ROBERT WOODSIDE, Chief Judge, Bankruptcy
The background for this Order is as follows. MDFC, a judgment creditor of the Debtor in the approximate amount of $141,000.00, requested a Rule 2004 examination of the Debtor and his nondebtor wife. On November 8, 1996, I granted that request. On November 25, 1996, the Debtor moved to quash that order.
Rule 2004(a) provides that u[o]n motion of any party in interest, the court may order the examination of any entity." 11 U.S.C. § 101(15) defines an "entity" to include a person. The Debtor objects to the examinations by averring (1) that good cause has not been shown for the exam; (2) that MDFC has an adversary proceeding in which it has exercised its full discovery rights, including a deposition of the Debtor; (3) that the 2004 request encompasses matters already disclosed (although the Debtor does not specify what those disclosures were); and (4) that the request embraces matters irrelevant to the continued administration of the estate. The Debtor alleges that this wife is without knowledge of the Debtor's affairs sufficient to make an examination worthwhile.
"Rule 2004 has been termed, the basic discovery device used in bankruptcy cases", permitting the examination of any party without the requirement of a pending adversary proceeding or contested matter." In re Symington, 209 B.R. 678, 683 (Bankr. D. Az. 1997), citing, In re French, 145 B.R. 991, 992 (Bankr. D. S.D. 1992). "Rule 2004 necessarily permits a broad investigation into the financial affairs of debtors to assure the proper administration of bankruptcy estates . . . Its obvious purposes are the discovery of assets of the estate and the exposure of fraudulent conduct." Symington at 683684 (citations omitted). Another purpose of a Rule 2004 examination is to allow the court to gain a clear picture of the condition and whereabouts of the debtor's estate. In re McLaren, 158 B.R. 655 (N.D. Ohio 1992).
While the criteria for granting Rule 2004 examinations are minimis and to be liberally construed, the Rule 2004 examination itself must be both relevant to the above — described purposes and reasonable. See, Snyder v. Society Bank 181 B.R. 40 (S.D. Tex. 1994), 52 F.3d 1067 (5th Cir. 1995). See also, Hickman v. Taylor, 329 U.S. 495, 507-508 (1947) ("No longer can the time honored cry of fishing expedition" serve to preclude a party from inquiring into the facts underlying his opponent's case . . . but discovery, like all matters of procedure, has ultimate and necessary boundaries.")
Despite the apparent lack of restrictions in granting Rule 2004 examinations, it has been held in numerous cases that "once an adversary proceeding . . . has been commenced, discovery is made pursuant to the F.R. Bankr. P. 7026 rather than by a F.R. Bankr. P. 2004 examination." In re Bennett Funding Group. Inc., 203 B.R. 24, 28 (Bankr. N.D. N.Y. 1996); citing, Intercontinental Enters. Inc. v. Keller (In re Blinder. Robinson Co., Inc.), 127 B.R. 267, 274 (D. Cola. 1991), In re Valley Forge Plaza Assoc., 109 B.R. 669, 674 (Bankr. E.D. Pa. 1990) (other citations omitted). This rule, however, is not a blanket prohibition against Rule 2004 exams in the "midstream" of an adversary proceeding. As Bennett observed, `the issue . . regarding the scope and propriety of an examination pursuant to F.R.Bankr.P.2004 in the shadow of a pending adversary proceeding has been the subject of much judicial discussion and "line drawing." Bennett, at 28 (citations omitted.)
The most generally agreed upon "line" is that which separates a party to an adversary from a non-party. Thus it has frequently been recognized that even in the midst of ongoing discovery in an ongoing adversary proceeding, a person who is not a party to such adversary may be subject to a 2004 exam. Blinder Robinson, 127 B.R. at 275; In re Buick, 174 B.R. 299, 305 (Bankr. D. Cob. 1994). Thus in the instant matter, the Debtor's arguments that his wife should not be subject to the exam because she is a non-debtor and nonparty go to support the request for her 2004 exam, not to undermine it.
The Courts are in general agreement that once discovery in an adversary proceeding commences, it becomes subject to the Federal Rules of Civil Procedure rather than `the broader bounds of Rule 2004.' Valley Forge, 109 B.R. at 674; In re Paramount Publix Corp., 82 F.2d 230, 233 (2d Cir. 1906); In re Kipp, 86 B.R. 490, 491 (Bankr. W.D. Tex. 1988). These courts are generally concerned with enabling a Debtor to invoke the procedural protections of the Federal Rules of Civil Procedure to prevent continuing harassment or embarrassment through repetitive or unnecessary discovery efforts by his angry creditors.
Fed.R.Civ.P. 26(b) contains the general limiting provisions regarding discovery in civil cases:
(b) Discovery Scope and Limits. Unless otherwise limited by order of the court in accordance with these rules, the scope of discovery is as follows:
(1) In General. Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party.
(2) Limitations. By order or by local rule, the court may alter the limits in these rules on the number of depositions. . . . and may also limit the length of depositions under Rule 30. . . . The frequency or extent of use of the discovery methods otherwise permitted under these rules and by any local rule shall be limited by the court if it determines that: (i) the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or (iii) the burden or expense of the proposed discovery outweighs its likely benefit, taking into account the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues. The court may act upon its own initiative after reasonable notice or pursuant to a motion under subdivision (c).
The Middle District has not promulgated a local rule prohibiting multiple depositions, but LR 30.1 limits the length of depositions to six (6) hours per deponent, unless the court authorizes a longer period of time.
The instant Debtor's deposition has already once been taken in the adversary proceeding. The information sought by MDFC from the debtor includes information regarding (1) income from rental properties which he holds as a tenant in common and from which income he said he derives his subsistence; (2) certain discrepancies between the Debtor's schedules regarding the value of furniture, jewelry and other valuables and statements he made to MDFC regarding such valuables' value in order to secure a loan; (3) the payout of funds from the sale of a real property jointly held by the Debtor and his wife in Reedsville, Pennsylvania.
I find that the discovery sought on these issues is neither unreasonably cumulative nor obtainable from another source. While MDFC has had opportunity in a prior deposition to inquire down the above-enumerated avenues, I find that such avenues may be long and winding (given the extent of the Debtor's assets and his debt) and thus that they may require more extensive inquiry than the garden variety case. I do not find that the burden of such examination will outweigh its potential benefit.
For these reasons, I hereby deny the Motion to quash my previous order granting the 2004 motion of MDFC.