[authors: Nicole M. Stephansen, Andrew M. Greenberg]
On May 25, 2012, Judge Allan L. Gropper of the United States Bankruptcy Court for the Southern District of New York approved a motion to compel the production of certain documents under section 1521 of the Bankruptcy Code. In his decision, Judge Gropper also suggested that the broad discovery provisions of Bankruptcy Rule 2004 may apply to chapter 15 discovery requests, but stopped short of making such a ruling. In re Millennium Global Emerging Credit Master Fund Limited, Case No. 11-13171 (ALG), (Bankr. S.D.N.Y May 25, 2012).
In October 2008, Millennium Global Emerging Credit Master Fund Limited and Millennium Global Emerging Credit Fund Limited filed “winding-up” petitions in the Supreme Court of Bermuda after failing to meet margin calls. The Bermuda Court appointed joint liquidators, who began an investigation into the affairs of the funds and claimed that certain of the funds’ investments had been overvalued. In June 2011, the joint liquidators filed a petition with the Bankruptcy Court for the Southern District of New York for the recognition of the Bermuda proceeding under chapter 15 of the Bankruptcy Code, noting that the purpose of filing the petition was to pursue discovery against parties in the United States. On September 19, 2011, the bankruptcy court entered an order granting recognition of the Bermuda proceeding as a foreign main proceeding, or in the alternative, as a foreign nonmain proceeding. BCP Securities LLC, the funds’ broker alleged to have been involved in the valuations at issue, appealed the bankruptcy court’s order granting the Bermuda case recognition as a foreign main proceeding. The appeal is pending.
Subsequently, the joint liquidators served a subpoena for the production of documents on BCP. BCP did not produce any documents and instead filed responses and objections to the subpoena. Thereafter, the joint liquidators filed a motion under section 1521(a)(4) of the Bankruptcy Code and Bankruptcy Rule 2004 for an order compelling BCP to produce certain documents requested in the subpoena, including all documents concerning the funds that BCP had provided to the SEC, which had filed a securities fraud complaint against both a BCP partner and the funds’ portfolio manager. BCP opposed the motion, arguing, among other things, that the requested discovery falls outside the scope of discovery authorized by section 1521(a)(4) of the Bankruptcy Code.
Chapter 15 of the Bankruptcy Code provides for the recognition of a foreign proceeding and also provides for an ancillary proceeding to assist in the administration of the foreign proceeding. Once a foreign proceeding is recognized, a foreign representative has general access to all courts in the United States. Section 1521(a)(4) of the Bankruptcy Code authorizes bankruptcy courts to enter an order allowing a foreign representative to take evidence or provide for “the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities.” Bankruptcy Rule 2004 provides broader discovery rights, stating in relevant part that “on motion of any party in interest, the court may order the examination of any entity” so long as the examination pertains to the “acts, conduct, or property or to 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 discharge.” The broad discovery rights granted under Bankruptcy Rule 2004 have not been explicitly incorporated into chapter 15 of the Bankruptcy Code.
BCP argued that the joint liquidators’ discovery request was broader than permitted under section 1521 and should be denied pursuant to the ruling in In re Glitnir banki hf., 2011 WL 3652764 (Bankr. S.D.N.Y. Aug. 19, 2011), which found that section 1521(a)(4) provided for discovery only of matters involving the debtor, rather than the debtor’s principals. In re Glitnir also contrasted the expansive language of Bankruptcy Rule 2004 with section 1521(a)(4).
The court, however, found that section 1521(a)(4) “enables a foreign representative to take broad discovery concerning the property and affairs of a debtor” and granted the joint liquidators’ motion to compel the production of evidence. Because the document request at issue directly concerned the financial affairs of the Debtors, it clearly fell within the boundaries of section 1521(a)(4). Further, the discovery related to potential causes of action against BCP concerned contingent property interests of the funds. Thus, the requested discovery would also qualify as “the taking of evidence concerning the debtors’ assets” under section 1521(a)(4). On these and other bases, Judge Gropper granted the motion.
While Judge Gropper held that section 1521 was broad enough to permit the joint liquidators’ discovery request, he also considered whether Rule 2004 would apply in the chapter 15 context. Judge Gropper thought that BCP was mistaken in asserting that discovery should be denied pursuant to In re Glitnir because the court in that case failed to consider section 1507(a) of the Bankruptcy Code, pursuant to which bankruptcy courts have authority “to provide additional assistance to a foreign representative under this title [the Bankruptcy Code] or under other laws of the United States.” Judge Gropper noted that one way courts could provide additional assistance to a foreign proceeding is by making Bankruptcy Rule 2004 fully applicable in a chapter 15 proceeding, noting that “one of the main purposes of chapter 15 is to assist a foreign representative in the administration of the foreign estate, which would militate in favor of granting a foreign representative broad discovery rights using the full scope of Rule 2004.” Further, he noted that prior caselaw is consistent with allowing the use of Rule 2004 in chapter 15 proceedings, as courts had construed the statutory predecessor of chapter 15, section 304, to allow for broad discovery, and there is no authority to suggest that chapter 15 was intended to limit the discovery available to foreign representatives. However, Judge Gropper stated that he did not have to reach an affirmative decision on the issue of whether Bankruptcy Rule 2004 is applicable in a chapter 15 case and made no final conclusion on the matter.
Judge Groppers’ statements make clear that he believes courts can permit broad discovery in a chapter 15 case despite Rule 2004 not being explicitly incorporated. If bankruptcy courts are inclined to follow Judge Gropper’s reasoning and are willing to apply Rule 2004 in chapter 15 cases, foreign representatives will have a powerful tool at their disposal and more reason to take advantage of the chapter 15 process.