Free Brief in Opposition to Motion - District Court of Colorado - Colorado


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Case 1:03-cv-02669-MSK-PAC

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Honorable Marcia S. Krieger Case No. 03-cv-2669-MSK-PAC LEPRINO FOODS COMPANY, Plaintiff, v. BIG-D CONSTRUCTION CORP.- CALIFORNIA, a Utah corporation; BIG-D CONSTRUCTION CORP., a Utah corporation; and Does 1-100, inclusive, Defendants/Counterclaimants.

BIG-D CONSTRUCTION CORP. ­ CALIFORNIA, a Utah corporation, BIG-D CONSTRUCTION CORP., a Utah corporation, and Does 1-100, inclusive, Third Party Plaintiffs, v. MARELICH MECHANICAL CO., INC. dba UNIVERSITY MARELICH MECHANICAL, a California corporation, Third Party Defendant.

MARELICH MECHANICAL CO., INC. dba UNIVERSITY MARELICH MECHANICAL, a California corporation, Third Party Plaintiff/Counterclaimant, v. BIG-D CONSTRUCTION CORP. ­ CALIFORNIA, a Utah corporation, FEDERAL INSURANCE COMPANY, an Indiana corporation, FRICK COMPANY, and Roes 20 through 80, inclusive, Counterdefendant/Third Party Defendants.

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DEFENDANT BIG-D CONSTRUCTION CORP.-CALIFORNIA AND BIG-D CONSTRUCTION CORP.'S OPPOSITION TO LEPRINO FOODS COMPANY'S MOTION TO COMPEL PRODUCTION OF DOCUMENTS

I.

INTRODUCTION

Leprino Foods Company's ("Leprino") Motion to Compel is the proverbial fishing expedition, intended to harass Big-D Construction Corp. ("Big-D Construction") and Big-D Construction Corp. ­ California ("Big-D California") into producing privileged and irrelevant financial information in the blind hope that it may eventually uncover some evidence to establish an alter-ego relationship between the two Defendants. In support of its improper discovery demands, Leprino has offered no evidence of wrongdoing by either Defendant, has blatantly misrepresented its failure to satisfy the goodfaith meet-and-confer requirements of the Federal Rules of Civil Procedure and its own failure to conduct discovery, and has failed to provide the Court with any legal authority supporting its demand for Defendants' privileged financial information. The Defendants, Big-D California and Big-D Corporation, have agreed to provide--and in fact have already provided--all relevant documentation (including corporate records, financial statements, and summaries of all monetary transfers) regarding the relationship between the distinct corporate entities. Leprino's demand for additional privileged information (including bank account numbers and federal and state tax returns) were met by the Defendants with proper objections, and prior to filing the current motion, Leprino refused to offer Defendants any basis, either factual or legal, for the specific information it was seeking or how that information would be relevant to the theory of alter-ego liability.

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As such, the Motion to Compel should be denied and, in light of Leprino's failure to comply in good-faith with the statutory meet-and-confer requirements prior to seeking the assistance of the Court, sanctions should be awarded against Leprino and/or its counsel in favor of Big-D California and Big-D Construction. II. BACKGROUND AND BRIEF STATEMENT OF FACTS

This Motion arises from Leprino's Second Set of Request for Production of Documents, which Leprino served on Big-D Construction and Big-D California on November 24, 2004. Leprino's Request for Production of Documents focused upon various categories of financial documents related to both Big-D Construction and Big-D California. Big-D Construction and Big-D California served their responses and objections to this Request on January 3, 2005 and produced more than 150 pages of documents pertaining to Big-D Construction's and Big-D California's business operations, articles of incorporation, director and shareholder meeting minutes, financial statements, marketing and advertising brochures, and corporate affiliations. Nearly seven (7) months after Defendants had furnished these documents, Leprino moved to amend its complaint to, in part, add two new parties to the litigation: Big-D Capital Corp. and Big-D Corporation. In July 2005, this Court granted Leprino's motion to amend its complaint, which alleges that one of the following entities, Big-D Construction, Big-D Corporation or Big-D Capital is the parent corporation of Big-D California and further that: "Big-D Construction, Big-D Corporation or Big-D Capital undercapitalized BigD California and freely commingled funds; that Big-D Construction, Big-D Corporation or Big-D Capital exerts total control over the day-to-day operations of Big-D California to such a degree that the corporations often interchangeably refer to one another and hold each other out to the public by the name of the parent and subsidiary without regard to form; and effectively ignore the corporate hierarchy of being separate entities but instead act as one." See Leprino's Amended Complaint, pp. 2-3.

