*1 This matter is before the court on Plaintiffs' Second Motion to Compel Discovery. [DE-84]. Plaintiffs seek an order to compel responses to third-party subpoenas issued to Vivid Cosmos Granite, LLC, a North Carolina LLC (“Vivid NC”); Vivid Cosmos Granite, LLC, a Texas LLC (“Vivid TX”) (collectively, “the Vivid Entities”); Cosmos Granite Charlotte, LLC (“Cosmos Charlotte”); Cosmos Granite Charleston, LLC (“Cosmos Charleston”); Cosmos Granite Dallas, LLC (“Cosmos Dallas”) (collectively, “the Cosmos Entities”); and Cosmos Granite Northeast, LLC (“Cosmos Northeast”) (altogether “the Subpoenaed Entities”). [DE-84, -85]. The Subpoenaed Entities have responded in opposition. [DE-91]. The court held a hearing on November 18, 2021. For the reasons set forth below, the motion to compel is allowed.

This case involves the winding down of a partnership between two cousins, Plaintiff Hari Hara Prasad Nallapaty (“Prasad”) and Defendant Vamsi Mohan Nallapati (“Vamsi”). First Am. Compl. [DE-45] at 1. Known as Cosmos Granite and Marble (“NCLLC”), the business sold wholesale granite and marble and was allegedly operated as a 50/50 partnership. Id. at 6. The alleged partnership acquired various assets, including real estate and a partial ownership interest in Vivid NC. Id. at 8–9, Prasad and Vamsi began discussing terminating their partnership in late 2015 Id. at 16. In May 2016, Vamsi used cash and materials from Vivid NC to set up a Dallas, Texas location, and he created Vivid TX as the legal entity to hold that location. Id. at 13–15 NCLLC held a 25% ownership interest in Vivid TX. Id. at 14.

In January 2019, Prasad and Vamsi executed a settlement agreement in which they allocated certain assets, but they have not yet separated their interests in NCLLC. Id. at 16–17. On March 1, 2020,[1] Vivid NC sold substantially all of its assets to Cosmos Charlotte, a newly formed entity, allegedly for less than fair market value. Id. at 23 Plaintiffs allege that the purpose of the sale was to exclude Prasad from Vivid NC. Id. Cosmos Charlotte subsequently spun out certain assets to another newly formed entity, Cosmos Charleston, Id. at 24. On December 31, 2020, Vivid TX merged into Cosmos Dallas and ceased to exist. Id. at 25-26. Collectively, the court will refer to March 1, 2020 for Vivid NC, Cosmos Charlotte, and Cosmos Charleston and December 31, 2020 for Vivid TX and Cosmos Dallas as “the transaction dates.”

Prasad alleges that Vamsi refused to share financial information that would enable Prasad to value his interest in Vivid NC and Vivid TX. Id. at 3, 15–16, 33. Prasad alleges Vamsi has breached his fiduciary duties as partner with Prasad in conspiring to transfer Vivid NC assets without notice to the exclusion of Prasad and selling its assets without paying fair value to NCLLC and freezing out Prasad and Justh from Vivid TX for less than fair value. Id. at 27–28. Furthermore, Prasad claims Vamsi has failed to account for the membership interests in the Vivid Entities preventing Prasad from learning the true value of his partnership share. Id. at 30–31.

*2 On April 7, 2021, Plaintiffs served virtually identical subpoenas on the Subpoenaed Entities. [DE-85] at 2. The subpoenas contained eight document requests:

Subpoena to Cosmos Charlotte [DE-70-2] at 10–11.

First Motion to Compel

The Vivid and Cosmos entities objected to the requests, but through meet and confer efforts it was believed that they had been able to resolve some of the objections. [DE-70] at 2; [DE-85] at 2–3. Thereafter, Plaintiffs filed a motion to compel the Vivid and Cosmos entities to produce documents in response to Request No. 2 (general ledgers) and No. 5 (QuickBooks data).[3] The court held a telephonic hearing and ultimately entered an order allowing the motion in part. See Nallapaty v. Nallapati, No. 5:20-CV-470-BO, 2021 WL 3686240 (E.D.N.C. Aug. 19, 2021).

