Merritt v. Redwoods Investments, LLC

• Court: District Court, S.D. California
• Decided: September 13, 2019
• Docket: 3:18-cv-01793
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 WILLIAM MERRITT, et al., Case No.: 18-cv-01793-JLS (JLB)

12 Plaintiffs, ORDER: 13 v. (1) DENYING DEFENDANTS 14 REDWOOD INVESTMENTS, LLC, et REDWOOD INVESTMENTS, LLC al., 15 AND CHI KUANG HWANG’S Defendants. MOTION TO QUASH PLAINTIFFS’ 16 FOUR SUBPOENAS TO THIRD 17 PARTIES (ECF No. 57); AND

18 (2) ISSUING PROTECTIVE ORDER 19 20 21 Before the Court is a motion to quash filed by Defendants Redwood Investments, 22 LLC and Chi Kuang Hwang (collectively, “Defendants”) regarding four third-party 23 subpoenas duces tecum issued by Plaintiffs Abdoulaye Diallo (“Diallo”) and William 24 Merritt (“Merritt”) (collectively, “Plaintiffs”) following the Honorable Janis L. 25 Sammartino’s dismissal of their First Amended Complaint. (ECF No. 57.) Plaintiffs 26 oppose the motion. (ECF No. 60.) 27 On September 3, 2019, this motion was referred to the undersigned judge for 28 determination. The Court finds that this motion is suitable for determination on the papers 1 submitted without oral argument. See CivLR 7.1(d)(1). For the reasons set forth below, 2 the Court DENIES the motion to quash, but sua sponte issues a protective order forbidding 3 Plaintiffs from using the formal discovery process to conduct plausibility discovery, 4 effectively quashing the four third-party subpoenas duces tecum issued by Plaintiffs. 5 I. BACKGROUND 6 Dasha Riley and Merritt commenced this action on August 3, 2018 against Redwood 7 Investments, LLC, SoCal Metro Holdings, LLC, Christopher Carnes, and Tonika Miller. 8 (ECF No. 1.) On October 3, 2018, Merritt and Diallo filed a First Amended Complaint 9 (“FAC”)1 against Defendants Redwood Investments, LLC, SoCal Metro Holdings, LLC, 10 Christopher Carnes, Tonika Miller, and Chi Kuang Hwang. (ECF No. 13.) In the FAC, 11 Plaintiffs allege that Defendants “engaged in an illegal and fraudulent transfer of real 12 property commonly known as 4026 Charles Street, San Diego, California, 91941 13 (‘Property’).” (FAC at ¶ 1.) 14 In the FAC, Plaintiffs brought the following claims: a civil RICO violation against 15 all Defendants, civil conspiracy to commit mail fraud and wire fraud against all 16 Defendants, for cancellation of the fraudulent grant deeds against Defendant Carnes, 17 constructive fraud against all Defendants, and elder financial abuse of Merritt against all 18 Defendants. (See id. at ¶¶ 127-85.) Defendants thereafter filed motions to dismiss the 19 FAC. (See ECF Nos. 27, 30, 32.) 20 On August 6, 2019, Judge Sammartino dismissed Plaintiffs’ claim for civil 21 conspiracy to commit mail fraud and wire fraud with prejudice and dismissed Plaintiffs’ 22 RICO claim with leave to amend. (ECF No. 54 at 13-18.) The Court declined to exercise 23 supplemental jurisdiction over Plaintiffs’ remaining state law claims. (Id. at 18-19.) 24 Accordingly, the Court dismissed all of Plaintiffs’ claims. The Court thereafter gave 25 26 27 28 1 1 Plaintiffs thirty (30) days to file a Second Amended Complaint curing the deficiencies in 2 their pleading. (Id. at 22.) 