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Subsequent to filing its Amended Complaint, and on or about September 7, 2005, Leprino served its Third Set of Request for Production of Documents. Despite the addition of Big-D Capital Corp. and Big-D Corporation to this litigation, Leprino's Third Set of Request for Production was directed to, and necessitated responses solely from, Big-D Construction and Big-D California. The nature of Leprino's Third Set of Request for Production of Documents was similar to its Second Set of Request for Production of Documents in that the Third Set demanded a broad production of privileged financial records, bank account numbers, business records, budget forecasts, loan agreements and credit history for Big-D Construction and Big-D California. In response to Leprino's Third Set of Request for Production of Documents, and on October 14, 2005, Big-D Construction and Big-D California provided Leprino with the following additional documents: (1) Itemized spreadsheets of Big-D Construction's and Big-D California's job contracts and revenue breakdown from 2000 to 2004; (2) Meeting minutes from Big-D Construction's first shareholder's meeting which indicates the source and amount of Big-D Construction's equity capitalization; (3) Monthly budget analyses, indicating operating costs and anticipated profits, for Big-D California from 2000 to 2004; and (4) The standard credit application form distributed by Big-D California and Big-D Construction to their subcontractors. Leprino asserts that Defendants have failed to provide any documentation regarding the financial and corporate histories of Big-D California and Big-D Construction. But in fact, Defendants have already provided the following documents in response to these issues: 1. 2. 3. 4. All shareholder and director meeting minutes for Big-D California from 2000 to 2003; All shareholder and director meeting minutes for Big-D Construction from 2000 to 2003; A spreadsheet itemizing each and every transaction between Big-D Construction and Big-D California from 2000 to 2003; Articles of Incorporation and all state filings for Big-D Construction;

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5. 6. 7. 8. 9. 10. 11. 12.

13.

14.

Articles of Incorporation and all state filings for Big-D California; All Stock Certificates and records of issuance for Big-D California; Financial Statements, itemizing assets, liabilities, profits and losses for Big-D Construction from 2000 to 2003; Financial Statements, itemizing assets, liabilities, profits and losses for Big-D California from 2000 to 2003; An itemized spreadsheet of Big-D California's advertising and marketing expenses; Numerous articles, periodicals, newsletters and print advertisements generated for the promotion of Big-D California; A copy of the standard employee lease agreement issued from Big-D Management Corp to Big-D California for the purpose of leasing labor; A detailed spreadsheet summarizing each contract, including an itemization of the contract amount(s), cost(s), earnings, and profit(s), entered into by Big-D Construction from 2000 to 2004; A detailed spreadsheet summarizing each contract, including an itemization of the contract amount(s), cost(s), earnings, and profit(s), entered into by Big-D California from 2000 to 2004; and Documents reflecting the per-hour rates for Big-D California's leased employees who performed work on the Project. III. ARGUMENT

In its Motion, Leprino argues that the documents it seeks are "directly related to the Lemoore West Project and are relevant, pursuant to Rule 26(b)(1), to Leprino's claims in this lawsuit." Specifically, Leprino contends that the requeted documents are relevant and necessary to: (a) Establish whether Big-D California and Big-D Construction are two separate entities for the purpose of isolating liability; or (b) Verify Big-D California's claim that it is a separate entity from Big-D Construction. Leprino already has the documents needed to make this determination and has failed to confer in good faith regarding the production of additional documents. The Court should therefore reject Leprino's motion to compel further responses from Defendants. A. Leprino Has Misrepresented Its Attempts To Meet And Confer And Its Inability To Conduct Discovery.

