IN RE GHR ENERGY CORP. Bankruptcy Nos. 4-83-00056-G, 4-83-00060-G, 4-83-00092-G, 4-83-00093-G and 4-83-00094-G.
35 B.R. 534 (1983)
In re GHR ENERGY CORP., f/k/a Good Hope Refineries, Inc., the GHR Companies, Inc., f/k/a Good Hope Industries, Inc., GHR Pipeline Corp., f/k/a Southern Pipe Line Corporation, Southern States, Inc., and Southern States Exploration, Inc., Debtors.
United States Bankruptcy Court, D. Massachusetts.
November 29, 1983.
Stephen Gordon, Boston, Mass., for debtor— Good Hope Energy Corp.
Robert M. Gargill, Boston, Mass., for debtors' secured bank creditors—Continental Illinois Nat. Bank & Trust Co. of Chicago.
Sumner Darman, Boston, Mass., for Creditors' Committee The GHR Companies.
Joseph Braunstein, Boston, Mass., for Creditors Committee GHR Energy.
Van Oliver, Dallas, Tex., for Creditors Committee GHR Pipeline Corp., Southern States, Inc., So. States Exploration, Inc.
Gerrard Kelley, Asst. U.S. Trustee, Paul P. Daley, Boston, Mass., for Texas Drilling Co.
PAUL W. GLENNON, Bankruptcy Judge.
The debtors' motion for reconsideration of the Court's order of October 12, 1983 denying the debtors' application for examination of Texas Drilling Company and others pursuant to Bankruptcy Rule 2004 was denied by order dated November 9, 1983. This memorandum sets forth the Court's reasons for its November 9 order.
GHR Energy Corp., The GHR Companies, Inc., GHR Pipeline Corp., Southern States, Inc. and Southern States Exploration, Inc. ("debtors"), five related Chapter 11 debtors in possession, filed an application requesting an order requiring Texas Drilling Company ("TDC") and others to appear for an examination pursuant to Bankruptcy Rule 2004. The Court denied the application without a hearing on October 12, 1983 citing in support thereof its decision of September 26, 1983 which denied the motion of these same debtors (and two other related debtors) for examination of James W. Glanville pursuant to Bankruptcy Rule 2004 ("Glanville decision").
By way of a Bankruptcy Rule 2004 application, the debtors seek to examine certain individuals and entities some of whom the debtors have assigned rights in drilling sites in Webb County, Texas and who the debtors allege have been acting to advance their own interests, contrary to the interests of the debtors and in violation of agreements made with the debtors. The debtors allege that these individuals and entities are "secreting" and "spiriting away" assets of the debtors thereby interfering with the administration of the debtors' estates, and participating in criminal activities. Specifically, the debtors allege that TDC, by its officers and employees (some of whom are past employees of one or more of the debtors), its banks and its financiers, and certain other individuals who are not formally associated with TDC, are acquiring acreage within two miles of land leased by the debtors in violation of contracts entered into with the debtors. The debtors claim that they need information from these individuals and entities to determine if an adversary proceeding should be brought against them because of these alleged violations. The debtors filed the affidavit of N. Kenneth May, land manager for GHR Energy Corp., who states he is familiar with the agreements entered into among the debtors and the various individuals and entities. He further states that a review of reports of instruments filed in Webb County disclosed that certain of these individuals and/or entities have recently acquired leases covering acreage adjacent to land leased by one or more of the debtors.
The debtors misconstrue the purpose of Bankruptcy Rule 2004.
The persons to be examined and the parties in interest who may conduct the examination are not defined in the Rules nor the Code. However, by looking to the language of Rule 2004, it is evident that an examination may be had only of those persons possessing knowledge of a debtor's acts, conduct or financial affairs so far as this relates to a debtor's proceeding in bankruptcy. In In re Mantolesky, 14 B.R. 973, 8 B.C.D. 384 (Bkrtcy.D.Mass.1981), I recognized this and allowed the examination of the debtor's former partner who was responsible for all administrative functions (including the payment of bills and taxes) of the partnership. However, the permissible examination was limited to those questions which sought information of the debtor's business or the debtor's financial picture. See also In re Clearview Concrete Products, Inc., 23 C.B.C. 373 (Bkrtcy.E.D.N.Y.1980) (examination of debtor's accountant permitted to determine to what use debtor's funds were put); In re Maidman, 2 B.R. 18, 5 B.C.D. 1299 (Bkrtcy.S.D.Fla.1979) (debtor entrusted all business matters to son; therefore court allowed Rule 205 examination of son by creditor); and In re Park Crescent Nursing Home, 5 B.C.D. 721 (Bkrtcy.S.D.N.Y.1979) (trustee authorized to examine state agency to determine if agency wrongfully recouped funds belonging to the debtor's estate where agency was responsible for establishing formula for reimbursement of funds to debtor and held information relevant thereto). The permissible scope of a Rule 2004 examination is one of the two reasons I denied the debtors' application in the Glanville decision. In that case, the debtors were attempting to examine an expert hired by their creditors. In denying the application I stressed the absence of any evidence that the expert possessed knowledge of the financial picture of the debtors which the debtors themselves did not possess.
