In re Bennett Funding Group, Inc.
| Decision Date | 11 October 1996 |
| Docket Number | Bankruptcy No. 96-61376 to 96-61379. |
| Citation | 203 BR 24 |
| Parties | In re The BENNETT FUNDING GROUP, INC., Bennett Receivables Corporation, Bennett Receivables Corporation II, Bennett Management & Development Corporation, Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of New York |
Helmer, Johnson & Misiaszek (Grant E. Johnson, of counsel), Utica, NY, for Gwen Bennett.
Simpson, Thacher & Bartlett (George Newcombe, of counsel), New York City, for Trustee Breeden.
Wasserman, Jurista & Stolz (Harry Gutfleish, of counsel), Millburn, NJ, for Unsecured Creditors Committee.
MEMORANDUM-DECISION, FINDINGS OF FACT CONCLUSIONS OF LAW AND ORDER
Presently before the Court is an application on behalf of third-party defendants Gwen Bennett ("G. Bennett"), Comfort Associates, Inc. ("CAI"), Comfort Financial Associates ("CFA"), and Bennett Financial Associates ("BFA"), brought on by an Order to Show Cause dated August 5, 1996, requiring the Trustee appointed pursuant to § 1104 of the Bankruptcy Code (11 U.S.C. §§ 101-1330) ("Code"), Richard C. Breeden ("Trustee"), to show cause why he should not be required to proceed under the Federal Rules of Civil Procedure ("Fed.R.Civ.P.") regarding any discovery of the aforementioned parties, as well as why an examination under Rule 2004 of the Federal Rules of Bankruptcy Procedure ("Fed.R.Bankr.P.") is appropriate as to a third party who is also a party to the adversary proceeding. The Court heard oral argument at a regular motion term in these proceedings on August 8, 1996, in Utica, New York. The parties were given an opportunity to file memoranda of law, and the matter was submitted for decision on August 22, 1996.
The Court has jurisdiction over the parties and subject matter of this matter pursuant to 28 U.S.C. §§ 1334(b), 157(a), (b)(1) and (b)(2)(A).
On March 29, 1996, the Bennett Funding Group, Inc. ("BFG"), Bennett Receivables Corporation ("BRC"), Bennett Receivables Corporation II ("BRC-II") and Bennett Management and Development Corporation ("BMDC") filed voluntary chapter 11 petitions (collectively, the "Initial Debtors"), which are being jointly administered. Thereafter, on April 18, 1996, the Court approved the appointment of the Trustee.
On May 13, 1996, the Trustee filed an Application for an Order to Show Cause requesting authorization to conduct Fed. R.Bankr.P. 2004 examinations of certain individuals and entities, including G. Bennett. The Court orally granted the Trustee's request on May 23, 1996, and thereafter signed an Order, dated June 7, 1996, authorizing the Trustee to conduct examinations pursuant to Fed.R.Bankr.P. 2004 of the individuals and entities listed in Exhibit "A" of the Application. The Order directed the listed individuals and entities, upon request, to produce any documents and to provide testimony relating to the acts, conduct, assets, liability and financial condition of the Initial Debtors and any other matter relevant to the administration of these cases.
On June 6, 1996, the Trustee commenced an adversary proceeding against numerous defendants, including G. Bennett, her husband Patrick Bennett, CFA, CAI, and BFA. The Trustee alleges in the First Amended Adversary Proceeding Complaint ("Amended Complaint"), dated August 29, 1996, inter alia, that Patrick Bennett diverted in excess of $8.5 million from BMDC to CFA, CAI, and/or BFA, to pay for the construction of the Comfort Suites Hotel at Vernon Downs Racetrack for the benefit of himself and G. Bennett. See Amended Complaint, at ¶¶ 15, 78. Other allegations in the Amended Complaint include the assertion that Patrick Bennett's purchase of the Vernon Downs Racetrack was made possible through the use of funds diverted from BMDC, which were used to acquire a controlling interest in Mid-State Raceway, Inc., the alleged owner of Vernon Downs Racetrack (see Amended Complaint, at ¶¶ 74-77). Also alleged is: that BFA is owned by Patrick and G. Bennett, and that this entity was at times a partner in Bennett Finance Group III and Bennett Finance Group IV (Amended Complaint, at ¶ 16); that CFA, owned and controlled by Patrick and G. Bennett, is also known as BFA (Amended Complaint, at ¶ 28); that CAI, owned by Patrick Bennett, was formerly known as Bennett Associates, Inc. (Amended Complaint, at ¶ 29); and that various entities received funding from BMDC (see Amended Complaint, at ¶¶ 16, 19, 21, 22, 27, 30). The significance of this partial list of interlocking relationships will become apparent in the following Discussion
The Trustee served a subpoena for a Fed.R.Bankr.P. 2004 examination of G. Bennett, dated July 30, 1996, and three other subpoenas on BFA, CAI, and CFA, dated July 31, 1996, all issued in care of G. Bennett. The Court subsequently signed an Order to Show Cause dated August 5, 1996, requiring the Trustee to show cause why he should not proceed with G. Bennett, BFA, CAI and CFA discovery pursuant to the Fed.R.Civ.P., and why a Fed.R.Bankr.P. 2004 examination is appropriate.1 The Court heard oral argument on August 8, 1996, and allowed the parties to submit memoranda of law on the issues presented.
