In re Countrywide Home Loans, Inc., 07-00204 TPA.

• Decision Date: 01 April 2008
• Docket Number: No. 07-00204 TPA.,07-00204 TPA.
• Parties: In re COUNTRYWIDE HOME LOANS, INC., f/k/a Countrywide Funding Corp.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania

Page 373

384 B.R. 373

In re COUNTRYWIDE HOME LOANS, INC., f/k/a Countrywide Funding Corp.

No. 07-00204 TPA.

United States Bankruptcy Court, W.D. Pennsylvania.

April 1, 2008.

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Thomas A. Connop. Esq., Dallas, TX, Dorothy A. Davis, Esq., Pittsburgh, PA, for Countrywide.

Leonard J. DePasquale, Esq., North Providence, RI, Norma Hildenbrand, Esq., for the UST.

David W. Ross, Esq., for the Ch. 13 Trustee.

MEMORANDUM OPINION

THOMAS P. AGRESTI, Bankruptcy Judge.

This case concerns the power of the office of the United States Trustee ("UST") to obtain information from a secured creditor in a number of bankruptcy cases pursuant to Notices of Examination under Fed.R.Bankr.P.2004 and Subpoenas Duces Tecum. The creditor, Countrywide Home Loans, Inc. ("Countrywide"), has filed an objection to the Notices of Examination and Subpoenas and seeks to have them quashed. For the reasons that follow, the Court will deny Countrywide the relief it seeks and permit the requested examination to go forward under the parameters as set forth herein.¹

BACKGROUND

Procedural history of the case

Several months ago the Chapter 13 Trustee for this District filed substantially identical motions entitled Trustee's Motion to Compel Countrywide Home Loans, Inc./ f/k/a Countrywide Funding Corp. to Provide Loan Histories and for Sanctions in 293 separate cases in which Countrywide was a creditor. On October 18, 2007, the Court entered a consolidation order which consolidated all of these separate motions for administrative purposes at Misc. No. 07-00203. Subsequently, in 10 of those 293 cases² the UST ("context cases") filed substantially identical documents entitled Notice of Examination Under Fed.R.Bankr.P.2004 and Service of Subpoena (Duces Tecum) ("Notice of Examination").³ In each of these 10 cases the UST identified actions engaged in by Countrywide that she claims were questionable or raised issues going to the integrity of the bankruptcy system.

On November 2, 2007, the Court entered another consolidation order, this one consolidating the 10 cases in which the UST had filed the Notices of Examination under Misc. No. 07-00204. Since the 10 Notices of Examination were substantially identical, the Court further ordered the UST to file a single Notice of Examination (with an attached Subpoena Duces Tecum ("Subpoena")) by November 7, 2007, with such single Notice of Examination to then have effect in all of the context cases.⁴

The UST timely filed the single Notice of Examination, Document No. 6. On November 9, 2007, Countrywide filed an Objection to Notices of Examination, Document No. 12, and a Motion to Quash Notices of Examination, Document No. 13. On November 13, 2007, the UST filed a Response to Objection to Notice of Examination, Document No. 15, and an Objection to Motion to Quash, Document No. 16. On November 15, 2007, the Court convened a status conference to discuss all pending matters in this consolidated proceeding. The Court issued an Order on November 20, 2007, which stayed Countrywide's obligation to respond to the Notice of Examination and Subpoenas, set a briefing schedule, and directed the Parties to address a number of pertinent issues in their briefs.

The Court heard final oral arguments from the Parties on February 28, 2008, and allowed for the filing of supplemental briefs by each Party as of March 17, 2008. All such briefs have been filed. The matter is now ripe for decision.

The Documents and Testimony Sought by the UST

The Notice of Examination, which the UST says was filed pursuant to Fed. R.Bankr.P.2004(c) and 9016, indicates that the UST seeks to examine the "corporate representative" of Countrywide regarding "its bankruptcy procedures as they relate to the Debtors' financial affairs, the administration of their estate, and the impact of Countrywide's bankruptcy procedures on the integrity of the bankruptcy process in the Western District of Pennsylvania." The Subpoena Duces Tecum ("Subpoena") component of the Notice of Examination directs Countrywide to produce a variety of documents,⁵ and Countrywide is further directed to produce an authorized representative of the company to be examined on a variety of topics.⁶

Countrywide's Objections

Countrywide objected to the Notice of Examination on a number of grounds. Most generally, and most significantly for purposes of this Opinion, Countrywide objects that the Notice of Examination exceeds the statutory scope of the UST's powers and duties and contends that the UST lacks standing to conduct the examination or compel production of the requested documents. A fair summary of Countrywide's position in this regard is found in the conclusion portion of its Objections, which states:

The UST cannot show a basis under 28 U.S.C. § 586, 11 U.S.C. § 307, or Fed. R.Bankr.P.2004 for the discovery it seeks. The mere pendency of a bankruptcy case does not open the door for the UST to hale a creditor into an examination room to give sworn testimony and produce documents relating to its general corporate affairs. The UST's powers are not without limit and Rule 2004 has its bounds. Both would be exceeded exponentially if the Notices of Examination and Subpoenas are not quashed.

