical professional corporations" had already elapsed. Objections at 3-4 (referring to prior ruling of Judge Pitman imposing a ninety (90) minute limit on State Farm's time to ask about professional corporations other than Universal). Not only did Quadrino object at the deposition on the basis of attorney-client privilege, but plaintiffs' other basis for an objection is invalid. Judge Pitman had in fact limited questioning about other professional corporations. For example, as plaintiffs quote in their papers, he admonished State Farm's counsel that "[y]ou can't say [Nandi] secretly owned and controlled other [professional corporations ("P.C.s")] to show he secretly owned and controlled this P.C.," id. at 4 (citing Transcript of 4/10/02 Conference Call with Judge Pitman). Thus, while the Quadrino Letter contains representations regarding Nandi's ownership of Universal as well as other professional corporations, Judge Pitman's ruling only permits State Farm to question Nandi about the accuracy of the representations concerning ownership of Universal, not the other P.C.s.
During the deposition, Quadrino interjected that questions about the letter "tread on attorney-client privilege." Nandi Dep. at 528. At a July 15 hearing, Judge Pitman addressed this objection by noting that communications between Nandi and his attorney are privileged, but that the statements made to the Bank in the Quadrino letter are not. See 7/15/02 Transcript of Hearing Before Judge Pitman ("Tr."), Ex. 3 to Def. Opp., at 20.
Moreover, plaintiffs do not establish that State Farm exceeded the ninety (90) minute limit on questioning about other P.C.s. To the contrary, defendant represents that "State Farm's counsel did not spend 90 minutes or more asking questions about non-Universal entities." Def. Opp. at 4. Further, Quadrino never raised this objection at the July 15 hearing at which Nandi's deposition was discussed, and on which Judge Pitman based his Order. See id.
Quadrino claims that he failed to raise the objection at the hearing because he had not had a chance to review the 600-page deposition transcript. See Objections at 3.
Questioning of Nandi regarding Quadrino's letter to the Bank pertains to a critical issue in the case, i.e., whether Nandi, a then-unlicensed acupuncturist, owned or controlled Universal in violation of New York law. See Universal Acupuncture v. State Farm, et al., 196 F. Supp.2d 378, 385-86 (S.D.N.Y. 2002) (holding that State Farm stated a cause of action for a declaration that Universal was not entitled to no-fault insurance payments to the extent that it was owned or controlled by an unlicensed individual). In sum, Judge Pitman's ruling permitting the continuation of the Nandi deposition with respect to representations in the Quadrino Letter is not clearly erroneous.
B. Preparation and Production of Tax Returns by Nandi and Universal
Plaintiffs next object to Judge Pitman's Order to the extent that it requires them to prepare and produce tax returns to State Farm, contending that it is "contrary to law" to order a party "to create documents to comply with State Farm's discovery demands." Objections at 8.
It is important to understand the events leading up to this ruling. State Farm first requested Nandi's and Universal's tax returns on December 21, 2001, by demanding the production of "financial statements, tax returns (including all schedules and attachments), and all other documents concerning Universal's revenues, shareholder earnings and business expenses. . . ." Def. Opp. at 5 (quoting State Farm's First Request for Production of Documents, Item 12, Ex. 4 to Def. Opp.) (quotation marks omitted). Nandi and Universal objected to the request in its entirety. See id. (citing Plaintiffs' Responses to Defendant's Request for Production, Ex. 5 to Def. Opp.). By order dated March 7, 2002, Judge Pitman sustained in part and overruled in part Universal's and Nandi's objections, requiring Universal to produce the check register and signature cards for its bank accounts. See id. at 5-6 (citing 3/7/02 Order). State Farm moved for reconsideration of Judge Pitman's order to the extent that it did not require the production of Universal's and Nandi's tax returns. See id. at 6. State Farm argued that the tax returns would reflect distributions made to officers of Universal, the percentage of time each officer devoted to the corporation, the percentage of stock each officer owned and how much money Nandi made from Universal. See id.
At the conclusion of a lengthy hearing, on June 10, 2002, Judge Pitman ultimately agreed with State Farm, and directed Universal to produce its tax returns for 2000 and 2001, and ordered Nandi to produce personal tax returns for the same years to the extent that they reflect income from Universal and Triborough, the management company that did work for Universal and is allegedly owned by Nandi. See id. (citing Transcript of June 10, 2002 Hearing, Ex. 7 to Def. Opp., at 72-74).
On June 24, 2002, counsel for State Farm spoke with counsel for Universal and Nandi and was told, for the first time, that no tax returns had been filed by either party. At the July 15 hearing before Judge Pitman, Quadrino informed the court that his clients had filed an extension. See Tr. at 71-72. Judge Pitman chided Quadrino for not previously asking his clients if they had filed returns or extensions, and having wasted the court's time for many months. See id. at 73. Noting that Nandi and Universal are obligated to file returns in any event, Judge Pitman then ruled that both plaintiffs must prepare and file their respective 2000 and 2001 tax returns and produce them to State Farm within four weeks. See id.; Order ¶ 8.
While New York courts are "normal[ly] reluctan[t] to order production of tax returns," Four Aces Jewelry Corp. v. Smith, 680 N.Y.S.2d 539, 540 (1st Dep't 1998), they will do so where special circumstances so warrant, see id. Where, as here, an insurance fraud scheme is alleged, courts have been willing to order the production of tax returns. See id. (holding that circumstances giving rise to an inference of insurance fraud warranted ordering production of tax returns); David Leinoff, Inc. v. 208 W. 29th St. Assocs., 663 N.Y.S.2d 554, 556 (1st Dep't 1997) (holding that personal income tax returns of sole shareholder of insured were discoverable "because they may contain vital information tending to prove or disprove the existence of [an insurance fraud] scheme"); Leon Sylvester, Inc. v. Aetna Cas. Sur. Co., 592 N.Y.S.2d 741, 742 (1st Dep't 1993) (holding that where plaintiff, a closely held corporation, was suspected of insurance fraud, disclosure of personal income tax returns of its two principals was warranted).
