Unpublished Disposition, 895 F.2d 1417 (9th Cir. 1988)

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U.S. Court of Appeals for the Ninth Circuit - 895 F.2d 1417 (9th Cir. 1988)

Paul LAXALT, Plaintiff-Appellant,andJames E. Beasley, Claimant-Appellant,v.C.K. McCLATCHY, et al., Defendant-Appellee.

No. 88-2991.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 29, 1989.Decided Feb. 12, 1990.

Before WALLACE, POOLE and CYNTHIA HOLCOMB HALL, Circuit Judges.


MEMORANDUM* 

Appellant Paul Laxalt and his attorney, appellant James Beasley (collectively "Laxalt"), appeal from the district court's order imposing Rule 37 and Rule 11 sanctions. Laxalt contends that the district court erred in ruling that his motions to compel appellee William Sharp's testimony and to transfer the motion to compel were not "substantially justified". Laxalt also contends that the district court erred in ruling that his motion to transfer was alternatively subject to Rule 11 sanctions. Sharp requests that this court award him attorney's fees and costs incurred in connection with this appeal.

BACKGROUND

In 1983, the Sacramento Bee, the Fresno Bee and the Modesto Bee, all owned by appellee McClatchy, each published an article which alleged that appellant Paul Laxalt, a former casino owner, had engaged in various illegal activities concerning the construction, financing and operation of the casino. The article, written by appellee Denny Walsh, attributed the information to an anonymous Internal Revenue Service (IRS) agent who had allegedly discovered the information during a criminal tax evasion investigation.

After the article was published, Laxalt filed a libel action against the appellees in the United States District Court for the District of Nevada. To meet his burden under New York Times v. Sullivan, 376 U.S. 254 (1964), Laxalt attempted to discover the confidential sources who provided Walsh with the information contained in the article. Walsh refused to identify the sources, but did describe one of them as a retired IRS Agent with 20 to 30 years of experience. Based upon this description, Laxalt believed that one of Walsh's sources was retired IRS agent William Sharp.

On January 27, 1986, Laxalt obtained a subpoena from the Northern District of California to depose William Sharp, a resident of Santa Cruz, California. At the deposition, Sharp was not represented by counsel, but was aided by counsel for McClatchy and Walsh. Sharp refused to answer the majority of the questions posed by Laxalt's counsel on the grounds that his answers would tend to be self-incriminating. Sharp stated that 26 U.S.C. § 6103 prohibited him from disclosing any information obtained in connection with his service as an IRS agent and that any unauthorized disclosure of information would subject him to criminal liability.

Following the deposition, Laxalt filed motions in the Northern District of California to: (1) compel Sharp's testimony; (2) limit interference by defense counsel; and (3) transfer consideration of the motions to the District of Nevada. In response to the motions, Sharp retained counsel who requested that Laxalt retake the deposition with counsel present to represent Sharp. Laxalt refused to retake the deposition unless counsel agreed that Sharp would answer the questions which were put to him.

On May 9, 1986, the magistrate denied all of Laxalt's motions, including his request for sanctions. The magistrate granted Sharp and McClatchy's request for sanctions, finding that Laxalt's motions to compel and to limit interference were not substantially justified under Fed. R. Civ. P. 37(a) (4). In addition, the magistrate found that Laxalt's motion to transfer was related to the motion to compel and was neither substantially justified under Rule 37(a) (4) nor well grounded in fact and warranted by law under Fed. R. Civ. P. 11. Laxalt was ordered to pay Sharp's and McClatchy's reasonable expenses incurred in opposing the motions.

Laxalt moved the district court for reconsideration of the magistrate's order. On August 12, 1987, the district court modified the magistrate's order to impose sanctions only against Laxalt's counsel, appellant James Beasley, and not against Laxalt.1  The order was affirmed in all other respects. On August 28, 1987, this court dismissed Laxalt's appeal for lack of jurisdiction because a final order setting the amount of costs and attorney's fees had not been entered. On June 14, 1988, the magistrate awarded Sharp $8,140.50 in costs and attorney's fees. Laxalt now appeals.

