Rock Bay, LLC v. Eighth Judicial District Court of the State of Nevada Ex Rel. County of Clark

129 Nev., Advance Opinion 2J
IN THE SUPREME COURT OF THE STATE OF NEVADA
ROCK BAY, LLC; AND MAYBOURNE, No. 61646
INC.,
Petitioners,
vs.
THE EIGHTH JUDICIAL DISTRICT
COURT OF THE STATE OF NEVADA,
FILED
IN AND FOR THE COUNTY OF APR 0 4 2013
CLARK; AND THE HONORABLE
STEFANY MILEY, DISTRICT JUDGE,
Respondents,
and
REDWOOD RECOVERY SERVICES,
LLC; AND ELEVENHOME LIMITED,
Real Parties in Interest.
Original petition for writ of prohibition challenging district
court orders refusing to quash subpoenas as to petitioners.
Petition denied in part and granted in part.
Gordon Silver and Eric D. Hone and Joel Z. Schwarz, Las Vegas,
for Petitioners.
Jolley Urga Wirth Woodbury & Standish and L. Christopher Rose and
Brian C. Wedl, Las Vegas,
for Real Parties in Interest.
BEFORE PICKERING, C.J., HARDESTY and SAITTA, JJ.
OPINION
By the Court, HARDESTY, J.:
In this opinion, we must determine when discovery of a
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nonparty's assets is permissible under NRCP 69(a), which permits post-
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judgment discovery in aid of execution of a judgment. We conclude that
discovery of a nonparty's assets under NRCP 69(a) is not permissible
absent special circumstances, which include, but are not limited to, those
in which the relationship between the judgment debtor and the nonparty
raises reasonable suspicion as to the good faith of asset transfers between
the two, or in which the nonparty is the alter ego of the judgment debtor.
FACTUAL AND PROCEDURAL HISTORY
In March 2011, real parties in interest Redwood Recovery
Services, LLC, and Elevenhome Limited (collectively, the judgment
creditors) obtained judgments in Florida against Jeffrey Kirsch and
various entities that he created throughout the United States (collectively,
the judgment debtors).' The judgment debtors form limited liability
companies with third-party investor funds and purchase pools of
residential mortgages, which are then resold for a profit. According to the
judgment creditors, the judgments were based on the judgment debtors'
unfulfilled promises to pay back promissory notes and obligations owed
under a settlement agreement obtained in March 2008 and amended in
August 2008.
In addition to the judgment debtor entities, Kirsch created
other companies, including Rock Bay, which is a small limited liability
company that administers pools of investor-purchased residential
mortgages. Rock Bay was organized in Delaware in August 2008, around
the time that the amended settlement agreement was signed, and that
same year, Kirsch reserved the name and registered Rock Bay as a
Nevada company. Rock Bay was listed as "doing business as" American
1-The judgment debtors are not parties to this writ proceeding.
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Residential Equities, LLC, which is the name of one of the judgment
debtors.
According to the 2010 and 2011 annual lists of officers and
directors filed with the Secretary of State, Rock Bay's managing member
is Maybourne, which is a Nevada corporation organized in 2008 by the
judgment debtors' in-house counsel. Kirsch was listed as an officer of
Maybourne, and he signed Rock Bay's 2009 initial list as Maybourne's
president and the 2010 annual list as Rock Bay's authorized signatory.
After the Florida litigation began, a series of monetary
transfers occurred between Rock Bay and the judgment debtors. In
December 2011, when the judgment creditors were unsuccessful in
executing their Florida judgments on the judgment debtors' assets, they
domesticated the Florida judgments in Nevada. Rock Bay was voluntarily
dissolved by Kirsch approximately one week later. Undeterred, the
judgment creditors served a subpoena on the Las Vegas accounting firm of
McNair & Associates, which performed accounting services for the
judgment debtors, Rock Bay, and Maybourne. The subpoena sought all
McNair records related to the judgment debtors, Rock Bay, and
Maybourne.
Rock Bay and Maybourne moved to quash the McNair
subpoena on the ground that they were not parties to the underlying
litigation. The district court denied the motion to quash because it found
that the relationship between Rock Bay and the judgment debtors raised
reasonable suspicion of good faith as to the asset transfers because Kirsch
had reserved Rock Bay's name in Nevada, there were multiple transfers of
money between Rock Bay and the judgment debtors after the Florida
litigation began, and Rock Bay was voluntarily dissolved shortly after the
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Florida judgments were registered in Nevada. The district court further
found that there was a reasonable inference of a relationship between
Maybourne and the judgment debtors because Maybourne has the same
address as the judgment debtors, Maybourne's incorporator was in-house
counsel for the judgment debtors, and Kirsch was initially registered as a
corporate officer of Maybourne. As such, the district court declined to
quash the McNair subpoena as to Rock Bay and Maybourne. 2
The judgment creditors then subpoenaed Rock Bay's financial
records from U.S. Bank. Rock Bay filed a motion to quash the U.S. Bank
subpoena or, in the alternative, to limit the scope of discovery to the
judgment debtors' assets. It argued that the U.S. Bank subpoena sought
highly sensitive financial information that was protected from disclosure.
