New Jersey Divorce Article
DO PARTNERS AND CO-SHAREHOLDERS
HAVE RIGHTS OF PRIVACY IN DIVORCE DISCOVERY?
BY
CHARLES F. VUOTTO, JR., ESQ.
and
JEFFREY K. EPSTEIN, ESQ.
WITH SPECIAL THANKS to
KRISTIN M. CAPALBO
In financially complex divorces, it is often necessary to obtain information from persons or entities not parties to the litigation. 2-12 Family Law and Practice §12.05 [1] (Matthew Bender & Co. Inc., 2003). This is especially necessary in cases where a spouse owns a partial interest in a business, i.e. Brown v. Brown, 348 N.J. Super. 466 (App. Div. 2002). Information is ordinarily obtained through testimony at a deposition, attendance at which is compelled by subpoena, which may also demand the production of documents. Id. When a non-party is subpoenaed, a typical response is to file a motion to quash based on invasion of the non-party’s privacy. Id. The question addressed by this article is, does such a right of privacy exist? The short answer is a qualified “yes”.
While New Jersey courts favor broad and liberal discovery, they have held that discovery is “not unbridled and unlimited.” Berrie v. Berrie, 188 N.J. Super. 274, 282 (Ch.Div. 1983). In considering a motion to quash the subpoena, the courts will consider multiple factors including:
[1] the interests of the proposed deponents and the outcome of the litigation;
[2] the necessity or importance of the information sought in relation to the main case;
[3] the ease of supplying information requested,
[4] the significance of the rights or interests which the non-party seeks to protect by limiting disclosure; and
[5] the availability of a less burdensome means of accomplishing the objective of the discovery sought. Id. at 284.
Generally, New Jersey courts will enter an Order that allows discovery, yet also implements procedures that protect the non-party’s privacy interests. 2-12 Family Law and Practice §12.05 [1], supra. Potential safeguards include the issuance of a protective order (see Gerson v. Gerson, 148 N.J. Super. 194 (Ch. Div. 1977)); appointment of an independent expert or accountant (see Merns v. Merns, 185 N.J. Super. 529 (Ch.Div. 1982)); partial disclosure (see De Graaff v. De Graaff, 163 N.J. Super. 578 (App. Div. 1978)); and in camera review of documents (see Weingarten v. Weingarten, 234 N.J. Super. 318 (App. Div. 1989)).
In New Jersey, discovery in family matters is governed by R. 5:5-1. Generally, section (c) provides that depositions “of any person, excluding family members under the age of 18, and including parties or experts, as of course may be taken pursuant to R. 4:11 et seq.” Under section (d) of the Rule, other discovery of third parties “shall be permitted only by leave of court for good cause shown except for production of documents (R. 4:18-1); request for admissions (R. 4:22-1); and copies of documents referred to in pleadings (R. 4:18-2) which shall be permitted as of right.” R. 5:5-1(d).
The discovery rules regarding third parties have changed over time. In 1948, the Supreme Court of New Jersey announced that “the presentation of the truth to the court is paramount; it must proceed unimpeded and unhampered despite claims of prying, where…there exists the means of affording adequate protection against unthwarted intrusion and invasion of the rights of one party by another party.” Bead Chain Mfg. Co. v. Smith, 1 N.J. 118, 121 (1948) (reversing the trial court’s order which denied plaintiff’s application for inspection of defendant corporation’s machinery where the information sought was “essential to a determination of the truth of the matters charged in the complaint.”). The holding in Bead reflects how the early courts clearly favored expansive discovery, yet still recognized the importance of protecting against intrusion and invasion of a party’s rights.
In 1977, the Superior Court of New Jersey addressed the issue of third party discovery rights with regard to closely-held corporations in matrimonial actions. See Gerson, supra. In Gerson, plaintiff wife sought to inspect the books and records of a corporation in which defendant husband and his brother were equal owners to determine the value of the asset for purposes of equitable distribution. Id. at 196-97. Defendant’s brother, as 50% owner and co-shareholder, objected to the discovery demand. In granting plaintiff’s motion to allow discovery, the court stated that “the corporate form should not be used as a shield behind which parties can conceal assets from the intent of our equitable distribution statutes. The form of ownership a husband chooses for his business ventures should not deprive the wife of the discovery to which she would otherwise be entitled.” Id. at 201.