3 On September 3, 2019, Plaintiffs requested a thirty (30) day extension of time to file 4 a Second Amended Complaint because they “require additional time in order to conduct 5 discovery so as to properly plead the particularity and continuity elements of the RICO 6 claim.” (ECF No. 56 at 3.) Finding good cause, the Court granted this extension of time. 7 (ECF No. 59.) Accordingly, Plaintiffs’ Second Amended Complaint is now due on or 8 before October 7, 2019. (Id.) 9 II. LEGAL STANDARD 10 Pursuant to Federal Rule of Civil Procedure 26(b)(1), “[p]arties may obtain 11 discovery regarding any nonprivileged matter that is relevant to any party’s claim or 12 defense and proportional to the needs of the case . . . .” Fed. R. Civ. P. 26(b)(1). Federal 13 Rule of Civil Procedure 45 governs discovery of non-parties by subpoena. See Fed. R. 14 Civ. P. 45(a)(1); Sali v. Corona Reg’l Med. Ctr., 884 F.3d 1218, 1224 (9th Cir. 2018). The 15 Advisory Committee Notes to the 1970 Amendments to Rule 45 state that the “scope of 16 discovery through a subpoena is the same as that applicable to [Federal Rule of Civil 17 Procedure] 34 and the other discovery rules.” Fed. R. Civ. P. 45 advisory committee notes 18 on 1970 amendments. Under Rule 34, the rule governing the production of documents 19 between parties, the proper scope of discovery is as specified in Rule 26(b). Fed. R. Civ. 20 P. 34; see also Heat & Control, Inc. v. Hester Indus., Inc., 785 F.2d 1017, 1023 (Fed. Cir. 21 1986) (“[R]ule 45(b)(1) must be read in light of Rule 26(b)”); Exxon Shipping Co. v. U.S. 22 Dept. of Interior, 34 F.3d 774, 779 (9th Cir. 1994) (applying both Rule 26 and Rule 45 23 standards to a motion to quash subpoena). 24 Under Rule 45, the nonparty served with a subpoena duces tecum may make 25 objections to the subpoena, but must do so within 14 days after service or before the time 26 for compliance, whichever is earlier. Fed. R. Civ. P. 45(d)(2)(B). On timely motion, the 27 court may quash or modify the subpoena. Fed. R. Civ. P. 45(d)(3)(A). As a general rule, 28 “a party has no standing to quash a subpoena served upon a third party, except as to claims 1 of privilege relating to the documents being sought.” Cal. Sportfishing Prot. Alliance v. 2 Chico Scrap Metal, Inc., 299 F.R.D. 638, 643 (E.D. Cal. 2014); see also Moon v. SCP Pool 3 Corp., 232 F.R.D. 633, 636 (C.D. Cal. 2005); Clair v. Schlachter, No. 2:13-cv-804-KJM- 4 EFB P (TEMP), 2016 WL 2984107, at *5 (E.D. Cal. May 23, 2016). “A party’s objection 5 that a subpoena issued to a non-party seeks irrelevant information or imposes an undue 6 burden on the non-party is not grounds on which the objecting party has standing to assert, 7 especially where the non-party, itself, has not objected.” Clair, 2016 WL 2984107, at *5 8 (citing Moon, 232 F.R.D. at 636-37). 9 “A party may, however, move for a protective order in regard to a subpoena issued 10 to a non-party if it believes its own interest is jeopardized by the discovery sought by a 11 third party and has standing under Rule 26(c) to seek a protective order regarding 12 subpoenas issued to non-parties which seek irrelevant information.” Clair, 2016 WL 13 2984107, at *5; see also In re REMEC, Inc. Sec. Litig., No. 04-cv-1948 JLS (AJB), 2008 14 WL 2282647, at *1 (S.D. Cal. May 30, 2008). 15 III. DISCUSSION 16 A. Defendants’ Arguments in Support of Motion to Quash 17 Defendants move to quash the subpoenas duces tecum issued by Plaintiffs to “four 18 different third-party escrow companies for ‘Any Real Properties transactions that involved 19 Redwood Investements LLC’ (sic).” (ECF No. 57-1 at 1.) The subpoenas were issued on 20 August 22 and 27, 2019 to Allison McClosky Escrow Company, Fidelity Escrow, North 21 American Title Company, and the Escrow Source (collectively, the “Subpoenas”). (ECF 22 No. 57 at 1-2.) Defendants move to quash the Subpoenas because the “requests entail 23 producing thousands of pages of real estate transaction documents involving Defendants” 24 and command production by September 5, 2019 at 5:30 p.m. (ECF No. 57-1 at 1.) 