In In re Defoor Centre, LLC, No. 8:20-bk-04273-MGW (Bankr. M.D. Fla. Dec. 7, 2021), the bankruptcy court analyzed when a Chapter 11 debtor can pursue post-confirmation Rule 2004 discovery to investigate potential causes of action against a stranger to the bankruptcy proceeding. A short summary of relevant events is given below:
Both Defoor and GB Square believed they had causes of action against Newtek, and GB Square assigned whatever causes of action it had against Newtek to Defoor. The debtor’s Subchapter V plan stated that the bankruptcy court retained jurisdiction over any potential claims against Newtek.
After confirmation of its Chapter 11 plan, Defoor tried to obtain Rule 2004 discovery from Newtek to investigate potential causes of action. Newtek objected on the grounds that the potential causes of action were outside the bankruptcy court’s post-confirmation “related-to” jurisdiction. The court acknowledged the difficulty in determining whether the potential causes of action were outside the court’s jurisdiction because the post-confirmation litigation had not yet been filed. Nevertheless, the court denied the debtor’s request for Rule 2004 discovery, finding that the debtor already had the preliminary information it needed to file the post-confirmation litigation and that permitting pre-filing Rule 2004 discovery would give the debtor an “undue strategic advantage in what amounts to private litigation.”
The court determined that the debtor already had the preliminary information needed to file whatever claims the debtor felt it had against Newtek, including the ability to (i) identify the potential causes of action in its schedules, (ii) articulate the facts giving rise to the potential claims in a case management summary filed in the Chapter 11 proceeding, and (iii) include the potential causes of action in its Chapter 11 plan.
The court contrasted Rule 2004 with Rule 26 of the Federal Rules of Civil Procedure, which would govern discovery after any claims were filed, as follows:
Unlike Rule 26 of the Federal Rules of Civil Procedure, which generally prohibits “fishing expeditions,” Rule 2004 “is often described as being in the nature of a fishing expedition.” Had the Debtor already filed its alleged claims against Newtek, the “pending proceeding” rule would bar the Debtor from circumventing the Federal Rules’ prohibition on “fishing expeditions.” [footnotes omitted]
The court also pointed to the fact that the debtor, once it filed an adversary proceeding against Newtek, would be pursuing what the court viewed as “private litigation” against a stranger to Defoor’s bankruptcy proceeding. The claims Defoor would be pursuing, along with whatever claims Defoor itself might have against Newtek, had been assigned to Newtek by a non-debtor, GB Square, the post-petition purchaser of the events center. In addition, the debtor failed to show good cause existed for the discovery by failing to show that the Rule 2004 discovery was needed to establish a claim or that denial of the Rule 2004 discovery would cause the debtor “undue hardship or injustice.”
The Defoor opinion, and the cases cited in the opinion, should be useful to attorneys representing parties from whom a debtor is trying to obtain post-confirmation Rule 2004 discovery. The characterization of Rule 2004 discovery as often a “fishing expedition” may provide a powerful argument against such discovery when a debtor already has the preliminary information it needs to file an adversary proceeding. Counsel can also point to Federal Rule of Bankruptcy Procedure 1001, which states in part, “These rules shall be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every case and proceeding,” and counsel can also point to Federal Rule of Civil Procedure 1, which contains almost identical language. It can be argued that fishing expeditions do not promote the stated policy of “just, speedy, and inexpensive” determinations of cases and proceedings.
