Opinion
Case No.: 05-35847-DHS.
January 23, 2008
Hellring Lindeman Goldstein Siegal LLP, Richard B. Honig, Esq., Newark, New Jersey, Counsel for Defendant Bruce M. Jacobson .
Law Offices of Styliades, Jackson and Burghardt, John J. Mastronardi, Esq., Marlton, New Jersey, Counsel to Liberty Mutual Insurance Company .
Trenk, DiPasquale, Webster, Della Fera Sodono, P.C. Richard D. Trenk, Esq., Meaghan E. Tuohey-Kay, Esq., West Orange, New Jersey, Special Counsel for Gary S. Jacobson, Chapter 7 Trustee .
McDermott McGee, LLP, Lindsay K. O'Shaughnessy, Esq., Millburn, New Jersey, Counsel to Allstate Insurance Company .
LETTER OPINION ORIGINAL FILED WITH THE CLERK OF THE COURT
Dear Counsel:
Before the Court is a motion to quash a subpoena in an adversary proceeding and/or for a protective order filed by Bruce M. Jacobson ("Jacobson" or "Defendant"). The subpoena at issue was served by Plaintiff Gary S. Jacobson, Chapter 7 Trustee ("Trustee") for Edward Lev ("Debtor"), on Wachovia Bank on August 1, 2007 seeking records concerning the personal and professional bank accounts of the Defendant to assist in the Trustee's investigation of the complicated network of medical entities created by the Defendant in which the Debtor was involved. The Defendant argues that the subpoena is overbroad in time and scope and would result in the disclosure of his personal affairs and patient names.
The Trustee opposed the instant motion contending that: (i) the subpoenaed bank records are relevant to the adversary proceeding in order to determine the flow of funds between the Defendant and the Debtor and the various related corporations; (ii) the time period of the subpoena should extend to the onset of the creation of the Defendant's entities even though the Debtor's involvement was later due to the complexity of the network of the corporations; and (iii) Federal Rule of Civil Procedure 45(c)(3)(A) does not require the quashing of a subpoena for a procedural defect such as improper service and instead the subpoena may be modified. The Defendant's reply characterized the Trustee's investigation as a "fishing expedition" dating back prior to the onset of a relationship between the Debtor and the Defendant. In the alternative, the Defendant argues that the time period should be limited to January 2002 through August 11, 2005, the date the bankruptcy petition was filed, because documents prior to their relationship are irrelevant especially since the documents at issue are confidential in nature and impact the right of privacy of the Defendant and his patients.
For the reasons stated hereafter, the Defendant's motion to quash the subpoena is denied. The Court has jurisdiction over the matter pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). Venue is proper under 28 U.S.C. §§ 1408 and 1409.
Statement of Facts and Procedural History
A. Defendant's Statement of Facts
On August 11, 2005, the Debtor Edward Lev filed a voluntary chapter 7 petition. Beginning in 2001, the Defendant served as manager of the Debtor's medical practice. The Defendant is a licensed chiropractor operating under the professional trade name Comprehensive Neurological Services, P.A. ("CNS"). On November 10, 2006, the Trustee filed an adversary proceeding against the Defendant and several other entities alleging that at various times during 2004 the Defendant engaged in fraudulent transfers. On or about February 15, 2007, the Defendant filed an answer in this adversary proceeding.
On August 1, 2007, the Trustee subpoenaed bank records from Wachovia Bank ("Wachovia") concerning CNS and related entities and persons. Trustee's counsel failed to send the subpoena to Defendant's counsel who later learned of the subpoena around the time of filing the instant motion. The subpoena specifically seeks the following documents dating from the opening of the account:
(1) all signature cards, and bank resolutions regarding the opening and maintenance of the account;
(2) all monthly bank statements and canceled checks;
(3) names and Social Security numbers of each individual authorized to sign checks on each account;
(4) all deposit slips from the opening of the account to the present; all account opening documents including but not limited to applications, identification documents and corporate resolutions;
(5) all wire transfer documents from the opening of the account to the present; and
(6) a copy of any correspondence or other documents concerning the above referenced account.
The Defendant received the subpoena when it was served in August 2007, but his counsel at the time did not receive a copy. This was unknown to the Defendant until recently, when he substituted his counsel to, Hellring Lindeman Goldstein Siegal LLP. He also learned that he had standing to file a motion to quash or to limit the scope of the subpoena.
