Aiming to fund a distribution to equity under a confirmed plan, a reorganized chapter 11 debtor may use Rule 2004 discovery to obtain “preliminary information needed to file an adversary proceeding” but cannot use the rule “to gain a strategic advantage,” according to Bankruptcy Judge Michael G. Williamson of Tampa, Fla.
In his December 7 opinion, Judge Williamson denied the Rule 2004 motion because the debtor already had the “preliminary information” required to file a lawsuit.
The Confirmed Plan
The corporate debtor owned real property in financial distress. Before filing, the debtor found a buyer who had a lender to finance the purchase. First, the lender sought an extension of the closing date. Then, the lender halted making any new loans in the early weeks of the pandemic.
Unable to close the sale, the debtor filed a petition under Subchapter V to stop the impending foreclosure.
In chapter 11, the bankruptcy court approved the sale of the property to the same buyer, but with a different lender, which made a costlier loan. The plan paid all claims in full.
The confirmed plan specifically contemplated suing the “old” lender after confirmation and retained jurisdiction in the bankruptcy court for the suit. Any recovery would go to the debtor’s equity holders under the plan.
After confirmation, the debtor filed a motion for discovery from the “old” lender under Rule 2004. The lender objected.
Jurisdiction
The lender argued that the bankruptcy court had no subject matter jurisdiction to entertain the Rule 2004 motion because any lawsuit would not be within the bankruptcy court’s more limited jurisdiction after confirmation.
Judge Williamson found jurisdiction for the Rule 2004 motion.
After confirmation, Judge Williamson said that bankruptcy courts have subject matter jurisdiction over Rule 2004 motions “because Rule 2004 discovery ‘arises in’ a case under title 11. And ‘arising-in’ jurisdiction — unlike ‘related-to’ jurisdiction — is not restricted post-confirmation.”
The Merits
Drawing on a 1988 decision from a bankruptcy court in Pennsylvania and a 2016 decision from Delaware, Judge Williamson gleaned two governing principles to determine whether there was “good cause” for Rule 2004 discovery.
First, Judge Williamson said that “bankruptcy courts should take into consideration their limited ‘related-to’ post-confirmation jurisdiction.”
If the matter under investigation is beyond post-confirmation jurisdiction, Judge Williamson said that “no cause exists for the Rule 2004 discovery.” On the other hand, the possibility that a discovered claim may lie outside jurisdiction “does not, by itself, preclude Rule 2004 discovery.”
Judge Williamson said that he was “not endowed with prophetic powers that [would] allow [him] to pre-judge subject-matter jurisdiction over yet-to-be-filed causes of action. At this stage, the Court cannot definitively say that the causes of action the Debtor is pursuing lie outside this Court’s subject-matter jurisdiction.”
Judge Williamson held that the “lack of subject matter jurisdiction is not grounds for denying Rule 2004 discovery.”
Second, Judge Williamson said that “Rule 2004 discovery should not be permitted when it is being used to gain an advantage in private litigation.”
The debtor had described the facts underpinning the claim against the “old” lender in the schedules and in the case management summary. In addition, the claim was included in the plan as a potential cause of action.
The debtor therefore “has the preliminary information needed to bring whatever claims it may have against [the “old” lender]. That preliminary information is all Rule 2004 is intended to provide,” Judge Williamson said.
The debtor “will not suffer a hardship or be prejudiced by the denial of Rule 2004 discovery,” Judge Williamson said, because “the Debtor will have ample opportunity to conduct discovery once it files an adversary complaint.”
“To the contrary,” Judge Williamson said, “allowing the Debtor to conduct Rule 2004 discovery would give the Debtor an unfair strategic advantage.”
Judge Williamson denied the motion because permitting the debtor to conduct a Rule 2004 “fishing expedition” would provide a tactical advantage permitting the debtor to “discover[] information it could not in the adversary proceeding.”
Aiming to fund a distribution to equity under a confirmed plan, a reorganized chapter 11 debtor may use Rule 2004 discovery to obtain “preliminary information needed to file an adversary proceeding” but cannot use the rule “to gain a strategic advantage,” according to Bankruptcy Judge Michael G. Williamson of Tampa, Fla.
In his December 7 opinion, Judge Williamson denied the Rule 2004 motion because the debtor already had the “preliminary information” required to file a lawsuit.
The Confirmed Plan
The corporate debtor owned real property in financial distress. Before filing, the debtor found a buyer who had a lender to finance the purchase. First, the lender sought an extension of the closing date. Then, the lender halted making any new loans in the early weeks of the pandemic.
Unable to close the sale, the debtor filed a petition under Subchapter V to stop the impending foreclosure.
In chapter 11, the bankruptcy court approved the sale of the property to the same buyer, but with a different lender, which made a costlier loan. The plan paid all claims in full.