The court set forth the procedure for evaluating objections to discovery by third parties as follows:
Where, as in this case, the books in question are not those of a party, but those of a corporation not a party to the suit, it would seem that three elements should be considered by the Court in determining, as a matter of discretion, whether the defendant should be subjected to the Order here sought: (a) whether good cause has been shown for the examination; (b) whether one not a party to the suit may be unduly affected by revelation of its private affairs; and (c) whether the books and records are in the possession, custody or control of the other party. The general rule with regard to inspection of documents is that inspection orders should issue upon a showing that the desired inspection of the document or other property is relevant to the subject matter of the pending action and will aid the moving party in the preparation of his case, or otherwise facilitate proof of her progress at the trial, or the denial of prejudice to the moving party. Gerson at 198, (citing Gross v. Kennedy, 15 N.J. Super. 118 (Law. Div. 1951)).
The court reasoned that once a court determines that an asset is subject to equitable distribution, it is necessary that the court have the ability to appraise the value of the asset so that it can determine a fair allocation. The court further stated:
In the case of a closely held corporation, the only feasible method for valuing the husband’s ownership interests lies in an examination of the corporations’ entire financial structure and condition. If such an examination threatens the legitimate interests of other shareholders or the corporate entity itself, an appropriate Protective Order limiting disclosure of such information may be sought. Id. at 200.
Clearly, the court adopted a broad and liberal approach to discovery in matrimonial actions. However, the court also set forth a mechanism to safeguard the privacy rights of non-parties by way of a Protective Order. Attached hereto is a proposed form of protective order that can be used as a starting point for practitioners.
The following year, the Appellate Division discussed an additional procedure to protect third parties – partial disclosure. See De Graaff, supra. In De Graaff, appellant ex-husband challenged a trial court order requiring him to produce a copy of his federal income tax return for the purpose of determining his child support obligation because his present spouse, a non-party, objected on the grounds that the tax return was filed jointly, and therefore disclosure of the return would result in the release of her personal financial information. Id. at 579
The Appellate Division modified the trial court’s order to require that all matters relating to the income of appellant’s present spouse be excised from the tax return before being produced to appellee ex-wife. In reaching its conclusion, the Appellate Division noted that “while income tax records are not privileged, discovery and inspection of income tax returns requires a showing of good cause.” Id. at 582. The court further stated:
The average taxpayer is sensitive about his return and wishes to keep it from publication. He is entitled to that privacy unless there is strong need to invade it. If disclosure will not serve a substantial purpose, it should not be ordered at all. If ordered, disclosure should be no greater than justice requires. The disclosure of entire returns should never be ordered if partial disclosure will suffice, and in all the clearest cases, the return should be examined by the judge before any disclosure is ordered. Even then, the judge should impose such restrictions and limitations as may be necessary for the protection of the taxpayer. Id. at 582, (citing Ullmann v. Hartford Fire Ins. Co., 87 N.J. Super. 409 (App. Div. 1965)).
In De Graaff, the Appellate Division cited to the New Jersey Supreme Court case of Irval Realty v. Bd. of Pub. Util. Comm’rs, 61 N.J. 366 (1972), which discussed the duty of the trial court to balance the competing factors of disclosure and confidentiality. In Irval, Justice Mountain gave the following instruction regarding partial disclosure:
In all future cases of this sort, where a controversy arises, the decision should be made by the trial judge to whom the issue will be presented, either on motion or otherwise. He should call for and examine the report or other records. If in his sound judgment some part or all of the information therein contained should not be revealed, he will so rule. If the whole of the record cannot be shown to the parties seeking discovery, but certain portions may be, then the judge should extract these portions and make them available for perusal or direct such other possible steps be taken as well as will achieve the desired result. This kind of selective practice has for some time been successfully followed with respect to such sensitive documents as income tax returns, corporate records that touch upon trade or business secrets and the like. De Graaff, supra 163 N.J. Super. at 582-83 (citing Irval, supra 61 N.J. at 375-76).