For the first time on September 7, 2005, more than nine months after Big-D responded to Leprino's Second Request for Production of Documents, Leprino's counsel, Patrick Markham, wrote a letter to Defendants demanding the production of additional 5

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documents. Leprino misrepresents to the Court that this letter was the culmination of a series of numerous attempts by Leprino to meet and confer with Big-D California and Big-D Construction regarding these documents. As is evident from Leprino's Motion, the September 7th letter was its only formal attempt to discuss the production of additional documents. And in fact, the September 7th letter was not even a good faith attempt to meet and confer. Rather, the letter was simply a reiteration of Leprino's entire Second Set of Request for Production of Documents and failed to acknowledge that Defendants had already provided practically every document nine months prior. Nevertheless, on September 13, 2005, Defendants responded to Leprino's September 7th correspondence. Defendants explained more fully the rationale behind their objections and the reasons why Defendants did not agree to produce the privileged documents. Defendants also requested that Leprino provide an explanation as to why it felt it was entitled to additional documentation beyond what had already been provided, and informed Leprino that they would be amenable to producing the additional documents in the event Leprino could articulate a reasonable need for them. A true and correct copy of the September 13, 2005 letter is attached hereto as Exhibit "A." Leprino refused to respond to Big-D's request, and to date has failed to articulate a single legal or factual basis in support of its demand for the privileged financial documents it seeks to compel. Not once in the past year has Leprino explained how these documents would assist it in determining whether Big-D California is the alter ego of Big-D Construction. Not once has Leprino responded to Defendants' request for a meetand-confer to discuss Leprino's need and justification for these documents. Instead of participating in a good faith meet-and-confer process, Leprino filed the instant Motion. And not once in its Motion does Leprino provide any factual or legal grounds in support of the relevancy of these documents.

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In addition to misrepresenting its "meet-and-confer" efforts, Leprino has also falsely claimed that the lack of these documents has led to its inability to conduct discovery in this matter. Since Defendants produced documents in response to this Request back in January 2005, Leprino has served Defendants with Interrogatories regarding the nature of Big-D California's corporate affiliations. In response, Big-D California has indicated that Big-D Capital, and not Big-D Construction, is the parent of Big-D California. In addition to written discovery, since January 2005 Leprino has deposed practically every current and former representative of Big-D California that performed work on the Lemoore West Project, including Big-D California's President, Rob Moore, and Vice-President, Forrest McNabb. Not once during the five days of deposition of BigD California's President and Vice-President did Leprino ask a single question related to the corporate relationship between Big-D California and any other corporate entity, including Big-D Construction. Leprino's assertion that Big-D has impeded its ability to conduct discovery is belied by its own failure and/or refusal to seek any of the information it now deems critical through the deposition process. Furthermore, pursuant to Federal Rules of Civil Procedure, Rule 26, and the local rules of this Court, Big-D California provided Leprino with its Corporate Disclosure Statement in May 2005, indicating that Big-D Capital, not Big-D Construction, is the parent company of Big-D California. Leprino has nevertheless chosen to ignore the Corporate Disclosure Statement, and has falsely alleged in its amended complaint and misrepresented to the Court in the current Motion to Compel that it cannot determine the identity of Big-D California's parent corporation without privileged financial documents. Leprino's current attempt to burden both Big-D and the Court with its improper requests for the production of privileged and/or duplicative financial information should be rejected.

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B.

Big-D Construction and Big-D California Are Justified In Withholding Their Tax Returns As Privileged Financial Information.

