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
2003
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.
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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:
1.
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.
2.
Any person
provided with Confidential Information shall be deemed an “Information
Recipient.”
3.
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.
4.
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.
5.
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.
6.
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.
7.
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.
8.
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.
9.
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.
10.
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.
11.
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.
12.
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.
13.
The undersigned
are authorized to sign this Agreement as above represented.
14.
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 _____________
