Chapter 10 Gone Fishing: The Fundamentals of Rule 2004

• Jurisdiction: United States

10. Gone Fishing: The Fundamentals of Rule 2004

Written by:

Thomas Michael Horan

Womble Carlyle Sandridge & Rice PLLC

Wilmington, Del.

Michael G. Busenkell

Womble Carlyle Sandridge & Rice PLLC

Wilmington, Del.

One of the most important discovery tools available to a party in interest in a bankruptcy case is an examination under Rule 2004 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). Famously described as permitting a "fishing expedition,"¹ Rule 2004 authorizes the court to order a deposition-type examination of the debtor or any other person and to compel the production of documents at the examination.²

A. What Is a Rule 2004 Examination?

Rule 2004 provides that "[o]n motion of any party in interest, the court may order the examination of any entity"³ about "the acts, conduct, or property or...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...."⁴ Courts have noted that the permissible scope of inquiry under Rule 2004 is "unfettered and broad."⁵ It is broader than discovery under the Federal Rules of Civil Procedure and has fewer procedural safeguards.⁶ For instance, "a witness has no general right to representation by counsel during a deposition, and the right to object to immaterial or improper questions is limited."⁷ A Rule 2004 examination legitimately may be used for "discovering assets, examining transactions, and determining whether wrongdoing has occurred."⁸ In a chapter 11, 12 or 13 case, the examination may also concern matters relevant to the operation of the debtor's business and the confirmation of a plan.⁹

B. What Limitations Are Imposed on 2004 Examinations?

There are few limits on the types of discovery that are permissible in a Rule 2004 examination. Discovery under Rule 2004 is not objectionable merely because it is nothing more than a "fishing expedition."¹⁰ However, Rule 2004 does not permit unfettered examination. It must be used for a legitimate purpose and cannot be used to harass. "It may not be used for 'purposes of abuse or harassment' and it 'cannot stray into matters which are not relevant to the basic inquiry.'"¹¹

In addition, courts will usually not allow a 2004 exam where an adversary proceeding is pending because the party requesting the exam is likely seeking to avoid the procedural safeguards of Bankruptcy Rules 7026-7037.¹² Rules 7026-7037 govern discovery in an adversary proceeding and, as incorporated by Rule 9014(c), in a contested matter.¹³ However, discovery under Rules 7026-37 is far more limited than it is under Rule 2004. Most courts conclude that a Rule 2004 examination should not be used as a mechanism for avoiding the discovery restrictions that apply in pending litigation.¹⁴

Because the scope of permissible discovery under Rule 2004 is so broad, there is an obvious tension when the entity seeking discovery is involved in litigation with the proposed examinee, whether that litigation takes the form of a contested matter or adversary proceeding in the bankruptcy context, or if there is nonbankruptcy litigation. Indeed, this tension is most obvious insofar as a Rule 2004 examination has been characterized as "nonadversarial in nature and aimed at discovering evidence upon which future causes of action may be based...."¹⁵

Accordingly, the courts will either not authorize a Rule 2004 examination while litigation is pending¹⁶ or authorize the examination only under conditions that ensure that there is no prejudice to the other litigants.¹⁷ Therefore, the "pending proceeding rule" provides that "once an adversary proceeding or contested matter has been commenced, discovery is made pursuant to Federal Rules of Bankruptcy Procedure 7026, et seq., rather than by a [Rule] 2004 examination."¹⁸ The "pending proceeding rule" also recognizes that a litigant may gain an unfair advantage in litigation outside of bankruptcy if it can subject a party to a Rule 2004 examination.¹⁹ Therefore, if there is litigation between the parties, and the discovery sought is related to that litigation, then discovery must be pursued outside of Rule 2004.

There is, however, an exception to the "pending proceeding rule." A party may still seek discovery under Rule 2004 that is unrelated to the pending litigation.²⁰ Accordingly, when weighing a motion for authority to conduct a Rule 2004 examination, "the relevant inquiry is whether the Rule 2004 examination will lead to discovery of evidence related to the pending proceeding or whether the requested examination seeks to discover evidence unrelated to the pending proceeding."²¹ It is important to note, however, that while the "pending proceeding rule" should apply to prohibit a Rule 2004 examination in instances where litigation is pending in a nonbankruptcy forum, several courts have opted not to limit the ability to conduct a Rule 2004 examination under such circumstances.²²

Similarly, courts have prohibited the use of Rule 2004 examinations (1) after a case has been closed,²³ (2) postconfirmation where there no longer exists property of the estate,²⁴ (3) where an examinee asserts that certain testimony is privileged,²⁵ and (4) where the 2004 exam involves matters barred by res judicata.²⁶ It is also impermissible to conduct a 2004 examination of a debtor's attorney.²⁷

C. Who May Be Compelled to Attend and Produce Documents?

As long as an entity possesses information of the type identified at Rule 2004(b), that entity may be compelled to participate in a Rule 2004 examination. Failure to provide discovery under Rule 2004 is grounds for a finding of civil contempt. Attendance may be compelled anywhere in the United States, whether within or inside the district in which the bankruptcy case is pending.²⁸ Rule 2004(c) provides that attendance for an examination and the production of documents may be compelled in the same manner provided for under Rule 9016.²⁹

D. What Is the Procedure for Obtaining Permission to Conduct a Rule 2004...