Although a party's tax returns do not enjoy an unqualified privilege from being disclosed, federal courts have historically been cautious in ordering the disclosure of tax returns. Thus, courts will, before compelling the production of tax returns, first determine that the tax returns are relevant and material to the matters at issue. Shaver v. Yacht Outward Bound, 71 F.R.D. 561, 564 (1976). The party seeking compulsion of the tax returns has the burden of establishing that they are relevant to the matters at issue. Eastern Auto Distributors v. Peugeot Motors of America, 96 F.R.D. 147, 149 (1982). Further, even if the moving party meets its burden of establishing that the tax returns are relevant to the matters at issue, the strong public policy against the unnecessary disclosure of tax returns dictates that the court, before compelling their production, must then determine whether the information sought from the tax returns is readily obtainable by other means or from other sources. Biliske v. American Live Stock Insurance Company, 73 F.R.D. 124, 126 (1977). If the information sought from the tax returns is found from other sources, courts will typically deny the compulsion of a party's tax records. Id. In this case, Leprino has failed to meet its burden of proof. Leprino seeks the production of Big-D Construction's and Big-D California's state and federal tax returns. The requests for these documents are generally couched in two compound Requests, which seek "financial statements, income statements, profit and loss statements, balance sheets, and state and federal tax returns." See Leprino's Second Set of Request for Production of Documents, Requests Nos. 3 and 4. As previously noted, however, Leprino has never provided any legal or factual explanation as to what specific information it needs from the tax returns or how the returns will help in its analysis. Defendants have already provided Leprino their financial statements and, in the case of

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Big-D California, its monthly budget forecasts. Moreover, as explained above, Leprino has failed to avail itself of other available means of discovery, such as depositions. Thus, Defendants should not be compelled to provide their tax returns, which are presumptively privileged and contain duplicative information with respect to income, especially in light of the fact that Leprino has failed to make any initial showing that the tax returns or other financial documents are relevant to the issue of whether or not Big-D Construction and Big-D California are separate legal entities. C. Big-D Construction And Big-D California Have Already Produced Documents Responsive To Leprino's Request For Production Of Documents Sufficient For Leprino To Analyze The Distinct Corporate Status Of The Companies.

Leprino's main contention is that Big-D Construction and Big-D California have failed to respond to Requests for Production of Documents Nos. 3, 4, 5, 9, 10, 11 and 17 by not producing documents "critical to Leprino's ability to assess the validity of Big-D's contentions regarding the existence or absence of the alter ego status of Big-D Construction and Big-D California." As a preliminary matter, Leprino admits that its sole motivation behind establishing an alter-ego relationship between the Defendants is because it fears that BigD California may not be able to satisfy a judgment. Leprino's unsubstantiated concern, however, is legally insufficient to constitute a proper basis for piercing the corporate veil. See, Lowell Staats Mining Co. v. Pioneer Uravan, Inc. 878 F.2d 1259, 1264-65 (10th Cir. 1989) (holding, "we do not consider the fact of consolidated financial reports to be a sufficient basis to impose liability under the alter ego doctrine. . . .[plaintiff] must prove the corporate entity was used to defeat public convenience, or to justify or protect wrong, fraud or crime. The possibility that [plaintiff] may have difficulty enforcing a judgment against [defendant] alone is not the type of injustice that warrants piercing the corporate veil.") Thus, even assuming that there were documents demonstrating a close

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relationship between the entities, the chance of Leprino succeeding in piercing the corporate veil is highly unlikely, and Leprino has failed to overcome the presumption that the requested financial documents would be relevant to its claims. With this in mind, Defendants respond to each Request as follows: 1. Request for Production of Documents Nos. 3 and 4:

In its Motion, Leprino contends that Big-D California and Big-D Construction have failed to respond to Request for Production of Documents Nos. 3 and 4 in that, Leprino claims, they have failed to produce any of their profit and loss statements and state and federal tax returns for the preceding five years. As explained above, Defendants are justified in withholding their tax information. Contrary to Leprino's assertions, Defendants have already provided Leprino with their financial statements for the years 2000 through 2003. Additionally, Big-D California has produced an itemized monthly spreadsheet for the years 2000 through 2004. These documents portray Defendants' estimated and actual profits and losses for the years aforementioned. Big-D California was not incorporated until 1999, had no operations in 1999 and therefore had no profits or losses to report for that year. True and correct copies of Big-D California's financial statements, already produced to Leprino, are attached hereto as Exhibit "B." A true and correct copy of Big-D California's monthly budget spreadsheet, already produced to Leprino, is attached hereto as Exhibit "C." True and correct copies of Big-D Construction's financial statements, already produced to Leprino, are attached hereto as Exhibit "D." 2. Request for Production of Documents No. 5:

