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Imagine a discovery device that would allow the investigating attorney to request all types of documents from a witness and then examine that witness on practically any subject without commencing an action, being bound by notions of relevance to a cause of action, or even without anyone other than the witness’ counsel being present. Sound too good to be true? In the bankruptcy world, it’s standard fare. While investigations in civil cases are limited by “relevance” to the four corners of a pleading, under Rule 2004 of the Federal Rules of Bankruptcy Procedure, a bankruptcy litigator/investigator is not necessarily so restricted. Rule 2004 is a litigator/investigator’s dream. It vests the litigator/investigator with a power far less restricted than the “reasonably calculated to lead to the discovery of admissible evidence” standard set forth in Rule 26 of the Federal Rules of Civil Procedure. Under Rule 2004(a), upon motion of any party in interest or an ex parte basis, the court may enter an order directing the examination of any entity. Fed. R. Bank. P. 2004(a). The scope of the examination may relate to the “acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any other matter which may affect the administration of the debtor’s estate, or to the debtor’s right to discharge.” Fed. R. Bank. P. 2004(b). The rule makes clear that third parties are also subject to examination if they possess knowledge of the debtor’s acts, conduct or financial affairs which relate to the bankruptcy proceeding. [FOOTNOTE 1] The scope of the Rule 2004 examination is unfettered and broad and is recognized as more in the nature of a fishing expedition. See In re Foerst, 93 F. 190, 191 (S.D.N.Y. 1899). The purpose of such a broad discovery tool is to assist the trustee or debtor in possession in revealing the nature and extent of the estate, and to discover assets of the debtor that may have been intentionally or unintentionally concealed or fraudulently transferred. See In re Bennett Funding Group Inc., 203 B.R. 24, 28 (Bankr. N.D.N.Y. 1996). “The sweeping general examination of debtors and others to recover assets and uncover fraudulent conduct is a traditional feature of bankruptcy jurisprudence that is traceable to the first bankruptcy statute enacted by the English Parliament more that 450 years ago.” See In re Symington, 209 B.R. 678, 683 (Bankr. D. Md. 1997) (citing 5 Remington on Bankruptcy � 1979 (1953 ed.)). Most importantly for the investigator who believes that there are causes of action to be brought but does not know all of the facts to file a complaint, the examination under Rule 2004 is properly used as a pre-litigation device. See In re Bennett Funding Group Inc., 203 B.R. at 28; In re Symington, 209 B.R. at 684 (“As an investigatory tool, [a Rule 2004 examination] is inquisitory rather than accusatory, although information discovered by its employment may presage litigation.”). The ability to conduct a “fishing expedition” is particularly important in bankruptcy cases, where many times there is only the carcass of a once profitable company remaining. Hence, unsecured creditors stand to receive, at best, a minimal distribution once the debtor’s assets are liquidated. In these cases, the financial shenanigans of officers, directors, shareholders, lenders and other parties in interest often come to light. Accordingly, Rule 2004 permits the investigation of the suspected wrongdoers prior to determining whether causes of action exist to recover assets for the estate. Once the bankruptcy court authorizes the investigation under Rule 2004, the court can use its discretion to determine how the investigation is going to proceed. For example, in the Pic ‘N Pay Stores Inc. Chapter 11 bankruptcy case pending in the District of Delaware — Pic ‘N Pay Stores Inc., U.S. Bankr. Ct., Dist. Del., (No.00-1358 JJF) — the court granted the investigating attorneys (the authors of this article) whose firm is counsel to the official committee of unsecured creditors, the right to obtain documents and take the examination of the debtor, the debtor’s past and present officers and employees, and the debtor’s lenders, without disclosure of that information to other interested parties, with the exception of the U.S. Trustee. Initially, the court ordered that the oral examination of each witness be conducted outside the presence of counsel but with the right of each witness to consult with counsel during the course of the oral examination (a proceeding analogous to a grand jury investigation). When the