In re Downs
| Decision Date | 13 October 2021 |
| Docket Number | 8:16-bk-12589-SC |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re: Andrea Steinmann Downs Debtor(s) |
Date September 29, 2021.
In response to the order from the United States District Court filed on the docket on July 27, 2021 [Dk. 1132] ("District Court Order"), vacating the entire sanction award issued on April 17, 2020 ("Sanctions Award") [Dk. 848] in favor of Creditors Hausman Holdings, LLC and David and Pamela Moellenhoff ("Creditors") and remanding the matter to this Court "to consider whether or not sanctions are still appropriate, and if so what the proper amount of that award should be "[1] this Court held a hearing on September 29 2021.[2] Appearances are as noted in the record. As further set forth below, at the September 29, 2021, hearing, the parties discussed the scope of this Court's review in light of the District Court's directive and the multiple potential approaches which could govern the review.
Having considered the District Court Order, the pleadings filed by the parties, the argument of counsel at the hearing, the docket as a whole, in both the Main Case and the Adversary Proceeding, [3] and for the reasons set forth below, the Court hereby DENIES Creditors' request for sanctions as it is unwarranted under every potential approach analyzed by this Court.
On June 19, 2016, Andrea Steinmann Downs ("Debtor") filed her Chapter 11 bankruptcy petition. [Main Case Dk. 1]. The case was subsequently converted to a case The duly appointed (now former) Chapter 7 Trustee, Thomas H. Casey, [5] initiated an adversary proceeding on September 6, 2018, against Debtor's two senior citizen parents and nine adult siblings (collectively, the "Former Defendants"), but not Debtor.[6][Adv. Dk. 1]. Eventually, on September 17, 2019, Creditors, moved to intervene in the Adversary Proceeding, which motion was granted on December 11, 2019. [Adv. Dk. 145].
The Adversary Proceeding ultimately resulted in a Judgment on the Pleadings in favor of the Former Defendants based on a motion by Defendants Lora Rae Steinmann, Heinz H. Steinmann, and Eric Steinmann, filed on October 14, 2020 [Adv. Dk. 262] and joined by the remaining defendants on October 14, 2020 [Adv. Dk. 264]. The Memorandum Decision on Judgment on the Pleadings in favor of the Former Defendants, which was not appealed by any party and is now final, was entered on November 17, 2020 [Adv. Dk. 300] ("MOD").[7]
Two pending motions for sanctions have been brought by the Former Defendants against the former Trustee, and his counsels, and Creditors, and their counsels, based on (1) Federal Rules of Civil Procedure (FRCP) 11 as made applicable under FRCP 9011, and (2) the Bankruptcy Court's inherent authority to sanction are pending before this Court. [Adv. Dks. 316 and 324].[8]
Now, the Trustee, the original plaintiff in the Adversary Proceeding, has resigned from the case [Main Case Dk. 1137], has renounced and disclaimed any fees and commissions owed to him [Main Case Dk. 1146], and a new Chapter 7 Trustee, Robert Whitmore (the "Successor Trustee"), has been appointed by the United States Trustee [Main Case Dk. 1145].
The history of this particular situation requires clarification and discussion. Despite the existence of the (now-concluded) Adversary Proceeding between the former Trustee on behalf of the Estate and the eleven Former Defendants, [9] the Trustee brought a motion in the Main Case for a 2004 examination of Debtor's parents, Lora and Heinz Steinmann (individually, "Debtors Mother" and "Debtor's Father" and collectively, "Debtor's Parents, ") on January 15, 2019.[10] [Main Case Dk. 502]. The Trustee's motion also sought to subpoena documents from Debtor's Parents regarding Debtor's assets, including any potential interests held in Debtor's Parents' family trust. Id.
