Opinion
Case No. 8:18-bk-05198-RCT
12-18-2018
In re Kristina Gaime, Debtor.
Chapter 7 ORDER GRANTING , WITHOUT PREJUDICE, (I) MOTION FOR PROTECTIVE ORDER, AND (II) MOTION FOR PROTECTIVE ORDER, TO QUASH SUBPOENA, FOR PROTECTION FROM UNDUE EXPENSE, AND OBJECTIONS
This case is considered, after briefing and oral argument, on two motions for protective order (Docs. 21 and 23), filed by State Farm Fire and Casualty Company and attorney Bryan W. Reynolds ("Mr. Reynolds"), respectively. Both motions address a third-party subpoena issued to Mr. Reynolds by Dawn A. Carapella, the chapter 7 trustee ("Trustee"), pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure ("Rule(s)").
Also considered was the response to the motions filed by the chapter 7 trustee and the declaration of Mr. Reynolds in support of his motion (Docs. 28 and 29).
Background
This is a sad case. In 1999, Debtor drugged her two sons, Mathew and Adam Rotell, and placed them in a running car in a closed garage. She then joined them in the car. As a result of this incident, Mathew died, Adam was injured, and Debtor survived.
In 2001, Debtor was sued by Mathew's probate estate, Adam, and the boys' father, S. Stephen Rotell (collectively, the "Rotells"). Debtor tendered her State Farm insurance policies for defense and indemnity, and the insurance company hired Mr. Reynolds to represent the Debtor, under reservation of rights. Sometime thereafter, the state court entered a declaration that the Debtor was not covered by the proffered polies. Following that ruling, Mr. Reynolds withdrew from representing the Debtor.
The precise entity or entities that provided insurance to Debtor is an issue in dispute. (Doc. 21 at 4 and 2 n.1). The possibilities are all companies within the State Farm family of companies. But as it is not necessary for the court to decide this issue and as the arguments raised might apply equally to all, for purposes of this Order, the court refers to the insurer as State Farm.
Ultimately, Debtor represented herself at trial, and a judgment was entered against her and in favor of the Rotells for $504,802,368.
The trial occurred in June 2016. The state court abated the proceedings after Mr. Reynolds withdrew while the Debtor completed her prison sentence arising from the criminal charges related to the incident. (Doc. 7 ¶¶ 4-6).
Doc. 7 Ex. A (Final Judgment entered Aug. 19, 2018).
After obtaining the judgment, the Rotells filed an involuntary bankruptcy petition against the Debtor. Debtor did not respond to the involuntary petition, and on July 24, 2018, this court entered an Order for Relief. The Trustee was appointed to administer the bankruptcy case. The Rotells are the only creditors in this chapter 7 case.
Doc. 1.
Doc. 9.
The Trustee retained two law firms as special counsel to file a "bad faith" claim against State Farm. One of the firms retained by the trustee disclosed in its application for employment that it had represented the Rotells as counsel in the state court litigation against the Debtor. The second firm disclosed that it represented the personal representative for Mathew Rotell's estate. The two law firms are collectively referred to as Special Counsel.
Doc. 16.
The "bad faith" claim was filed against State Farm in state court. The claim was brought on behalf of the Trustee. State Farm removed the action to the United States District Court for the Middle District of Florida (the "Bad Faith Action").
Case No. 8:18-cv-02396-CEH-CPT (M.D. Fla.)
After the Bad Faith Action was commenced, Special Counsel issued a subpoena in this bankruptcy case to obtain all of Mr. Reynolds's files related to his defense of Debtor in the Rotells' state court case. At oral argument, Special Counsel conceded that the subpoena was issued under Bankruptcy Rule 2004. Both Mr. Reynolds and State Farm promptly moved for a protective order based on the privileged nature of the material subpoenaed. The motions assert the files are protected under the attorney-client and/or the work product privileges.
Discussion
Under Rule 2004(a), "[o]n motion of any party in interest, the court may order the examination of any entity." The rule also extends to the production of documents. Rule 2004(c).
The aim of Rule 2004 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." Accordingly, an examination under Rule 2004 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." Rule 2004(b). Third parties, like Mr. Reynolds, are subject to Rule 2004 examination "if they possess knowledge of the debtor's acts, conduct, or financial affairs which relate to the bankruptcy proceedings."
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)).
In re Bennett Funding Grp., Inc., 203 B.R. 24, 28 (Bankr. N.D. N.Y. 1996); see also In re Ecam Publ'ns, Inc., 131 B.R. 556, 559 (Bankr. S.D. N.Y. 1991).
The decision to grant or deny a request for Rule 2004 discovery rests in the sound discretion of the bankruptcy court. In granting a request for Rule 2004 examination, the court must make a finding of "good cause".
See In re Enron Corp., 281 B.R. 836, 840 (Bankr. S.D. N.Y. 2002); see also In re Seaside Eng'g & Surveying, Inc., 780 F.3d 1070, 1083 (11th Cir. 2015) (noting the bankruptcy court has "wide discretion" relative to examinations under Rule 2004).
See ePlus, Inc. v. Katz (In re Metiom, Inc.), 318 B.R. 263, 268 (S.D. N.Y. 2004); In re Subpoena Duces Tecum, 461 B.R. 823, 829 (Bankr. C.D. Cal. 2011) (citing Northmount Assocs. v. W & S Invs., Inc. (In re W & S Invs., Inc.), No. 91-35830, 1993 WL 18272, at *2 (9th Cir. Jan. 28, 1993)).
The party seeking information under Rule 2004 has the burden of demonstrating good cause for conducting the requested discovery. This burden can be satisfied by demonstrating either that the Rule 2004 discovery is needed to establish a claim, or that the denial of the discovery would cause undue hardship or injustice.
