Gone Fishin’ - Rule 2004 Exams in MN Bankruptcy

Posted by William Kain on October 27, 2016 at 1:15 PM
William Kain

mn-bankruptcy-lawyers-rule-2004.jpgFiling a bankruptcy case in Minnesota is, for almost everyone, a fairly straight-forward process: a person facing financial difficulties meets with an MN Bankruptcy Attorney well-versed in bankruptcy practice and, during that (or subsequent) meetings, the person decides to file a bankruptcy case. Once the lawyer is retained, the lawyer’s office, with the assistance of the bankruptcy client, prepares a petition, schedules and statements identifying the debtor, listing assets, liabilities, income and expenses, together with disclosures of any financial transactions in which the debtor has engaged during defined periods prior to filing the bankruptcy case.

The case is filed with the appropriate bankruptcy court, triggering the court’s order for relief - the “automatic stay” that prevents any creditor - secured, unsecured or priority - from taking any action to collect on accounts owed by the debtor.
The court’s order is sent to all creditors listed by the debtor, the debtor and the debtor’s attorney so that everyone financially involved with the debtor is aware of the bankruptcy filing. At this time a trustee is appointed to administer the debtor’s “bankruptcy estate” - all of the property the debtor owns, or has a right to as of the date the bankruptcy petition and schedules were filed. The notice sent by the bankruptcy court will also advise all interested parties of the date, time and location of the 341 Meeting - the meeting the bankruptcy debtor is required to have with the trustee.

This procedure is the same whether or not the debtor has filed a chapter 7 or chapter 13 bankruptcy case. And in both chapter 7 and chapter 13, the debtor is required to appear (with the debtor’s attorney) and answer questions while the debtor is under oath to assist the trustee in administering the case. The bankruptcy trustee, whether a chapter 7 trustee, or chapter 13 trustee, is going to be interested in the nature of, and the value of, the debtor’s property. Chapter 13 trustees are also interested in the source and amount of income available to the chapter 13 bankruptcy debtor, since a chapter 13 plan is predicated on the amount of disposable household income available to the chapter 13 debtor.

In a chapter 7 case, the bankruptcy debtor receives his or her “discharge” 60 days after the date of the 341 Meeting. In a chapter 13 case, the bankruptcy court confirms the chapter 13 debtor’s repayment plan approximately 30 days after the meeting with the chapter 13 trustee. Once the plan is confirmed, the chapter 13 debtor makes monthly payments, as set forth in the plan, until the time period for the plan (a minimum of 36 months, up to a maximum of 60 months) has run, after which the chapter 13 debtor will receive his or her discharge.

The bankruptcy discharge is the reason people file bankruptcy: the discharge is a permanent injunction against creditors from seeking personal liability against bankruptcy debtors on debts the bankruptcy debtor owed at the time the bankruptcy case was filed.

It’s a simple process, when the process is handled professionally by the bankruptcy debtor, his or her MN Bankruptcy attorney, the debtor’s creditors and the bankruptcy trustee. And in cases without complicating factors, the simple file, meeting, discharge sequence almost always occurs.

But there are occasionally odd circumstances in which the bankruptcy debtor’s journey from filing to discharge isn’t smooth. One of the scenarios in which there can be complications for bankruptcy debtors is when the bankruptcy trustee, or one of the debtor’s creditors, or the bankruptcy debtor him- or herself seeks to question someone in a deposition-type examination. It’s something called a Rule 2004 Exam.

Who Can Ask for a 2004 Exam?

The 2004 exam gets its name from the Bankruptcy Rule that allows it. The Rule provides that “a party in interest” can, by motion to the bankruptcy court, ask for the examination of “any entity.”

Who is a Party in Interest?

A party in interest is a party in a particular bankruptcy case that has standing to be heard by the court in the bankruptcy case. The United States Trustee, the case trustee, a creditor of the debtor, and the debtor or debtors are parties in interest. While it is clear that bankruptcy debtors can request a 2004 exam, the incidence of this happening is rare, and in most cases the United States trustee is not going to get involved in requesting 2004 exams.. For our purposes, during this section of this blog, assume that the 2004 exam is being sought by the case trustee or a creditor.

What the Court Does

A trustee or creditor is not allowed to simply schedule a 2004 exam of a debtor. Rather, the entity seeking the 2004 exam has to move the bankruptcy court for an order allowing the 2004 exam. In the motion, the individual seeking the 2004 exam must make at least generalized statements to support the request for the 2004 exam. Rule 2004 limits the scope of the 2004 exam to questioning regarding 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.”
While the scope of the 2004 examination is defined, the bankruptcy court will almost always order the examination; courts have noted that the scope of inquiry under Rule 2004 is “unfettered and broad.” In other words, if an individual wants to examine a bankruptcy debtor under Rule 2004, and the individual can articulate in the motion the reasons that support the examination, bankruptcy courts will order the 2004 examination to go forward. The only common basis to deny the request for a 2004 exam is that there is already an adversary proceeding pending on the case. In that situation, the court will require the party seeking the 2004 examination to comply with the Rules of Federal Civil Procedure regarding obtaining information prior to trial.

The 2004 Examination is a Discovery Tool

Why would a case trustee, or a creditor want to examine a bankruptcy debtor in a deposition-type setting? In most cases, it is because the trustee or the creditor believe there are issues in the debtor’s case that warrant closer investigation. Normally, the questions are going to be about the existence of assets and the value of the asset, and/or the debtor’s financial transactions (payments to insiders or relatives, or the transfer of assets to another prior to the bankruptcy case being filed).