The debtors cite In re Goodwin, 38 F.2d 669 (D.Mass.1939), for the proposition that the overriding purpose of a 2004 examination is to enable the trustee to determine whether or not an action against the examinee
The debtors also argue that the case of In re Good Hope Refineries, Inc., 9 B.R. 421 (Bankr.D.Mass.1981) stands for the proposition that a Rule 2004 examination (then Rule 205) may not be used by a debtor post-confirmation. True, in that case the application was made by the debtor post-confirmation. However, I do not believe that ruling was intended to apply only to post-confirmation applications. As I quoted in the Glanville decision
By this I do not mean to suggest that a debtor may never properly invoke Rule 2004 but I do believe Rule 2004 is creditor and trustee oriented.
I agree with the debtors that the scope of a Rule 2004 examination is broad. In light of the many cases which have passed on this question, it cannot be debated. See, e.g., Sachs v. Hadden, 173 F.2d 929 (2d Cir.1949) and In re Foerst, 93 F. 190 (S.D.N.Y.1899).
The debtors allege that the information sought is necessary in order that they may determine whether to bring a complaint against certain of the individuals and entities. From the evidence presented to me, it seems that the debtors are now in a position to file an action against certain of the individuals and entities if they so choose. It appears the debtors are attempting to use Rule 2004 to circumvent the procedural safeguards provided a litigant by the Federal Rules of Civil Procedure (or where appropriate any other similar state discovery rules). While it is obvious that particular rights of a creditor are affected when one of its debtors files for protection under the Bankruptcy Code, it cannot be said that a creditor necessarily loses the protections afforded by the Federal Rules of Civil Procedure especially in the context of an action arising under non-bankruptcy law. See In re duPont Walston, Inc., 4 B.C.D. 61 (Bkrtcy.S.D.N.Y.1978) and In re Western Pork Packers, Inc., 5 B.C.D. 396 (Bkrtcy.S.D.N.Y.1978).
The fact that if a lawsuit were to be filed the defendants would raise the defense of the bankruptcy court's lack of subject matter jurisdiction following the case of Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), is irrelevant, contrary to the debtors' assertions. Such a defense could be raised whenever a suit is filed. More specifically, if I were to allow the debtors' motion to examine the named individuals and entities and some time in the future the debtors decided to bring suit against these individuals and entities, the individuals and entities would be free at that time to raise the Marathon defense. Furthermore, this Court has been conducting hearings involving questions of state law, and in accordance with the Emergency Rule adopted by the Circuit Council for the First Circuit on December 22, 1983, has entered findings of fact, conclusions of law and proposed orders, and submitted same for review to the United States District Court.
While I recognize the potential harm to the debtors if these individuals and entities are truly taking advantage of contracts and information which belong to the debtors, I do not agree with the debtors that a Rule 2004 examination is the proper vehicle for relief. It will oftentimes be difficult for a Court to determine whether the person whose examination is sought can be said to have information relative to the debtor's financial affairs or facts necessary to the administration of the debtor's estate. However, from the evidence presented to me, I am unable to find that the individuals and entities harbor any information properly discoverable by the debtors in the context of a Rule 2004 examination. As it is within my discretion to permit a Rule 2004 examination to proceed, see, e.g., McLaughlin v. McPhail, 707 F.2d 800 (4th Cir.1983); In re Rassi, 701 F.2d 627, 10 B.C.D. 385 (7th Cir. 1983); and In re Machek, 368 F.Supp. 956 (M.D.Fla.1973) (and cases cited therein), I decline to so exercise this discretionary power and instead follow the direction of Travis v. United States, 123 F.2d 268 (10th Cir.1941) wherein the Court stated "unreasonable discursiveness should not be permitted; and frivolous or prolix examination should be stopped". Id. at 271.
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