September 6, 2009
Delaware Bankruptcy Judge Rules 2004 Exam Proper Even Though Four Adversary Actions are Pending
Brief by UWLA Law Student, Sara Hussain:
In re Washington Mutual, Inc., 408 B.R. 45 (Bkrtcy D. Delaware, June, 2009)
ISSUE: Does the existence of four pending adversary proceedings or other litigation between the parties require denial of a requested 2004 examination?
Judge Mary Walrath
The chapter 11 debtor filed a motion for a 2004 exam directing the examination of JPMorgan Chase Bank (“JPM”). “For the reasons set forth below, the Court will grant the Debtors' Motion.” Prior to the filing of a chapter 11 petition, Washington Mutual, Inc. (“WMI”) was a savings and loan holding company, which owned Washington Mutual Bank (“WMB”). “Deteriorating confidence in WMB fueled a bank run beginning September 15, with $16.7 billion in deposits withdrawn over a ten-day period.” On September 25, 2008, FDIC took over WMB. It was the largest bank failure in the nation's history. Immediately after its appointment as receiver, the FDIC sold substantially all the assets of WMB to JPM. On September 26, the Debtors filed chapter 11 petitions.
The Debtors filed proofs of claim with the FDIC in its capacity as receiver of WMB which the FDIC denied. On March 20, 2009, the Debtors filed suit in the United States District Court against the FDIC (the “DC Action”) with the following five counts: (1) seeking review of the FDIC's denial of the Debtors' proofs of claim; (2) wrongful dissipation of WMB's assets; (3) taking of the Debtors' property without just compensation; (4) conversion of the Debtors' property; and (5) seeking a declaration that the FDIC's disallowance of the Debtors' claims is void. JPM moved to intervene in the DC Action; the Debtors have opposed JPM's motion to intervene.
JPM filed an adversary proceeding against the Debtors seeking declaratory judgments regarding the ownership of various assets which JPM asserts it acquired in good faith and for value from the FDIC (the “JPM Adversary Action”). The Debtors then filed an adversary proceeding against JPM seeking turnover of approximately $4 billion in cash held in demand deposit accounts in the name of the Debtors at WMB at the time WMB was seized and sold to JPM. JPM filed a motion to dismiss the Turnover Action; the Debtors filed a motion for summary judgment.
A fourth action was filed, in state court in Texas by a group of insurance companies which held common stock of WMI against JPM (the “Texas Action”). On March 25, 2009, the FDIC and JPM removed the Texas Action to the United States District Court for the Southern District of Texas.
Rule 2004(a) of the Federal Rules of Bankruptcy Procedure states that “on motion of any party in interest, the court may order the examination of any entity.” The scope of a Rule 2004 examination is “unfettered and broad.” “The examination ... may 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. Additionally, in a case under chapter 11 ... the examination may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.”
“At issue in this case is the potential limitation on the use of the Rule 2004 examination device caused by the shadow of pending adversary proceedings or litigation in other forums. The ‘pending proceeding’ rule states ‘that once an adversary proceeding or contested matter has been commenced, discovery is made pursuant to Federal Rules of Bankruptcy Procedure 7026 et seq., rather than by a Rule 2004 examination.’” In addition, courts have also recognized that Rule 2004 examinations may be inappropriate “where the party requesting the Rule 2004 examination could benefit their pending litigation outside of the bankruptcy court against the proposed Rule 2004 examinee.”
In this case, JPM argues that the 2004 examination is improper because it seeks to elicit information directly related to issues and parties already named in the JPM Adversary Action as well as the DC Action. However, the Court held that nothing in the document production request seeks any information related to the Turnover Action. “The requested Rule 2004 examination does seek extensive discovery related to the Texas Action and because the Debtor is not a party to the Texas Action, the requested 2004 examination is proper, even though it seeks information related to the Texas Action.”
JPM then argues that the Debtors' requested 2004 examination seeks documents related to the JPM Adversary Action. The JPM Adversary Action primarily seeks a series of declaratory judgments that JPM owns a number of disputed assets it asserts that it purchased when it acquired the assets of WMB from the FDIC. The Debtors' Motion seeks production of documents and related depositions relating to potential business tort claims, potential fraudulent transfer claims, potential turnover claims against JPM, and potential preferential transfer claims against JPM.
“The Court concludes that the Debtors' Motion does not seek the discovery of evidence ‘related’ to the JPM Adversary Action. With respect to the potential business tort claims, the Debtors seek to investigate conduct which occurred before the OTS closed WMB. In contrast, the JPM Adversary Action seeks to have the Court determine the ownership of certain disputed assets from the sale of WMB's assets to JPM, which occurred after the OTS closed WMB. Accordingly, the Court finds that the Debtors' Motion does not seek to discover evidence related to the JPM Adversary Action.”
JPM also argues that the Debtors' requested 2004 examination seeks documents related to the DC Action. However, JPM is not a party to the DC Action. “The possibility that JPM may intervene in the DC Action is not a sufficient reason to deny the Debtors' Motion at this time. The “pending proceeding” rule is predicated on there actually being a pending action involving the two parties.”
“[T]here is no justification to prevent the Rule 2004 examination of JPM simply because the Debtors may obtain evidence which could be used in a pending proceeding in which JPM is not yet a party. One of the primary purposes of a Rule 2004 examination is as a pre-litigation device. Consequently, the Court should not permit a party to avoid examination by simply filing a motion to intervene in a pending proceeding against a third party. Since JPM is not a party to the DC Action, the concern that the Debtors are attempting to circumvent the Federal Rules of Civil Procedure is not present. The ‘relatedness’ of the DC Action to the Debtors' requested 2004 examination is not relevant.”
With respect to the DC Action, the “Debtors seek to discover evidence regarding JPM's alleged malfeasance prior to the seizure and sale of WMB. JPM argues that discovery of this evidence is related to the Debtors alleged causes of action against the FDIC for dissipation of WMB's assets and the taking of Debtors' property without just compensation. However, these causes of action are premised on the FDIC's failure to maximize the value of the receivership's assets in the sale of WMB to JPM. Specifically, the Debtors assert the FDIC would have received a higher value through the liquidation of WMB than the sale to JPM. The requested 2004 examination does not seek to discover evidence related to the hypothetical liquidation analysis implicated in the dissipation and takings causes of action asserted in the DC Action.”
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In other words: Buy the crap out of WAMUQ because JPM is in deep doo doo...
Posted by: Larry | Sep 8, 2009 8:34:07 AM
Look into "Deal"-aware DEEPER;
With open eyes
See the manu falling from Federal protected Skies
Posted by: Laser Haas | Sep 9, 2009 5:41:48 PM