The district court denied the motion to quash for the same reasons that it
denied the prior motion to quash the McNair subpoena, and it declined to
limit the scope of the subpoena because it found that disclosure would not
harm Rock Bay. This petition for a writ of prohibition followed.
DISCUSSION
Writ relief is an "extraordinary remedy, and therefore the
decision to entertain a petition lies within the discretion of this court."
State v. Dist. Ct. (Jackson), 121 Nev. 413, 416, 116 P.3d 834, 836 (2005).
A petitioner bears the burden of "demonstrat[ing] that extraordinary relief
is warranted." Valley Health System v. Dist. Ct., 127 Nev. „ 252
P.3d 676, 678 (2011). A writ of prohibition may be granted when the
2The subpoena also sought the records related to another nonparty,
Sloan Park, LLC, who is not a party to this writ proceeding because the
district court quashed the subpoena as it related to Sloan Park's
independent records.
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district court exceeds its jurisdiction. NRS 34.320. Thus, it is an
"appropriate remedy for the prevention of improper discovery." Valley
Health System, 127 Nev. at n.5, 252 P.3d at 678 n.5; Wardleigh v.
District Court, 111 Nev. 345, 350, 891 P.2d 1180, 1183 (1995).
However, this relief, designed to prevent the district court
from acting beyond its authority, is not available when there is a "plain,
speedy and adequate remedy in the ordinary course of law." NRS 34.170;
Ashokan v. State, Dep't of Ins., 109 Nev. 662, 665, 856 P.2d 244, 246
(1993). Although the right to appeal is generally an adequate legal
remedy that would preclude writ relief, Pan v. Dist. Ct., 120 Nev. 222, 224,
88 P.3d 840, 841 (2004), an appeal is not available here because
petitioners are not parties to the action below, NRAP 3A(a), and because a
post-judgment order denying a motion to quash is not substantively
appealable. NRAP 3A(b). Further, while we typically decline to consider
writ petitions challenging discovery orders unless certain exceptions exist,
Valley Health System, 127 Nev. at , 252 P.3d at 678-79, here, the writ
is necessary to prevent improper post-judgment disclosure of private
information, the issues are novel and important to Nevada jurisprudence,
and those issues might avoid appellate review were we not to consider
them now. See, e.g., Callie v. Bowling, 123 Nev. 181, 160 P.3d 878 (2007)
(explaining when a judgment creditor must proceed against a nonparty in
an independent action). Thus, we exercise our discretion to entertain this
writ petition.
Discovery of nonparty assets under NRCP 69(a) is permissible in limited
circumstances
When interpreting Nevada's Rules of Civil Procedure, we turn
to the rules of statutory interpretation. Webb v. Clark County School
Dist., 125 Nev. 611, 618, 218 P.3d 1239, 1244 (2009). "Statutory
5
interpretation is a question of law that we review de novo." Consipio
Holding, BV v. Carlberg, 128 Nev. „ 282 P.3d 751, 756 (2012).
"When a statute is clear and unambiguous, this court gives effect to the
plain and ordinary meaning of the words and does not resort to the rules
of construction." Id.NRCP 69(a) provides that "[in aid of the judgment or
execution, the judgment creditor. . . may obtain discovery from any
person, including the judgment debtor, in the manner provided in these
rules." Rock Bay and Maybourne concede that this rule permits the
judgment creditors to obtain discovery from nonparties, but they argue
that such discovery must be limited. To the extent discussed herein, we
agree.
As the federal courts have recognized when examining this
issue, obtaining post-judgment discovery from nonparties is generally
limited to a judgment debtor's assets, and a judgment creditor may not
inquire into the nonparties' own assets. See Caisson Corporation v.
County West Building Corp., 62 F.R.D. 331, 334 (E.D. Pa. 1974) (holding
that inquiries of nonparties under FRCP 69(a) "must be kept pertinent to
the goal of discovering concealed assets of the judgment debtor and not be
allowed to become a means of harassment" of the nonparties); Burak v.