25 Specifically, Defendants contend that the Subpoenas request a response in an 26 unreasonably short period of time. (Id. at 1-2.) The Subpoenas seek the production of 27 thousands of pages of documents within nine to fourteen days of service. (Id. at 2.) 28 Defendants further contend that the escrow companies subpoenaed would be “unduly 1 burdened in collecting, copying, redacting, and sending the thousands of pages of 2 documents responsive to Plaintiffs’ overbroad requests.” (Id.) In addition, Defendants 3 would be unduly burdened in reviewing, redacting, and objecting to the thousands of pages 4 of sensitive documents—almost none of which would be pertinent to the instant case. (Id.) 5 In that regard, Defendants note that because they are in the business of purchasing real 6 properties and routinely do so, Plaintiffs’ document requests “would only result in 7 production of documents that are wholly unrelated to Plaintiffs’ case.” (Id.) 8 B. Plaintiffs’ Arguments in Opposition to Motion to Quash 9 Plaintiffs argue that the “subpoenas are essential for [them] to adequately carry their 10 burden to demonstrate to this Court that Defendants have carried out a RICO operation and 11 scheme, for years, in violation of 18 U.S.C. § 1962, et seq.” (ECF No. 60 at 2.) “Plaintiffs 12 believe that the escrow companies identified in the Subpoenas are riff [sic] with fraudulent 13 conduct information about Defendants.” (Id.) Plaintiffs add that they have “already 14 uncovered at least one additional prior fraudulent transaction in which Defendant Redwood 15 Investments was directly participating in and involved the grand theft of cash.” (Id.) 16 Plaintiffs contend that their requests are not overbroad, burdensome, irrelevant, or 17 oppressive. (Id. at 3.) Plaintiffs further contend they have “merely requested files from 18 the escrow companies that bear the Defendant’s [sic] transactions.” (Id.) 19 Plaintiffs do not suggest that the subpoenaed parties objected to the Subpoenas under 20 Rule 45. Rather, Plaintiffs indicate that they anticipate receiving the documents “within 21 the next weeks” and may have already received some responsive documents. (See id. at 2- 22 3.) 23 /// 24 /// 25 /// 26 // 27 /// 28 /// 1 C. Analysis 2 As an initial matter, Defendants do not appear to have standing under Rule 45 to 3 move to quash the subpoena. Defendants do not assert claims of privilege relating to the 4 documents being sought. (See ECF No. 57-1.) Instead, Defendants focus on the 5 unreasonable deadline, the undue burden on the subpoenaed parties, and the irrelevance of 6 the documents sought. (See id. at 2.) These arguments are insufficient to confer standing. 7 See Clair, 2016 WL 2984107, at *5. 8 Defendants further contend that they would have to significantly redact the 9 documents in order to remove “proprietary and confidential information—including the 10 personal information, payment information, and contact information of Defendants’ 11 investors.” (ECF No. 57-1 at 2.) However, it is unclear why Defendants, rather than the 12 subpoenaed parties, would be involved in redacting such information. As Defendants have 13 failed to establish standing to quash the subpoenas, the Court DENIES Defendants’ motion 14 to quash. 15 However, the Court finds good cause to issue a protective order effectively quashing 16 the subpoenas. Under Rule 26(c), and in the inherent discretion of a court to manage its 17 own discovery, a court may sua sponte enter a protective order for good cause shown. See 18 McCoy v. Sw. Airlines Co., 211 F.R.D. 381, 385-86 (C.D. Cal. 2002); Coleman v. 19 Schwarzenegger, No. C 01-1351TEH, 2007 WL 4276554, at *1 (E.D. Cal. Nov. 29, 2007). 