Gone Fishin’: Addressing the “Pending Proceeding” Limit on Examinations under Federal Rule of Bankruptcy Procedure 2004
by Ralph E. Avery
U.S. Courts Bankruptcy Judges Division; Washington, D.C.
Rarely is an official rule of court publicly acknowledged as a license for a “fishing expedition,” but that is the characterization often conferred by the courts on Fed. R. Bankr. P. 2004. E.g., In re French, 145 B.R. 991, 992 (Bankr. D. S.D. 1992). As with all fishing licenses, however, this one can be revoked if one tries to catch more than the limit. Specifically, courts frequently deny a request for a 2004 examination if another proceeding is pending, either in bankruptcy court, or in another federal or state court. In re Enron Corp., 281 B.R. 836 (Bankr. S.D.N.Y. 2002) (denying Rule 2004 examination in aid of pending federal securities case and discussing cases); In re French, 145 B.R. 991, 992 (pending bankruptcy court proceeding). Courts will not permit the use of Rule 2004 to subvert the more limited discovery procedures available in litigation, 2435 Plainfield Ave., Inc. v. Township of Scotch Plains (In re 2435 Plainfield Ave., Inc.), 223 B.R. 440, 445-47 (Bankr. D. N.J. 1998), nor will they impose duplicative or unduly burdensome procedures upon the target of the 2004 examination. In re Buick, 174 B.R. 299, 305 (Bankr. D. Colo. 1994). This note will provide some guidelines for dealing with the court-developed “pending proceeding” limitation on the otherwise expansive discovery available under Rule 2004. International Fibercom, Inc., 283 B.R. 290, 292 (Bankr. D. Ariz. 2002) (limitation is created by courts, not in text of rule).
Threshold Matters: Demonstrated Need for Rule 2004 Examination
Explaining the complexities of the relationship between a Rule 2004 examination and other pending litigation should not distract from the fundamental need to establish the predicates for the examination enumerated in Rule 2004(b). The court denied a motion for a Rule 2004 examination in In re Enron Corp., 281 B.R. 836, 842, not because of the likelihood that it would compromise discovery in other litigation, but because the movant failed to make a prima facie case for using Rule 2004.
Articulate the Relationship between the Pending Proceeding and the Goals of the Rule 2004 Examination
Clearly delineating the respective scopes of the issues in the pending proceeding and the discovery sought in the Rule 2004 examination can aid the court in deciding whether to grant the examination. The greater the distinction between the discovery sought in the Rule 2004 examination and the other pending proceeding, the more likely the court is to permit the examination, although some overlap between the two matters is not necessarily fatal to the examination. Compare In re Recoton Corp., 307 B.R. 751, 756 (Bankr. S.D.N.Y. 2004) (distinct subject matter justifies 2004 examination; some degree of overlap between pending proceeding and 2004 examination subjects is permissible); and International Fibercom, Inc., 283 B.R. 290, 292-93 (permitting Rule 2004 examination since it was broader than matter in pending litigation); with In re Comdisco, Inc., 2006 WL 2375458 (N.D. Ill. 2006) (Rule 2004 examination denied where it related to issues in pending litigation but not to bankruptcy case); In re Bennett Funding Group Inc., 203 B.R. 24 (Bankr. N.D.N.Y. 1996) (inability to segregate issues in Rule 2004 examination and pending proceeding fatal to request for Rule 2004 examination).
Articulate the Relationship between the Parties in the Pending Proceeding and the Parties Involved in the Rule 2004 Examination
Explaining the differences between the parties, and especially between their various interests, in the pending litigation can be persuasive in justifying the Rule 2004 examination. In re Blinder, Robinson & Co., Inc., 127 B.R. 267, 275 (Bankr. D. Colo. 1991); In re Buick, 174 B.R. 299, 305.
Be Creative in Offering Safeguards Against Misuse of Rule 2004 Discovery in the Pending Proceeding and in Preventing Undue Burden on the Target of the Discovery
Courts have looked with favor on the use of Web sites and other mechanisms to make the products of the Rule 2004 process available to other interested parties in the bankruptcy, thus avoiding undue burden on the targets of the Rule 2004 examination. In re International Fibercom Inc., 283 B.R. 290, 293-94, citing In re Enron, 281 B.R. 836. Courts have also favored protective orders to prevent the products of Rule 2004 examinations from being misused by parties to other pending proceedings. In re Recoton Corp., 307 B.R. 751, 756. Carefully crafting protective orders to constrain the subject matter of the proposed Rule 2004 examination and/or the use of the products, exploring ways to prevent duplication or other burdens on parties to the examinations, and the like can be determinative in persuading a court to grant a Rule 2004 examination. Id. (depositions to be taken only if necessary after document review completed; creditors, committee to work with target of examination to manage administrative burden).
Be Forthright Concerning the Motivations for the Requested Examination
Too much cannot be said in favor of forthrightness with the tribunal, and that certainly applies to requests for Rule 2004 examinations. Anything about the timing, scope, participants or other attributes of the examination in relation to the other pending proceeding can lead not only to denial of a request for an examination, but even to sanctions against the use of the results thereof. Collins v. Polk, 115 F.R.D. 326, 328-29 (M.D. La. 1988).
Rulings on Rule 2004 Examinations May Be Appealed
Rulings on applications for or opposition to Rule 2004 examinations are generally considered interlocutory. Pontikes v. SIP Claimants (In re Comdisco Inc.), 2006 WL 2375458 at *3 (N.D. Ill. 2006); In re Dinubilo, 177 B.R. 932, 939 (E.D. Cal. 1993). District courts are alert, however, to the unusual nature of bankruptcy proceedings, in which many rulings might never become appealable, and may therefore exercise their broad discretion to review orders on these examinations. The standard of review, however, is abuse of discretion by the bankruptcy court, making success difficult, though not impossible. Pontikes, supra; Dinubilo, supra, (sustaining use of Rule 2004 but conditioning future examinations on use of Bankruptcy Rule 9014 and corresponding Rules of Civil Procedure).
Rule 2004 is one of the most powerful procedures in bankruptcy practice. Pendency of contested matters or adversary proceedings in the bankruptcy case or lawsuits in state or federal court can make this procedure unavailable. There is, however, much flexibility in this general rule. Making careful distinctions between the purposes of the Rule 2004 process and discovery in the other proceedings, highlighting differences in the parties to the two, creatively controlling the use of the results of the examination, and avoiding burden on the target of the examination can justify exceptions to the “pending proceedings” rule.