Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_08-cv-01959/USCOURTS-casd-3_08-cv-01959-1/pdf.json

Nature of Suit Code: 380
Nature of Suit: Other Personal Property Damage
Cause of Action: 28:1332 Diversity-Breach of Contract

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1 08cv1959-JAH

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

DEPLOYMENT MEDICINE CONSULTANTS,

INC.,

Civil No. 08cv1959-JAH (BGS)

Plaintiff,

ORDER ON JOINT MOTION FOR

DETERMINATION OF DISCOVERY

DISPUTE 

[Doc. No. 95]

v.

CHRISTOPHER PIPES, et al.,

Defendants.

And all related counterclaims.

 Deployment Medicine International (“DMI”) filed this lawsuit alleging that Christopher Pipes

(“Pipes”), a former employee, wrote himself unauthorized “checks totaling $200,000.00 drawn on

DMI’s checking account.” Compl. at 4. DMI confronted Pipes about the unauthorized use of funds and

Pipes allegedly agreed to “repay the money over time.” Id. at 5. DMI agreed to treat the $200,000.00

as a loan, however, Pipes has refused to repay any part of the money. Id. DMI also has a cause of

action against Pipes for slander. After DMI terminated Pipes in April, 2008, Pipes allegedly solicited

business by telling customers that “DMI was having tax problems with the IRS and that DMI was, in

fact, going out of business.” Id. at 16. 

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John Hagmann is the founder and director of DMI and a counter-defendant in the case.

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Discovery Dispute

On October 29, 2010, Pipes, DMI, and John Hagmann1 (“Hagmann”) filed a Joint Motion for

Determination of Discovery Dispute. (Doc. No. 95.) After extensive meet and confer efforts, DMI

withdrew its objections to all but one Request for Production—Request for Production No. 66. (Id.) 

Specifically, DMI agreed to supplement its responses to interrogatory Nos. 5 and 6, and also agreed to

produce documents responsive to Request For Production Nos. 65, 69, and 70. (Id.) Hagmann also

withdrew his objections and agreed to produce documents responsive to Request For Production Nos. 5

and 14. The only remaining dispute pertains to Request For Production No. 66. 

A. Pipes’ Request for Production No. 66

Request For Production No. 66 asks DMI to produce its “federal and state income tax returns for

tax year 2006.” Joint Mot. at 4. Pipes argues that he is entitled to DMI’s entire 2006 tax return in order

to “probe the truth of DMI’s allegation that $200,000.00 in unauthorized checks were paid to Mr. Pipes

and that this amount was then considered a loan payable to DMI.” Id. Ultimately, Pipes wants to

determine how DMI characterized the $200,000.00 in its disclosure to the IRS. Pipes also argues that he

is entitled to the tax return in order to rebut DMI’s claim for slander per se. Pipes allegedly made

statements to third-parties that “DMI was ‘going out of business’ and having trouble with the IRS.” Id. 

DMI’s written objection stated the following:

This responding party objects to this request on the grounds that it seeks records and

documents which are beyond the permissible scope of discovery, not relevant to any

party’s claims or defenses or likely to lead to the discovery of admissible evidence,

violates the financial rights of privacy and trade secrets of Deployment Medical

Consultants, Inc. and is oppressive and burdensome.

After meeting and conferring, DMI has offered to produce a “redacted version of its 2006 income tax

return,” to provide the portion “which may reflect the treatment of a $200,000 loan....” Id. at 5. DMI

also states that it has already described the circumstances of the loan in response to two interrogatories. 

Id. 

B. Legal Standards and Analysis

Neither party addresses whether the Court should apply federal privilege law or California law to

this discovery dispute. Federal Rule of Evidence 501 governs privilege in cases in federal court. The

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Rule states, in relevant part, that where “State law supplies the rule of decision, the privilege...shall be

determined in accordance with State law.” Fed. R. Evid. 501. This case is in federal court on diversity

grounds. There are no federal questions or claims, therefore California law should govern in this

instance. Nevertheless, the Court will also analyze the issue under the more relaxed federal standard. 

1. California Law

California courts have created an implied privilege against disclosure of tax returns. Schnabel v.

