In re Serignese, Case No. 19-10724 (JLG)

• Decision Date: 03 June 2019
• Docket Number: Case No. 19-10724 (JLG)
• Parties: In re: Anthony Serignese, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

In re: Anthony Serignese, Debtor.

Case No. 19-10724 (JLG)

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

June 3, 2019

Chapter 7

MEMORANDUM DECISION AND ORDER DENYING REQUEST FOR LEAVE TO CONDUCT EXAMINATION UNDER RULE 2004 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE

APPEARANCES:

MINTZ & GOLD, LLP

Attorney for the Debtor

Andrew R. Gottesman, Esq.

600 Third Avenue, 25^th Floor

New York, NY 10016

MCGRAIL & BENSINGER LLP

Co-counsel to ALQ LLC, Ismael Alba and Karina DeMarco

Ilana Volkov, Esq.

888-C 8th Avenue, #107

New York, New York 10019

KATZ MELINGER PLLC

Co-counsel to ALQ LLC, Ismael Alba and Karina DeMarco

280 Madison Avenue

Suite 600

New York, New York 10016

HON. JAMES L. GARRITY, JR. UNITED STATES BANKRUPTCY JUDGE

Introduction

The matter before the Court is the motion ("Motion") of ALQ LLC ("ALQ"), Ismael Alba ("Alba") and Karina DeMarco ("DeMarco" and, together with ALQ and Alba, collectively, the "Movants") for an order authorizing the oral examination of, and requiring production of documents by, Anthony Serignese, the chapter 7 debtor herein (the "Debtor"), pursuant to Rules 2004 and 9016 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). See Motion for an Order Authorizing Oral Examination Of, and Requiring the Production of Documents By, Anthony Serignese Pursuant to Fed. R. Bankr. P. 2004 and 9016 [ECF No. 8]¹ (the "Motion"). The Debtor objects to the Motion. See Debtor's Objection to Motion by ALLQ [sic] LLC, Ismael Alba and Karina DeMarco for an Order Authorizing Oral Examination and Requiring the Production of Documents Pursuant to Federal Rules of Bankruptcy Procedure 2004 and 9016 [ECF No. 11] (the "Objection"). For the reasons set forth herein, the Court sustains the Objection and denies the Motion.

Jurisdiction

The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

Facts

The facts are not in dispute. On March 7, 2019 (the "Petition Date"), the Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in this Court. See Voluntary Petition for Individuals Filing For Bankruptcy [ECF No. 1] (the "Chapter 7 Petition"). On March 8, 2019, Deborah Piazza, Esq. was appointed to serve as the chapter 7 trustee (the "Trustee") of the Debtor's estate. The Debtor's case is currently listed as a "no asset" case. Objection ¶ 1. As relevant, the Debtor's Schedules show that as of the Petition Date, his assets include membership interests in the following three limited liability companies:

Casual Hospitality LLC ("Casual Hospitality") - 24% interest;

Meat Milk & Grapes LLC - 100% interest; and

Casual Hospitality Management LLC ("Casual Hospitality Management") - 50% interest.

See Chapter 7 Petition, Schedule A/B Property, ¶ 19. Alba and DeMarco are investors in and members of Casual Hospitality. Motion ¶ 5. Casual Hospitality Management is the "Class A" Managing Member of Casual Hospitality, and the Debtor is the "tax matters" partner of Casual Hospitality. Id.

ALQ, as landlord, is party to two lease agreements that are relevant to the Motion. First, ALQ and the Debtor are party to an agreement dated September 1, 2016, for the lease of a residential apartment (#2F) (the "Apartment Lease") in a building located at 509 East 6th Street, New York, New York 10013 (the "Building"). Id. ¶ 7. Prepetition, the Debtor defaulted under the Apartment Lease, and on or about January 30, 2019, ALQ obtained a default judgment against the Debtor in an amount in excess of $50,000 (the "Judgment").² Second, pursuant to anagreement dated May 18, 2016 (the "Retail Lease"), ALQ leased to Casual Hospitality certain ground floor retail and related cellar space in the Building (collectively the "Premises").³ Casual Hospitality managed a restaurant at the Premises. In or around February of 2017, it defaulted under the Retail Lease. Id. ¶ 6. The Debtor and his business partner, Peter Kane, guaranteed Casual Hospitality's obligations under the lease (the "Retail Lease Guaranty"). Objection ¶ 4. On or about October 5, 2018, ALQ sued Peter Kane in the Supreme Court, New York County (the "State Court Action") essentially to enforce the guaranty and, in doing so, recover the rent allegedly due and owing under the Retail Lease.⁴ Id. Kane contends that as of January of 2018, he had paid ALQ approximately $245,650 from personal funds for monies claimed by ALQ to be due and owing under the Retail Lease Guaranty. On or about January 18, 2019, he filed a Verified Third-Party Complaint against the Debtor in the State Court Action.⁵ In that complaint, Kane seeks, among other things, a determination that he is entitled to contribution from the Debtor in an amount equal to 50% of any judgment taken against Kane in the State Court Action. See Verified Third-Party Complaint ¶¶ 22-24, 30(a). That action was pending on the Petition Date and has been stayed.