It is well-established, however, that courts may not compel the creation of documents to comply with a discovery demand. See Romeo v. City of New York, 689 N.Y.S.2d 517, 518 (2d Dep't 1999); Gen. Elec. v. Macejka, 675 N.Y.S.2d 420, 420-21 (2d Dep't 1998); Lauro v. Top of the Class Caterers, Inc., 565 N.Y.S.2d 714, 714 (2d Dep't 1991); Corriel v. Volkswagen of Am Inc., 512 N.Y.S.2d 126, 127-28 (2d Dep't 1987). State Farm cites no authority supporting an exception for tax returns, nor has this Court found any. Thus, Judge Pitman erred by ordering Universal and Nandi to prepare and produce tax returns. State Farm's alternative request, however, that Nandi and Universal should be required to produce all documents reflecting the information called for in the tax returns and a witness who can testify about them, see Def. Opp. at 7, is granted.
Further, State Farm may be entitled to an adverse inference based on Universal's and Nandi's delay, and subsequent failure to produce their tax returns. An adverse inference instruction is available where "evidence is not produced in time for trial, [and] the party seeking the instruction can show (1) that the party having control over the evidence had an obligation to timely produce it; (2) that the party that failed to timely produce the evidence had a culpable state of mind; and (3) that the missing evidence is relevant to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense." Residential Funding Corp. v. DeGeorge Fin. Corp., __ F.3d __, 2002 WL 31120098, at *7 (2d Cir. Sept. 26, 2002). See also Blatsch v. Franco, No. 97 Civ. 3918, 2002 WL 342453, at *4 (S.D.N.Y. Mar. 5, 2002) (permitting adverse inference against plaintiff for failure to submit to Rule 35 examination). "An adverse inference may be predicated on a finding of bad faith, intentional misconduct, or fault in the form of gross negligence." Barsoum v. NYCHA, 202 F.R.D. 396, 400 (S.D.N.Y. 2001) (citing Reilly v. Natwest Mkts Group, Inc., 181 F.3d 253, 267-68 (2d Cir. 1999)).
There is no question that Nandi and Universal are required to file tax returns. Further, the returns are clearly relevant to State Farm's claim that Nandi was the true owner of Universal during the relevant time. The question to be determined prior to trial is whether Nandi and/or Universal acted with a "culpable state of mind," i.e., intentionally or negligently, in failing to inform the Court for six months that they had not filed their tax returns, and persisting in their failure to file. If or when this finding is made, State Farm may be entitled to an adverse inference instruction at trial.
C. Production of Financial Documentation by Triborough
Finally, plaintiffs object to Judge Pitman's order that Triborough produce federal income tax returns, check ledgers, Form 1099s, and Form W-2s for the years 2000 and 2001. Nandi and Universal contend that Judge Pitman ordered the production of these records based on a "false claim" by State Farm that "Triborough did not provide any services to Universal for which they were paid over 12 million dollars." Objections at 8.
Plaintiffs' objection is without merit. One of State Farm's "central theories in this case" is that Triborough, allegedly owned by Nandi and hired to manage Universal, "was merely a tool through which Nandi secretly owned and controlled Universal in violation of New York law." Def. Opp. at 7. The information (1) will identify how funds received at Universal were ultimately disbursed; (2) will bear on the legitimacy of the $15,000,000 annual management fee that Universal was required to pay Triborough under its management contract; and (3) will enable State Farm to compare Triborough's gross receipts and interest earned from Universal with the expenses Triborough actually incurred. See id. at 8. "If the financial information Magistrate Judge Pitman ordered Triborough to produce does not show that a reasonable portion of the management fee was spent on expenses related to the management of Universal, it would support State Farm's argument that Triborough was merely a vehicle for Nandi to control Universal and extract millions of dollars from a professional corporation that he could not lawfully own or control." Id.
Whether Triborough provided some services as plaintiffs argue, see Objections at 8, does not render Judge Pitman's Order clearly erroneous. Any evidence showing that Triborough was receiving large sums of money "grossly out of proportion with the services it was providing," would suggest a lack of a "bona fide management relationship to Universal." Def. Opp. at 8. Plaintiffs' second argument, that Triborough's tax returns and other financial information will not demonstrate the nature and scope of the services allegedly provided by Triborough, see Objections at 10, is also unavailing. Clearly, defendant will glean relevant information about the relationship between Universal and Triborough from the financial information, e.g., the interest on late management fees that Universal paid to Triborough, and whether Triborough paid rent, and how much, to lease clinic space as a service rendered to Universal. See Def. Opp. at 8-9. Plaintiffs argue, finally, that "it appears that State Farm desires this information for other purposes, such as to obtain discovery in another action in which State Farm has sued Triborough." Objections at 10. Such conjecture on plaintiffs' part is insufficient to show an abuse of discretion by Magistrate Judge Pitman.
III. CONCLUSION
For the foregoing reasons, plaintiffs' objections are denied, and the Order affirmed, regarding (1) the continuation of Nandi's deposition on the subject of the Quadrino Letter; and (2) the production of financial information by Triborough. The remainder of the Order is adopted with one exception: plaintiffs' objection to Judge Pitman's ruling compelling them to file and produce tax returns is sustained and the Order reversed. Plaintiffs are nevertheless directed to produce all documents reflecting the information called for in the tax returns, as well as a witness who can testify about such documents.