Bankruptcy attorneys usually think of Rule 2004 of the Federal Rules of Bankruptcy Procedure as a near-unstoppable discovery tool that can be used by a debtor-in-possession (DIP), panel trustee or liquidating trustee to obtain documents needed to evaluate and successfully prosecute claims against insiders and others.[1] This tool is a much-needed one, particularly in cases of insider malfeasance, where the insider — not the DIP or trustee — has the needed books and records. The all-powerful Rule 2004 meets its match, however, when faced with the Fifth Amendment privilege against self-incrimination.
In In re HJH Consulting Group Inc.,[2] the chapter 11 debtors sought extensive documents pursuant to Rule 2004 from a nondebtor — a former executive of the debtors — who they alleged committed fraud and breached his fiduciary duty.[3] As the executive invoked the Fifth Amendment privilege against self-incrimination, Chief Bankruptcy Judge Ronald B. King ruled that the debtors were only entitled to the executive’s and his franchise’s tax returns and W-2 forms from the last four years.[4] The bankruptcy court was particularly keen to protect the executive’s Fifth Amendment privilege given the existence of an ongoing, parallel criminal investigation of the executive.[5] The opinion is a thoughtful, thorough and nuanced application of the law on Fifth Amendment privilege in the bankruptcy context.
The Act of Production Doctrine
As noted by the bankruptcy court, the Fifth Amendment privilege may be invoked even where the testimony itself is not directly incriminating. If the witness “believes the testimony provided may travel down the road of possible self-incrimination,”[6] that is enough. It follows then that “Fifth Amendment protections are explicitly extended to protect individuals from being compelled to personally produce documents if the production itself would have testimonial aspects that could be self-incriminating.”[7] “[T]he act of production itself may implicitly communicate statements of fact, such as the existence of documents, the defendant’s possession and control of the documents, and the documents’ authenticity.”[8] This is known as the Act of Production Doctrine.
Exceptions: The Foregone Conclusion and the Required Records Doctrines
The primary exceptions to the Act of Production Doctrine are the Foregone Conclusion Doctrine and the Required Records Doctrine.[9] Under the former exception, “the Fifth Amendment privilege does not apply where the existence and location of a particular document is a ‘foregone conclusion.’”[10] “When those testimonial aspects are absent — control and authenticity are not at issue — the matter is not one of testimony, but merely of surrender.”[11] Thus, where the DIP or trustee knows that a third party “prepared documents and delivered them, but is not requiring that the [witness] authenticate or verify them, the risk of self-incrimination is almost nonexistent, absent additional facts. The existence was already known, and the authenticity is verified through the [third party] who created the document instead of through the [witness].”[12] Under the latter exception, the Fifth Amendment is not a proper basis to avoid the production of records required by law to be kept or disclosed to a public agency. “[R]ecords not required by law to be kept or disclosed to a public agency are protected.”[13]
The bankruptcy court determined that the Foregone Conclusion Doctrine did not apply because the debtors failed to meet their burden to show its applicability to any documents requested.[14] “The moving party must demonstrate the document’s existence and possession are, indeed, foregone conclusions not requiring any declaration of control, authenticity, or actuality. To do so, the moving party must establish its prior awareness and bears the burdens of production and proof on the questions of possession and existence of the documents.”[15] Notably, speculation and surmise as to documents is not enough. Even a well-founded general allegation that “‘a businessman such as respondent will always possess [certain] general business and tax records’” is insufficient.[16]
The Required Records Doctrine did apply, but only as to the executive’s and his franchise’s tax returns and W-2 forms from the last four years, as those were the only documents sought that were “required by law to be kept or disclosed to a public agency.”[17] Other general business and older tax records and the other extensive documents and communications sought did not have to be produced.[18]
Practical Impacts of Fifth Amendment Invocation
Where an individual with key documents sought by a DIP or trustee appears likely to invoke the Fifth Amendment in response to a Rule 2004 document production request, the DIP or trustee may have little choice but to seek the documents elsewhere,[19] toll the statute of limitations pending the criminal investigation or proceeding, or commence an adversary proceeding within the statute of limitations but then immediately seek to stay that proceeding pending the criminal investigation or proceeding.[20] Although delay is usually the enemy of maximizing estate value and ensuring prompt distributions to creditors, there may be a silver lining. A host of documents and information (including smoking gun documents or testimony, the identification of key witnesses, stipulated and adjudicated facts, and jury verdicts and convictions) may come out of the criminal proceeding, transforming a perhaps initially difficult adversary proceeding into a slam-dunk one, all at the cost, expense and effort of Uncle Sam.
A Parting Warning
Lest anyone be too tempted to invoke the Fifth Amendment, however, the bankruptcy court cautioned that, “[u]nlike in a criminal proceeding, invoking the Fifth Amendment in a civil case allows, but does not require, courts to draw an adverse inference.… Thus, the invocation in a civil — including bankruptcy — case does not come without a price: individuals must balance the benefit of protection from self-incrimination against the risk of negative inferences in the civil action.”[21]
[1] See, e.g., In re Enron Corp., 281 B.R. 836, 840 (Bankr. S.D.N.Y. 2002) (“As a general proposition, Rule 2004 examinations are appropriate for revealing the nature and extent of the bankruptcy estate … and for discovering assets, examining transactions, and determining whether wrongdoing has occurred.… In this regard, courts have recognized that Rule 2004 examinations are broad and unfettered and in the nature of fishing expeditions.”) (citations and internal quotation marks omitted).
[2] In re HJH Consulting Group Inc., 2018 WL 4090594 (Bankr. W.D. Tex. Aug. 24, 2018).
[3] Id. at *1.
[4] Id. at *1 and *7.
[5] Id. at *1-*3.
[6] Id. at *2 (citing United States v. Burr, 25 F. Cas. 38, 40 (C.C.D. Va. 1807)).
[7] Id. at *3 (citing Fisher v. United States, 425 U.S. 391, 410 (1976)).
[8] Id. (citing United States v. Hubbell, 530 U.S. 27, 36 (2000)).
[9] Id. at *4. A third exception, not at issue in HJH Consulting Group, is “where the possible testimony has been deemed not to be self-incriminating after an in camera review.” 2018 WL 4090594, at *6-*7.
[10] Id. (citing Fisher, 425 U.S. at 411) (emphasis in original).
[11] Id.
[12] Id. (citing Hubbell, 530 U.S. at 44-45).
[13] Id. (citing United States v. Doe, 465 U.S. 605, 607 n.3 (1984)) (emphasis in original).
[14] Id.
[15] Id. (citing cases).
[16] Id. at *5 (quoting Hubbell, 530 U.S. at 45).
[17] Id. at *4 and *6.
[18] Id. at *6.
[19] Id. (suggesting some communications might be more easily obtained from the debtors’ employees).
[20] Id. at *3 (while there is an ongoing criminal investigation or proceeding, “in some instances, discovery should be deferred, questions must be omitted, or the proceeding should be stayed”).
[21] Id. at *2 (citing Baxter v. Palmigiano, 425 U.S. 308, 318 (1976)); see also, e.g., In re Martinez, 500 B.R. 608, 615-16 (Bankr. N.D. Cal. 2013) (discussing when an adverse inference is and is not appropriate).