witnesses requested the court reconsider the order authorizing the examinations, the court allowed counsel for the witness to be present during the examination but sealed the transcript of the examinations and the identity or nature of the documents used at the depositions. The court also directed the witness and the witness’ counsel not to discuss in any manner the Rule 2004 examination and deposition with any other witness or party until such time as the court lifts the seal. Hence, in the Pic ‘N Paycase, the court exercised its discretionary power to allow committee counsel to conduct its investigation without fear of collusion between the witnesses. ARE THERE BOUNDARIES? Despite its characterization as being tantamount to a “fishing expedition,” a Rule 2004 examination must be both relevant and reasonable. See Snyder v. Society Bank, 181 B.R. 40 (S.D. Tex. 1994) aff’d52 F.3d 1067 (5th Cir. 1995); In re Table Talk Inc., 51 B.R. (Bankr. D.Mass. 1985); In re Mittco Inc., 44 B.R. 35 (Bankr. E.D.Wis. 1984); Keene Corp. v. Johns-Manville Corp. ( In re Johns-Manville Corp.), 42 B.R. 362 (S.D.N.Y. 1984). In fact, the scope of a Rule 2004 examination is not unlimited as many would suggest because it may relate only to acts, conduct or property, or to the liabilities and financial condition of the debtor, or any matter that may affect the administration of the debtor’s estate. Clearly, matters having no relationship to the debtor’s affairs, or the administration of the bankruptcy estate, are not the proper subjects of a Rule 2004 examination. See In re Financial Corporation of America, 119 B.R. 728 (Bankr. C.D.Cal. 1990); In re Johns-Manville Corp., supra. Further, as with depositions conducted in civil litigation, “Rule 2004 examinations may not be used to annoy, embarrass or oppress the party being examined.” See In re Coffee Cupboard Inc., 128 B.R. 509, 514 (Bankr. E.D.N.Y. 1991) ( citing In re Drexel Burnham Lambert Group Inc., 123 B.R. 702, 712 (Bankr. S.D.N.Y. 1991)). Many witnesses who are the targets of Rule 2004 examinations argue that the scope of a Rule 2004 examination is subject to the limitations as set forth in the Federal Rules of Civil Procedure. See In re Symington, 209 B.R. at 684. In this regard, “those seeking to examine witnesses or records pursuant to Rule 2004 are subject to applicable evidentiary privileges.” In re Financial Corporation of America, 119 B.R. at 733. In addition, the court may issue an appropriate protective order to preserve the rights of those from whom discovery is sought. [FOOTNOTE 2] While Federal Rule of Bankruptcy Procedure 2004 does not contain an explicit requirement of “good cause” for the granting of a motion to conduct an investigation, courts have ruled that such a requirement is implicit [FOOTNOTE 3]and can be enforced by a protective order for various reasons, including but not limited to, when the investigator is acting in bad faith, such as for an improper purpose, including harassment, or where the information purportedly sought is either already well-known or within the investigator’s possession. [FOOTNOTE 4] The investigator’s burden of showing good cause is an affirmative one that “is not satisfied merely by a showing that justice would not be impeded by production of the documents.” See Drexel Burnham Lambert Group Inc., 123 B.R. at 712 ( citing Boeing Airplane v. Coggeshall, 280 F.2d 654 (D.C. Cir. 1960)). “Good cause may ordinarily be sustained by a claim that the requested documents are necessary to establishment of the moving party’s claim or that denial of production would cause undue hardship or injustice.” Id. Finally, the Rule 2004 examination should not be so broad so as to be more disruptive and costly to the party sought to be examined than beneficial to the party seeking discovery. See In re Eagle-Picher Indus. Inc.,169 B.R. at 134; In re Texaco Inc., 79 B.R. 551, 553 (Bankr. S.D.N.Y. 1987). COURT’S CONSIDERABLE DISCRETION It is clear that there are cases supporting an investigator’s right to an expansive investigation under Rule 2004 and those allowing for a more limited investigation. In either circumstance, the bankruptcy court is afforded significant discretion to fashion a remedy for the bankruptcy investigator. As in most cases, the facts of the case influence the court’s use of its discretion. In the Pic ‘N Paycase, the company, a once flourishing national chain of discount shoe stores with over 500 locations throughout the United States, filed a voluntary Chapter 11 petition with the bankruptcy court in Delaware to stave off an involuntary