A Federal Rule of Bankruptcy Procedure 2004 examination is commonly referred to as a “fishing expedition”[1] into a debtor’s financial affairs. Debtors, trustees and creditors routinely use Rule 2004 exams to investigate an examinee’s financial affairs with very little interference by bankruptcy courts or discovery rule limitations. However, a party with pending litigation against an examinee may find that a Rule 2004 exam is not the road to take. The “pending proceeding rule” can be used to stop or limit this common and unrestricted discovery method.
A Rule 2004 exam is used to inspect the “the acts, conduct, or property or … the liabilities and financial condition of the debtor, or … any matter [that] may affect the administration of the debtor’s estate, or the debtor’s right to discharge.”[2] It should be used to discover estate assets, examine transactions and determine if a party has participated in wrongdoing.[3] While this range of information seems broad, Rule 2004 exams can be limited when there is other litigation pending against a proposed examinee. Rule 2004 exams have been limited by courts “under the well-recognized rule that once an adversary proceeding or contested matter is commenced,” the Federal Rules of Civil Procedure apply.[4] This concept is referred to as the “pending proceeding” rule,[5] which is also applicable when there is litigation pending in state or federal courts. In those cases, the discovery rules of the forum where the litigation is pending apply.[6] The pending proceeding rule is often used when there is other litigation between a debtor and a creditor.
The pending proceeding rule is a result of the bankruptcy courts’ concerns that a Rule 2004 exam can be used as a “tactic to circumvent the safeguards” of applicable discovery rules.[7] Due to the broad scope of a Rule 2004 exam, it can easily allow interested party to obtain information that it would not have normally received in the forum where the matter is being litigated, whether it is an adversary proceeding, contested matter or other court action.[8]
When a bankruptcy court is determining whether to permit a Rule 2004 exam, “the relevant inquiry is whether the Rule 2004 examination will lead to [the] discovery of evidence [that is] related to the pending proceeding or whether the requested examination seeks to discover evidence [that is] unrelated to the pending proceeding.”[9] In In re Bennett Funding, the U.S. Bankruptcy Court for the Northern District of New York held that the trustee was not permitted to conduct a Rule 2004 exam of a party when such party was listed as a defendant in an adversary proceeding and the trustee was the plaintiff.[10] In Snyder, the U.S. Bankruptcy Court for the Southern District of Texas determined that the debtor was seeking a Rule 2004 exam of a third party solely for the purpose of obtaining documents relating to a state court action and denied the debtor’s request or the Rule 2004 exam.[11] These courts reasoned that the information being sought could be obtained in the pending proceedings and the use of a Rule 2004 exam was therefore improper.
However, the pending proceeding rule should not be viewed as a bulletproof shield to protect against unwanted discovery. If a Rule 2004 exam relates to information that is unrelated to the dispute pending in another forum, courts will generally allow the examination.[12] In In re Washington Mut. Inc., the U.S. Bankruptcy Court for the District of Delaware permitted the debtor to proceed with a Rule 2004 exam of an entity against which the debtor had a pending adversary proceeding.[13] The court compared the causes of action that were identified in the adversary proceeding and the information being sought by the debtor, and determined that the debtor was seeking evidence in the Rule 2004 exam that was unrelated to the adversary proceeding.[14] The debtor was permitted to proceed with its examination.[15]
A determination of whether a Rule 2004 exam should be permitted if litigation is pending in another forum is determined on a case-by-case basis. To the extent that an examining party can prove that it is only seeking information that is related to a debtor’s bankruptcy and is not trying to circumvent another forum’s discovery rules, a Rule 2004 exam will likely be permissible. However, if a party is seeking information that it could not obtain through its pending litigation against the examinee, the pending proceeding rule will apply and prevent a Rule 2004 exam. A Rule 2004 exam is a powerful tool in bankruptcy proceedings and serves an important purpose. The pending proceeding rule is one way that courts have ensured that this powerful tool is not abused.
[1] See, e.g., In re M4 Enters. Inc., 190 B.R. 471, 474 (Bankr. N.D. Ga. 1995); In re Drexel Burnham Lambert Group Inc., 123 B.R. 702, 711 (Bankr. S.D.N.Y. 1991); In re Wilcher, 56 B.R. 428, 433 (Bankr. N.D. Ill. 1985).
[2] Fed. R. Bankr. P. 2004(b).
[3] In re Enron, 281 B.R. 836, 840 (Bankr. S.D.N.Y. 2002).
[4] Id. at 840 (internal citations omitted); Fed. R. Bankr. P. 7026, et al.; Fed. R. Bankr. P. 9014.
[5] See In re Simms, 2012 Bankr. LEXIS 3264, *2-3 (Bankr. N.D. Ga. May 10, 2012); In re Washington Mut. Inc., 408 B.R. 45, 50-51 (Bankr. D. Del. 2009); In re Szadkowski, 198 B.R.140, 141 (Bankr. D. Md. 1996); In re M4 Enters. Inc., 190 B.R. at 475; In re Sutera, 141 B.R. 539 (Bankr. D. Conn. 1992); In re Blinder, Robinson & Co., 127 B.R. 267, 274-75 (D. Colo. 1991).
[6] In re Enron, 281 B.R. at 842; Snyder v. Soc’y Bank, 181 B.R. 40, 42 (S.D. Tex. 1994), aff’d sub nom., In re Snyder, 52 F.3d 1067 (5th Cir. 1995).
[7] In re Enron, 281 B.R. at 841.
[8] Id. The use of a Rule 2004 examination to further a state court action is an abuse of Rule 2004. Snyder v. Soc’y Bank, 181 B.R. at 42.
[9] In re Washington Mut. Inc. 408 B.R. 45, 51 (Bankr. D. Del. 2009).
[10] In re Bennett Funding, 203 B.R. 24, 29-30 (Bankr. N.D.N.Y. 1996).
[11] Snyder v. Soc’y Bank, 181 B.R. at 42.
[12] Bennett Funding Group, 203 B.R. at 29 (citations omitted).
[13] Washington Mut., 408 B.R. at 52.
[14] Id.
[15] Id.