While De Graaf seems to limit the scope of allowable discovery where a non-party objects to disclosure, the 1982 Superior Court decision in Merns, expanded the holding in Gerson to allow examination of a corporation’s books and records where a party is merely a minority shareholder. Merns, supra. In Merns, plaintiff wife filed a pendente lite motion for inspection of the books and records of a family-held corporation which defendant husband owned a minority interest. The court granted plaintiff’s motion, holding that “this court whole-heartedly endorses Gerson’s call for broad and liberal discovery in matrimonial actions.” Id. at 532, n2. The court did not recognize the option of partial disclosure but instead stated that, “the argument that discovery into the finances of closely held corporations violates privacy interests is satisfactorily dealt with by means of a protective order.” Id. at 532. In addition, the court appointed an independent accountant to review the books and records. Id. at 533.
The following year, the Superior Court again addressed the issue of third party discovery rights, however, the third party objecting to the discovery request was not a partner or co-shareholder, but rather a business competitor. Berrie, supra. In Berrie, plaintiff husband sought to depose his brother regarding certain financial issues that were relevant to equitable distribution in his divorce case. Id. at 277. Plaintiff and his brother operated almost identical businesses and plaintiff argued that “the recent sale of [his brother’s] interests ‘would constitute the closest and most useful comparable for the purpose of the determination by [the court]…of the market value of plaintiff’s business interest.’” Id. Defendant wife objected on the basis that the information was “irrelevant and immaterial.” Plaintiff’s brother also filed his own motion to quash the subpoena.
The court recognized that a non-party can be deposed where information is relevant to a case, and “a non-party deponent may not assert lack of relevancy or materiality since he has no real interest in the outcome of the pending litigation.” Id. at 279-80. However, despite the fact that the information requested by plaintiff was relevant, the court concluded that “such evidence would be collateral and supportive rather than direct proof of the value of plaintiff’s business interests.” Id. at 284. Therefore, the court granted the brother’s motion to quash the subpoena, holding that there were alternative means to valuing plaintiff’s business interests. Id. at 287. The court held that “to require [plaintiff’s brother] to provide discovery over his objection under these circumstances is unreasonable and oppressive, imposes an undue burden upon him and is an unwarranted intrusion and invasion of his rights.” Id.
In reaching its decision, the court discussed third party privacy rights at great length. Specifically, the court acknowledged the holdings in Gerson and Merns which permit liberal discovery in matrimonial actions. However, the court emphasized the limitations on discovery as follows:
Nevertheless, broad as modern discovery may be, it is not unbridled and not unlimited. Upon motion of the person from whom discovery is sought, the Court may make an Order which justice requires to protect the person (R. 4:10-3) and afford adequate protection against unwarranted intrusion and invasion of the rights of such person. All discovery procedures and disclosure requirements impose some burdens on the persons from whom information is sought, the justification for which is a quest for justice. When the burden outweighs the benefit, the tools of discovery become, intentionally or unintentionally, weapons of oppression. This possibility has become apparent when only parties are involved and deserves close scrutiny with respect to the interests of the non-party. Each application to allow or restrict discovery is addressed to the discretion of the Court and requires a balancing of these considerations. Id. at 282-83 (internal citations omitted).
Specifically as to the concept of “privacy,” the Court stated that:
The right of privacy and the right to keep confidential one’s financial affairs is well recognized. It seems to be part of human nature not to desire to disclose them. It is not privileged matter in the legal sense of the term, but even if the information is not privileged, and it is not, it still may be oppressive or unreasonable to require disclosure at the taking of a deposition . . . It seems oppressive and unreasonable to require these persons to disclose this information in advance when many things may happen between now and the trial that might make the disclosure unnecessary.
Modern civil procedure in the Federal courts contemplates liberal disclosure. Discovery is in the interest of justice. Nevertheless, discovery is not unbridled and not unlimited. There must be restrictions to protect individuals in their natural privacy. Hecht v. Pro-Football, Inc., 46 F.R.D. 605, 607 (D.D.C.1969).
As to business records, courts have been most reluctant to force a nonparty competitor to divulge confidential information. United States v. Serta Associates, Inc., 29 F.R.D. 136, 138 (N.D.Ill.1961). Where the need for the information was not sufficient to outweigh the invasion of corporate privacy, discovery has been denied especially where the deponent is not a party to the suit. Premium Service Corp. v. Sperry & Hutchinson Co., 511 F.2d 225, 229 (9 Cir.1975).