ISSUES

I. Did the district court err in awarding Sharp's expenses incurred in opposing Laxalt's motion to compel, pursuant to Fed. R. Civ. P. 37(a) (4)?

II. Did the district court err in awarding Sharp's expenses incurred in opposing Laxalt's motion to transfer, pursuant to either Fed. R. Civ. P. 37(a) (4) or Fed. R. Civ. P. 11?

III. Should this court award Sharp attorney's fees and costs incurred in connection with this appeal?

STANDARD OF REVIEW

Imposition of discovery sanctions under Fed. R. Civ. P. 37 is committed to the discretion of the district court. Marquis v. Chrysler Corp., 577 F.2d 624, 642 (9th Cir. 1978). This court therefore reviews a district court's decision to impose Rule 37 sanctions for an abuse of discretion. North American Watch Corp. v. Princess Ermine Jewels, 786 F.2d 1447, 1450 (9th Cir. 1986).

DISCUSSION

Fed. R. Civ. P. 37(a) (4) provides, in part:

If the motion [to compel] is denied, the court shall, after opportunity for hearing, require the moving party or the attorney advising the motion or both of them to pay to the party or deponent who opposed the motion the reasonable expenses incurred in opposing the motion, including attorney's fees, unless the court finds that the making of the motion was substantially justified or that other circumstances make an award of expenses unjust.

(Emphasis added).

Laxalt contends that his motion to compel Sharp's testimony was substantially justified for three principal reasons. First, it was reasonable to assert that the statute upon which Sharp based his refusal to testify, 26 U.S.C. § 6103, did not prohibit Sharp from disclosing tax return information in a non-tax civil case. Second, it was reasonable to assert that the information sought by Laxalt was not "return information" and thus, not within the ambit of section 6103. Finally, it was reasonable to assert that Sharp's invocation of his Fifth Amendment privilege was improper.

A. Applicability of section 6103 to "return information"

Laxalt cites the District of Columbia's decision in McSurely v. McAdams, 502 F. Supp. 52 (D.D.C. 1980), in support of his assertion that section 6103 did not prohibit Sharp from disclosing tax return information. In McSurely, the plaintiffs issued a subpoena to the Commissioner of the IRS calling for the production of certain IRS documents. The Commissioner refused to produce the documents, contending that 26 U.S.C. § 6103 prohibited their disclosure. The court granted the plaintiff's motion to compel the production of the documents on the ground that section 6103 does not bar the disclosure of IRS documents to private parties in a non-tax civil case.

We find that McSurely does not control the present case. In McSurely, the discovery request was aimed at the Commissioner of the IRS. Because the Commissioner of the IRS is the only individual authorized to disclose otherwise prohibited information under section 6103, see 26 U.S.C. § 6103(c)-(m); Stokwitz v. United States, 831 F.2d 893, 895 n. 2 (9th Cir. 1987), Sharp was not authorized to disclose return information under any circumstances without the permission of the Commissioner.

Even if the McSurely rationale would have authorized Sharp's disclosure of return information, it is not the law of this circuit. 26 U.S.C. § 6103(a) (1) expressly prohibits an employee of the United States from disclosing any return or return information obtained in connection with his service as an employee of the United States. 26 U.S.C. § 7213(a) (1) imposes a penalty of up to $5,000 and five years imprisonment for the unauthorized disclosure of returns or return information (as defined in section 6103(b)) by a Federal employee. Because the clear language of the statute invoked by Sharp would subject him to criminal penalties if he disclosed return information2 , Laxalt was not reasonable in asserting that section 6103 did not prohibit Sharp from disclosing tax return information.

B. Character of information sought by Laxalt

Laxalt asserts that the information sought from Sharp was not "tax return" information which is subject to the prohibition of section 6103, because it stemmed from an internal investigation of an IRS employee. Sharp counters that he was a special agent in the IRS's Criminal Division and not an employee of the IRS's Inspection Division, which conducts internal investigations. Since the primary responsibility of an IRS criminal agent is to investigate criminal violations of the Internal Revenue Code, Sharp contends that the information obtained in the scope of his employment is return information.