Countrywide's Objections to Notices of Examination, at 7, Document No. 12. Whether the UST possesses the authority to conduct a Rule 2004 examination is the primary objection raised by Countrywide to be resolved in deciding this matter. If Countrywide is correct, the Rule 2004 process may not move forward and any other objections become moot. Countrywide also raises various other general or "per se" objections based on overbreadth and vagueness, exceeding the scope of Rule 2004(c), inconvenience and burden, invasion of the attorney-client and work-product privileges, proprietary and confidential nature of information sought, impermissible fishing expedition, and relevance. Only if the primary objection is overruled, must these other objections be considered as necessary.

The Motion to Quash filed by Countrywide raises essentially the same issue as the Objections although elaborating on Countrywide's position. Countrywide contends that the UST's powers and duties are circumscribed by the list set forth in 28 U.S.C. § 586(a) and that none of those powers and duties permits the UST to proceed with the Notice of Examination and Subpoena. Countrywide further argues that Section 307 of the Bankruptcy Code, 11 U.S.C. § 307, which provides that the UST "may raise and may appear and be heard on any issue in any case or proceeding under this title", does not serve as a basis for the UST to obtain the information it seeks in this case. Countrywide claims the power granted the UST under that statute may only be exercised in a particular case or proceeding whereas here the UST is essentially seeking discovery related to general policies and procedures employed by Countrywide in its business affairs. Countrywide also argues that the scope of the Notice of Examination is beyond what is allowed by Fed.R.Bankr.P. 2004(b). Countrywide argues that Rule 2004 exists for the purpose of identifying assets and transactions involving the Debtor's estate and it may not be used as a device to launch into a wholesale investigation of a non-debtor's private business affairs. Finally, Countrywide asserts there is no statutory foundation for the UST to take on the role of a "watchdog" to protect the integrity of the bankruptcy system.

The UST's Response

Not surprisingly, the UST has a different view of matters. The UST claims she enjoys broad legal authority pursuant to 11 U.S.C. § 307, 28 U.S.C. §§ 586(a)(3)(G) and (a)(5), and Rule 2004 to conduct the "examination" at issue in this case. She argues that Congress intended, the UST to actively oversee the administration of bankruptcy cases and to intervene whenever particular actions threaten an abuse of the bankruptcy system or its procedures. The UST denies being engaged in any kind of fishing expedition for "whim or curiosity" and points to issues existing in the context cases related to inaccurate proofs of claim, unwarranted motions for relief from stay, and unfounded demands for payment after debtor discharge. The UST contends that these issues call for an inquiry into whether Countrywide has accurately accounted for funds received from the Debtors and the Chapter 13 Trustee, accurately calculated escrow account balances, and accurately calculated mortgage arrearages. The UST believes that, pursuant to the powers conferred upon her by 11 U.S.C. § 307, an examination of Countrywide is necessary, if not essential, to her efforts to determine whether any further action against Countrywide is appropriate.

DISCUSSION

History of the Office of the UST

In order to properly evaluate the extent of the UST's power to subpoena documents and conduct the examination at issue in this case, it will be helpful to begin with a brief look at the history underlying the creation of that office. Prior to passage of the Bankruptcy Reform Act of 1978 ("1978 Act"), P.L. 95-598, all administrative and judicial functions in the bankruptcy system were handled by the bankruptcy court judges themselves. Many observers concluded that the handling of both administrative and judicial functions by the bankruptcy courts had eroded public confidence in the bankruptcy system. For instance, a bankruptcy judge might appoint a private trustee to administer an estate who would subsequently appear before that same judge to make recommendations regarding estate matters. In such circumstances, it is not hard to understand a trustee's possible reluctance to vigorously take a position contrary to the view of the judge who made the appointment.

To correct the situation, the 1978 Act sought to create a separation between the administrative and judicial aspects of bankruptcy, leaving bankruptcy judges free to resolve disputes untainted...