Leprino further contends that it received no payroll account or bank account statements showing the amounts paid for wages and/or salary for Big-D California's employees. Leprino admits that it did receive the Employee Lease Agreement that Big-D

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California entered into to lease employees from Big-D Management Corp1. Big-D California explained to Leprino, in its September 13th letter, that neither Big-D California nor Big-D Construction possesses payroll account or bank account statements "utilized" for the payment of employee payroll, wages or salary. Furthermore, as previously explained to Leprino in both Defendants' Response to the Request for Production and its September 13th letter, Big-D Construction and Big-D California do not hire employees, but rather lease personnel from another corporation. Thus, Big-D California does not have any employees of its own, and has no documents responsive to this request. Leprino's Request, which also seeks bank account statements "utilized" for Big-D California's employees therefore does not ask the right question. Leprino now seeks by way of this Motion, for the first time, Big-D California's records indicating the price(s) it paid to lease labor from Big-D Management Corp. Leprino had an opportunity, in its Third Request for Production of Documents, to seek this information but failed to request it. Big-D California should not be compelled to produce documents that Leprino has failed to ask for. Even supposing that Request for Production No. 5 can be construed as a request for documentation showing the amounts paid for wages and/or salary for the personnel Big-D California leases, Leprino already possesses information indicating these amounts. Part of Big-D California's claim against Leprino is for un-funded general conditions costs that Big-D California incurred during its work on the project. Incorporated in this claim are the unpaid wages and/or salaries of the personnel leased by Big-D California for the project. Various spreadsheets and other itemized documentation previously provided to Leprino indicate the name(s) of the personnel, their hourly wages and the time spent working on the Project. //
1

Big-D Management Corp. is an affiliated, sister corporation to both Big-D Construction and Big-D California and has not been made a party to this action.

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3.

Request for Production of Documents No. 9:

Leprino next contends that Defendants have failed to produce any meeting notes or reports regarding Big-D California board meetings during the past five years. This is a clear misstatement of the facts. As previously explained Big-D California has already provided its shareholder and director meeting minutes to Leprino for the years 1999 through 2003, which represents the duration of time from when Big-D California was incorporated through the time the project was completed. Big-D California is unaware of any additional documentation responsive of this request. As such, it remains Defendants' position that they have fully responded to this Request. 4. Request for Production of Documents Nos. 10 and 11:

Requests for Production Nos. 10 and 11 seek the same information; namely, all bank statements, reconciliation reports, cancelled checks, check stubs, deposit slips, receipts, ledgers, or journal entries reflecting payments or monies transferred from Big-D Construction to Big-D California for the preceding five years. In response to these Requests, Big-D California and Big-D Construction provided Leprino with a spreadsheet itemizing all transfers of money from Big-D Construction to Big-D California. Stated on the spreadsheet is the following description: "In all transactions a cash payment was received from a customer and was deposited into Big-D [Construction] in error. The cash payment should have been deposited in Big-D California. Big-D [Construction] then paid Big-D California by check to transfer the deposited amount to the rightful owner." A true and correct copy of the Spreadsheet is attached hereto as Exhibit "E." The Spreadsheet indicates the date each transaction was made, the check number used by Big-D Construction to fund the transfer and the amount of the transfer. In all, Big-D has made 28 money transfers to Big-D California. Each of these transfers was made to correct a payment error; i.e. either a customer mistakenly wrote a check out to Big-D Construction, rather than Big-D California, or the money was mistakenly