Chapter 11 petition that was going to be filed by unsecured creditors in Charlotte, N.C., the company’s headquarters. The unsecured creditors suspected that there was fraud in the inducement for the shipment of goods on open credit when the company was insolvent and that insiders and other parties in interest had manipulated the company just prior to the bankruptcy filing for their own pecuniary gain. Armed with these suspicions, the unsecured creditors argued, first individually, and then collectively through the committee, that the court should be concerned with the events leading up to the bankruptcy until the “true” facts were known. To assist the committee in discovering the “truth,” counsel for the committee moved to conduct examinations of the debtor’s past and present officers, directors, shareholders, lenders and other parties in interest. As noted above, the court granted the committee’s request and initially fashioned the proceedings as if committee counsel were a special prosecutor conducting a grand jury investigation. Similarly, in the Crowley, Milner and Company/Steinbach Stores Inc. confirmed liquidating Chapter 11 bankruptcy cases pending in the Eastern District of Michigan, the bankruptcy court has permitted the investigating attorneys (again, the authors of this article) whose firm is counsel to the official committee of unsecured creditors, to examine numerous parties in interest to uncover potential causes of action against the debtors’ former officers, who are believed to have negligently operated the companies. See Crowley, Milner and Company/Steinbach Stores Inc., U.S. Bankr. Ct., East. Dist. Mich., (No. 99-41767). In these particular cases, Rule 2004 has allowed counsel to the committee the ability to operate free from the usual discovery restrictions as well as the obstacles employed by a party involved in a lawsuit whose interests are not necessarily compatible with a full scale investigation of the facts and circumstances of the matters under examination. In sum, although there are boundaries to the territorial waters being explored, the investigator — come fisherman under Rule 2004, can navigate far and wide before exceeding the fishing permit granted by the court. Ronald R. Sussman is counsel to New York’s Kronish Lieb Weiner & Hellman LLP, practicing in the firm’s bankruptcy group. Richard S. Kanowitz is a senior associate practicing in the firm’s bankruptcy group. Kronish Lieb represents the official committee of unsecured creditors in two of the cases discussed in this article. ::::FOOTNOTES:::: FN1The persons to be examined and the parties in interest who may conduct the examination are not defined in the Rules nor the Code. However, by looking to the language of Rule 2004, it is evident that an examination may be had only of those persons possessing knowledge of a debtor’s acts, conduct or financial affairs so far as this relates to a debtor’s proceeding in bankruptcy.” In re GHR Energy Corp., 35 B.R. 534, 537 (Bankr. D. Mass. 1983). FN2Bankruptcy Code � 105 provides, in part, that “the court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this Title.” 11 U.S.C. � 105(a). FN3 See In re Eagle-Picher Indus. Inc., 169 B.R. 130, 134 (Bankr. S.D. Ohio 1994) (“one seeking to conduct a 2004 examination has the burden of showing good cause for the examination which it seeks”); In re Drexel Burnham Lambert Group, 123 B.R. at 712 (“Rule 2004 requires that we balance the competing interests of the parties, weighing the relevance of and necessity of the information sought by the examination. That documents meet the requirement of relevance does not alone demonstrate that there is good cause for requiring their production.”). FN4 See, e.g., Matter of Georgetown of Kettering, 17 B.R. 73 (Bankr. S.D. Ohio 1981) (Rule 2004 may not be used to obtain information about disclosure statement); Matter of Wilcher, 56 B.R. 428 (Bankr. N.D. Ill. 1985) (Rule 2004 may not be used to examine purchaser of a debtor’s building at a court-ordered sale without establishing good cause for the requested discovery); In re ASI Reactivation Inc., 934 F.2d 1315, 1324 (4th Cir. 1991) (“Given some appellants’ status as competitors and given the acrimonious relations of the parties, the court was justifiably reluctant to allow appellants full access to [asset purchaser's] financial data”) CF. In re Handy Andy Home Improvement Centers Inc., 199 B.R. 376 (Bankr. N.D. Ill. 1996) (holding that the Federal Rules of Civil Procedure are inapplicable to Rule 2004 examinations).

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