Show me the financials

When Michael Brown, a real estate investor who has accused two businessmen of defrauding him out of more than $2 million, received tax returns and bank records from the pair he was hoping to get some clues about what happened to his money.

Instead, he got a pile of heavily redacted documents, said his attorney, Michael Carpenter of Gray, Layton, Kersh, Solomon, Furr & Smith in Gastonia: “When the CIA releases information … and a lot of it’s blacked-out — that’s sort of what it looked like.”

Brown objected to the redactions and the two defendants, Arthur Secor and Joseph Rosso, argued that they could obscure any information in the records that they deemed to be irrelevant.

The dispute raised an issue that apparently had never been addressed in any written decision in North Carolina.

In addressing the question of first impression, state Business Court Judge Adam Conrad looked to the federal courts, which have held that “relevance-based redactions are disfavored,” he wrote in a July 28 order.

Conrad concluded that the “discretion to make unilateral redactions would incentivize parties to hide ‘as much as they dare.’” He added that the “suspicions are heightened in this case where Brown contends defendants stole more than $2 million from him, concealed the transactions, and are now hiding the wrongdoing behind large-scale redactions of relevant documents.”

Attempts to speak with Secor and Rosso’s attorneys at Parker Poe in Charlotte were unsuccessful.

Carpenter said there is a dearth of state case law dealing with the discoverability of tax returns, and none of the decisions delved into redaction issues, “probably because nobody has ever tried to redact the majority of the information.”

“The ruling in this case has given us a definitive opinion that says you can’t get away with making unilateral redactions to discovery documents,” he said.

Christopher Browning, a commercial litigator and partner at Troutman Sanders in Raleigh who reviewed Conrad’s ruling at Lawyers Weekly’s request, said a determination of whether financial documents are relevant and what kind of information needs be redacted requires a “balancing test” on a case-by-case basis.

“This is a difficult situation for which there has been relatively little guidance for attorneys in the trenches in terms of discovery disputes,” he said. “On the one hand, if you have an issue with regard to relevancy, typically you either work that out with the other side or seek a protective order as appropriate. Then the question becomes, What happens if you have a document that has some relevant information but a lot of extraneous stuff?”

Conrad ordered Secor and Rosso to hand over tax records without making “any substantive redactions,” but allowed them to black-out confidential information, such as social security numbers. The documents are also being kept under seal.

Brown, who is in his 70s, made a series of wire transfers totaling $2.2 million to Secor and Rosso, both of whom live in Mecklenburg County, after being told that he’d see a profit on his investment in several real estate deals, according to the complaint.

But Brown alleges that he was kept in the dark about a $300,000 debt on one property in question and never received proceeds from any land deals that occurred after his investments, which he made without a written agreement.

“Generally, it’s not uncommon to see commercial disputes arise when parties go into a business arrangement based on a handshake deal,” Browning said. “A lot of litigation can be avoided by getting an attorney involved and drafting an appropriate contract at the outset of a business arrangement.”

The 35-page opinion is Brown v. Secor (Lawyers Weekly No. 020-072-17). An opinion digest is available at nclawyersweekly.com.

Follow Phillip Bantz on Twitter @NCLWBantz