Raphael v. Rizk CA2/2

Filed 11/2/15 Raphael v. Rizk CA2/2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
YOUSSEF I. RAPHAEL, B259417
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. KC061475)
v.
GEORGE E. RIZK,
Defendant and Appellant;
LAW OFFICES OF HENRY HADDAD,
APC, et al.,
Appellants.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Robert A. Dukes, Judge. Affirmed.
Vakili & Leus, Sa’id Vakili, Robert M. Zabb, John A. Schlaff for Defendant and
Appellant George E. Rizk.
Law Offices of Henry Haddad, Henry Haddad for Appellants Law Offices of
Henry Haddad, APC, and Henry Haddad.
Law Office of Richard M. Foster, Richard M. Foster, Sylvia Saltanyan for Plaintiff
and Respondent.
___________________________________________________
The trial court imposed monetary sanctions on George Rizk and attorney Henry
Haddad after they violated a court order directing the production of personal tax returns.
(Code Civ. Proc., § 2023.010 et seq.)1 Sanctions were proper: there was no justification
for violating a discovery order. This frivolous appeal warrants sanctions. (§ 907.)
FACTS
Youssef Raphael’s Lawsuit
In 1987, plaintiff Youssef Raphael, a resident of Lebanon, formed a California
corporation called Caderex, Inc., in which he owned a 40 percent interest. Jean Rizk was
a 20 percent shareholder and a director and officer of Caderex; his brother George Rizk
was the corporate secretary.2 In 1988, Caderex took title to real property in La Verne
containing a service station. Plaintiff provided cash, while Jean Rizk oversaw the day-to-
day operations of the business, known as J.R. Shell.
In 2008, Jean and George Rizk conveyed the La Verne property owned by
Caderex to themselves. Plaintiff was unaware of this transfer. George Rizk then
dissolved Caderex, without authorization from the corporation’s board of directors.
Plaintiff was deprived of his investment in Caderex by the Rizks’ actions. Plaintiff sued
the Rizks and Caderex for fraud; constructive fraud; conversion; breach of fiduciary duty;
intentional interference with prospective business advantage; and fraudulent conveyance.
The Discovery Disputes
When plaintiff subpoenaed tax returns for Caderex, J.R. Shell and the Rizks in
2012, Rizk moved to quash on the grounds of privilege. The trial court referred the
discovery dispute to a retired judge, Gregory C. O’Brien, Jr. (§ 639, subd. (a)(5).) Based
on recommendations in the referee’s first report, the trial court ordered Rizk to produce
Caderex’s tax returns.
1 Unlabeled statutory references in this opinion are to the Code of Civil Procedure.
2 Jean Rizk died in 2008. George Rizk is the estate’s personal representative. As
used in this opinion, “Rizk” refers to George Rizk, unless otherwise stated.
2
In a second report, the referee recommended that Rizk be ordered (through his
CPA, Roy McGarrell) to produce all business records, including tax records, for J.R.
Shell, regardless of whether the records are in the name of Caderex, Jean Rizk, George
Rizk, or the latter’s spouse. The referee noted that George Rizk’s “personal tax records
may in fact be the only tax records for J.R. Shell after Jean’s death. This problem may
also extend to the tax records of Mrs. Rizk.”3 Rizk challenged the referee’s second
report. At a hearing on April 8, 2014, the trial court rejected Rizk’s challenge to the
production of his personal tax returns.
The deposition of CPA McGarrell was held, attended by the referee. McGarrell
failed to produce tax documents, and Rizk raised more objections to the production of his
tax returns. Plaintiff asked the referee to sanction Rizk for violating a court order.
The Referee’s Third Report and Related Court Order
The referee issued a third report regarding tax returns. He wrote, “I wish to advise
the Court that I was frankly shocked by the testimony of Mr. McGarrell. The fact that he
said he had not been instructed to bring the tax records of George Rizk, following the
intensely litigated dispute over this matter strikes me as someone’s defiance of a court
order.” The referee recommended that (1) McGarrell be ordered to bring all tax
documents to a supervised deposition, (2) plaintiff’s counsel be awarded $2,700, plus
referee’s and court reporter’s fees, and (3) Rizk and his attorney be warned that any
failure to produce documents may result in evidentiary or terminating sanctions.