G. Bennett2 asserts that once an adversary proceeding has been initiated, discovery in furtherance of that litigation is properly obtained through the use of provisions of the Fed.R.Civ.P., and not Rule 2004 of the Fed. R.Bankr.P. G. Bennett further contends that Fed.R.Bankr.P. 2004 examinations of third parties are appropriate only when the party has knowledge of the debtor's conduct or financial affairs that relate to the bankruptcy proceeding, and that this discovery device is not properly employed to investigate a non-debtor's private business affairs. Based on this, G. Bennett argues that discovery of third parties must be accomplished under the Fed.R.Civ.P.
The Trustee counters that the filing of the adversary proceeding against an individual is not an automatic bar to the use of a Fed. R.Bankr.P. 2004 examination. More specifically, the Trustee argues that a Fed. R.Bankr.P. 2004 examination should be permitted of parties to the adversary proceeding in order to examine matters which are outside of and not pled in the pending adversary proceeding. The Trustee represents that he will not inquire into the Comfort Suites Hotel transaction, which allegedly is the only claim against G. Bennett in the adversary proceeding. Instead, for example, the Trustee wants to explore the alleged diversion of BMDC monies to acquire shares in Mid-State Raceway, Inc., which were then transferred to a company owned by G. Bennett. In addition, the Trustee wants to explore the source of assets received or owned by G. Bennett in an effort to determine the extent to which Debtor assets were transferred to her. As further stated by the Trustee, the breadth of inquiry under Fed.R.Bankr.P. 2004 is necessary to assist in the discovery of hidden assets and to fully ascertain the extent of the estate.
Fed.R.Bankr.P. 2004(a) allows the court, upon motion of any party in interest or upon an ex-parte basis, to order the examination of any entity. The examination "may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any other matter which may affect the administration of the debtor's estate, or to the debtor's right to discharge." Fed.R.Bankr.P. 2004(b). Third parties are also subject to examination under this rule if they possess knowledge of the debtor's acts, conduct or financial affairs which relate to the bankruptcy proceeding. In re Dinubilo, 177 B.R. 932, 940 (E.D.Cal.1993); In re Ecam Publications, Inc., 131 B.R. 556, 559 (Bankr.S.D.N.Y.1991). The scope of this examination is admittedly "unfettered and broad" (see In re GHR Energy Corp., 33 B.R. 451, 453 (Bankr.D.Mass.1983)), and indeed is commonly recognized as more in the nature of a "fishing expedition." In re Wilcher, 56 B.R. 428, 433 (Bankr.N.D.Ill.1985). The purpose of such a broad discovery tool is to assist the trustee in revealing the nature and extent of the estate, and to discover assets of the debtor which may have been intentionally or unintentionally concealed. In re Drexel Burnham Lambert Group, Inc., 123 B.R. 702, 708 (Bankr.S.D.N.Y.1991); In re Valley Forge Plaza Assocs., 109 B.R. 669, 674 (Bankr.E.D.Pa.1990). It is properly used as a pre-litigation device to determine whether there are grounds to bring an action to determine a debtor's right to discharge or the dischargeability of a particular debt. Sweetland v. Szadkowski (In re Szadkowski), 198 B.R. 140, 141 (Bankr.D.Md.1996).
While Fed.R.Bankr.P. 2004 is the basic discovery device used in bankruptcy cases (see In re French, 145 B.R. 991, 992 (Bankr.D.S.D.1992)), its application is not without bounds. In fact, the issue before this Court regarding the scope and propriety of an examination pursuant to Fed. R.Bankr.P. 2004 in the shadow of a pending adversary proceeding has been the subject of much judicial discussion and "line drawing."3 While Fed.R.Bankr.P. 2004 seems straightforward, caselaw interpreting it has established certain distinctions to be noted in its application. An important distinction is when the discovery provisions of the Fed. R.Civ.P., as incorporated by reference into the Fed.R.Bankr.P., must be used rather than the more liberal Fed.R.Bankr.P. 2004. As Fed.R.Bankr.P. 2004 is meant to give the inquiring party broad power to investigate the estate, it does not provide the procedural safeguards offered by Fed.R.Bankr.P. 7026. In re Bakalis, 199 B.R. 443, 447-48 (Bankr. E.D.N.Y.1996); Dinubilo, 177 B.R. at 939. For example, under a Fed.R.Bankr.P. 2004 examination, a witness has no general right to representation by counsel, and the right to object to immaterial or improper questions is limited. Dinubilo, 177 B.R. at 939-40; French, 145 B.R. at 992; see also GHR Energy, 33 B.R. at 454.
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