What Is the Rule 2004 Bankruptcy Exam?
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The bankruptcy process lets interested parties, like the trustee or creditors, obtain information about the person filing bankruptcy and their financial situation. But sometimes, these interested parties want more information than what’s contained in the bankruptcy filings. When this happens, they can use Bankruptcy Rule 2004 to compel someone to testify in court and/or bring documents that may offer some insight to the bankruptcy-related issue or question.
Written by Attorney Paige Hooper.
Updated November 16, 2022
To file bankruptcy, you must submit bankruptcy forms containing information about you and your finances. Then, you must attend a Section 341 meeting of creditors, where you may be asked for even more information.
In most bankruptcy cases, the forms and 341 meeting provide enough evidence for the bankruptcy court to complete the case. But sometimes, more information is necessary. Rule 2004 exams are a way to get that additional information. This article covers what a Rule 2004 exam is and how it works.
What Is the Rule 2004 Bankruptcy Exam?
Rule 2004 exams exist to allow bankruptcy trustees, creditors, and other interested parties to access the information they need to fulfill their duties under the Bankruptcy Code. This is similar to the goal of a Section 341 meeting of creditors. But a Rule 2004 exam is different from a Section 341 meeting.
Rule 2004 vs Section 341
Section 341 meetings take place in every bankruptcy case. In a typical 341 meeting, the trustee verifies that the information in the debtor’s bankruptcy paperwork is correct and clarifies any confusing or missing information. Most consumer 341 meetings last less than 15 minutes.
Rule 2004 exams, on the other hand, are rare. They often take longer and involve much more in-depth questioning than 341 meetings. Unlike a 341 meeting, a Rule 2004 exam isn’t limited to the debtor, trustee, and creditors. Under Rule 2004, the bankruptcy court can order testimony or production of documents from anyone with relevant information about the filer’s finances.
Rule 2004 exams and Section 341 meetings do have some things in common. Both proceedings take place under oath and are recorded. The information obtained from either proceeding can be used later in the bankruptcy or other court cases.
Where Does Rule 2004 Come From?
Rule 2004 exams come from Rule 2004 of the Federal Rules of Bankruptcy Procedure. Most civil cases in federal court, in contrast to bankruptcy court, are limited to the discovery procedures contained in the Federal Rules of Civil Procedure (FRCP). Rule 2004 allows investigation into a wider range of topics than what’s permitted under the FRCP. Because of this broad scope, people sometimes refer to Rule 2004 exams as “fishing expeditions” because the party requesting the exam can cast a wide net of questioning just to see what information they reel in.
Testifying or producing documents under Rule 2004 is not optional. The rule gives the bankruptcy judge authority to issue a court order compelling anyone with relevant information to comply with the examination notice. This authority extends beyond the parties to the bankruptcy case. A bankruptcy judge may use the subpoena power of FRCP 45 to order anyone to testify or deliver documents.
When Does a Rule 2004 Exam Apply?
Rule 2004 applies to all types of bankruptcy cases, but examinations under Rule 2004 are relatively rare. Rule 2004 exams typically come up when the information from the case paperwork and 341 meeting isn’t enough to fully administer the bankruptcy case.
For example, in a large corporate Chapter 11 case, the trustee may need a 2004 exam to get information or documents about parent companies, affiliates, receivables, or purchase offers, or may need to question an accountant or a corporate officer. Similarly, a Chapter 15 case might involve questions of foreign law or international holdings that are too complex to fully investigate at a 341 meeting.
Rule 2004 exams also arise when documents or testimony create a suspicion of fraudulent activity. In cases filed under Chapter 7, Chapter 12, or Chapter 13, a debtor who commits bankruptcy fraud could lose their right to a discharge. A Rule 2004 exam may be necessary to get information about undisclosed assets or transactions or to investigate instances where the debtor’s testimony at the 341 meeting differs dramatically from what’s in their paperwork.
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Who Can Ask for a Rule 2004 Exam?
Rule 2004 says that any “party in interest” can request a Rule 2004 exam. This interested party could be you (the debtor), your trustee, one of your creditors, or any other person or company that might be affected by your bankruptcy.