Plaintiff submitted the third report to the trial court, along with a request for
discovery sanctions in the amount of $7,673.80. Rizk contested the referee’s third report,
arguing that he should not have to produce his personal tax returns because they do not
contain tax information regarding J.R. Shell. Rizk maintained that the tax records of J.R.
3 Rizk’s attorney Henry Haddad wrote a letter stating, “J.R. Shell does not file a tax
return on its own but [its income] is included in the personal tax return of George E.
Rizk.” Rizk later claimed that this was “scrivener’s error” and the income for J.R. Shell
is not included in his personal returns.
3
Shell were already produced, and he should not be sanctioned because he has no control
over McGarrell’s failure to produce documents at a deposition. Rizk termed plaintiff’s
request for sanctions to be “exorbitant” and “unreasonable” as well as “unjustified.”
The court ruled on the referee’s third report on September 3, 2014. The court
rejected Rizk’s objections, reciting its April 2014 ruling that “‘both Jean Rizk and George
Rizk waived the [taxpayer] privilege by filing the business returns under their tax returns,
an intentional act on their part. Further, the gravamen of this lawsuit is the wrongful
conversion by Defendant George Rizk and his brother Jean Rizk of the assets of Caderex,
which include J.R. Shell. Therefore, the gravamen of this lawsuit is inconsistent with the
continued assertion of the taxpayer privilege. Finally, the purpose of the privilege is to
encourage a taxpayer to make full and truthful declarations in his return. It is not to
facilitate the taxpayer in perpetrating a fraud, [which] would be inconsistent with public
policy.’” Also, the court listed a new reason: Rizk “fail[ed] to raise the objection to his
own return in a timely manner,” thereby waiving the privilege.
The court wrote that Rizk “ignor[ed] the court’s earlier finding and rulings.” The
basis for the lawsuit—the Rizk brothers’ unlawful conversion of Caderex’s assets—
remains unchanged. Rizk’s continuing objections are inappropriate, given the allegations
in plaintiff’s complaint. The court awarded plaintiff sanctions of $9,173, payable by Rizk
and his attorney, jointly and severally.
DISCUSSION
The Trial Court’s Order Imposing Discovery Sanctions
Appeal lies from an interlocutory judgment or an order directing a party or an
attorney to pay monetary sanctions of $5,000 or more. (§ 904.1, subd. (a)(11)-(12).)
This applies to sanctions imposed for discovery abuse. (Rail-Transport Employees Assn.
v. Union Pacific Motor Freight (1996) 46 Cal. App. 4th 469, 471-475; Doe v. United
States Swimming, Inc. (2011) 200 Cal. App. 4th 1424, 1432; Ellis v. Toshiba America
Information Systems, Inc. (2013) 218 Cal. App. 4th 853, 868.)
The court may impose monetary sanctions for misuse of the discovery process on
a party “or any attorney advising that conduct, or both,” unless they “acted with
4
substantial justification or [ ] other circumstances make the imposition of the sanction
unjust.” (§ 2023.030, subd. (a).) The sanctions may cover “reasonable expenses,
including attorney’s fees, incurred by anyone as a result of that conduct.” (Ibid.)
“The trial court has broad discretion in selecting discovery sanctions, subject to
reversal only for abuse.” (Doppes v. Bentley Motors, Inc. (2009) 174 Cal. App. 4th 967,
992-994 [trial court erred by failing to impose terminating sanctions after defendant
violated discovery orders, because less severe sanctions were ineffective].) All
evidentiary conflicts are resolved in favor of the trial court’s ruling, which can be
overturned only if it is arbitrary, capricious or whimsical. Appellants bear the burden of
affirmatively demonstrating error. (Williams v. Russ (2008) 167 Cal. App. 4th 1215,
1224.) The issue on appeal “‘is not whether the trial court should have imposed a lesser
sanction; rather, the question is whether the trial court abused its discretion by imposing
the sanction it chose,’” so that defendants will not “‘benefit from their stalling tactics.’”
(Collisson & Kaplan v. Hartunian (1994) 21 Cal. App. 4th 1611, 1619-1620.)