26 U.S.C. § 6103(b) (2) includes within its definition of return information, "data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to ... the determination of the existence, or possible existence, of liability ... for any tax ..., or other imposition, or offense." Although not all criminal violations of the Internal Revenue Code relate to tax return information, see, e.g., 26 U.S.C. § 7212, it does appear that the information sought by Laxalt pertained to return information. During Sharp's deposition, Laxalt asked Sharp if he had "ever prepared any reports on an alleged scam occurring at [Laxalt's casino]", and if he had "ever [witnessed] any alleged scam at [Laxalt's casino]". Since the reference to the "alleged scam" related to the skimming of casino profits, which would impact the casino's tax liability, the information sought was return information.

Laxalt's contention that Sharp improperly invoked his Fifth Amendment privilege is essentially a reformulation of the arguments advanced concerning the applicability of 26 U.S.C. § 6103 to the information sought at Sharp's deposition. Because the information sought by Laxalt was within the scope of section 6103, Sharp's invocation of his Fifth Amendment privilege was proper. See Matter of Seper, 705 F.2d 1499, 1501-02 (9th Cir. 1983).

Because Laxalt's proffered explanations did not provide a substantial justification for filing the motion to compel Sharp's testimony, the district court did not abuse its discretion in awarding Sharp's expenses incurred in opposing the motion.

The district court also imposed sanctions against Laxalt under Fed. R. Civ. P. 37(a) (4) and alternatively, under Fed. R. Civ. P. 11, for filing the motion to transfer. Laxalt contends that the imposition of sanctions under Rule 37(a) (4) was an abuse of discretion, because the motion to transfer was not a discovery motion subject to the provisions of Rule 37. Laxalt further contends that sanctions were unwarranted under Rule 11, because the motion was neither subjectively nor objectively frivolous.

Laxalt's motion to transfer the motion to compel Sharp's testimony falls squarely within the scope of Rule 37. The motion to transfer was based upon Laxalt's interpretation of Rule 37(a) (1). Moreover, the motion was ancillary to the motion to compel; it had no impact on the litigation apart from determining the forum for adjudicating the underlying discovery dispute. By filing the motion to transfer, Laxalt forced both the district court and Sharp to address the motion before turning to the merits of the underlying motion to compel. As the express purpose behind Rule 37(a) (4) is to "deter the abuse implicit in carrying or forcing a discovery dispute to court when no genuine dispute exists", Fed. R. Civ. P. 37(a) (4) advisory committee's note (1970), the filing of an unwarranted motion to transfer a discovery motion is as abusive as the filing of the underlying motion and is therefore subject to Rule 37.

Fed. R. Civ. P. 37(a) (1) provides:

An application for an order to a party may be made to the court in which the action is pending, or, on matters relating to a deposition, to the court in the district where the deposition is being taken. An application for an order to a deponent who is not a party shall be made to the court in the district where the deposition is being taken.

(Emphasis added).

Sharp was a non-party deponent whose deposition was taken in the Northern District of California. Consequently, the express language of Rule 37(a) (1) required that Laxalt file the motion to compel Sharp's testimony in the Northern District of California. Because no other district, including the District of Nevada, possessed the authority to entertain the motion to compel Sharp's testimony, See Wright & Miller, Federal Practice and Procedure, Sec. 2287; In re Corrugated Container Anti-trust Litigation, 620 F.2d 1086, 1090 (5th Cir. 1980), cert. denied, 449 U.S. 1102 (1981); First National Bank at Thermopolis v. Western Cas. and Sur. Co., 598 F.2d 1203, 1205-06 (10th Cir. 1979), Laxalt was not substantially justified in filing the motion to transfer.