On April 10, 2019, the Trustee presided over the Debtor's section 341(a) meeting of creditors. Objection ¶ 2.⁶ The Movants assert that although ALQ's counsel attended the section341(a) meeting of creditors and was given the opportunity to question the Debtor about his Chapter 7 Petition and Schedules, counsel did not have sufficient time to conduct a fulsome examination of the Debtor's assets, liabilities and financial affairs or to probe the Debtor regarding any documentary evidence. Motion ¶ 8. On May 9, 2019, the Movants filed a Notice of Presentment of their Proposed Order Authorizing the Oral Examination of, and Requiring Production of Documents By, Anthony Serignese Pursuant to Fed. R. Bankr. P. 2004 and 9016, and the Motion in support of the proposed order. The Debtor timely objected to the Motion.

Discussion

Under Rule 2004, "[o]n motion of any party in interest, the court may order the examination of any entity." Fed. R. Bankr. P. 2004(a). "The purpose of a Rule 2004 examination is to assist a party in interest in determining the nature and extent of the bankruptcy estate, revealing assets, examining transactions and assessing whether wrongdoing has occurred." In re Recoton Corp., 307 B.R. 751, 755 (Bankr. S.D.N.Y. 2004) (citing In re Bennett Funding Grp., Inc., 203 B.R. 24, 28 (Bankr. N.D.N.Y. 1996)). Accordingly, such examination must "relate only 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). The Movants say that the Rule 2004 discovery they seek is related to the Debtor's involvement in and guarantee of obligations of entities that are indebted to ALQ, as well as the Debtor's indebtedness to ALQ. Motion ¶ 15.They also assert that the Debtor owes fiduciary duties to Alba and DeMarco in connection with his roles with Casual Hospitality and Casual Hospitality Management. Id. They maintain that they require the Rule 2004 discovery they are seeking "to determine whether a complaint under Section 523(a)(4) and/or (a)(6) [of the Bankruptcy Code] is appropriate here to except their claims against the Debtor from discharge." Id.

The Movants' stated purpose in seeking to conduct Rule 2004 discovery fits comfortably within the scope of Rule 2004(b). See, e.g., In re Bennett Funding Grp., Inc., 203 B.R. at 28 (Rule 2004 "is properly used as a 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."). Still, the Court will not merely rubberstamp the Motion. Rather, it is well settled that the decision to grant or deny a request for Rule 2004 discovery rests in the sound discretion of the court. See In re Enron Corp., 281 B.R. 836, 840 (Bankr. S.D.N.Y. 2002) ("[a]s the permissive language of the rule suggests, the Court has the discretion to grant a request for a 2004 examination"); see also In re Bd. of Dirs. of Hopewell Int'l Ins. Ltd., 258 B.R. 580, 587 (Bankr. S.D.N.Y. 2001) (noting that Rule 2004 gives the court "significant" discretion). Indeed, in granting such a request, the court must make a finding of good cause for the examination. See ePlus, Inc. v. Katz (In re Metiom, Inc.), 318 B.R. 263, 268 (S.D.N.Y. 2004); see also Matter of Wilcher, 56 B.R. 428, 434 (Bankr. N.D. Ill. 1985) ("Although a Rule 2004 examination may be ordered ex parte, once a motion to quash a subpoena is made, the examiner bears the burden of proving that good cause exists for taking the requested discovery."). The Movants bear the burden of showing good cause for the examination they are seeking. See SIPC v. BLMIS LLC (In re Madoff), Adv. Pro. No. 08-01789, 2014 WL 5486279, at *2 (Bankr. S.D.N.Y. Oct. 30, 2014).

As a general rule, "'good cause is shown if the [Rule 2004] examination is necessary to establish the claim of the party seeking the examination, or if denial of such request would cause the examiner undue hardship or injustice.'" In re Metiom Inc., 318 B.R. at 268 (quoting In re Dinubilo, 177 B.R. 932, 943 (E.D. Cal. 1993)); accord In re Drexel Burham Lambert Grp., Inc., 123 B.R 702, 712 (Bankr. S.D.N.Y. 1991). In evaluating the merits of the Motion, the Court must "balance the competing interests of the parties, weighing the relevance of and necessity of the information sought by examination. That documents meet the requirement of relevance does not alone demonstrate that there is good cause for requiring their production." In re Drexel Burnham Lambert Grp., Inc., 123 B.R. at 712. Where, as here, the Movants are seeking to conduct an examination to determine whether there are grounds under sections 523(a)(4) and (a)(6) of the Bankruptcy Code to challenge the dischargeability of the debts...