Scott, 29 F. Supp. 775, 776 (D.D.C. 1939) (holding that "a judgment
creditor [does not have] any right to . . . require the disclosure of assets of
persons other than the judgment debtor" under FRCP 69). 3 However, this
3 NRCP
69(a) is modeled after its federal counterpart, FRCP 69(a)(2),
and thus, cases interpreting the federal rule are strongly persuasive. See
Executive Mgmt. v. Ticor Title Ins. Co., 118 Nev. 46, 53, 38 P.3d 872, 876
(2002) ("Federal cases interpreting the Federal Rules of Civil Procedure
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general rule should not be "applied mechanically." Magnaleasing, Inc. v.
Staten Island Mall, 76 F.R.D. 559, 562 (S.D.N.Y. 1977). Because the
purpose of post-judgment discovery is to locate the judgment debtor's
assets, discovery of a nonparty's assets is permissible if it will lead to
discovery of "hidden or concealed assets of the judgment debtor." Caisson
Corporation, 62 F.R.D. at 334.
Thus, we conclude that discovery of a nonparty's assets is
permissible in certain limited circumstances. These circumstances
include, for example, a situation "where the relationship between the
judgment debtor and the nonparty is sufficient to raise a reasonable doubt
about the bona fides of the transfer of assets between them,"
Magnaleasing, 76 F.R.D. at 562; see also Alpern v. Frishman, 465 A.2d
828, 829 (D.C. 1983), or where the nonparty is the alter ego of the
judgment debtor. See Falicia v. Advanced Tenant Services, Inc., 235
F.R.D. 5, 9 (D.D.C. 2006) (holding that post-judgment discovery of
nonparties was permissible in light of evidence suggesting that the
nonparties were "mere extensions" and "possible successor entities of a
judgment debtor"). We now must determine whether there were certain
limited circumstances present in this case to support the district court's
denial of the motions to quash the subpoenas seeking discovery of Rock
Bay's and Maybourne's assets.
...continued
'are strong persuasive authority, because the Nevada Rules of Civil
Procedure are based in large part upon their federal counterparts."
(quoting Las Vegas Novelty v. Fernandez, 106 Nev. 113, 119, 787 P.2d
772, 776 (1990))).
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Denial of the motions to quash
The judgment creditors subpoenaed all of McNair's records
related to the judgment debtors, Rock Bay, and Maybourne. They also
subpoenaed Rock Bay's financial records from U.S. Bank. The district
court ultimately declined to quash these subpoenas after finding that
there was a reasonable inference of a close relationship between the
judgment debtors, Rock Bay, and Maybourne.
The McNair subpoena
Rock Bay argues that the district court abused its discretion
by declining to quash the McNair subpoena because there was no evidence
supporting its conclusion that the asset transfers between Rock Bay and
the judgment debtors might not have been in good faith. We disagree.
The district court found that the apparent relationship
between Rock Bay and the judgment debtors, and the overall timing of
events, raised reasonable suspicion as to the good faith of the asset
transfers because Kirsch reserved the name for Rock Bay in Nevada, there
was evidence of money being transferred between Rock Bay's and the
judgment debtors' bank accounts, and Rock Bay was voluntarily dissolved
shortly after the judgment creditors registered their judgment in Nevada.
In addition, there was evidence before the district court that Rock Bay was
registered as doing business under the name of one of the judgment debtor
entities, the signer of Rock Bay's operating agreement was the judgment
debtors' in-house counsel, and the form listing Maybourne as the
managing member of Rock Bay was signed by Kirsch. We conclude that
the relationship established by this evidence is sufficient to raise a
reasonable suspicion as to the good faith of the asset transfers between
Rock Bay and the judgment debtors. As the district court acted within its
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discretion in so concluding, it has not exceeded its authority over Rock Bay
such that a writ of prohibition is warranted as to the McNair subpoena. 4
However, we cannot reach the same conclusion as to
Maybourne. As Maybourne points out, there is no evidence that
Maybourne ever held or transferred assets with the judgment debtors. In
addition, the judgment creditors never argued or established that
Maybourne was the judgment debtors' alter ego. 5 Thus, because the
judgment creditors did not demonstrate anything about the relationship
between Maybourne and the judgment debtors that raises suspicion
sufficient to require access to Maybourne's financial records, the district
court improperly declined to quash the McNair subpoena as to Maybourne.
The U.S. Bank subpoena
Rock Bay also argues that the district court exceeded its
authority in allowing the U.S. Bank subpoena to endure because in it, the
judgment creditors impermissibly sought to acquire highly confidential
4 We decline to consider Rock Bay's argument as to the
confidentiality of the records sought by the McNair subpoena because
Rock Bay did not argue that the McNair records were confidential and
private before the district court. See In re AMERCO Derivative
Litigation, 127 Nev. n.6, 252 P.3d 681, 697 n.6 (2011) ("[W]e
decline to address an issue raised for the first time" before this court.).
