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Strategic Uses of a Rule 2004 Exam
While most bankruptcy practitioners are familiar with the basic concepts behind the Rule 2004 exam, some are less familiar with the procedural intricacies of obtaining, conducting, and responding to the exam ' intricacies that often involve practices and procedures adapted from civil discovery that are beyond the scope of pure bankruptcy practice. Rule 2004 of the Federal Rules of Bankruptcy Procedure provides a broadly construed discovery device that allows debtors, trustees, or any other party-in-interest in a bankruptcy case to examine 'any entity' as long as the examination relates 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 a discharge.' Fed. R. Bankr. P. 2004(b).
A Rule 2004 examination is not limited to seeking discovery against the debtor, trustee, or parties-in-interest in the bankruptcy case. The broad phrase 'any entity' clearly includes any third parties who possess knowledge of the debtor's acts, conduct, or financial affairs relating to the bankruptcy case. A Rule 2004 exam may not be used for purposes of abuse or harassment and may not go into matters not relevant to the broad scope set for the in Rule 2004(b). However, this scope is significantly greater than that typically allowed in civil discovery. This difference is so great that Rule 2004 exams are routinely referred to as 'fishing expeditions.'
The ability to examine 'any entity' on matters relating to the bankruptcy case is the real key to obtaining maximum value from a Rule 2004 exam. For instance, if there is some reason to believe that the debtor secretly transferred assets prior to bankruptcy, Rule 2004 provides a device to compel the alleged transferee to sit for a deposition or produce relevant documents. Depending on the circumstances of the alleged transfers, this could mean pursuing a Rule 2004 exam against an affiliate, business associate, or even a family member of the debtor. If there is a belief that examining a person or entity 'friendly' to the debtor will not yield helpful results, the transfers can be investigated by compelling the production of account records from the debtor's or from the alleged transferee's bank. A Rule 2004 exam could also potentially as a pre-litigation tool to explore whether the debtor has claims that are worth pursuing. If there are valuation concerns, third parties can also be compelled to produce documents in their possession relating to key assets of the debtor.
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