We note, at the outset, that Attorney Haddad did not file objections to the referee’s
recommendation that sanctions be imposed against Rizk “and his counsel of record.”
“The failure to file a written objection to the contents of the referee’s report or to properly
move to set aside the report results in the waiver of the right to object to the referee’s
findings.” (Martino v. Denevi (1986) 182 Cal. App. 3d 553, 557.) Appellant Haddad has
waived his right to challenge sanctions.
Among the sanctionable misuses of the discovery process are: disobeying a court
order to provide discovery; failing to respond to an authorized method of discovery;
making unmeritorious objections to discovery without substantial justification; making
evasive responses to discovery; and opposing a motion to compel discovery without
substantial justification. (§ 2023.010.) After defying a court order, a party
“‘presumptively should pay a sanction to the prevailing party.’” (Clement v. Alegre
(2009) 177 Cal. App. 4th 1277, 1286-1287; Ellis v. Toshiba America Information Systems,
Inc., supra, 218 Cal.App.4th at pp. 878-880 [sanctions may be imposed if a lawyer fails
5
to obey court orders compelling discovery, even if she personally feels justified in
disobeying the orders].)
Appellants claim that the referee’s second report—and the court order based on
the second report—did not require George Rizk to produce his personal tax returns. As a
result, they reason, there was no violation of a court order. Appellants’ interpretation of
the trial court’s April 2014 order has no basis in logic or reality.
In his second report, the referee wrote that “defendant Rizk opposes the
production of any of his personal tax records, but through his counsel acknowledges that
his personal records may in fact be the only tax records for J.R. Shell after Jean’s death.”
The referee stated that the profits of Caderex could not “be hidden behind the personal
tax privacy” of the Rizks. Rizk contested the referee’s findings. The trial court rejected
Rizk’s objections, echoing the referee’s findings and adding that both of the Rizk
brothers waived the taxpayer privilege by filing business returns under their tax returns,
and that applying the privilege to defendant Rizk would “facilitate the taxpayer in
perpetrating a fraud” in violation of public policy.
There is nothing ambiguous about the trial court’s order, which directed the
production of the tax returns of George Rizk for three reasons: (1) intentional waiver of
the taxpayer privilege; (2) the gravamen of the lawsuit is inconsistent with the taxpayer
privilege; and (3) public policy reasons. These are all valid reasons to order the
production of tax documents. (Schnabel v. Superior Court (1993) 5 Cal. 4th 704, 721.)4
Appellants did not comply with the court’s order at CPA McGarrell’s deposition.
The referee, who attended the deposition, “was frankly shocked” that the tax records of
George Rizk were not produced, in defiance of the court’s order.
4 On page 1 of their opening brief, appellants write, “the question raised by this
appeal is not whether the substantive discovery orders must be reversed, but whether the
sanctions must be reversed.” (Italics added.) This is a concession that the trial court’s
reasons for ordering production of Rizk’s tax returns are correct.
6
Appellants claim that McGarrell “independently decided” not to produce tax
returns at his deposition. McGarrell testified that shortly before his deposition, George
Rizk “asked me for copies of his [tax] records . . . and I gave those to him.” Defense
counsel Mr. Haddad interjected, “But you’re not here to produce tax returns for George
Rizk; you’re here to produce financial documents for J.R. Shell.” The referee observed
that appellants did not instruct McGarrell to produce the tax returns of George Rizk, so he
did not bring the documents.
It was reasonable for the trial court to conclude that appellants subverted its April
2014 order by failing to instruct McGarrell to bring George Rizk’s tax returns to the
deposition, a point underscored by Attorney Haddad’s directions to McGarrell during the
deposition that “you’re not here to produce tax records for George Rizk.” It is also
reasonable for the trial court to find that McGarrell, Rizk and defense counsel lack
credibility, so that anything they say on the subject of Rizk’s tax returns is not believable.
The referee rejected the belated “scrivener’s error” excuse (see fn. 3, ante) because
defense counsel represented “on several separate occasions” that income for J.R. Shell is
contained in George Rizk’s personal tax returns. Credibility is not reassessed on appeal.
(Bateman v. Long (1951) 105 Cal. App. 2d 173, 178-179.)
