International Oil Field Servs. Corp. v Fadeyi
Annotate this CaseDecided on March 31, 2008
Supreme Court, Nassau County
International Oil Field Services Corp., Plaintiff,
against
Festus Alani Fadeyi a/k/a Festus a Fadeyi a/k/a Festus Fadeyi ("Festus Fadeyi"), Jason Oluwatoyin Fadeyi a/k/a Jason Toyin Fadeyi, a/k/a Jason Fadeyi ("Jason Fadeyi"), Pan Ocean Oil Corporation, Nigeria Css Petroleum Services, LLC, John/Jane Doe No.1, John/Jane Doe #2, John/Jane Doe #3, Nigerian National Petroleum Corporation ("NNPC"), Defendants.
5881-04
COUNSEL FOR PLAINTIFF
Ingerman Smith, LLP
150 Motor Parkway, Suite 400
Hauppauge, New York 11788
COUNSEL FOR DEFENDANTS
Borstein & Sheinbaum, Esqs.
420 Lexington Avenue - Suite 2920
New York, New York 10170
Leonard B. Austin, J.
Plaintiff, International Oil Field Services Corp. ("International"), asserts that, between 1993 and 2003, it paid a substantial sum to Festus to act as its agent in Nigeria to identify and secure business opportunities.
In 1995, Jason acquired an 80% interest in International. That interest gave Jason operational control over International.
Between 1999 and September 2003, at Festus' request, International purchased back Jason's interest in International.
International also had a relationship with Pan Ocean Oil Corporation (Nigeria) ("Pan Ocean"). Pan Ocean is a business alleged to be controlled by Festus. In 1994, International provided the services of one of its petroleum engineers to Pan Ocean. In January 2003, International entered into a one year service agreement with Pan Ocean.
Between December 2002 and November 2003, Festus, while claiming to act on behalf of International, prepared and submitted certain misleading projections to the Nigerian government. He is alleged to have forced International to use substandard products and service providers to make International appear incompetent. During this same period of time, Festus, Jason and other members of their family were setting up CSS Petroleum Services, LLC ("CSS") to handle the business that would have been referred to International.
In November 2003, Pan Ocean terminated its service agreement with International and, effective January 2004, replaced International with CSS.
The essence of International's claim is that it spent significant sums of money over the years believing that Festus and Jason would use their expertise and contacts to assist International to develop business in Nigeria. International alleges that Festus and Jason used their positions to undermine International's reputation in Nigeria. Festus and Jason also set up a competing business, CSS, and diverted International's business opportunities to CSS. Based upon these allegations, International alleges causes of action against Festus and Jason for breach of fiduciary duty. International Oil Field Supply Services Corp. v. Fadeyi, 35 AD3d 372 (2nd Dept. 2006).
On this application, International seeks to compel Festus to produce his income tax returns for the years 1993 through 2003.
At his deposition, Festus denied performing services for, or receiving compensation from, International. Festus testified he received such compensation from Kevin Murtha.
International has produced IRS Forms 1099 issued to Festus indicating that it paid "non-employee compensation" in 1995, 1996, 1997, 1999 and 2001.
International seeks all of Festus' income tax returns to determine whether he was being compensated by Pan Ocean or CSS while being compensated for rendering services on behalf of International.
International also seeks Festus' income tax returns for the purposes of impeachment. International claims Festus' income tax returns contain information that will contradict his deposition testimony. More specifically, International claims Festus was "on the payroll" of Pan Ocean and was compensated for providing services to CSS at a time when he was supposed to be acting on behalf of International. [*2]
International seeks production of Jason's income tax
returns for the years 1995 to 2003. Jason asserts his fiduciary relationship with International
ended in 2000 when he entered into an agreement whereby International purchased his shares.
International asserts that Jason's income tax returns will establish his relationship with
International during that period of time. International also asserts that Jason's income tax returns
will establish when he invested or obtained an interest in CSS and whether he had an interest in
CSS at the same time he had an interest in, or was providing services on behalf of, International.
DISCUSSION
CPLR 3101(a) permits "...full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof."
In determining whether the material sought through discovery is "material and necessary", the court must determine if the demanded material has any bearing on the issues raised in the case and whether the demanded documents will "...sharpen the issues and reduce delay and prolixity." The test is one of usefulness and reason. Allen v. Crowell-Collier Publishing Co., 21 N.Y2d 403, 406 (1968).The demanded material must be produce if it can be used as evidence in chief, for rebuttal or for cross-examination. Id.; and Wind v. Eli Lilly & Co., 164 AD2d 885 (2nd Dept. 1990).
Discovery is permitted of material and documents that may not be admissible in evidence provided that the production of such information may lead to the disclosure of admissible evidence. Southampton Taxpayers Against Reassessment v. Assessor of the Village of Southampton, 176 AD2d 795 (2nd Dept. 1991); and Fell v. Presbyterian Hosp. in the City of New York, 98 AD2d 624 (1st Dept. 1983).
The party seeking discovery has the burden of establishing that the demanded material may lead to the discovery of admissible evidence while the party opposing the production has the burden of establishing that the material is irrelevant, privileged or confidential. Crazytown Furniture, Inc. v. Brooklyn Union Gas, 150 AD2d 420 (2nd Dept.1989); and Herbst v. Bruhn, 106 AD2d 546 (2nd Dept. 1984).