Despite the unambiguous language of Rule 37(a) (1), Laxalt contends that he had a justifiable basis for filing the motion to transfer because: (1) Fed. R. Civ. P. 26(c) permits the transfer of a non-party deponent's motion for a protective order; (2) the District of Maryland and the Eastern District of Pennsylvania, in published opinions, have ordered the transfer of a motion to compel the responses of a non-party deponent; and (3) the district courts for the District of Columbia and the Eastern District of California each issued orders in the underlying libel action which validated the filing of the motion to transfer.

In the face of the express language of Rule 37(a) (1), none of Laxalt's proffered rationales provide substantial justification for filing the motion to transfer. First, the venue provision of Fed. R. Civ. P. 26(c) has no application to Rule 37(a) (1). Rule 26(c) permits a non-party deponent to seek a protective order in either the district where the action is pending or in the district where the deposition is to be taken. If a deponent files a protective order in the district where the deposition is to be taken, Rule 26(c) authorizes the court to "remit the deponent ... to the court where the action is pending". Fed. R. Civ. P. 26(c) advisory committee's note (1970). Contrary to Laxalt's assertions, this provision is not analogous to Rule 37(a) (1) because Rule 26(c) involves a situation in which a non-party deponent has submitted to the jurisdiction of the court by filing a motion for a protective order. Furthermore, the absence of a similar provision within Rule 37(a) (1) (or the advisory notes contained therein) indicates that the drafters intended that a motion to compel the testimony of a non-party deponent can only be entertained in the district in which the deposition is being taken.

Second, the decisions cited by Laxalt, S.E.C. v. Paradyne Corp., 601 F. Supp. 560 (D. Md. 1985), and In re Subpoena to Ford Aerospace and Communications Corp., 27 Fed.R.Serv.2d 402 (E.D.Penn.1979), do not stand for the proposition that transfer of a motion to compel a non-party deponent's testimony is generally permissible. In Paradyne, the defendant deposed a non-party in the District of Maryland. The defendant then filed motions in the District of Maryland to compel the non-party's testimony, to exclude third-party counsel from the deposition, and to transfer the motions to the Eastern District of Florida, where the underlying action was pending. The Maryland district court permitted the transfer of the motion to exclude counsel, but declined to transfer the motion to compel, stating that "there would appear to be considerable doubt as to whether this Court has the power to transfer ... any order directed to [the non-party deponent] to any federal district court outside the District of Maryland". Paradyne, 601 F. Supp. at 561-62. Instead, the court stayed consideration of the motion to compel, pending the disposition of the motion transferred to the Florida district court. Paradyne simply does not support Laxalt's filing the motion to transfer; if anything, Paradyne provides further support for the proposition that a motion to compel a non-party's deposition testimony may not be transferred.

Ford Aerospace, 27 Fed.R.Serv.2d 402, arose out of a patent infringement action in the Eastern District of Wisconsin. The defendants in the patent action obtained a subpoena from the Eastern District of Pennsylvania for discovery of certain documents possessed by Ford Aerospace, a non-party to the action. Ford refused to produce the documents and the defendants filed a motion in the Eastern District of Pennsylvania to compel production of the documents. Ford then submitted the documents under seal to the district court for in camera inspection to resolve the dispute. The district court noted that although the controversy involved "complex and esoteric" patent issues, and that it would be "unable to devote the study and thought that such complex issues are normally given", 27 Fed.R.Serv. at 403, it was required to rule on the motion to compel because "a non-party deponent has been served." Id. at 403-04. The court then denied the motion without prejudice and forwarded copies of the documents to the Eastern District of Wisconsin "in fairness to the parties and in deference to the expertise of the Wisconsin trial judge." Id. at 404.

Although the district judge's order had the effect of transferring the motion to compel to the Eastern District of Wisconsin, he recognized that Rule 37(a) compelled him to decide the motion. The judge's decision to forward the documents to the Eastern District of Wisconsin was attributable solely to the complexity of the issues involved and to the proximity to trial. As the present case involved neither of these exigencies, Ford Aerospace provides no rationale which would support Laxalt's filing of the motion to transfer.