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deposited into the wrong corporation's account. Of the 28 money transfers, 17 occurred after Big-D California had completed its work on the Lemoore West project and were made in regards to other projects Big-D California was working on. In addition to the spreadsheet, Defendants have also disclosed their financial statements, which reflect actual costs incurred, and cash received, by each company. Defendants are not aware of any monetary transfers from Big-D California to Big-D Construction and have indicated this fact to Leprino. The documents already provided in response to Leprino's Requests Nos. 10 and 11 are therefore adequate. Put simply, the information contained in the Spreadsheet mirrors the information contained in any particular check. The Spreadsheet clearly demonstrates that transfers of money were made from Big-D Construction to Big-D California. Thus, Defendants concede that transfers occurred. The additional documentation requested will not provide Leprino with the information it really seeks; i.e., the reasons why the transfers were made, and Leprino has elected not to seek this information from the witnesses it has deposed. Finally, providing Leprino with copies of each check would require Defendants to search through literally thousands of check stubs, which, in light of the duplicative information contained in those documents, would place an undue burden on Defendants beyond what is required of them under the Federal Rules of Civil Procedure.

5.

Request for Production of Documents No. 17:

Finally, Leprino requests production of documents reflecting the allocation of profits of Big-D California for the preceding five years. Previous information provided to Leprino concerning Big-D California's profits and its allocation thereof include: BigD California's Articles of Incorporation, demonstrating that Big-D Corporation, which later became Big-D Capital Corp., owns 100% of Big-D California's shares; Big-D

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California's Stock Certificates, indicating that Big-D Corporation, which later became Big-D Capital Corp., was issued the voting shares for Big-D California; and Big-D California's financial statements, which indicate the profits earned by Big-D California for the past five years. Leprino's apparent concern is determining whether Big-D California and Big-D Construction are alter egos. The fact that no monies, which would necessarily include profits, have ever been transferred from Big-D California to Big-D Construction, illustrates that no documentation reflecting Big-D California's internal allocation of profits would assist Leprino in determining whether the companies are alter egos. D. Sanctions are inappropriate in light of Defendants' good faith attempt to fully respond to Leprino's Request for Production.

Citing to Federal Rules of Civil Procedure, Rule 37(a)(4)(A), Leprino finally asserts that this Court must impose sanctions against Big-D Construction and Big-D California for their "failure to properly answer and respond to Leprino's Second Set of Discovery." Not surprisingly, Leprino misstates the rule on sanctions. Rule 37(a)(4)(A) requires the Court to impose sanctions only if the motion was filed after the movant first made a good faith effort to obtain disclosure or discovery without court action or the opposing party's nondisclosure, response or objections were not substantially justified. In this case, Leprino has made no good-faith effort to explain or justify the basis for its requests through the meet-and-confer process. Further, Defendants have already produced all non-privileged documents responsive to Leprino's Requests and have selectively stated their objections to producing the remaining financial information. Because Leprino has made no attempt to engage in the meet and confer process and, moreover, because Defendants have fully responded to Leprino's Requests, this Court should not impose sanctions on Big-D California, Big-D Construction, or their counsel. This Court should impose sanctions, however, on Leprino and/or its counsel, for its

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misuse of the discovery process, including its decision to ignore Defendants' previous disclosures, and for its blatant failure to abide by the meet and confer process before seeking the assistance of this Court. IV. CONCLUSION

For the aforementioned reasons, Big-D Construction and Big-D California respectfully ask that this Court deny the Motion to Compel in whole or, in the event this Court determines that Defendants must produce additional documents, that sanctions not be awarded. Further, in the event this Motion is denied, in whole or in part, Defendants respectfully ask this Court to award them their costs incurred in opposing this Motion pursuant to Federal Rules of Civil Procedure, Rule 37(a)(4)(c). Respectfully submitted this 26th day of October, 2005. BIG-D CONSTRUCTION CORP. and BIG-D CONSTRUCTION CORP. CALIFORNIA By: s/Daniel J. Nevis One of its attorneys. Miller, Morton, Caillat & Nevis 25 Metro Drive, 7th Floor San Jose, California 95110 Phone: (408) 292-1765 Fax: (408) 436-8272 [email protected]
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