At issue was whether the requested information was relevant to the valuation of Vivid NC and Vivid TX as of their respective transaction dates and whether the burden of producing the material was disproportionate to the needs of the case. Id. at *3–4. In support of their motion, Plaintiffs included the declaration of Tiffany Couch (“Couch”), a Certified Public Accountant. Id. at *3. According to Couch, documents previously produced in discovery, such as tax returns and internally prepared financial statements, had significant discrepancies and examining the granular-level QuickBooks data was the only way to resolve the discrepancies and properly value the entities. Id. Couch opined further that because the entities are related, transactions between them can be conducted at less than arms' length for less than fair market value, and they are therefore considered high risk by auditors and forensic accountants. Id. Because the valuation of the entities as of the transaction dates is a central issue in the case, and because Couch's declaration indicated that the QuickBooks data from before the transaction dates would bear on the entities' valuation as of the transaction dates, the court ruled that the pre-transaction date data is relevant. Id. However, Couch's declaration failed to articulate a basis for requesting data from after the transaction dates. Id. at *4. While she opined that the data would be useful for resolving questions regarding a discrepancy between a 2016 Vivid TX balance sheet and tax return and Plaintiffs contended that there may be evidence of mismanagement or movement of funds, the court found that argument to be speculative at the time without prejudice the request for Quickbooks data from after the transaction dates. Id. Finally, the court held that production of the pre-transaction date data was not disproportionate to the needs of the case or unduly burdensome noting that production would be made following the procedures set out in a consent protective order. Id.

Second Motion to Compel

*3 According to Plaintiffs' motion now before the court, the Vivid entities have produced most of the QuickBooks data they were ordered to produce. [DE-85] at 2. In correspondence dated September 15, 2021, counsel for Subpoenaed Entities indicates the Vivid Entities have produced all of the QuickBooks data in their possession, custody, or control in compliance with the court's order and that the Vivid Entities will produce their general ledgers from 2015 and 2016. [DE-91-1]. However, after their meet and confer efforts following the court's order on the first motion to compel, it appears there remains disagreement as to what documents the Subpoenaed Entities had earlier committed to voluntarily produce. The Subpoenaed Entities contend the court's order applied only to QuickBooks data and did not compel the Cosmos and Vivid Entities to produce general ledgers.

Plaintiffs now seek an order from the court compelling the following:

[DE-84] at 5; [DE-85].

Subpoenas issued to nonparties are governed by Fed. R. Civ. P. 45, which “adopts the standard codified in Rule 26” in determining what is discoverable. Schaaf v. Smithkline Beecham Corp., 233 F.R.D. 451, 453 (E.D.N.C. 2005). Rule 26 provides for a broad scope of discovery:

Fed. R. Civ. P. 26(b)(1); see Mainstreet Collection, Inc. v. Kirkland's, Inc., 270 F.R.D. 238, 240 (E.D.N.C. 2010) (“During discovery, relevance is broadly construed ‘to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case.” ’) (quoting Oppenheimer Fund., Inc. v. Sanders, 437 U.S. 340, 351 (1978)). Thus, the two fundamental limits on discovery imposed by Rule 26(b)(1) are relevance and proportionality. Va. Dep't of Corr. v. Jordan, 921 F.3d 180, 188 (4th Cir.), cert denied, 140 S. Ct. 672 (2019).

Rule 45 imposes further limits when discovery is sought from nonparties.[4] “A more demanding variant of the proportionality analysis [ ] applies when determining whether, under Rule 45, a subpoena issued against a nonparty ‘subjects a person to undue burden’ and must be quashed or modified.” Id. at 189 (quoting Fed. R. Civ. P. 45(d)(3)(A)(iv)). This is so because “[b]ystanders should not be drawn into the parties' dispute without some good reason, even if they have information that falls within the scope of party discovery.” Id. Ultimately, giving the nonparty status “special weight,” the court must determine “whether the benefits of discovery to the requesting party outweigh the burdens on the recipient.” Id.; Spring v. Bd. of Trustees of Cape Fear Cmty. Coll., No. 7:15-CV-84-BO, 2016 WL 4204153, at *1 (E.D.N.C. Aug. 8, 2016). When considering the propriety of enforcing a subpoena, a trial court should consider “the relevance of the discovery sought, the requesting party's need, and the potential hardship to the party subject to the subpoena.” Id. (quoting Heat & Control, Inc. v. Hester Indus., 785 F.2d 1017, 1024 (Fed. Cir. 1986)). “A party or attorney responsible for issuing and serving a subpoena must take reasonable steps to avoid imposing undue burden or expense on a person subject to the subpoena,” and the court “must quash or modify a subpoena that subjects a person to undue burden.” Fed. R. Civ. P. 45(d)(1), (d)(3)(iv).