This does not mean that the existence of Non-Exempt Assets, large payments to creditors prior to the case filing, or transfers of assets from the debtor to another will automatically result in a 2004 exam. In most cases in which the debtor has disclosed assets, transfers and payments in the debtor’s bankruptcy schedules and statements, the trustee does not need to examine the debtor - the debtor herself has given information to the trustee to allow the trustee to administer the case.

It is in situations in which assets have not been disclosed, or payments or transfers not mentioned in the bankruptcy debtor’s statements that the trustee seeks to examine the debtor under Rule 2004. The trustee in these situations might conclude that the debtor is not being entirely forthcoming in the schedules and statements that were filed with the court when the bankruptcy case was commenced. If the trustee’s suspicion that there is more to the case than has been disclosed in the debtor’s schedules and statements, it is likely that the trustee will ask the bankruptcy court to order an examination under Rule 2004.

Rule 2004 allows a trustee to discover the true extent of the Property of the Bankruptcy Estate and to find out whether the bankruptcy debtor behaved in such a way that a denial of the debtor’s bankruptcy discharge is warranted. A 2004 examination is not a trial; rather, it is a way for the trustee to learn more about the assets present in the debtor’s case. The trustee does this by requiring the debtor to attend the examination.

As mentioned before, the 2004 examination is similar to a deposition, but it is less reined-in by rules than a civil deposition. For instance, the party examined in a Rule 2004 examination does not have the right to have an attorney present at the exam to represent him, and the right to object to immaterial and irrelevant questions is more restricted than in the Federal Rules of Civil Procedure.

Why is that? Why is the bankruptcy debtor not afforded the type of protection that a deponent in a federal civil lawsuit? It has to do with the provisions of Bankruptcy Code section 521(a)(3). That section explains the Debtors Duties and requires a bankruptcy debtor to “cooperate with the trustee as necessary to enable the trustee to perform the trustee’s duties.” So cooperating in the Rule 2004 exam is something that bankruptcy debtors are required to do when the trustee is seeking the examination.
Rule 2004 examinations, then, usually take place when something doesn’t seem right about a debtor’s case. The petition, schedules and statements filed with the court represent the debtor’s self-reporting of assets and liabilities, income, expenses and transactions. However, the trustee can receive information from many sources other than a bankruptcy debtor about the debtor’s property. And when the information self-reported by the debtor differs in a meaningful way from the information being given to the case trustee by other people (usually creditors; but sometimes neighbors, relatives and, particularly ex-spouses), the trustee will want to depose the debtor: place the debtor under oath and ask detailed questions about the debtor’s financial behavior and asset ownership.

The case trustee’s questions at a 341 meeting - the meeting that all bankruptcy debtors have to attend - is usually much more summary in nature than the probing questions that can be posed to the bankruptcy debtor in a 2004 exam. Further, the case trustee has the ability to require the debtor to produce certain documents at the 2004 exam that are not normally required at the 341 meeting. And the trustee can take a fair amount of time at the 2004 exam to question the debtor about the debtor’s finances. At 341 meetings, when there are multiple meetings scheduled every half hour, it is difficult for the trustee to probe a debtor’s finances in detail due to time concerns.

What Benefit Does the Trustee get from a 2004 Exam?

If the trustee is able, through the 2004 exam, to obtain information about the existence of previously undisclosed assets or unreported preferential payments or fraudulent transfers, the trustee will be in a much better position to collect the appropriate assets or payments in order to administer the bankruptcy estate. And when the trustee is able to pay creditors’s claims from non-exempt assets, or after recovering payments or transfers, the debtor’s creditors receive (at least) partial payment and the trustee gets paid a commission. So the information that comes out of a 2004 examination can be profitable for a case trustee.

If a 2004 examination reveals a pattern of deceptive practices by the debtor, the bankruptcy trustee can use the discovery of the non-disclosed information as a basis to ask the bankruptcy court to deny a bankruptcy debtor’s discharge.

What about Creditors Using 2004?

A bankruptcy debtor’s creditors also have the right to depose a debtor through a 2004 exam, although this does not happen as frequently as a trustee-initiated exam.

The creditor seeking to examine the debtor must, like the trustee, ask the bankruptcy court for an order allowing the exam. And, like the trustee's request, courts are likely to grant a creditor's motion and order the 2004 exam.

Why would a creditor be interested in this? The creditor, unlike the trustee, won't receive any money from collecting non-exempt assets or wheeling transferred property or preferential payments back into the bankruptcy estate. So there is usually one reason why a creditor would ask for a 2004 exam: the creditor suspects that there may be grounds for the creditor to seek a bankruptcy court order excepting the debt owed by the debtor to the creditor from the debtor's discharge.

Sometimes a creditor may not be able to establish sufficient grounds for excepting a debt from discharge without admissions of some behavior by the debtor. So the 2004 exam can be used to set the stage for the creditor bringing an adversary proceeding.

What's an adversary proceeding? We'll look at that next week.


If you have any further questions about a Rule 2004 Exam please reach out to us by calling or filling out our online request form, we'd be happy to help. At our 8 Professional and Convenient MN Locations we have MN Bankruptcy Lawyers available Monday through Friday 8-5. 


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