In the context of a criminal investigation, Justice Holmes recognized a right to confidentiality of business records in prohibiting:
. . . a fishing expedition into private papers on the possibility that they may disclose evidence . . . The interruption of business, the possible revelation of trade secrets, and the expense of compliance . . . are the least considerations. It is contrary to the first principles of justice to allow a search through all of the respondents’ records, relevant or irrelevant, in the hope that something will turn up. F.T.C. v. American Tabacco Co., 264 U.S. 298, 306, 44 S.Ct. 336, 337, 68 L.Ed. 696, 701 (1921).
Weighing the potential importance and probative value of the main case of the data sought against the existence of a sibling rivalry with strained familial relationship as well as the competitive business positions, this court believes that the right of privacy with respect to personal financial affairs and confidential business information far outweigh the necessity for disclosure in this case. There are other means for proving the value of plaintiff’s business interests without any unwelcome intrusion being visited upon non-parties.
Id. at 286-87.
The court announced the following factors to be weighed when considering a non-party’s application to limit discovery:
[1] the interests of the proposed deponents in the outcome of the litigation;
[2] the necessity or importance of the information sought in relation to the main case;
[3] the ease of supplying information requested,
[4] the significance of the rights or interests which the non-party seeks to protect by limiting disclosure; and
[5] the availability of a less burdensome means of accomplishing the objective of the discovery sought.
Id. at 284.
In conclusion, although not a “privileged matter in the legal sense,” there is a right of privacy, which must be addressed when seeking discovery against a third party. Courts must endeavor to lessen the impact of the invasion of privacy in such a way that balances the needs of the litigants to full information with the interests of non-interested parties to keep their confidential information private. The tools available to the litigants and the Courts are Protective Orders, in camera reviews, independent experts, partial discovery and redacting documents. Utilization of these tools should minimize the intrusive nature of discovery upon non-interested third parties unfortunately involved in divorce related discovery.
SAMPLE PROTECTIVE ORDER
WILENTZ, GOLDMAN & SPITZER P.A.
Attorneys at Law
90 Woodbridge Center Drive
Post Office Box 10
Woodbridge, New Jersey 07095
(732) 636-8000
Attorneys for ______________________
SUPERIOR COURT OF NEW JERSEY
CHANCERY DIVISION-FAMILY PART
____________________COUNTY
DOCKET NO.
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__________________ Plaintiff, v. __________________ Defendant. |
: : : : : |
Civil Action PROTECTIVE ORDER |
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This matter having been brought before the Court by ___________, attorneys for the plaintiff, ______________, and Wilentz, Goldman & Spitzer, P.C. (“WG&S”), attorneys for defendant, ______________, and it appearing that the plaintiff has retained _______________, for purposes of performing a valuation of defendant’s ownership interest in _______________ and any other business/entity in which he has an interest, and to confirm the income of perquisites of defendant for the above matrimonial litigation, and has therefore requested the production of certain business records including but not limited to tax returns, financial statements, accountant work papers and associated data and information, of the defendant and his business;
IT IS on this day of , 2003,
ORDERED as follows:
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- Strictly for purposes of valuing plaintiff’s ownership interest in ________________ and any other businesses/entities in which defendant has an interest, and to determine income and perquisites for purposes of this divorce action, ___________ and ___________ shall be permitted conditional access to ______’s financial data and other ________ information and documentation as well as any of the business/entities in which defendant has an interest (all hereinafter “Confidential Information”). This access is conditioned upon plaintiff’s, her attorneys’ and experts’ strict adherence to the terms of this Protective Order.
- Any person provided with Confidential Information shall be deemed an “Information Recipient.”
- The Confidential Information shall not be copied or disclosed (including its substance or contents) to any person, firm, corporation or other entity, except in accordance with the terms and provisions of this Order.
- The only person to whom the plaintiff’s attorney (or staff) may provide a copy of the Confidential Information or to whom the contents or substance thereof may be provided is plaintiff, ________ or other expert retained by plaintiff’s attorney , and to the limited extent that the plaintiff’s expert will be used by the plaintiff prior to and upon the trial of this action in connection with relevant issues pertaining to the value of defendant’s business(es), compensation, income and perquisites and for no other purpose.
