Rule 2004 Discovery Barred for Use in Litigation Outside Bankruptcy Court

Refusing to “set a very bad precedent,” Bankruptcy Judge Sean H. Lane of Manhattan precluded a newly minted creditor from obtaining discovery from the debtor to use in litigation in another court against a third party.

The plaintiff in a derivative action in Delaware Chancery Court sued Facebook officers and directors last year. In March of this year, the plaintiff purchased a $650 claim against the debtor, Cambridge Analytica LLC, which had allegedly obtained data from Facebook about Facebook users.

One week after purchasing the claim, the plaintiff filed a motion under Bankruptcy Rule 2004 seeking discovery from the chapter 7 trustee for Cambridge Analytica. The rule allows the court to authorize discovery “only [as] to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge.”

Judge Lane denied the motion on June 14 in an opinion he designated for publication.

Judge Lane noted that courts have historically placed limits on Rule 2004 discovery. In addition to barring discovery designed to abuse or harass, he said that courts do not permit discovery under Rule 2004 after an adversary proceeding or contested matter has been initiated.

Courts, the judge said, have “exhibited similar concerns . . . where the party requesting the Rule 2004 examination is to benefit in pending litigation outside of Bankruptcy Court.”

As support for the ruling he was about to make, Judge Lane cited a decision from the Fifth Circuit and a 2019 opinion from another New York bankruptcy judge, both precluding the use of Rule 2004 “for the improper purpose of obtaining discovery for the pending state court civil litigation.”

In the case on his docket, Judge Lane said that the plaintiff was not a creditor when the bankruptcy began and filed the 2004 motion one week after purchasing a $650 claim. He found that the plaintiff filed the Rule 2004 motion “for the purpose of obtaining discovery for use in the Delaware derivative action.”

Judge Lane denied the Rule 2004 motion. The opposite result, he said, “would incentivize parties to purchase nominal claims in bankruptcy cases solely to pursue their outside litigation agendas.”