Target of Investigation “Discovers” that Section 1521(a)(4) of the Bankruptcy Code Permits Broad Discovery of a Debtor’s Property and Affairs

Contributed by Blaire Cahn
In a recent decision out of the United States Bankruptcy Court for the Southern District of New York, Judge Gropper required that the target of an investigation produce certain documents related to the investigation pursuant to section 1521(a)(4) of the Bankruptcy Code and suggested that Bankruptcy Rule 2004 may be applicable in chapter 15 proceedings.

In re Millennium Global Emerging Credit Master Fund Ltd., centers around two investment funds undergoing liquidation in Bermuda.  After the liquidators were appointed, they began an investigation into the financial affairs of the funds and the value of certain of the funds’ investments.  The liquidators commenced arbitration proceedings in the United Kingdom against certain of the funds’ service providers.  On June 30, 2011, the liquidators filed a petition in the United States Bankruptcy Court for the Southern District of New York requesting recognition of the Bermuda proceedings pursuant to chapter 15 of the Bankruptcy Code.  In support of the request for recognition, the liquidators cited their intention to pursue discovery against parties in the United States and potentially commence litigation against them.  BCP Securities LLC, the funds’ broker and a target of the liquidators’ investigation, opposed the request for recognition.  The court granted the request for recognition on September 19, 2011.  BCP appealed the decision. 
Following the court’s recognition of the Bermuda proceedings, the liquidators served BCP with a subpoena for the production of documents.  BCP requested an extension of the deadline for producing the requested documents, which it received twice.  On the date that the second extension expired, BCP sought yet another extension.  The liquidators consented on the condition that, within one week of the extension, BCP would produce certain documents that it had already turned over to the Securities and Exchange Commission.  BCP failed to produce the SEC documents and, instead, filed responses and objections to the subpoena.  The liquidators filed a motion to compel BCP to produce the SEC documents pursuant to section 1521(a)(4) of the Bankruptcy Code and Bankruptcy Rule 2004.  BCP opposed the liquidators’ motion on several grounds and filed a motion to vacate the court’s order recognizing the Bermuda proceedings.
Section 1521(a)(4) of the Bankruptcy Code provides that a court may order, among other things, the “taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations, or liabilities.”  BCP asserted that section 1521(a)(4) only applies to discovery with respect to issues involving the debtor rather than the debtor’s principals, but the court found that the requested documents fell squarely within the ambit of section 1521(a)(4).  Disagreeing, the court noted that section 1521(a)(4) allows for broad discovery regarding the property and affairs of a debtor and found that the request for the SEC documents pertained to both the funds’ assets as well as their financial affairs.  Thus, the court found that the liquidators’ document request satisfied section 1521(a)(4).
In addition, Judge Gropper noted, without ruling on the issue, that the expansive discovery provisions of Bankruptcy Rule 2004 may be applicable in a chapter 15 case pursuant to section 1507(a) of the Bankruptcy Code.  Section 1507(a) states that, with respect to a recognized proceeding, a court “may provide additional assistance to a foreign representative under [the Bankruptcy Code] or under other laws of the United States.”  Judge Gropper further pointed out that a central objective of chapter 15 is to aid foreign representatives in the administration of foreign estates and that such objective weighs in favor permitting foreign representatives full discovery rights under Bankruptcy Rule 2004.  He also indicated that such a ruling would be aligned with case law under the statutory predecessor to chapter 15.
The court dismissed BCP’s remaining arguments in opposition to the liquidators’ motion.  The court found that because BCP never denied having possession or control over the relevant documents, the fact that a BCP subsidiary may have performed certain valuations at issue in the investigation was insufficient to deny the liquidators’ motion.  With respect to BCP’s contention that the discovery lacked sufficient nexus to the United States, the court ruled that no nexus is required because chapter 15 is not an independent in rem proceeding.  The court also determined that the requested discovery did not violate the “pending proceeding” rule because BCP was not a party to the arbitration proceedings in the United Kingdom.  The “pending proceeding” rule provides that upon the commencement of what Judge Gropper described as a “formal legal case,” discovery should follow the rules of that proceeding rather than Bankruptcy Rule 2004.  Further, though BCP contended that the Electronic Communications Privacy Act, which imposes civil and criminal penalties for the unauthorized access of facilities that provide an electronic communication service, excused BCP from producing the documents, the court found that the Electronic Communications Privacy Act is inapplicable as a defense to the motion.  It reasoned that although the documents may be stored in an electronic format, this does not preclude them from being discoverable.  Finally, the court stated that it could not consider BCP’s argument that discovery should not be permitted because the recognition of the Bermuda proceedings should be vacated.  The court held that BCP’s appeal of the recognition order divested the court of jurisdiction with respect to the subject of the appeal.
The case illustrates the broad scope of section 1521(a)(4) of the Bankruptcy Code and sets up an interesting question as to whether future case law will hold (as Judge Gropper implied) that Bankruptcy Rule 2004 applies in chapter 15 proceedings thereby providing foreign representatives with access to a wide range of discovery tools.  Notably, the plain language of Bankruptcy Rule 2004 does not preclude its application in a chapter 15 case.