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Court Orders Further Production of Financial Records from Company and Accountant, Finding “Inconceivable” That Company Was Only Able to Locate Two Years of Tax Returns

Plaintiffs filed an action defendants, Bouncing Angels, Inc. for, among other things, patent and copyright infringement. Plaintiffs successfully moved the district court to allow them to amend the complaint to add the owner of defendant Bouncing Angels, Inc., as a defendant based on financial evidence they discovered that could support an argument in favor of piercing the corporate veil. Discovery was extended “for the limited purpose of allowing discovery and dispositive motions only on issues relating to piercing the corporate veil.” The plaintiffs filed a motion to compel discovery on that issue.

As explained by the court, “[t]he discovery requests at issue in the Motion are all directed at defendant Bouncing Angels, and consist of document requests, requests for admissions, and an interrogatory. The discovery seeks Bouncing Angels’ tax returns and annual statements for a number of years, loan and security documents relating to a line of credit, information as to this defendant’s working capital, and whether Bouncing Angels ever conducted an independent audit.”

In response to the motion, Defendants argued that they are “small, family businesses with no prior experience in business litigation;” that defendant Bouncing Angels has “engaged in a thorough search for responsive documents and information” and has “produced what it has found” and will produce additional documents if located; that it would permit plaintiffs’ representative to inspect items in Bouncing Angels’ possession at its place of business; and that the terms “working capital” and “independent audit” are undefined.”

The district court had previously referred to defendant Bouncing Angels’ discovery responses as “evasive” as to the corporation’s working capital and whether it ever obtained an independent audit of its accounting records. The Magistrate Judge agreed. “The Court finds it inconceivable that Bouncing Angels, a California corporation that must comply with state financial requirements, would be able to locate tax returns from only two of the last eight years, and only one annual statement for that same period; that it cannot locate loan and security documents for a financial transaction from only two years ago; and that it is unable to understand, and thus respond to discovery based on, straight-forward accounting terms. To the extent it represented that it has produced those documents that it has found, and will ‘continue[] its efforts to supplement its responses,’ the Court notes that the document requests were served over five months ago. The time to produce is now. Bouncing Angels’ offer that plaintiffs can inspect the subject documents at Bouncing Angels’ place of business is meaningless. Until defendant finds the documents, there is nothing for plaintiffs to inspect and copy. Further, plaintiffs are in no better position to search defendant’s records than defendant, and have no right (except through subpoena) to obtain those documents in Bouncing Angels’ accountant’s possession directly from the accountant.”

The Court also found it significant that the defendant used an accountant and noted that the defendant had not represented it had obtained documents from the accountant. “Here, Bouncing Angels represents that it uses the services of an accountant (see, e.g., Joint Stipulation, at 6). As a general matter, a defendant is required to produce all documents in its possession, custody or control responsive to discovery requests. Property is within a party’s possession, custody or control whether the party has actual possession thereof, or the right to obtain the property on demand. In re Bankers Trust Co., 61 F.3d 465, 469 (6th Cir. 1995). A party is not in control of documents when the requesting party has an equal ability to obtain them from public sources. See Estate of Young v. Holmes, 134 F.R.D. 291, 294 (D. Nev. 1991). Here, there is no indication that Bouncing Angels ever attempted to obtain responsive documents from its accountant, or that the accountant would be unable to provide them upon request. Bouncing Angels must obtain those responsive documents that are in its accountant’s possession.”

As a result, the court granted the motion to compel and ordered the production of the additional financial records.

Whatru Holding, LLC v. Bouncing Angels, Inc., Case No. CV 14-5187-BRO (PLAx)

The authors of are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. For more information about this case, contact Stan Gibson at 310.201.3548 or