The Defendant opened personal and business accounts with Wachovia in or about 1995, approximately eight to nine years before the events at issue in the adversary complaint. These business accounts relate to transactions between the Defendant, vendors, suppliers, and patients. His concerns stem from the time period covered by the subpoena as it dates back further than the applicable federal and state statutes allow for actions involving the Debtor. Additionally, the subpoenas seek information pertaining to his personal affairs and professional affairs, including patient names.
B. Plaintiff's Statement of Facts
The Debtor, a medical doctor, formed relationships with several chiropractors, including the Defendant, and knowingly or recklessly allowed the chiropractors to use his medical license in violation of the New Jersey Insurance Fraud Prevention Law. N.J.S.A. 17:33A-1 et seq. Allstate Insurance Company ("Allstate") and Liberty Mutual Insurance Company ("Liberty Mutual") both filed unsecured claims for $767,978.18 and $1,240,302.50 respectively based upon the Debtor's violations of the state law.
The Trustee began investigating the Debtor's financial transactions and conduct with Allstate, Liberty Mutual, State Farm Insurance Company ("State Farm"). His investigation, assisted by forensic accountants Shalik, Morris Company, LLP ("Shalik"), led to the discovery of an intertwined set of corporations used by the Debtor and the Defendant to further their fraudulent conduct against the insurance companies. This investigation led to the filing of the instant adversary proceeding to recover the assets wrongly diverted by the Defendant. The discovery requests made by the Trustee here are alleged to facilitate the investigation of the financial transactions between the Debtor and the Defendant. In addition, the subpoenas focus on the various entities formed by the two.
The Defendant owned and operated several corporations that purportedly provided medical services. The scheme consisted of a doctor who owned an entity on paper and submitted claims to the insurance companies. Among the web of entities, most were owned by the Defendant including CNS. The Debtor was the owner of record of Encompass Medical Group and Encompass Medical P.C. However, all of these entities had bank accounts bearing the Defendant's name. During his deposition testimony, the Defendant acknowledged that he used CNS bank accounts for his personal use.
The Debtor and the Defendant began their relationship in 2001 when another "owner" of an entity introduced the two. The Defendant hired the Debtor for a salaried position to run Encompass. The Debtor eventually formed the second Encompass entity with the Defendant, however, the Debtor alleged that he did not know the amount of money the Defendant earned from these entities even though the Debtor had access to the books and records of the entities and was the signatory on the checking account.
In 2004, the Debtor recognized that funds were missing from the Encompass accounts and first wrongly suspected the administrative assistant of the office. Subsequently, in the summer of 2004, the Debtor began to suspect the Defendant's involvement. At his deposition in the instant adversary proceeding, the Debtor testified that soon thereafter he believed he lost control of all financial transactions of his practice and that his signature was being forged on checks and several accounts opened at Wachovia bank under the Defendant's control. In October 2004, the Defendant evicted the Debtor and moved all of the documentation and records into a storage facility leaving the Debtor with no access to them. In November 2004, the Debtor assigned the Encompass Medical accounts receivable to the Defendant's father in exchange for $31,600.00, of which the Debtor only received $5,000.00 in cash. In late 2004 or early 2005, the Debtor terminated his relationship with the Defendant and filed for bankruptcy on August 11, 2005.
The Trustee's investigation resulted in the unearthing of various transactions and cancelled checks indicating transfers from the Encompass entities to CNS, the Defendant, or other corporations. The records revealed $190,100.00 in disbursements from April 30, 2002 through January 24, 2005. These records demonstrate the financial relationship between the Defendant and the Debtor, although the full extent is still to be determined. It is alleged that the subpoena for the financial records from Wachovia will facilitate the Trustee and the forensic accountant's further investigation into this financial relationship and will enable them to also determine whether there are additional transactions at issue.
Discussion
Federal Rule of Bankruptcy Procedure 2004 provides "[o]n motion of any party in interest, the court may order the examination of any entity." FED. R. BANKR. P. 2004(a). Rule 2004 further provides 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, or to the debtor's right to discharge." Id. Rule 2004's scope "has been explained as a broad investigation into the financial affairs of the debtor for the purpose of the discovery of assets of the estate and the discovery of fraudulent conduct." 2435 Plainfield Ave., Inc. v. Twp. of Scotch Plains, (In re 2435 Plainfield Ave., Inc.), 223 B.R. 440, 456 (Bankr. D.N.J. 1998) (citations omitted). Courts, in fact, recognize that Rule 2004 examinations are broad, unfettered and in the nature of fishing expeditions. See In re Valley Forge Plaza Assoc., 109 B.R. 669, 674 (Bankr. E.D. Pa. 1990). To further the above stated purpose of discovering fraudulent conduct, "[t]hird parties having knowledge of the debtor's affairs, as well as the debtor itself, are subject to examination." Id. at 674.