However, the ordinary discovery rules do not apply to income tax returns. "Tax returns are generally not discoverable in the absence of a strong showing that the information is indispensable to the claim and cannot be obtained from any other sources. (Citations omitted)." Latture v. Smith, 304 AD2d 534, 536 (2nd Dept. 2003). See, Benfeld v. Fleming Properties, LLC, 44 AD3d 599 (2nd Dept. 2007); and Altidor v. State-Wide Ins. Co., 22 AD3d 435 (2nd Dept. 2005). A party will not be required to produce an income tax return if the information may be obtained from any other source. Samide v. Roman Catholic Diocese of Brooklyn, 5 AD3d 463 (2nd Dept. 2004).
International does not need copies of Festus or Jason's income tax returns to determine how much it paid to them either as consulting fees, non-employee compensation, employee compensation, dividends or other compensation. This information should be available from International's own records. To the extent that International does not have copies of the tax information it filed over the years, it should be able to obtain them from either its accountant or from the Internal Revenue Service.
International does not need Festus income tax returns to establish his relationship with Pan Ocean. Festus admits he was, at all relevant times, the chairman and managing director of Pan Ocean. Festus' obligations to International and Pan Ocean are determined by his relationship with, and the work he performed or was to perform for, International and Pan [*3]Ocean; not by the amount he was paid. Stated another way, If Festus was acting as International's agent, he owed International a fiduciary duty of good faith and loyalty regardless of the amount he was being paid. Sokoloff v. Harriman Estates Development Corp., 96 NY2d 409 (2001).
International seeks Jason's tax returns to establish (1) his relationship with International in 2003, the time when Jason became an investor in CSS; (2) whether this overlapped with the period where he was supposed to be acting on behalf of International; and (3) the amount Jason invested in CSS.
As with Festus, the amount International paid to Jason, the dates of payment and the status of his stock ownership should be available from in International's own records. Business Corporation Law §624(a) requires a corporation to maintain records indicating the names and addresses of corporate shareholders and the number of shares owned by each shareholder. International's own tax returns reflect that T. Kevin Murtha and Albert Longoria were International's only shareholders during the years 2001, 2002 and 2003. Thus, International does not need Jason's income tax returns to determine whether Jason was a shareholder in International during those years.
Nor does International need Jason's income tax return to determine when Jason acquired an interest in CSS or the extent of his interest. This information should be contained in the business records of CSS. CSS is a domestic limited liability company. Its records can either be obtained through discovery and inspection should they be in the possession of a party or through a subpoena, if not. CPLR 3101(a)(4), 3120, 3122.
As with Festus, Jason's obligations to International are determined by and dependent upon his relationship with it; not how much he received as compensation Thus, as long as Jason was a corporate officer, director or shareholder of International, a closely held corporation, he owed it a fiduciary duty. Global Minerals and Metals Corp v. Holme, 35 AD3d 93 (1st Dept. 2006).
International does not need either Festus or Jason's full income tax returns for any of the
requested years. Those returns contain information that is totally irrelevant to
this litigation. Whether Festus or Jason breached their fiduciary duty to International
is dependent upon their actions, not their income.
International cannot obtain Festus or Jason's income tax return solely to impeach their testimony. "Any impeachment value of any false statements that defendants may have made to the IRS are...clearly outweighed by the strong policy disfavoring disclosure of tax returns." Lichtman v. Gibbons, 30 AD2d 319 (1st Dept. 2006).
Finally, the Court cannot estop Festus from testifying contrary to the information contained in either International's or his records. Festus can, and almost certainly will be, called as a witness to testify at the trial of this action. He will be subject to cross-examination at which time International's counsel can attempt to impeach his testimony through any legally permitted means. See gen'lly, Prince, Richardson on Evidence (11th Edition, Farrell) §6-401, et seq. Ultimately, the weight to be accorded Festus' testimony will be determined by the trier of fact. PJI 1:41.
While International is not entitled to Festus or Jason's entire tax returns, it is entitled to some of the information contained therein. An agent who breaches his fiduciary duty must [*4]account to his principal for the secret profit and must also forfeit any compensation earned during the period of disloyalty. Lamdin v. Broadway Surface Advertising Corp., 272 NY 133 (1936).
When the Plaintiff seeks money damages for breach of fiduciary duty, the statute of limitations is three years. Papp v. Debanne, 16 AD3d 128 (1st Dept. 2005); Dignelli v. Berman, 293 AD2d 565 (2nd Dept., 2002); Yatter v. William Morris Agency, Inc., 256 AD2d 260; and CPLR 214(4). The cause of action for breach of fiduciary duty accrues and the statute of limitations begins to run when the fiduciary has openly repudiated the obligation or the relationship has been terminated. Westchester Religious Institute v. Kamerman, 262 AD2d 131 (1st Dept. 1999).
The precise date upon which the action accrued is not clear. However, it appears that the claims against Festus and Jason involve activities in 2002 and 2003. The cause of action apparently accrued in 2002. Thus, Festus and Jason should produce to International copies of any IRS Forms 1099 they received from CSS for the years 2002 and 2003 or any other tax documents he received from CSS indicating income paid to Festus and/or Jason for these years.
If either Festus and/or Jason breached his fiduciary duty through their activities in CSS, they could be required to pay to International any compensation they received from CSS during their period of disloyalty. Therefore, Festus and Jason should produce any documents they received from CSS indicating income paid to them during the years 2003 to date.
Accordingly, it is,
ORDERED, that Plaintiff's application to compel Festus and Jason to produce their
personal income tax returns is granted to the extent of directing them to deliver to
International within 20 days of the date of service of a copy of this order with notice of
entry copies of all documents received by them from or on behalf of CSS indicating
income paid to them by International during the years 2002 and 2003 and income paid to them by
CSS during the years 2003 to present and is, in all other respects, denied.
This constitutes the decision and Order of the Court.
Dated: Mineola, NY_____________________________
March 31, 2008Hon. Leonard B. Austin, J.S.C.
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