Appellants contend that they had “substantial justification” for opposing the
production of George Rizk’s tax returns in the referee’s presence, despite the court order.
Appellants suggest that the referee’s “consternation” arose from his inability to
understand his own report, leading to the referee’s “misconception” that the court’s order
required the production of Rizk’s personal returns. As discussed above, there is nothing
ambiguous about the April 2014 court order: the production of Rizk’s personal tax
returns was ordered, in no uncertain terms, for the three reasons listed by the court.
Quoting the referee, the court stated that it is “‘manifestly unfair’” to prevent plaintiff
from proving damages following the improper dissolution of Caderex because the
corporation’s profits were “‘hidden behind the personal tax privacy of Jean Rizk, George
Rizk and/or his spouse.’” There is no substantial justification for defense counsel to
believe that the court order excluded Rizk’s personal returns.
7
It is irrelevant that neither the referee nor the court called for Rizk to produce his
tax returns in the first discovery report and order. Over time, it became apparent that
production of this tax information was necessary and proper, which is precisely why the
court appointed the referee to monitor case developments and attend depositions.
Appellants were not deprived of notice. Plaintiff asked the referee for discovery
sanctions because appellants violated a court order. The referee recommended that the
court impose sanctions for appellants’ violation of the April 2014 court order. When
Raphael submitted the referee’s third report to the trial court, he requested $7,673 in
discovery sanctions. Rizk filed written opposition to the imposition of sanctions before
the court ruled on the report.
Appellants complain that they were denied an “opportunity for hearing” on
discovery sanctions. (§ 2023.030.) The court is not obliged to hold a hearing on the
referee’s report. (Marathon Nat. Bank v. Superior Court (1993) 19 Cal. App. 4th 1256,
1259-1261.) In any event, to obtain a reversal for a procedural flaw, appellants must
demonstrate not only a defect but prejudice arising from the error, a requirement for
relief on appeal. (§ 475 [no ruling shall be reversed unless it was prejudicial]; Reedy v.
Bussell (2007) 148 Cal. App. 4th 1272, 1289 [defendants failed to demonstrate prejudicial
lack of notice before terminating sanctions were imposed].) Appellants do not state in
their brief that they were prejudiced by the lack of a hearing, or that they would have
obtained a different result. The trial court examined its prior order to produce tax returns,
and was faced with appellants’ adamant refusal to comply with that order. There was no
procedural error resulting in a miscarriage of justice. (Cal. Const., art. 6, § 13.)
Appellants object to the amount of sanctions imposed. The trial court is in the best
position to determine what amounts are reasonably necessary to compensate a party. It is
entirely proper for plaintiff to recover his referee’s and court reporter’s costs for
McGarrell’s deposition, inasmuch as appellants violated the court order directing
production of Rizk’s tax returns at the deposition, after the issue was litigated and
resolved in plaintiff’s favor. Awarding plaintiff $2,700 for a letter brief relating to
appellants’ continuing refusal to produce tax records was justified and reasonable.
8
Sanctions on Appeal
Respondent Raphael filed a motion asking this Court to impose sanctions for a
frivolous appeal. “When it appears to the reviewing court that the appeal was frivolous
or taken solely for delay, it may add to the costs on appeal such damages as may be just.”
(§ 907; Cal. Rules of Court, rule 8.276(a).) The standard is (1) whether, focusing on the
subjective good faith of appellant and his counsel, the appeal was prosecuted for an
improper motive, i.e., to harass the respondent or to delay the case, or (2) whether,
objectively viewed, the appeal indisputably has no merit, so that any reasonable attorney
would agree that it is totally and completely without merit. (Marriage of Flaherty (1982)
31 Cal. 3d 637, 649-650.)
We have no difficulty concluding that this appeal is utterly without merit. On
April 8, 2014, the court issued an order giving three reasons for requiring production of
the Rizk brothers’ tax returns. Subsequently, in the presence of the referee, George Rizk,
his attorneys, and his CPA failed to produce the court-ordered tax documents. This
necessitated a third report and yet another court hearing, to once again instruct Rizk to
produce the tax returns. Appellants were sanctioned for their unjustifiable misconduct.