Federal Rule of Civil Procedure 45, made applicable in bankruptcy by Federal Rule of Bankruptcy Procedure 9016, provides in relevant part:
On timely motion, the issuing court must quash or modify a subpoena that:
(i) fails to allow reasonable time to comply;
(ii) requires a person who is neither a party nor a party's officer to travel more than 100 miles from where that person resides, is employed or regularly transacts business in person — except that, subject to Rule 45(c)(3)(B)(iii), the person may be commanded to attend a trial by traveling from any such place within the state where the trial is held;
(iii) requires disclosure of privileged or other protected matter if no exception or waiver applies, or
(iv) subjects a person to undue burden.
FED. R. CIV. P. 45(c)(3)(A) (2007). The burden of proof to demonstrate a subpoena's undue burden lies with the objector to the subpoena. See Official Committee of Unsecured Creditors v. Ashdale (In re LaBrum Doak), 1998 Bankr. LEXIS 925, at *6-7 (Bankr. E.D. Pa. July 27, 1998) (citing Concord Boat Corp. v. Brunswick Corp., 169 F.R.D. 44, 49 (S.D.N.Y. 1996)). Courts take into account "relevance, the need of the party for the documents, the breadth of the document request, the time period covered by it, the particularity with which the documents are described and the burden imposed." Concord Boat Corp., 169 F.R.D. at 49 (citations omitted). Another consideration is the value of the information to the issuing party in comparison to the burden imposed on the subpoenaed party. See Travelers Indem. Co. v. Metro. Life Ins. Co., 228 F.R.D. Ill, 113 (D. Conn. 2005). Once a motion to quash a subpoena is filed, the subpoena's issuer must show good cause for the Rule 2004 examination. See In re Eagle-Picher Indus., Inc., 169 B.R. 130, 134 (Bankr. S.D. Ohio 1994). Once good cause is established, the objecting party must convince the court of the impropriety of the Rule 2004 examination. See In re Buick, 174 B.R. 299, 304 (Bankr. D. Colo. 1994).
In the instant matter, it is clear that the alleged "fishing expedition" that the Defendant believes the Trustee is conducting is relevant to the issues in the adversary proceeding as the Debtor's role in the Defendant's complex fraudulent scheme has been discovered by the Trustee. The value of this information to the Trustee and his investigating team is far greater than the burden imposed upon Wachovia to produce the necessary records. The Trustee has explicitly demonstrated that good cause exists for this subpoena as the determination of the individual's relationship's breadth is critical to the Trustee's investigation and lawsuit and is imperative to the administration of the bankruptcy estate. The Defendant has not borne his burden of proving the subpoena's impropriety under the far-reaching circumstances known to date.
Instead, the Defendant argues, in the alternative, that a protective order be issued limiting the time period of the subpoenas. Federal Rule of Civil Procedure 26(c)(1) provides grounds for protective orders to avoid embarrassment, oppression, undue burden or expense when the scope, time, or subject of a subpoena requires limitation. FED. R. CIV. P. 26(c)(1) (2007). Specifically, the Defendant requests that the Court limit the subpoena to January 2002 through August 11, 2005. However, the Trustee has demonstrated that the web of illegal activity and corporate entities existed prior to January 2002 and may still be operational as of the date of the instant motion. Further, it is determined that under the circumstances of this case, that investigation into this network is appropriate during discovery and the records from Wachovia for the entire subpoenaed period are necessary and not prejudicial nor unduly burdensome.
Conclusion
For the foregoing reasons, the Defendant's motion to quash the subpoena and/or for a protective order are hereby denied. An Order in conformance with this Opinion has been entered by the Court and a copy is attached.
Very truly yours,
NOTICE OF JUDGMENT OR ORDER Pursuant to Fed.R.Bankr.P. 9022
Please be advised that on January 23, 2008, the court entered the following judgment or order on the court's docket in the above-captioned case:
Document Number: 43-35
Opinion (related document: [35] Motion to Quash Subpoena and for a Protective Order filed by Defendant Bruce Jacobson). The following parties were served: Plaintiff, Plaintiff's Attorney, Defendant, Defendant's Attorney. Signed on 1/23/2008 (zlh.)
Parties may review the order by accessing it through PACER or the court's electronic case filing system (CM/ECF). Public terminals for viewing are also available at the courthouse in each vicinage.