Most bankruptcy practitioners are aware of the intentionally broad scope of discovery under Bankruptcy Rule 2004. However, there are limits to this discovery and the “pending proceedings” rule can be a useful tool to limit. the scope of the discovery in the appropriate circumstances.
Bankruptcy Rule 2004
The Bankruptcy Rule 2004 provides that “the court may order a review of any entity” and that the scope of such review “may relate only to the acts, conduct or property or to the debts and financial condition of the debtor, or on any matter which may affect the administration of the debtor’s estate or the debtor’s right to a discharge. Bankruptcy Rule 2004 (a) and (b).
Reviews conducted under the 2004 Rule have often been referred to as “fishing expeditions” because they are very broad in scope with limited protection for defendants. Collars on bankruptcy §2004.01 (16th edition 2019). At least one goal behind this broad scope is to enable the trustee to discover the nature and extent of the bankruptcy estate. With respect to Washington Mut., Inc., 408 BR 45 (Bank D. DE. 2009).
However, the use of the 2004 Rule review is not without limitations. Simms v. Deutsche Bank Nat’l Trust Co. (In re. Simms), 2012 Banker. Lexis 3264 (Bankr. ND GA 2012 citing In re Enron, 281 BR 836, 840 (Bankr. SDNY 2002). “It cannot be used for abuse or harassment” and it cannot go astray in questions that are not relevant to the baseline survey ”. In re Washington Mut., Inc., supra. And he cannot go against the rule of pending proceedings.
Pending procedural rule
The pending procedural rule states that once a separate case has been initiated (whether in adversarial proceedings, a contested case, or in a forum other than bankruptcy), disclosure should be made in accordance with the rules of disclosure applicable to the separate proceeding, not the 2004 Rule. In d. Wash. Mut., Inc., 408 BR 45, 49-51, supra. This rule has been well recognized by other courts. See, for example In re Sanomedics, Inc., 2018 Lexis 2187 (Bankr. SD FL 2018); In Camferdam, 597 BR 170 (Bank. ND FL 2018) and In re Simms, supra. The discovery of the evidence related to the pending proceedings must be made in accordance with the more restrictive provisions contained in the Rules of Civil Procedure governing the separate matter. In the case of Bennett Funding Group, Inc., 203 BR 24, 29 (Bankr. NDNY 1996).
The relevant question in the application of the current proceeding rule is “whether the examination of the 2004 rule will lead to the discovery of evidence relating to the current proceeding or whether the requesting examination seeks to uncover evidence. unrelated to the current procedure ”. In re Sanomedics, supra (citing In re Washington Mutual). As one court noted, “[t]A difficult and relevant question is whether the primary objective of Designer Glass in reviewing / producing the 2004 Rule is to further the administration of the bankruptcy case or to assist its pending litigation before state courts. During Ramadan, No. 11-02734-8-SWH, 2012 WL 1230272, at * 3 (Bankr. EDNC April 12, 2012) (emphasis in original).
In some cases, the application of the rule of pending proceedings is very clear. For example, in Regarding Cambridge Analytica LLC, 600 BR 750 (Bankr SDNY 2019), the court dismissed a plaintiff’s request to abuse his creditor status to obtain a Rule 2004 review. The court found that the mover had paid $ 650 for a claim against the bankrupt debtor and was then seeking a 2004 review for use in a derivative lawsuit in which the debtor was not a party. “The Court would set a very troubling precedent in allowing Movant’s 2004 rule motion to go ahead. Such an outcome would encourage parties to purchase nominal claims in bankruptcy cases only to continue their external litigation programs. »Identifier.
In other cases, the facts and circumstances may be less clear. Invoking its discretion, there are a variety of mechanisms that a bankruptcy court can use to control discovery. The court may limit, condition, or even prohibit the use of the 2004 rule to prevent abuse when a review begins to touch on or focus exclusively on matters relating to an ongoing litigation. Collars on bankruptcy §2004.01, above. Since the application of the rule of pending procedure can often be far from straightforward, see Int’l Fibercom, 283 BR 290, 292-93 (Bankr. D. Ariz. 2002) (gathering the cases in which the rule of “pending proceedings” was not applied despite the existence of a related pending litigation), the practitioner will need to assess each case and adapt the approach to override or otherwise define the limitations requested for examinations under the 2004 Rule.
Copyright © 2021 Nelson Mullins Riley & Scarborough LLPRevue nationale de droit, volume XI, number 341