Most Rule 2004 examinations are requested by the trustee to help locate and value assets, investigate pre-bankruptcy transfers and other transactions, and investigate potential fraud. Creditors sometimes request Rule 2004 exams to find assets that aren’t protected by the bankruptcy or to determine whether there’s any evidence that a debt isn’t dischargeable in bankruptcy. . The debtor may also request a Rule 2004 exam to get more information about a debt.
What Information Is Subject to a Rule 2004 Exam?
The language of Rule 2004 allows investigation into a broad range of topics, including:
Any information related to the debtor’s assets: This might include information about the location or value of assets, or details about the debtor’s ownership rights.
Any information related to the debtor’s debts: For example, payment histories, information from loan applications, or the terms of a credit agreement.
Any information concerning the debtor’s financial condition: This might include information about the debtor’s income, earning potential, or expenses.
Any information about the debtor’s conduct that could affect the debtor’s assets, liabilities, or financial condition: This could include transferring or disposing of assets, or actions that could affect the value of assets.
Any information that might affect the debtor’s right to a bankruptcy discharge: For example, concealing or attempting to conceal assets, destroying financial books or records, deleting electronically stored information, or knowingly giving false testimony.
Any other information that could affect the administration of the debtor’s estate: Depending on the type of bankruptcy, this could involve liquidation of assets, distribution of payments, the formulation of a plan, or the feasibility of the plan’s success.
Rule 2004 in Business-Related Bankruptcies
In a bankruptcy case under Chapter 11, 12, or 13 where the debtor is a business, or where the debtor owns and operates a business, a Rule 2004 exam may also investigate:
Any information related to the operation of the business.
Any information related to whether the business is profitable and whether it makes sense for the business to continue operating.
Any information relevant to creating and implementing a reorganization plan.
How Does an Interested Party Request a Rule 2004 Exam?
A party that seeks to hold a Rule 2004 examination must request the exam by filing a motion with the bankruptcy court. There is no automatic right to take a Rule 2004 exam. The party requesting the exam must have a valid reason for requesting it. If the party to be examined ,called the examinee, believes the examination is unnecessary or seeks information beyond the scope of Rule 2004, they can file an objection.
If the bankruptcy judge grants the motion for a Rule 2004 exam, the court will issue an order requiring the examinee to appear and testify at a set date and time. The order may also direct them to bring specific documents to the Rule 2004 exam. If the examinee is not already a party in the bankruptcy case (e.g., not the debtor or a creditor) the court must also issue a subpoena under FRCP 45.
Are There Limits to the Rule 2004 Exam?
The scope of investigation allowed under Rule 2004 is wide but not unlimited. As discussed above, the party seeking the Rule 2004 exam must demonstrate that there is a legitimate reason for the examination. Rule 2004 exams can’t be used to harass or abuse debtors or examinees.
Rule 2004 examinations are also limited by the “pending proceeding” rule, which applies when there is a pending adversary proceeding (a separate lawsuit in bankruptcy court that’s related to an underlying bankruptcy case). Adversary proceedings are governed by the FRCP, so the parties to the adversary proceeding are limited to the FRCP discovery rules.
The pending proceeding rule also applies to pending non-bankruptcy litigation, such as a lawsuit in state court. Parties who are involved in a pending non-bankruptcy proceeding must comply with the rules that would normally govern that proceeding. They can’t use a Bankruptcy Rule 2004 exam to get around those rules.
Rule 2004 exams exist to ensure that everyone involved in a bankruptcy case has access to all information necessary to carry out the case under bankruptcy law. The need for a Rule 2004 exam typically arises when the information from the Section 341 meeting and bankruptcy forms is incomplete, confusing, or contradictory. Any interested party can request a Rule 2004 exam, but they’re usually requested by the trustee or a creditor.
Rule 2004 permits investigation into a wide range of subject matter related to the debtor and the administration of the bankruptcy case. That said, the party seeking the exam must have a legitimate reason, relevant to the bankruptcy, and can’t use the exam to harass the examinee or to circumvent the rules of other pending litigation.