Chris Lazarini Comments on Scope of Bankruptcy Rule 2004 Examination

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Bass, Berry & Sims attorney Chris Lazarini commented on a case in which objectors (a law firm, banks and accountants) opposed a bankruptcy trustee's Rule 2004 Motion requesting information related to his investigation of potential claims in a bankruptcy proceeding. While the objectors argued the type of the information requested exceeded the scope of Rule 2004 and the court lacked subject matter jurisdiction, the court disagreed, describing the Rule 2004 examination as a core proceeding over which it had jurisdiction and finding the scope of the examination well within the trustee’s mandate.

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication.

Millennium Lab Holdings, II, LLC, In Re, No. 15-12284 (D. Del., Bankr., 12/2/16) 

*A bankruptcy court's subject matter jurisdiction extends to both core and non-core proceedings.

**A Rule 2004 examination is akin to a fishing expedition and allows a bankruptcy trustee or other interested party to seek information and documents related to assets, transactions, and whether some wrongdoing has occurred. 

Not long after borrowing $1.8 billion under a 2014 Credit Agreement, Millennium filed a Chapter 11 petition and plan for reorganization. The plan was confirmed and two trusts were created to pursue recoveries from third parties: a Corporate Trust for the benefit of those holding claims related to the 2014 Credit Agreement and a Lender Trust for the benefit of certain lenders who transferred their potential third-party claims to the bankruptcy estate. The same person was appointed Trustee for both Trusts. To aid in his investigation of potential claims, the Trustee filed a Rule 2004 Motion on behalf of both Trusts, seeking authority to examine the banks (including investment banks that underwrote the transaction – or, as the Court put it, "served as arrangers"), law firm and accountants that arranged the 2014 Credit Agreement (collectively the "Objectors"). The Objectors opposed the motion, arguing that (1) the Court lacked subject matter jurisdiction and (2) the information requested exceeded the scope of Rule 2004. 

The Court first notes that its jurisdictional mandate is "quite broad," reaching both core and non-core proceedings. Core proceedings are (1) the bankruptcy petition itself, (2) matters where the Bankruptcy Code creates a cause of action or provides the substantive right involved (i.e., those "arising under" Title 11) and (3) matters where the proceeding, by definition, could only arise in a bankruptcy case (i.e., those "arising in" a Title 11 action). Non-core proceedings are those that "relate to" a bankruptcy case. For post-confirmation matters, a non-core proceeding must have a "close nexus" to the bankruptcy plan for the court to exercise subject matter jurisdiction over it. The Objectors argued that the Court lacked subject matter jurisdiction because the Rule 2004 Motion did not have the mandated nexus required for a post-confirmation, non-core proceeding. In doing so, they asked the Court to focus on the potential causes of action the Trustee might bring following his investigation.

The Court disagrees. Refusing to speculate on potential causes of action that might follow, it focuses only on the Rule 2004 Motion and finds that, because it only "arises in" in a bankruptcy case, it is a core proceeding over which the Court has jurisdiction. Turning to the alleged excessive scope of the Trustee's proposed investigation, the Court notes that a Rule 2004 examination is not like traditional discovery. Instead, it is broad and unfettered, like an "inquisition." On the one hand, the Court concludes that the Trustee has made a good faith showing of the need for the proposed examination on behalf of the Corporate Trust, as it fits squarely within the Trustee's role to discover assets, examine transactions and determine whether wrongdoing occurred. On the other hand, the Court decides the examination is beyond the scope of the Trustee's investigation of potential claims benefiting the Lender Trust. The Court concludes that the Trustee's possible use of the information gained in the examination during a collateral proceeding on behalf of the Lender Trust is not a sufficient reason to deny its appropriate use for the benefit of the Corporate Trust. 

KPMG, the accounting firm involved in the 2014 Credit Agreement, also challenged the Rule 2004 Motion pointing to a prepetition arbitration agreement and claiming that any discovery taken from it should be governed by arbitration discovery rules. The Court rejects this agreement, stating that a Rule 2004 examination is not a "dispute or claim." Rather, it is an investigatory tool not subject to the arbitration agreement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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