See In re AOG Entm't, Inc., 558 B.R. 98, 108-09 (Bankr. S.D. N.Y. 2016); In re Subpoena Duces Tecum, 461 B.R. at 829; In re 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.").
See In re Metiom, Inc., 318 B.R. at 268 ("Generally, 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." (quoting In re Dinubilo, 177 B.R. 932, 943 (E.D. Cal. 1993)) (alteration in original)); see also In re SunEdison, Inc., 572 B.R. 482, 489 (Bankr. S.D. N.Y. 2017); In re AOG Entm't, Inc., 558 B.R. at 109.
Here, the Trustee has not met her burden of showing good cause for relief under Rule 2004. As an initial matter, the Trustee has had, or will have, ample opportunity to conduct discovery in the Bad Faith Action. She will not suffer hardship or injustice if she is denied an additional opportunity to do the same discovery in this case.
At oral argument, Special Counsel argued that the Trustee may not have had enough time to fully investigate the claims asserted in the Bad Faith Action before filing that case due to statute of limitation concerns. The court does not find this argument persuasive. Neither of the two law firms representing the Trustee are strangers to this case or the underlying facts. Both law firms were sufficiently satisfied as to the merits of their claims to sign the complaint in the Bad Faith Action. Moreover, now that the Bad Faith Action has been removed to federal court, the strictures of Rule 11 of the Federal Rules of Civil Procedure come into play.
The court also does not accept the Trustee's argument that the information is necessary to establish the claims set forth in the Bad Faith Action. Under Florida law, both the insured (the Debtor) and the judgment creditor (the Rotells) can maintain a bad faith claim. If the Rotells had brought an independent claim for bad faith, Special Counsel concedes that they would not be entitled to privileged communications between Mr. Reynolds and Debtor.
See Progressive Express Ins. Co. v. Scoma, 975 So. 2d 461, 465 (Fla. Dist. Ct. App. 2007); see also Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980); Thompson v. Commercial Union Ins. Co., 250 So. 2d 259, 264 (Fla. 1971).
In addition to the failure to establish good cause, the court also denies the Trustee's request because it runs afoul of the "pending proceeding" rule. Under this rule, "once an adversary proceeding or contested matter is commenced, discovery should be pursued under the Federal Rules of Civil Procedure and not Rule 2004." The rule applies to the Bad Faith Action.
See, e.g., In re Glitnir banki hf., No. 08-14757(SMB), 2011 WL 3652764, at *4 (Bankr. S.D. N.Y. Aug. 19, 2011) (discussing the rule and its purpose).
Id. (quoting In re Enron Corp., 281 B.R. at 840); see also In re Bennett Funding Grp., Inc., 203 B.R. at 28.
See In re Glitnir banki hf., 2011 WL 3652764, at *4 (noting that the rule applies to state court or other litigation in which discovery is available); see also In re SunEdison, Inc., 572 B.R. at 490.
The rationale underlying the "pending proceeding" rule is the "concern that a party to litigation could circumvent his adversary's rights by using Rule 2004 rather than civil discovery to obtain documents or information relevant to the lawsuit." The concern arises because discovery under Rule 2004 is broad in scope, often likened to a "fishing expedition," in contrast to the more stringent nature and available protections of discovery under the Federal Rules of Civil Procedure or applicable state court rules. Special Counsel conceded at oral argument that the only reason for the Rule 2004 subpoena was for use in the Bad Faith Action.
In re SunEdison, Inc., 572 B.R. at 490 (listing cases).
See, e.g., In re Enron Corp., 281 B.R. at 840-41; In re Ecam Publ'ns, Inc., 131 B.R. at 559.
Finally, the court does not agree that the Trustee is entitled to a Rule 2004 examination because the Trustee, as a result of her ownership of the claim and her duties under the Bankruptcy Code, may waive the attorney client privilege of an individual debtor. On facts remarkably similar, in In re Behn, a chapter 7 trustee was denied the right to waive an individual debtor's attorney client privilege. Behn involved a debtor on the wrong side of a large wrongful death judgment. As here, the judgment creditor filed an involuntary bankruptcy against the debtor. And as here, the chapter 7 trustee filed a "bad faith" claim and sought to waive the debtor's attorney client privilege to gain access to the files of the debtor's state court counsel in the wrongful death action. The Behn court did not permit the trustee to waive the debtor's attorney client privilege under these circumstances. The court finds the reasoning in Behn persuasive and adopts it here.
No. 3:12-bk-5146-PMG, 2013 WL 12377690, at *1 (Bankr. M.D. Fla. Apr. 17, 2013).
Id. at 9; cf. Gottlieb v. Fayerman (In re Ginzburg), 517 B.R. 175, 181-82 (Bankr. C.D. Cal. 2014) (analyzing Swidler & Berlin v. United States, 524 U.S. 399 (1998), and concluding "federal common law simply prohibits the balancing of the trustee's duties and need for the information with the debtor's attorney client privilege."). --------
For these reasons, it is ORDERED:
1. The Motion for Protective Order (Doc. 21) is GRANTED, without prejudice.
2. The Motion for Protective Order, to Quash Subpoena, and for Protection from Undue Expense (Doc. 23) is GRANTED, without prejudice.
3. The court takes no position on the independent privileges asserted by movants and leaves those issues to the court presiding over the Bad Faith Action.
ORDERED.
Dated: December 18, 2018
/s/_________
Roberta A. Colton
United States Bankruptcy Judge Attorney Camille J. Iurillo is directed to serve a copy of the Order on interested parties that are not registered CM/ECF users and to file proof of service within 3 days of its entry.