Commercial Division Blog
Posted: July 7, 2020 / Categories Commercial, Discovery/Disclosure
Attorneys Seeking Tax Returns in Discovery Must Show They Are Indispensable
On April 22, 2020, Justice Knipel of the Kings County Commercial Division issued a decision regarding whether personal tax returns were discoverable. In Safir v Charm City House, LLC, 2020 NY Slip Op. 31619(U), Justice Knipel confirmed longstanding New York precedent that a party’s tax returns are not discoverable absent a showing that they are indispensable to the case at bar. The rule limiting access to tax returns in litigation is important for litigants as often attorneys attempt to obtain these private records to impose a substantial burden and, ultimately, force a potential settlement.
In Safir v. Charm City Housing, LLC, et al., Case No. 501085/2017 (Sup. Ct. Kings Cty. 2017), the Plaintiff, David Safir (“Safir”), was approached in 2013 by the Defendant, Amos Weinberg (“Weinberg”), with a business proposition to invest in Defendant Charm City Housing, LLC (“Charm City”). Charm City was a company that purchased vacant properties in Maryland and turned them into luxury housing. According to the complaint, Weinberg described Charm City’s business plan as “foolproof” and “guaranteed [the properties] would go up in price and result in a profit” to Safir.
Safir, believing Weinberg’s representations about the current and continued success of Charm City, invested nearly $1.8 million dollars with the company. Safir’s investment was used to purchase fifteen properties in Baltimore. In connection with the investment, Weinberg guaranteed an 8% return and personally guaranteed both the investment funds and the 8% return. Consistent with the contractual arrangement, Safir requested that Defendants sell the properties and divide up any proceeds.
However, Defendants refused even to attempt to sell the properties, and also refused to provide an accounting of the properties. Defendants also refused to share any financial information related to Charm City’s assets or financial condition. The complaint further alleged that Defendants were trying to obtain financing for the subject property, despite there being no mortgage, in order to extract equity without having to pay Safir.
As the parties litigated the case, Defendants sought Safir’s tax returns in discovery, which Safir refused to provide. Defendants then moved to have Safir’s complaint stricken for refusing to produce the tax returns.
In denying Defendants’ request to strike the complaint the court noted that a “court may strike a party's pleading or impose some other sanction if the party 'refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been disclosed”’ Safir v Charm City House, LLC, 2020 NY Slip Op. 31619(U); Household Fin. Realty Corp. of NY v Della Cioppa, 53 AD3d 908, 910 (2d Dep’t 2017) (quoting CPLR 3126). The court stated that before imposing a “drastic remedy” such as striking a complaint, Defendants must first show the failure to comply with discovery was “willful and contumacious.” Safir v Charm City House, LLC, 2020 NY Slip Op. 31619(U).
The court found that Defendants “are not entitled to discovery of plaintiffs tax returns and the W-9 forms[.]” Safir v Charm City House, LLC, 2020 NY Slip Op. 31619(U). Because it is well established that "tax returns are generally not discoverable in the absence of a strong showing that the information is indispensable to the [defense.]” Id. (quoting Latture v Smith, 304 AD2d 534, 536 (2d Dep’t 2003)). The court stated that not only had “Defendants “failed to demonstrate the existence of special circumstances warranting disclosure of plaintiff's tax returns and the W-9 forms” but under the facts at bar it was “defendants [who] allegedly owed plaintiff money[.]” Safir v Charm City House, LLC, 2020 NY Slip Op. 31619(U). Consequently, the “initial source(s) of plaintiffs funds and how he subsequently accounted to the taxing authorities regarding those funds, including the monthly income therefrom, are not material and necessary to the defense of this action.” Id.
The principal of law in Safir, that tax returns are only discoverable on a showing that they are indispensable to the proceeding, is consistent with other New York cases. The reason for this principal is that, by their very nature, a party’s tax returns contain confidential and private information. That is not to say that courts never required a party to disclose tax returns. Rather, courts are hesitant to require production of these records because often one party will seek production as a method harassing the other side. However, there are certain instances when production of tax returns is indispensable to the case.
The attorneys at Schlam Stone & Dolan have extensive experience in high-stakes litigation that frequently involves resolution of issues regarding the disclosure and production of sensitive materials such as tax returns. Contact Schlam Stone & Dolan attorney Chris Dyess at email@example.com if you or a client have questions regarding production of sensitive materials.