In In re Golden Sphinx Limited, No. 22-bk-14320 (Bankr. C.D. Cal. Mar. 21, 2023), the U.S. Bankruptcy Court for the Central District of California held that, in appropriate circumstances, creditors of a chapter 15 debtor may take Bankruptcy Rule 2004 examinations. Notwithstanding that conclusion, the Court ultimately denied the motion before it, holding that the information sought by the creditor was too closely related to the claims asserted in litigation that it had initiated against the debtor. Under the so-called “pending proceeding rule,” a party to pending litigation involving a debtor is required to seek any information relevant to the proceeding under the normal rules governing discovery in civil litigation, which are set forth in the Federal Rules of Civil Procedure. A litigant may not use Bankruptcy Rule 2004 to circumvent the limitations on discovery set forth in the Federal Rules of Civil Procedure. Bankruptcy Rule 2004 creates a broad right to seek information relevant to a debtor’s property, liabilities and financial condition and is not subject to the same limitations on scope as discovery under the Federal Rules of Civil Procedure.
The debtor was a corporation in liquidation on the island of Jersey. The joint official liquidators appointed to oversee the Jersey liquidation had previously petitioned for, and the Bankruptcy Court had previously granted, recognition of the Jersey liquidation as a foreign main proceeding pursuant to chapter 15 of the Bankruptcy Code. The Court’s order also recognized the joint official liquidators as “foreign representatives” vested with standing to act on the debtor’s behalf in the chapter 15 case.
After recognition was granted, the debtor’s principal creditor, which was a plaintiff in pending litigation against the debtor in state and federal court in California, filed a motion for leave to seek the production of documents from a third-party bank that provided various services to the debtor pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure. The creditor contended that the examination could potentially uncover the existence of U.S.-based assets of the debtor and thus increase the value of the bankruptcy estate.
The foreign representatives opposed the motion, arguing that (a) section 1521(a)(4) of the Bankruptcy Code is the sole avenue for examining witnesses and obtaining third-party document productions in a chapter 15 case and that relief under Rule 2004 is unavailable, (b) only a debtor’s foreign representative is entitled to take witness examinations and seek third-party document productions in a chapter 15 case; creditors have no such right, and (c) in any event, the scope of the document production sought by the creditor was inappropriate because, among other reasons, it was too closely related to the creditor’s claims against the debtor in the pending litigation.
The Bankruptcy Court rejected the first two arguments but ultimately denied the motion on the basis of the foreign representatives’ third argument.
The Bankruptcy Court’s Decision
Section 1521(a)(4) and Rule 2004 each authorize the examination of third-party witnesses and the production of documents concerning the debtor’s assets, affairs, rights, obligations or liabilities. However, section 1521(a)(4) applies only in chapter 15 cases and is available only “at the request of the foreign representative,” whereas Bankruptcy Rule 2004 is available “on a motion of any party in interest.” In Golden Sphinx, the foreign representatives argued that, when read together, these provisions should be held to mean that section 1521(a)(4) provides the only avenue for third-party examinations and document productions in a chapter 15 case and that, as a consequence, only a foreign representative (and not the debtor’s creditors) are entitled to take such examinations.
The Bankruptcy Court rejected that argument. It emphasized that Bankruptcy Rule 2004 does not contain any language limiting its application to cases pending under one of the Bankruptcy Court’s other chapters (i.e., chapters 7, 11, 12 or 13). To the contrary, Bankruptcy Rule 1001 makes clear that “[t]he Bankruptcy Rules and forms govern procedure in [all] cases under” the Bankruptcy Code, including cases pending under chapter 15. Thus, in the Bankruptcy Court’s view, Bankruptcy Rule 2004 is fully applicable in chapter 15 cases.
The Bankruptcy Court also rejected the foreign representatives’ argument that examinations are not available to creditors and may only be taken by foreign representatives. In reaching that conclusion, the Court explained that chapter 15 cases are intended to be ancillary proceedings in which the U.S. court is essentially assisting the foreign court that is presiding over the foreign proceeding (i.e., the Jersey court). Thus, the Bankruptcy Court opined that while examinations should ordinarily take place in the foreign proceeding, there may be many “scenarios in which it might [be] appropriate for a creditor to seek discovery” in the United States, such as where “it would further [the U.S.] Court’s assistance of the foreign main proceeding.”
Notwithstanding the Bankruptcy Court’s legal conclusions, it ultimately denied the creditor’s motion because the requested discovery was “too closely related” to the claims the creditor had asserted in the pending state and federal court lawsuits. Under a well-established judicial doctrine known as the “pending proceeding rule,” a party to pending litigation involving a debtor must seek discovery under the Federal Rules of Civil Procedure and is not entitled to Rule 2004 relief. The Bankruptcy Court held that the pending proceeding rule applied to the creditor’s motion even though the discovery deadline had passed in the pending state and federal court suits (in other words, discovery was no longer available in the pending litigation). The Court explained that, in these circumstances, permitting the creditor to take Rule 2004 discovery would “appear to [result in] an ‘end run’ around the discovery limitations in the [pending suits].”
The Golden Sphinx decision takes a similar approach to that taken by the U.S. Bankruptcy Court for the Southern District of New York in In re Comair Limited, No. 21-10298 (JLG), 2021 WL 532988 (Bankr. S.D.N.Y. Nov. 21, 2021). There, the Bankruptcy Court held that section 1521(a)(4) authorized the foreign representative of Comair Limited, a South African airline, to take pre-litigation discovery “to facilitate his efforts to assess the viability of potential causes of action against [The Boeing Company] and the extent of potential monetary recovery from Boeing.” However, at a later stage in the case, after Comair had commenced litigation against Boeing, the Bankruptcy Court held that the “pending proceeding rule” barred the foreign representative from taking any further discovery under section 1521(a)(4) or Rule 2004. See Order Denying Motion to Compel Discovery From The Boeing Company [Docket No. 101] (Bankr. S.D.N.Y. Mar. 29, 2023).
The overwhelming majority of Bankruptcy Court decisions on the scope of permissible third-party examinations in a chapter 15 case arise in the context of a motion filed by a foreign representative. However, the Bankruptcy Court’s decision in Golden Sphinx establishes that Rule 2004 examinations may be available to creditors or other parties-in-interest in appropriate circumstances. A creditor seeking to take discovery in a chapter 15 case is subject to the same limitations as foreign representatives and thus cannot use Rule 2004 to take discovery when there is pending litigation.