Superior Court, 5 Cal.4th 704, 718-721 (1993). The privilege is not absolute and there are three

grounds where courts do not uphold the privilege. “The privilege will not be upheld when (1) the

circumstances indicate an intentional waiver of the privilege; (2) the gravamen of the lawsuit is

inconsistent with the privilege; or (3) a public policy greater than that of the confidentiality of tax

returns is involved.” Weingarten v. Superior Court, 102 Cal.App.4th 268, 274 (Cal.Ct.App. 2002); see

also Small v. Travelers Property Cas. Co. of Am., 08cv1160-BTM, 2010 WL 2523649, at *1 (S.D. Cal.

June 21, 2010) (citing Weingarten.) The last exception is narrow and California courts have held that

the public policy exception only “applies when warranted by a legislatively declared public policy.” Id. 

The “[p]ublic policy favoring discovery in civil litigation is not, by itself, sufficiently compelling to

overcome the privilege.” Fortunato v. Superior Court, 114 Cal.Appl.4th 475, 483 (Cal.Ct.App. 2003).

Finally, “[a] trial court has broad discretion in determining the applicability of a statutory privilege.”

Weingarten, 102 Cal.App.4th at 274. 

Only the third exception is potentially applicable to the facts of this case. Yet, Pipes has not

indicated any compelling public policy that warrants ordering disclosure. “The fact that financial

records are difficult to obtain or that a tax return would be helpful, enlightening or the most efficient

way to establish financial worth is not enough.” Id. at 276. Furthermore, DMI agrees to produce

relevant financial records and this less intrusive method will likely provide Pipes with the information

he seeks. DMI has also agreed to produce portions of the 2006 tax return that reflect the company’s

characterization of the $200,000.00 loan. 

2. Federal Law

Pursuant to federal law, discovery of tax returns is not privileged. The Ninth Circuit, however, 

has maintained that public policy demands a higher standard for the discovery of tax returns than for

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discovery of other documents. See Premium Service Corp. v. Sperry & Hutchinson Co., 511 F.2d 225,

229 (9th Cir. 1975); see also Thornton v. Crazy Horse, Inc., 2010 WL 3718945, at *2 (D. Alaska Sept.

14, 2010). Discovery of tax returns is allowed when “they are relevant and there is a compelling need

for the returns because their information is not otherwise readily attainable from an alternative source.” 

Melendez v. Gulf Vessel Management, Inc., No. C09-1100-MJP, 2010 WL 2650572, *2 (W.D. Wash.

July 1, 2010); see also A. Farber & Partners, Inc. v. Garber, 234 F.R.D. 186, 191 (C.D. Cal.2006).

Assuming the tax returns are relevant to establish the veracity of DMI’s claim that it treated the

$200,000.00 as a loan; Pipes has not shown that he has a compelling need for a complete and unredacted

version of DMI’s 2006 tax return. DMI has agreed to produce its accounting records for 2006, including

its business expense records, travel expense records, and payroll records. Joint Mot. at 3. Additionally,

DMI will produce documents reflecting any loans, bonuses, or real estate that DMI made to its

employees or subcontractors as a form of compensation. Id. at 7. Pipes will also have the opportunity

to make inquiries into DMI’s characterization of the $200,000.00 during depositions. 

Finally, DMI’s 2006 tax return is not relevant to defend against the slander allegation. The

complaint alleges that Pipes made slanderous statements in 2008. DMI’s 2006 tax return is not likely to

show that DMI was going out of business or having problems with the IRS in 2008. Pipes has also

failed to establish that he has sought information to rebut the slander claim from other, less intrusive,

discovery devices such as interrogatories, demands for documents, or inquires during depositions. 

For the reasons stated above, the Court finds that Pipes’ need for the 2006 tax return does not

outweigh the public policy favoring confidentiality of tax returns. There are sufficient alternative

sources for the limited information Pipes wants from the tax returns. Most significant, DMI offered to

produce a redacted version of its 2006 tax return.

C. Conclusion

DMI must supplement its responses to interrogatory Nos. 5 and 6; produce documents

responsive to Request For Production Nos. 65, 69, and 70; and produce the redacted 2006 tax return no

later than 

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December 10, 2010. Hagamann must produce documents responsive to Request For Production Nos. 5

and 14 no later than December 10, 2010.

IT IS SO ORDERED.

DATED: November 23, 2010

Hon. Bernard G. Skomal

U.S. Magistrate Judge

United States District Court

Case 3:08-cv-01959-JAH-BGS Document 101 Filed 11/23/10 Page 5 of 5