*4 The party seeking the court's protection from responding to discovery “must make a particularized showing of why discovery should be denied, and conclusory or generalized statements fail to satisfy this burden as a matter of law.” Mainstreet Collection, 270 F.R.D. at 240 (citation omitted). Accordingly, it is the Vivid Entities and the Cosmos Entities' burden to show why discovery should be denied. See U.S. Equal Emp't Opportunity Comm'n v. Bojangles ' Rests., Inc., No. 5 16-CV-654-BO, 2017 WL 2889493, at *3 (E.D.N.C. July 6, 2017) (citing Papanicolas v. Project Execution & Control Consulting, LLC, No. CIV.A. CBD-12-1579, 2015 WL 1242755, at * 1 (D. Md. Mar. 17, 2015)) (noting that “ ‘[t]he burden of proving that a subpoena is oppressive is on the party moving to quash’ ”); Sherrill v. DIO Transp., Inc., 317 F.R.D. 609, 612 (D.S.C. 2016) (“[T]he burden of proof is with the party objecting to the discovery to establish that the challenged production should not be permitted”) (citation omitted).

A. Relevance

1. Request to compel Vivid NC, Cosmos Charlotte, Cosmos Charleston, Vivid TX, and Cosmos Dallas to produce all documents from the respective transaction dates to the present responsive to Requests No. 1 (financial statements), No. 3 (bank statements), No. 4 (tax returns), No. 5 (QuickBooks data), and Nos. 6 & 7 (loan agreements and supporting documentation) of their respective subpoenas.

Plaintiffs' case theory is that Defendants were hiding the way they treated assets of Vivid NC and Vivid TX, that these businesses were acquired at “firesale” prices by artificially depressing the asset value of Vivid NC and Vivid TX to the detriment of Prasad by virtue of its effect on the purchase price. The Subpoenaed Entities resist the discovery of materials that post date the transaction dates. However, Plaintiffs challenge the fairness of that sale, in particular the value at which the assets were sold. Indeed, it appears the principal issue for trial in this case is whether Defendants breached their fiduciary duty to Prasad by failing to pay him fair value for his interests in Vivid TX and Vivid NC. This makes relevant the validity and integrity of the financial information that was used to justify the purchase price for the Vivid Entities. See Mainstreet Collection, 270 F.R.D. at 240.

In support of their motion Plaintiffs have provided two declarations from Couch, attesting to the relevance of the materials sought. Second Decl. of Tiffany Couch (“Second Couch Decl.”) [DE-85-1]; Third Decl. of Tiffany Couch (“Third Couch Decl.”) [DE-97]. Couch's latest declaration testimony has evolved from her earlier hunch and now makes clear in detailed fashion the relevance of the materials sought to the valuation of Vivid NC and Vivid TX and, in light of the discovery produced thus far, the need Plaintiffs have for the materials. For example, having reviewed discovery produced by the Vivid Entities, Couch has identified discrepancies between the inventory reported by Vivid NC to its banks for lending purposes as compared to that recorded in its QuickBooks data or reported for tax purposes. Second Couch Decl. [DE-85-1] ¶¶ 6, 7, 15; Third Couch Decl. [DE-97] ¶¶ 5–17. Defendants structured the buy-out pricing of Vivid NC's assets, which primarily consisted of its inventory. Couch observes valuation of inventory that appears improper, artificial, and not reflective of actual value, and there appear to be internal communication calling into question the validity of inventory valuations. Couch highlights internal communications concerning adjustments made to inventory valuation and how, in fact, that information would be relevant in this lawsuit. Third Couch Decl. [DE-97] ¶¶ 5, 6, 10. According to Couch, it appears the Vivid Entities have attempted to use less favorable inventory valuations to justify the value assigned to Vivid NC and Vivid TX. Second Couch Decl. [DE-85-1] ¶ 14; Third Couch Decl. [DE-97] ¶ 7. She explains the information is needed in order to learn the value given the assets by Cosmos Charlotte and Cosmos Dallas. Second Couch Decl. [DE-85-1] ¶¶ 15, 17.

*5 Couch notes further that the Vivid Entities decreased the value of their inventory by millions of dollars prior to the transaction at issue, a write-down which would have resulted in devaluing assets and reducing capital accounts. Id. ¶¶ 18-30; Third Couch Decl. [DE-97] ¶¶ 5–13. According to Couch, the discovery provided fails to explain how the Cosmos Entities have recorded inventory value received in the transaction at issue, how the value was represented to financial institutions, or the prices at which Cosmos Entities sold the write-down inventory. Second Couch Decl. [DE-85-1] ¶ 29; Third Couch Decl. [DE-97] ¶ 14. According to Couch, the QuickBooks data provided by Vivid Entities inexplicably fails to contain normal and customary transactional detail and she is unable to conduct a meaningful forensic analysis of the data from the Vivid Entities. Second Couch Decl. [DE-85-1] ¶ 38; Third Couch Decl. [DE-97] ¶ 9. Because of the lack of detail in the data she is unable to verify whether the transactions were properly recorded. Second Couch Decl. [DE-85-1] ¶ 43; Third Couch Decl. [DE-97] ¶ 13. Couch notes she has reviewed bank statements from the Vivid Entities' accounts and traced sources and uses of funds but has been unable to verify whether the transactions are properly recorded as assets, liabilities, capital transactions, income, or expenses due to the lack of accounting detail. Second Couch Decl. [DE-85-1] ¶¶ 42–43. Couch has also noted millions of dollars from Vivid NC and Vivid TX transferred to entities either owned in part by codefendants or to entities whose accounts were electronically-linked to those of Vivid NC or Vivid TX, and are likely related entities. Id. ¶¶ 44–55. Couch explains the transaction identified do not appear to be customary or attributable to distributions. Id. 48–49. In her opinion the requested material is necessary to understand whether the transfers to the related entities in which codefendants have some ownership interest or signatory authority have been used to misappropriate assets of the Vivid Entities. Id. ¶ 58. The remainder of her declaration testimony further supports a finding that the materials sought are relevant. Id.; Third Couch Decl. [DE-97].

