Opinion
Case No. 98-1360-MLB.
March 27, 2001.
MEMORANDUM AND ORDER
This matter is before the court on the City's motion to compel defendants Walter Trombold, Charles Trombold, and David Trombold (collectively the "Trombolds") to produce their federal and state income tax returns for the years 1983 to the present (Doc. 976). The Trombolds oppose the motion. For the reasons stated below, the motion shall be GRANTED.
Analysis
The standard for discovery of tax returns was succinctly set forth by Judge Rushfelt in Hilt v. SFC Inc., 170 F.R.D. 182, 189 (Kan. 1997):
Although courts do not favor compelling production of tax returns, no absolute privilege exists preventing their discovery. The courts have developed a two-pronged test to assure a balance between the liberal scope of discovery and the policy favoring the confidentiality of tax returns. First, the court must find that the returns are relevant to the subject matter of the action. Second, the court must find that there is a compelling need for the returns because the information contained therein is not otherwise readily obtainable. The party seeking production has the burden of showing relevancy, and once that burden is met, the burden shifts to the party opposing production to show that other sources exist from which the information is readily obtainable.Id. (citations omitted). As discussed below, the court is persuaded that the City has satisfied its burden of showing relevance. However, the Trombolds have not met their burden of showing that other sources exist from which the information is readily obtainable.
I. Relevance
The Trombolds were officers and stockholders of defendant Reid Supply, Inc., a corporation which was dissolved in 1988. The City argues that the tax returns are relevant to determine whether there are assets traceable to Reid Supply and whether the Trombolds may have individual liability under a veil-piercing theory. The City also argues that the returns are relevant to show the economic status of the parties, a factor the court may consider it equitably apportioning contribution costs.
Walter Trombold is the father of David and Charles and was the sole shareholder of Reid Supply from 1978 to 1986. In 1986 Walter resigned as president of Reid Supply and "gifted" the shares to David and Charles. Corporate records indicate that Charles and David were the sole shareholders in 1986 and took steps to dissolve Reid Supply by dividing its assets and operations between three newly created corporations.
The City has sufficiently shown that the Trombolds' income tax returns are relevant to claims in this lawsuit. The returns may show whether assets or payments from Reid Supply were funneled to the stockholders. See Barton Solvents. Inc. v. Southwest Petro-Chem, Inc., 836 F. Supp. 757, 761-62 (Kan. 1993) (plaintiff in a CERCLA action should be allowed opportunity to discover payments made to dissolved corporation's shareholder). The siphoning of corporate funds by dominant stockholders is one of the factors used to determine whether to disregard the corporate entity. MacKey v. Burke, 751 F.2d 322, 326-27 (10th Cir. 1984) (listing factors considered under Kansas law); Amoco Chemical Corp. v. Bach, 222 Kan. 572, 665 P.2d 743 (1977). Moreover, the financial or economic status of a party is a factor the trial judge may take into account in equitably allocating contribution costs. See e.g., Farmland Industries, Inc. v. Colorado Eastern Railroad Co., 944 F. Supp. 1492 (Colo. 1996) (financial resources is one of a number of factors the court may consider when equitably apportioning costs of cleanup).
The Trombolds vigorously object that corporate formalities were observed and that the City has no evidence to support a veil piercing claim. However, the issue before the court is relevancy. The Trombolds' arguments concerning the ultimate success of the City's veil piercing theory are more appropriate for a dispositive motion or trial.
The court has broad discretion when considering equitable factors and allocating response costs. FMC Corp. V. Aero Industries. Inc., 998 F.2d 842, 846 (10th Cir. 1993). This ruling should not be interpreted as an expression of the equitable factors Judge Belot will ultimately apply. However, at the discovery stage, the financial resources of a party are certainly relevant.
"Relevancy is broadly construed at the discovery stage of litigation and a request for discovery should be considered relevant if there is any possibility that the information sought may be relevant to the subject matter of the action." Smith v. MCI Telecommunications Corp., 137 F.R.D. 25, 27 (Kan.). Because the tax returns may disclose income and dividends from Reid Supply and the financial status of the Trombolds, the returns are relevant.
Effective December 1, 2000, Rule 26(b)(1) was amended. The former version permitted discovery into any matter, not privileged, that was "relevant to the subject matter involved in the pending action." The 2000 amendment provides that the scope of discovery is limited to matters "relevant to the claims or defense of any party" unless the court, for good cause shown, permits discovery of "any matter relevant to the subject matter involved in the action." The distinctions between the former and current versions of Rule 26(b)(1) do not affect the court's ruling. Under either version, the tax returns are relevant.
II. Information Available From Other Sources
The Trombolds argue that even if their tax returns are relevant, the information the City seeks is otherwise available from other sources. They maintain that the Reid Supply corporate records produced during discovery are sufficient to explain what happened to the assets and liabilities of Reid Supply. As an alternative, the Trombolds request an in camera review for a determination of which portions of the returns should be provided to the City.
Reid Supply produced its 1983-87 annual corporate reports, corporate minute books, and 1987 and 1988 corporate tax returns. The balance sheets for Reid Supply's three wholly-owned subsidiaries were also produced.
The Trombolds have not met their burden of showing that other sources exist from which the information contained on their tax returns is readily available. The corporate minutes and balance sheets submitted with the parties' briefs do not show what payments or distributions were made by Reid Supply to the Trombolds. For example, David Trombold testified that provisions for Walter's retirement were established from the sale and dissolution of Reid Supply. (The City's Brief, Doc. 975, David Trombold's deposition, ex. H, pp. 200-01). However, David had no understanding of the amount or how the retirement was structured. Id. The provisions for Walter's retirement are not disclosed in the corporate records provided to the court.
While the corporate records contain some information regarding stock transfers from Walter to Charles and David in 1986, they do not provide a complete picture.
In addition, one of the "spin-off" corporations, Associated Chemicals, continued until at least 1992. Charles Trombold testified that he would have to refer to his tax returns to determine the amount of monies received for the liquidation of Associated Chemicals. (The City's Brief, Doc. 975, Charles Trombold's deposition, ex. G, p. 26). Charles' reference to his own tax returns as the source of information illustrates the importance of the returns. The Trombolds proffer no source other than the tax returns for this information.
The examples listed above are not exhaustive but merely illustrate that the Trombolds have not met their burden of showing that the information sought is readily available from other sources. Thus, the motion shall be granted. The court declines the Trombolds request for an in camera review. The parties shall be given a limited opportunity to enter into a protective order similar to the order concerning Reid Supply's 1987-88 tax returns. See Doc. 1040.
IT IS THEREFORE ORDERED that the City's motion to compel (Doc. 976) is GRANTED. The Trombolds shall produce the tax returns within 15 days from the date of this order. An agreed protective order concerning the tax returns shall be submitted to the court within 10 days from the date of this order.