20 The Court finds it appropriate to issue one here. Plaintiffs claim that they are using the 21 formal discovery process in order to ascertain facts to support their claims in a yet-to-be- 22 filed Second Amended Complaint. Such discovery is improper. 23 “[T]he Ninth Circuit Court of Appeals and the United States Supreme Court have 24 both determined that a plaintiff must satisfy the pleading requirements of Federal Rule of 25 Civil Procedure 8(a) before proceeding to discovery.” Pallamary v. Elite Show Servs., Inc., 26 No. 17-cv-2010-WQH-BGS, 2018 WL 3064933, at *4 (S.D. Cal. June 19, 2018) (citing 27 Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009) (“Rule 8 . . . does not unlock the doors of 28 discovery for a plaintiff armed with nothing more than conclusions.”); Bell Atlantic Corp. 1 v. Twombly, 550 U.S. 544, 559 (2007) (“It is no answer to say that a claim just shy of a 2 plausible entitlement to relief can, if groundless, be weeded out early in the discovery 3 process through ‘careful case management.’”); Mujica v. AirScan, Inc., 771 F.3d 580, 593 4 (9th Cir. 2014) (“The Supreme Court has stated, however, that plaintiffs must satisfy the 5 pleading requirements of Rule 8 before the discovery stage, not after it.”)). 6 In Persian Gulf Inc. v. BP W. Coast Prod. LLC, 225 F. Supp. 3d 1178 (S.D. Cal. 7 2016) (Skomal, J.), the court squarely addressed the question of whether a court has 8 discretion to allow a plaintiff “limited plausibility discovery” prior to filing an amended 9 complaint, where the prior complaint was dismissed under Federal Rule of Civil Procedure 10 12(b)(6) for failure to meet the plausibility requirements set forth in Iqbal and Twombly. 11 Id. at 1179. The court held that the “unambiguous directive in Iqbal and Mujica does not 12 allow the court discretion to order pre amendment plausibility discovery.” Id. at 1180. 13 Simply stated, “Plaintiffs are not entitled to discovery in order to allege sufficient facts to 14 nudge its claim across the line from conceivable to plausible.” Id. (citations and internal 15 quotation marks omitted); see also Hu Honua Bioenergy, LLC v. Hawaiian Elec. Indus., 16 Inc., No. CV 16-00634 JMS-KJM, 2017 WL 11139576, at *2 (D. Haw. July 6, 2017) (“The 17 law is well settled that a plaintiff is not entitled to discovery it might need to state a 18 plausible claim for relief.”). 19 Based on the foregoing, the Court finds good cause to issue a protective order 20 forbidding Plaintiffs the use of the formal discovery process in order to allege sufficient 21 facts to nudge their civil RICO claim into the realm of plausibility. In practical terms, the 22 Subpoenas are effectively quashed. 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 1 |}IV. CONCLUSION 2 Based on the foregoing, the Court ORDERS as follows: 3 1. Defendants’ motion to quash is DENIED. 4 2. The Court sua sponte issues a protective order forbidding Plaintiffs from using 5 the formal discovery process to conduct plausibility discovery, effectively 6 quashing the Subpoenas served on Allison McClosky Escrow Company, 7 Fidelity Escrow, North American Title Company, and the Escrow Source. 8 3. Plaintiffs shall promptly serve a copy of this Order on all subpoenaed parties. 9 IT IS SO ORDERED. 10 || Dated: September 13, 2019 11 %

13 n. Jill L. Burkhardt rited States Magistrate Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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