Opinion
No. 76 B 2689
May 8, 1979
Bankruptcy Rules — Scope of Examination — Discovery — Pending State Court Proceedings
Absent a showing of good cause, it was improper to permit examination of persons under Bankruptcy Rule 205 so long as the information sought by the bankruptcy trustee was available under state discovery rules in connection with a pending state action.
Following the filing of an involuntary petition against it, the bankrupt had been adjudicated. Thereafter, an order was entered permitting the examination of designated persons under Bankruptcy Rule 205. Approximately two and one-half months later the bankruptcy trustee commenced a state court action against persons who had been designated for Rule 205 examination. The instant case arose from a motion to vacate the order permitting the examination under Rule 205. The issue presented by the motion was the propriety of permitting the continuation of the Rule 205 examinations in light of discovery procedures that had become available in connection with the state court action. A question, noted the court, that has not often been the subject of judicial scrutiny.
The scope of examination under Bankruptcy Rule 205 is virtually unfettered and is limited only by the language of Section 205(d), to "acts, conduct, or property of the bankrupt, or to any matter which may affect the administration of the bankrupt's estate. . .". In addition, procedural safeguards for witnesses in a Rule 205 examination are minimal. For example, notice of the application is not generally necessary and the order is usually entered ex parte. On the other hand, the state procedural rules gave a witness many protections not available under Rule 205. Thus, where state discovery rules are available to the trustee, reasoned the court, a showing of good cause would be required for the continuation of a Rule 205 examination.
The court relied on the decision in In re duPont Walston, Inc., CCH BANKRUPTCY L REP. ¶ 66,777, where it was held that a trustees should not be permitted to "seek refuge from the procedural protections afforded witnesses under the Federal Rules discovery process, and take sanctuary in the relatively unfettered fishing expedition available in a Rule 205 examination" without a showing of good cause.
The Walston case, observed the court, involved the Federal Rules of Civil Procedure. However, the reasoning of the Walston decision could properly be applied to the instant situation, where state discovery rules were available to the trustee. Moreover, counsel for the trustee had conceded that he could not anticipate seeking anything by way of Rule 205 that would not be available under state court procedures. Further, the trustee was not forever foreclosed from applying for a Rule 205 examination. Indeed, the court observed that the trustee was free to return to the court should the information he sought prove unavailable under state discovery rules. Thus, the court vacated the order that had permitted examination under Rule 205. See Bankruptcy Rule 205 at ¶ 20,055.