5 Inorder to show that Maybourne was the alter ego of the judgment
debtors, the judgment creditors would have needed to establish by a
preponderance of the evidence that (1) Maybourne is "influenced and
governed by" the judgment debtors, (2) there is a "unity of interest and
ownership' between the two such that they are essentially the same
company, and (3) "adherence to the corporate fiction of a separate entity
would, under the circumstances, sanction [a] fraud or promote injustice."
LFC Mktg. Group, Inc. v. Loomis, 116 Nev. 896, 904, 8 P.3d 841, 846-47
(2000) (alteration in original) (quoting Polaris Industrial Corp. v. Kaplan,
103 Nev. 598, 601, 747 P.2d 884, 886 (1987)).
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and private financial information. 6 Although Nevada does not recognize a
privilege for financial documents, see NRS Chapter 49 (detailing Nevada's
evidentiary privileges), this court has recognized that "public policy
suggests that. . . financial status [should] not be had for the mere asking."
Hetter v. District Court, 110 Nev. 513, 520, 874 P.2d 762, 766 (1994). In
the context of post-judgment discovery, courts have recognized that a
nonparty's privacy interests "must be balanced against the need of the
judgment creditor" for the requested information. Blaw Knox Corp. v.
AMR Industries, Inc., 130 F.R.D. 400, 403 (E.D. Wis. 1990). Thus, a
nonparty's financial assets are generally protected where "the information
sought was critical to the financial health of the non-party's business and
was being requested by a direct competitor." Falicia, 235 F.R.D. at 10.
However, the need of a judgment creditor to examine a
nonparty's financial records outweighs the nonparty's privacy interest
where, as in this case, there are reasonable doubts as to the good faith of
the transfer of assets between the nonparty and the judgment debtor, and
the judgment creditor is not a competitor of the nonparty. Id. at 9-10. In
Falicia, the court held that disclosure of a nonparty's bank records was
appropriate because there was a "reasonable belief that inspection of the
bank records by the (judgment creditor] could lead to the discovery of
concealed assets of the judgment debtors." Id. at 10. After considering the
content and recipient of the requested documents, the court concluded that
6 Maybourne also challenges the U.S. Bank subpoena on the basis of
confidentiality and privacy. However, it appears that Maybourne was not
included in the U.S. Bank subpoena, and Maybourne moved to quash only
the McNair subpoena. Therefore, we do not consider Maybourne's
argument. See In re AMERCO, 127 Nev. at n.6, 252 P.3d at 697 n.6.
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protection of the nonparty's financial information was not warranted
because the judgment creditors were not competitors of the judgment
debtors. Id.
Similarly, in this case, the judgment creditors are not
competitors of Rock Bay. Moreover, the financial records requested from
U.S. Bank are relevant and pertain to financial account activity that
occurred throughout the underlying litigation, as Rock Bay was not
created in Nevada until after the judgment creditors commenced the
Florida lawsuit. Therefore, we conclude that the district court did not act
in excess of its jurisdiction when it declined to quash the U.S. Bank
subpoena. 7
Accordingly, we grant the petition as to Maybourne because
the district court improperly declined to quash the McNair subpoena as to
Maybourne. Thus, we direct the clerk of this court to issue a writ of
prohibition instructing the district court to quash the McNair subpoena as
it pertains to Maybourne. However, we deny the petition as to Rock Bay
because the relationship between Rock Bay and the judgment debtors
7 The parties also dispute whether Rock Bay previously rejected a
confidentiality agreement. In support of this argument, the judgment
creditors rely on a letter their counsel sent to Rock Bay stating that the
nonparties had not answered the judgment creditors' request for a
proposed confidentiality agreement. However, Rock Bay argues that the
proposed agreement was not sufficient, and that the agreements it
alternatively proposed were similarly rejected by the judgment creditors.
We do not address this issue because it is a question of fact, and it was not
raised in the district court. See State v. Rincon, 122 Nev. 1170, 1177, 147
P.3d 233, 238 (2006) ("This court does not act as a finder of fact . . ."); In
re AMERCO, 127 Nev. at n.6, 252 P.3d at 697 n.6.
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raises reasonable suspicion as to the good faith of the asset transfers
between them, and because no privacy interest will be impacted in a way
sufficient to overcome the judgment creditors' interest in discovering any
concealed assets. 8
J.
Hardesty
We concur:
C.J.
Saitta
8As
such, we deny as moot Rock Bay's and Maybourne's petition for
rehearing of the order denying their motion for a stay.
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