- Upon plaintiff’s attorney retaining any expert other than _______, the plaintiff’s attorney shall provide written notice to the defendant’s attorney five (5) business days before providing the Confidential Information to the new expert, which notice shall specify the full name, address, telephone number and facsimile telephone number of said expert. Before providing any Confidential Information to said expert, the plaintiff’s attorney shall provide a copy of this Order to said expert and obtain from such person a signed acknowledgment of the receipt of a copy of this Order in the form annexed as Exhibit “A” (“Confidentiality Confirmation”). A signed copy of the Confidentiality Confirmation shall immediately be provided to defendant’s counsel.
- Any person receiving the Confidential Information pursuant to the terms of this Order shall take all steps necessary to prevent its disclosure to anyone other than those persons to whom disclosure is specifically permitted under the terms of this Order.
- All Confidential Information and all copies thereof shall be maintained in safe and secure facilities under the control of the plaintiff’s attorney and experts; and upon termination of this action, all Confidential Information and all copies thereof shall be returned to the defendant.
- Pleadings, Certifications, Exhibits, Depositions or similar items containing Confidential Information, if filed in Court, shall be filed under seal, if permitted by Court. Specifically, when any documents constituting Confidential Information are made part of a motion or other application to the Court, the party that offers such documents or portions thereof shall submit such documents under seal and shall advise the Court that the documents constitute Confidential Information pursuant to this Order. These documents shall be marked confidential and shall not be available to the public. Similarly, at the trial of this action, any party offering documents for any purpose in Court constituting Confidential Information, shall submit such documents under seal and shall advise the Court that the documents constitute Confidential Information pursuant to this Order.
- The terms and provisions of this Order shall have no effect upon and shall not apply to, the defendant’s use or disclosure of his own Confidential Information for any purpose whatsoever. However, defendant shall be bound by the terms and requirements of this Order for purposes of this litigation.
- If any Information Recipient (a) is subpoenaed in another action, or (b) is served with a demand in another action to which he or she is a party or (c) is served with any legal process by one not a party to this action seeking Confidential Information, the person receiving such subpoena, demand or legal process shall give prompt written notice thereof including a copy of the subpoena, demand or legal process, by hand or telecopier, to the attorneys for the defendant and defendant shall object to its production to the extent permitted by law and shall provide a full and complete copy of this Order in opposing such subpoena, demand or legal process.
- Plaintiff, plaintiff’s attorneys, _________ (or any other expert) and their respective agents, servants, employees and representatives are bound by this Order and are hereby enjoined and restrained from in any way interfering with or affecting defendant’s or _______’s contractual rights.
- A violation of this Order by the plaintiff, plaintiff’s attorney, plaintiff’s expert(s), or any other Information Recipient shall be grounds for an application by defendant or permissible by law.
- The undersigned are authorized to sign this Agreement as above represented.
- At the conclusion of this matter, all confidential documents received by plaintiff shall be returned to defendant’s counsel.
I hereby consent to the form and entry of the within Protective Order and certify that I shall discuss the terms hereof with my client, so that my client will understand the requirements set forth herein.
(INSERT PLAINTIFF’S ATTORNEY), WILENTZ, GOLDMAN & SPITZER
A Professional Corporation
By: __________________ By: ________________
Attorney for Plaintiff Attorney for Defendant
Address: Address:
(INSERT ATTORNEY ADDRESS) P.O. Box 10
90 Woodbridge Center Drive
Woodbridge, NJ 07095
In witness whereof, (INSERT PLAINTIFF’S EXPERT/ACCOUNTANT), by its’ duly authorized employee had caused this Agreement to be executed.
_____________________ __________________________________
Dated: _________________, CPA
For _____________
EXHIBIT A
CONFIDENTIAL CONFIRMATION
I have been provided with and have read the Order annexed hereto, and I acknowledge and agree to the following terms and provisions:
1. To be bound by the Order and by all of its terms and provisions; and
2. All Confidential Information obtained or disclosed to me will be used only for the prosecution or defense of this action in accordance with the terms and provisions of the Order and for no other purposes; and
3. I will take all necessary steps to protect all Confidential Information during the pendency of this action and after the termination of this action; and
4. I will not disclose the Confidential Information to any person for any reason whatsoever pursuant to the terms of the Order.
Dated: ________________________________
Information Recipient (Signature)
________________________________
Print Name
_________________________________
Address
_________________________________
City/State
_________________________________
Telephone Number
_________________________________
Telecopier Number
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