Persons not involved with the particularized bankruptcy practice regarding discovery in main bankruptcy cases and separate adversary proceedings need to be familiarized with the general overarching process that has been in place throughout the country for over forty years. Federal Rule of Bankruptcy Procedure (FRBP) Rule 2004 allows parties in interest (especially bankruptcy trustees and others) to conduct general "fishing expedition"-type inquiries of parties, both previously joined in the proceeding and outside third parties, in order to discover assets, liabilities, improper transfers, and other important information related to the administration of a bankruptcy estate. Rigby v. Mastro (In re Mastro), 585 B.R. 587, 597 (B.A.P. 9th Cir. 2018). The Rule 2004 examination is broad in scope, not as limited to discovery under the Federal Rules of Civil Procedure used in litigation and contested matters in bankruptcy practice. But, similar protections are afforded to examinees in Rule 2004 Examinations. Id. ( ).
If a Rule 2004 examination target is already a party to the bankruptcy proceeding, only an entered order properly served, and no subpoena, is necessary for an appearance or document request.[11] On the other hand, if the target of the Rule 2004 examination is a third party, the due process rights of third parties are protected by jurisdiction being obtained by the issuance of an order and a FRCP 45 subpoena. Stipp v. CML-NV One, LLC (In re Plise), 506 B.R. 870, 877-78 (B.A.P. 9th Cir. 2014).
Another important feature of Rule 2004 is that (at least in the Central District of California) the applicant seeking court approval to conduct a Rule 2004 examination must certify that no adversary proceeding or contested matter is presently pending whereby the applicant can utilize the more restricted and controlling discovery procedures. It is a "well recognized rule that once an adversary proceeding or contested matter is commenced, discovery should be pursued under the Federal Rules of Civil Procedure and not by Rule 2004." In re Enron Corp., 281 B.R. 836, 840 (Bankr. S.D.N.Y. 2002); see also In re Bennett Funding Group, Inc., 203 B.R. 24, 28 (Bankr. N.D.N.Y. 1996) ("Courts are wary of attempts to utilize Fed.R.Bankr.P. 2004 to avoid the restrictions of the Fed.R.Civ.P. in the context of adversary proceedings."); In re Valley Forge Assocs., 109 B.R. 669, 675 (Bankr. E.D. Pa. 1990) ("Many courts have expressed distaste for efforts of parties to utilize [Rule] 2004 examinations to circumvent the restrictions of the [Federal Rules of Civil Procedure] in the context of adversary proceedings or contested matters.").
There may be exceptions to this rule; however, issuance of such an order when an adversary proceeding exists, and is related, is quite uncommon. This feature and process provides various protections to both the applicant and the target of the discovery, as well as avoids confusion.
To overcome the hurdle presented by the then-pending Adversary Proceeding, the Trustee argued to the prior judge that most of the information requested to be produced in Debtor's Parents' 2004 examination remained unrelated to the Adversary Proceeding, and any overlap was not duplicative because discovery had not yet commenced in the Adversary Proceeding. [Main Case Dk. 502]. In his motion for a 2004 examination, the Trustee asserted that Id. at pg. 3:11-17 (internal citations omitted). The Trustee's assertion was misleading; it is hokum.[12] In fact, such a situation is not common, but rather is largely frowned upon. See Enron Corp., 281 B.R. at 840 (Bankr. S.D.N.Y. 2002); Bennett, 203 B.R. at 28 (Bankr. N.D.N.Y. 1996); In re Valley Forge Assocs., 109 B.R. at 675 (Bankr. E.D. Pa. 1990).[13] This Court surmises that this approach is disfavored in at least in part because of the confusion and misapprehensions it creates, particularly when it comes to the question of which devices are used to compel compliance with orders under Rule 2004 and the FRCP, a problem displayed here.[14]
Debtor's Parents opposed the Trustee's motion for Rule 2004 examination, noting that the Trustee failed to explain why the requested examination could not proceed by discovery in the Adversary Proceeding, as is the preferred course of action pursuant to most case law, and emphasizing the burden placed upon Debtor's elderly parents if they were forced to travel over 80 miles from their home for 2004 examinations; Debtor's Father had previously been deemed incapable of being examined when, prior to the bankruptcy Creditors sought to depose him and his doctor believed sitting for a deposition would adversely impact his health, and Debtor's Mother had her own health concerns[15] while bearing responsibility for the care for her husband, both of which made such travel overly burdensome. [Main Case Dk. 509]. Further, Debtor's Mo...
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