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Hawkins v. Medapproach Holdings, Inc.

United States District Court, S.D. New York

June 28, 2018

SHARON HAWKINS, derivatively on behalf of MEDAPPROACH, L.P., and individually, Plaintiff,



         Before the Court is a motion by Defendants MedApproach Holdings, Inc. (“Holdings”) and W. Bradley Daniel (“Daniel”) (collectively, the “Defendants”) to compel Plaintiff Sharon Hawkins (“Plaintiff” or “Hawkins”) to produce tax returns. (Defs.' 6/21/18 Letter-Mot., ECF No. 162.) For the reasons set forth below, Defendants' motion is GRANTED.


         This case arises out of a complex web of entities created to invest in the development, production and sale of the abortion drug mifepristone, also known as RU-486. Hawkins asserted claims against Holdings and Daniel (its owner) alleging, among other things, breaches of fiduciary duties owed to MedApproach, L.P. (“MALP”), an entity in which Plaintiff owns approximately 88% of the limited partnership interests. (Second Am. Compl. (“SAC”), ECF No. 115 ¶¶ 1, 4.)

         Following decisions by the District Court on two motions to dismiss, [1] there remain in this case, in addition to a breach of contract claim, three claims for breach of fiduciary duty, which are set forth in Counts IV, V and VII of the SAC.[2] (SAC ¶¶ 112-27, 133-35.) Count IV-which concerns the tax status of N.D. Management, Inc. (“NDM”), an entity 75%-owned by MALP (SAC ¶¶ 48, 115)-is the breach of fiduciary duty claim that is implicated by the pending motion to compel.

         By way of background, Plaintiff alleges that distributions to limited partners of MALP are subject to “double taxation.” (SAC at pp. 13-15.) Specifically, Plaintiff alleges as follows:

As the general partner of Danco Investors Group, [NDM] is allocated a significant share . . . of the profits flowing through Danco Investors from the [RU-486] Project. As a “C Corporation, ” [NDM] must first pay state and federal taxes on distributions made to it by Danco Investors Group before that money is paid as dividends to [MALP] and then as distributions by [MALP] to [MALP's] limited partners, who must then pay tax again on their respective shares.
Over the years, [NDM] has paid millions of dollars in taxes. These taxes are completely unnecessary and could be eliminated if, for example, [NDM] was converted to an S Corp. and its shares were simply distributed to the limited partners of [MALP] on a pro rata basis. Despite repeated requests, however, the Defendants have refused to take the steps appropriate to eliminate this waste. …

(SAC ¶¶ 48-49.) In Count IV, Plaintiff alleges that the “taxable status of [NDM] and the resulting tax imposed on income received by [NDM] results in diminished income to [NDM], and thus to [MALP] and its limited partners, as well as a reduction in the value of the limited partnership units.” (SAC ¶ 115.) One of the forms of relief requested by Plaintiff on Count IV is “[p]ermanent injunctive relief compelling the Defendants to take all appropriate actions necessary to eliminate the taxable status of [NDM] that results in an unnecessary level of taxation on distributions to the limited partners of [MALP].” (SAC at p. 33.)

         By their motion, Defendants seek to compel Plaintiff to produce tax returns for any year as to which she claims she suffered damages based upon NDM's corporate status.[3] Defendants assert that, in order to measure any damages that were suffered by Plaintiff by reason of NDM's corporate status, Defendants need certain information regarding Plaintiff's taxes, including her “tax rate, deductions, credits and the like.” (Defs.' 6/21/18 Letter-Mot. at 2.) Plaintiff responded that her “tax returns have no conceivable relevance to any aspect of this case.” (Pl.'s 6/25/18 Letter Resp., ECF No. 163 at 3.) Among other reasons, she asserts that Count IV is brought derivatively on behalf of MALP such that her personal tax returns are not germane. (See Id. at 2.) Defendants submitted a reply letter asserting that, even if Plaintiff's claims were asserted derivatively, her tax returns nevertheless are relevant since she is a limited partner of the entity on whose behalf she asserts Count IV. (Def. 6/26/18 Letter Reply, ECF No. 165 at 1-2.)

         The Court held oral argument on the motion by telephone on June 28, 2018.


         I. Legal Standards

         Tax returns in the possession of the taxpayer are not immune from civil discovery. See St. Regis Paper Co. v. United States, 368 U.S. 208, 218-19 (1961). However, courts generally are reluctant to order the production of personal financial documents and have imposed a heightened standard for the discovery of tax returns. See Chen v. Republic Rest. Corp., No. 07-CV-3307, 2008 WL 793686, at *2 (S.D.N.Y. Mar. 26, 2008) (citation omitted). A party seeking to compel production of tax returns in civil cases must meet a two-part test: “first, the court must find that the returns are relevant to the subject matter of the action; and second, that there is a compelling need for the returns because the information contained therein is not otherwise ...

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