Finally, the orders issued by the judges in the District of Columbia and the Eastern District of California do not establish substantial justification for filing the motion to transfer. In the first order, Judge Ritchey of the District of Columbia requested briefing on the appropriateness of an order to transfer a discovery matter involving a non-party. However, Judge Ritchey resolved the issue by appointing a Special Master, pursuant to Fed. R. Civ. P. 53, in lieu of transferring the matter. As Rule 53(a) provides that a district court "in which any action is pending may appoint a special master therein", such appointment provides no authority for a transfer of a motion to compel.

In the second order, Judge Schwartz of the Eastern District of California transferred a motion to compel a non-party deponent's testimony to the District of Nevada. In so doing, however, Judge Schwartz supplied no authority or rationale for departing from the express language of Rule 37(a) (1). Moreover, Judge Schwartz's order was entered after Laxalt filed the present motion to transfer. While Judge Schwartz's order may have made Laxalt optimistic with regard to the previously filed motion to transfer Sharp's deposition, it does not provide a sufficient basis to conclude that the district court abused its discretion in determining that Laxalt's motion to transfer was not substantially justified.

Sharp contends that he should be awarded attorney's fees and costs incurred in connection with this appeal. Sharp argues that the award of attorney's fees and costs on appeal is supported by our decision in Mickwee v. Hsu, 753 F.2d 770 (9th Cir. 1985) (per curiam), which stated:

When the trial court has imposed sanctions for failure to comply with discovery and the order is appealed, as a general rule attorney's fees should be awarded where the discovery order is upheld. Failure to award attorney's fees in such instances would substantially diminish the value of the award made in the trial court and thus frustrate the purpose of Fed. R. Civ. P. 37. See Tamari v. Bache & Co. (Lebanon) S.A.L., 729 F.2d 469, 475 (7th Cir. 1984).

Although Mickwee concerned an appeal of an award of sanctions for failure to comply with discovery under Fed. R. Civ. P. 37(b), we find that its rationale is equally applicable to an appeal of an award under Fed. R. Civ. P. 37(a) (4). Rule 37(a) (4) is designed to "deter the abuse implicit in carrying or forcing a discovery dispute to court when no genuine dispute exists." Fed. R. Civ. P. 37(a) (4) advisory committee's note (1970). When a party against whom Rule 37(a) (4) expenses have been imposed chooses to appeal the award of expenses, the abuse inherent in forcing the dispute to court is compounded and the initial award of fees becomes trivialized. To deter this abuse and to maintain consistency with Mickwee, we hold that attorney's fees and costs should be awarded where a district court's award of Rule 37(a) (4) expenses is upheld on appeal. In the present case, we see no reason to depart from the general rule announced in Mickwee which calls for an award of attorney's fees on appeal. By filing this appeal, Laxalt has forced Sharp, a non-party to the underlying action, to incur substantial additional expenses merely to recover the award of attorney's fees and expenses to which he was entitled. Cf. North American Watch v. Princess Ermine Jewels, 786 F.2d 1447, 1451 (9th Cir. 1986) (attorney's fees on appeal not appropriate where district court imposed sanction of dismissal, as opposed to awarding fees).

The district court's award of costs to Sharp is AFFIRMED and Sharp is awarded reasonable expenses and attorney's fees incurred in connection with this appeal.

WALLACE, Circuit Judge, concurring and dissenting:

I cannot say the district judge abused his discretion in granting sanctions for bringing the motion to compel. But I dissent from the majority position that we can affirm sanctions for bringing the motion to transfer. Beasley probably had a losing argument, but I am far from convinced that it was sanctionable.

 *

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3

 1

Prior to August 12, 1987, the underlying libel action was settled between Laxalt and the defendants. Thus, the only remaining issue is the propriety of the sanctions awarded against Beasley

 2

This court has recognized that 26 U.S.C. § 7213(a) (3), which proscribes the willful publication of illegally disclosed tax return information, provides a legitimate basis for a non-party deponent's invocation of his Fifth Amendment privilege. See Matter of Seper, 705 F.2d 1499 (9th Cir. 1983)