Although ruling that a creditor is entitled to conduct discovery under Bankruptcy Rule 2004 in a chapter 15 case, Bankruptcy Judge Neil W. Bason of Los Angeles denied the motion under familiar principles: Discovery can’t be a “fishing expedition,” and discovery taken under Rule 2004 can’t be used in litigation outside of bankruptcy court.
The debtor was a corporation in liquidation on the island of Jersey, a self-governing British dependency near the French coast. Judge Bason had granted “foreign main recognition” last year under chapter 15, finding that Jersey was the center of main interests.
At filing in the U.S., the debtor’s principal creditor had lawsuits pending against the debtor in state and federal courts in California. Chapter 15 recognition imposed a stay on the suits. Previously, Judge Bason had denied the creditor’s motions to modify the stay to permit the suits to proceed outside bankruptcy court.
More recently, the principal creditor filed a motion to take discovery under Rule 2004 from a third-party bank. The creditor alleged that discovery could uncover assets of the estate.
The debtor’s foreign representatives objected to the motion, contending that Rule 2004 discovery is not available to creditors in chapter 15 cases. More specifically, the liquidators argued that discovery is only available under Section 1521(a)(4).
After recognition, Section 1521(a)(4) provides that the court may grant “appropriate relief, including . . . the examination of witnesses.”
Judge Bason said he was “not persuaded” that Rule 2004 does not apply in chapter 15 cases. In “appropriate circumstances,” he said that “some limited discovery would be available in this ancillary proceeding.”
However, Judge Bason was “not persuaded” that the creditor had “established that such circumstances exist at present.”
In reaching his conclusion about the applicability of Rule 2004 in chapter 15, Judge Bason said that the rule “does not contain any language limiting its application to chapters 7, 11, 12, or 13.” Furthermore, Rule 1001 says that “[t]he Bankruptcy Rules and forms govern procedure in cases under title 11 of the United States Code.”
Judge Bason listed cases to say that the “vast majority of authorities . . . support the conclusion that Rule 2004 does apply in chapter 15 cases, although generally those holdings have arisen from the foreign representatives’ Rule 2004 discovery, not other parties’ attempts to use Rule 2004.”
Similarly, Judge Bason said he was “unpersuaded” that Rule 2004 discovery is not available to creditors in chapter 15. He said there may be “limited instances in which a creditor would be permitted to pursue discovery, if it would further this Court’s assistance of the foreign main proceeding.”
Applying the principles to the motion at hand, Judge Bason said he was “not persuaded” that the creditor was proposing “a proper use of discovery.” First, discovery would be a “fishing expedition.” Second, the discovery was “too closely related” to the lawsuit in state court.
Denying the discovery motion, Judge Bason said that Rule 2004 discovery cannot be used in litigation outside of bankruptcy court.
Although ruling that a creditor is entitled to conduct discovery under Bankruptcy Rule 2004 in a chapter 15 case, Bankruptcy Judge Neil W. Bason of Los Angeles denied the motion under familiar principles: Discovery can’t be a “fishing expedition,” and discovery taken under Rule 2004 can’t be used in litigation outside of bankruptcy court.
The debtor was a corporation in liquidation on the island of Jersey, a self-governing British dependency near the French coast. Judge Bason had granted “foreign main recognition” last year under chapter 15, finding that Jersey was the center of main interests.
At filing in the U.S., the debtor’s principal creditor had lawsuits pending against the debtor in state and federal courts in California. Chapter 15 recognition imposed a stay on the suits. Previously, Judge Bason had denied the creditor’s motions to modify the stay to permit the suits to proceed outside bankruptcy court.