The Subpoenaed Entities respond that the relevance of post-transaction documents is mere conjecture and that Couch's statements are speculative and unfounded. Resp. [DE-91] at 7–10. They dispute her findings that the Vivid Entities maintain separate books and instead use commonly-accepted accounting principles. Through the declaration of Vamsi Nallapati, the Subpoenaed Entities insist the Vivid Entities lawfully write down inventory for tax purposes and that its accounting practices are commonly-accepted and in fact were well known to Prasad. Decl. of Vamsi M. Nallapati [DE-92] (“Nallapati Decl.”). However, simply disputing Couch's findings does not negate relevance; rather, that would be an issue for trial. Moreover, to the extent the Subpoenaed Entities argue discovery is not needed because Couch may simply rely on pre-transaction data fails to acknowledge her findings that such data is inadequate or inexplicably irregular as she describes in her declarations.

2. Request to compel Vivid Entities and Cosmos Entities to produce all general ledgers responsive to Request No. 2 of their respective subpoenas.

To the extent the Vivid and Cosmos Entities have not produced responsive general ledgers dating prior to the transaction date, this information should be produced. Couch's declaration testimony has now moved beyond speculation and provides a basis to also compel production of general ledgers dating after the transaction date. See Second Couch Deck [DE-85-1] ¶17 ;Nallapaty, 2021 WL 3686240, at *4. The general ledgers, both pre-and post-transaction, are relevant and must be produced.

3. Request to compel Cosmos Northeast to produce all documents responsive to Requests No. 2, No. 3 and No. 5 of its subpoena.

Plaintiffs have alleged Vamsi established Cosmos Northeast in 2017 using cash and material from Vivid NC and Cosmos Charlotte and has barred Prasad from learning of its capitalization and assets. See First Am. Compl. [DE-45] ¶¶ 53, 54. Plaintiffs seek general ledgers, bank statements, and Quickbooks data from Cosmos Northeast. In her review of financial data thus far provided Couch has identified a large number of financial transactions between Vivid NC and Cosmos Northeast. Second Couch Decl. [DE-85-1] ¶¶ 56, 59. Counsel for Cosmos Northeast has indicated certain financial information has been provided from which the funding should be self-evident. On the other hand, counsel for the Plaintiffs indicates they have received QuickBooks data, but the data has been grouped or arranged in a manner such that they have been unable to trace the flow of funds from Vivid NC to Cosmos Northeast. According to Couch, the requested information cannot be traced to a transaction in the provided QuickBooks data but is necessary in order to determine whether any of Vivid NC's assets were transferred to Cosmos Northeast without proper consideration. Second Couch Decl. [DE-85-1] ¶ 59. The requested documents from Cosmos Northeast are relevant and should be produced.

B. Proportionality

*6 The Subpoenaed Entities argue they are unduly burdened having to produce voluminous amounts of confidential information to a competitor. Resp. [DE-91] at 10–11. In particular, they argue the production of the post-transaction materials would identify suppliers, customers, and prices of the Cosmos Entities and thereby provide Prasad with a competitive advantage. Id. at 11. The Subpoenaed Parties raised a similar argument earlier with respect to pre-transaction materials. Nallapaty, 2021 WL 3686240, at *4. The court finds the protective order in place gives parties a period of time in which to designate documents produced by third parties in response to a subpoena as confidential or attorneys' eyes only, and the Subpoenaed Entities' conclusory argument that the protective order provides insufficient protection lacks merit.

For the foregoing reasons, Plaintiffs' Second Motion to Compel, [DE-84], is allowed, and the third parties are ordered to produce responsive material no later than March 1, 2022.

So ordered, the 1st day of February, 2022.