On appeal, appellants have the temerity to argue that the referee, a retired jurist,
was unable to understand his own report or the court order based on the recommendations
in his report. Appellants repeatedly and frivolously try to deflect focus from the trial
court’s orders and ask this Court to review the referee’s recommendations to the court.5
We review superior court orders, not referee reports. (Doyle v. Superior Court (1996) 50
Cal. App. 4th 1878, 1884, fn. 1.) The orders made by the court in April and September
2014 direct production of Rizk’s tax returns for clear, concise reasons. Appellants
egregiously misrepresent the contents of the court’s April 2014 ruling in their briefs.
5 For example, appellants’ reply states that “the real issue—which is whether
George Rizk’s personal returns were ordered produced previously in Report Nos. 1 or 2,
as required to legally support sanctions.” Later, they write that “Report No. 2 did not
order George Rizk to produce his personal returns.”
9
Appellants brought three unmeritorious writ petitions regarding the production of
tax returns. They challenged the trial court’s first discovery order in a writ petition that
we summarily denied on January 21, 2014 (B253424). They challenged the trial court’s
April 2014 discovery order in a writ petition that we summarily denied on July 29, 2014
(B257589). They challenged the trial court’s order to produce returns again in a writ
petition that we summarily denied on September 30, 2014 (B258901). Appellants have
made persistent unfounded contentions, which they continue in this appeal.
The conduct of Rizk and his attorneys is an intolerable display of disrespect for the
judicial system and court orders. The consequences for such behavior must be harsh.
Appellants’ continuing refusal to produce documents despite multiple court orders can be
viewed as a contempt of court. (§ 2025.480, subd. (k).) Appellants have wasted
plaintiff’s time, the referee’s time, and the courts’ time, which “is not fair to the opposing
litigant who is victimized by such tactics and it is not fair to the greatly overworked
judicial system itself and those citizens with legitimate disputes waiting patiently to use
it. In those cases where such abuse is present, an award of substantial sanctions is
proper.” (National Secretarial Service, Inc. v. Froehlich (1989) 210 Cal. App. 3d 510,
526, fn. omitted; In re Marriage of Gong & Kwong (2008) 163 Cal. App. 4th 510, 520.)
Trial was originally scheduled for 2012 in this case. Owing to their underhanded tactics,
appellants have denied plaintiff his day in court for three years.
Plaintiff has requested $16,140 for his costs and attorney fees in opposing this
appeal, and for preparing his motion for sanctions. We grant his request both as
compensation and to discourage like conduct in the future. (Pierotti v. Torian (2000) 81
Cal. App. 4th 17, 33-34.) In addition, we order sanctions of $6,000 to be paid directly by
defense counsel to the clerk of this court for their diversion of court time and waste of
taxpayer resources. (In re Marriage of Gong & Kwong, supra, 163 Cal.App.4th at p. 520
[where legal issues are not complex, $6,000 is an appropriate sanction]; Foust v. San Jose
Construction Co., Inc. (2011) 198 Cal. App. 4th 181, 189-190; Young v. Rosenthal (1989)
212 Cal. App. 3d 96, 135-137 [requiring an attorney to pay the appellate court $20,000 for
its costs in processing frivolous appeals].)
10
DISPOSITION
The trial court’s order imposing discovery sanctions is affirmed. For bringing a
frivolous appeal, George Rizk, and attorneys Sa’id Vakili and Henry Haddad are ordered
to pay $16,140 to plaintiff Youssef Raphael, jointly and severally. In addition, Sa’id
Vakili and Henry Haddad shall each pay $3,000 to the clerk of this court. All sanctions
shall be paid no later than 15 days after the remittitur is issued by the clerk of this court.
Sa’id Vakili (SBN 176322) and Henry Haddad (SBN 100834) and the clerk of this
court are each ordered to forward a copy of this opinion to the State Bar upon issuance of
the remittitur. (Bus. & Prof. Code, §§ 6068, subd. (o)(3); 6086.7, subd. (c).)
Plaintiff Raphael is entitled to recover his costs on appeal. (Cal. Rules of Court,
rule 8.278(a)(1)-(2).)
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
BOREN, P.J.
We concur:
CHAVEZ, J.
HOFFSTADT, J.
11