In re Cambridge Analytica LLC

600 B.R. 750

IN RE: CAMBRIDGE ANALYTICA LLC, et al., Debtors.

Case No. 18-11500 (SHL) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

Signed June 14, 2019

GIBSON, DUNN & CRUTCHER LLP, Attorneys for Facebook, 200 Park Avenue, New York, New York 10166 By: Dylan Cassidy, Esq.

LOWENSTEIN SANDLER LLP, Attorneys for the Data Breach Plaintiffs, 1251 Avenue of the Americas, New York, New York 10020, By: Nicole Fulfree, Esq.

LAMONICA HERBST & MANISCALCO LLP, Trustee, 3305 Jerusalem Avenue, Suite 201, Wantagh, New York 11793, By: Salvatore LaMonica, Esq., Michael Rozea, Esq., Jordan Pilevsky, Esq.

SCHULTE ROTH & ZABEL LLP, Attorneys for the Debtors, 919 Third Avenue, New York, New York 10022, By: Kristine Manoukian, Esq.

DILWORTH PAXSON LLP, Attorneys for Karen Sbriglio, 99 Park Avenue, Suite 320, New York, New York 10016, By: Anne Marie Aaronson, Esq., Catherine Pratsinakis, Esq.

MODIFIED BENCH DECISION DENYING APPLICATION FOR FRBP 2004 EXAMINATION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the Motion of Karen Sbriglio under Bankruptcy Rule 2004 for an order directing the production of documents from Debtor, Cambridge Analytica LLC. For the reasons stated below, the Motion is denied.¹

BACKGROUND

Karen Sbriglio is a plaintiff in a derivative action brought in Delaware Chancery Court in 2018 against certain Facebook officers and directors. Neither the Debtors nor any of their affiliates are named as defendants in the Delaware derivative action.

On March 13, 2019, Ms. Sbriglio purchased a claim that was initially filed by Rod Foster and denominated as Claim No. 6 by the Clerk of Court. The purchased claim has a face value of $ 650 and is filed against the estate of the Cambridge Debtor. Eight days after purchasing this claim, Ms. Sbriglio filed this Motion, which requests access to the same documents to be provided to the so-called Data Breach Plaintiffs.

The Data Breach Plaintiffs filed a punitive class action in the United States District Court in Delaware against Facebook and Cambridge Analytica regarding Cambridge Analytica's alleged obtaining of data from Facebook users. See In re Cambridge Analytica , 596 B.R. 1 (Bankr. S.D.N.Y. 2019) (setting forth background as to the Data Breach Plaintiffs).

DISCUSSION

Rule 2004 of the Federal Rules of Bankruptcy Procedure states that, on motion of any party-in-interest, the Court may order the examination of any entity. The scope of an examination permitted by Rule 2004 may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor or any matter which may affect the administration of the bankruptcy estate. See Fed. R. Bankr. P. 2004(b).

The Bankruptcy Court has the discretion to grant a request for a Rule 2004 examination. See In re Bd. of Dirs. of Hopewell Int'l Inst. Ltd. , 258 B.R. 580, 585 (Bankr. S.D.N.Y. 2001) ; see also In re Enron , 281 B.R. 836, 840 (Bankr. S.D.N.Y. 2002). Courts have imposed limits on the use of Rule 2004 examinations where the purpose of the examination is to abuse or harass. See In re Mittco Inc. , 44 B.R. 35, 36 (Bankr. E.D. Wis. 1984). Similarly, there is a well-recognized rule that once an adversary proceeding or contested matter is commenced, discovery should be pursued under the applicable Federal Rules of Civil Procedure, and not Rule 2004. See In re Bennett Funding , 203 B.R. 24, 28 (Bankr. N.D.N.Y. 1996).

Courts have exhibited similar concerns when confronted with the propriety of Rule 2004 examinations where the party requesting the Rule 2004 examination is to benefit in pending litigation outside of the Bankruptcy Court. See In re Enron Corp. , 281 B.R. at 842 (citing Snyder v. Society Bank , 181 B.R. 40, 42 (S.D. Tex. 1994), aff'd sub nom. In re Snyder , 52 F.3d 1067 (5th Cir. 1995) ). In Snyder , the District Court held that the Bankruptcy Court did not abuse its discretion in denying production under a Rule 2004 request where the appellant's primary motivation was to use the requested materials in a state court action against the examinee. The Enron case also cites to In re Coffee Cupboard, Inc. , 128 B.R. 509, 515–17 (Bankr. E.D.N.Y. 1991) (recognizing the principle that " Rule 2004 examinations should not be used to obtain information for use in an unrelated case or proceedings pending before another tribunal"); see also Collins v. Polk , 115 F.R.D. 326, 328–29 (M.D. La. 1987).

More recently, a Rule 2004 application was denied in a case similar to our own. See In re Bibhu LLC , 2019 WL 171550 (Bankr. S.D.N.Y. Jan. 10, 2019). In that case, the creditor who filed the application had a lawsuit pending against two non-debtors, including a claim for fraud. The Court concluded that the creditor was seeking to use the Rule 2004 discovery for the improper purpose of obtaining discovery for the pending state court civil litigation. See id. at *2; see also In re Keyworth , 47 B.R. 966 (D. Colo. 1985).

Like Bibhu and similar cases, the Movant here filed this Rule 2004 request for the purpose of obtaining discovery for use in the Delaware derivative action. The improper purpose of the Rule 2004 application here is confirmed by the fact that the Movant was not actually a creditor in this bankruptcy when these cases were filed. The Movant only became a creditor by purchasing a claim of $ 650 against the Debtor on March 13th of this year, about a week before the filing of this Motion.

This fact makes the Movant here markedly different than the Data Breach Plaintiffs. The Data Breach Plaintiffs asserted claims in a multi-district litigation against the Debtors even before these Chapter 7 cases were filed. They filed their Rule 2004 motion to further their interests as creditors of the Debtor.

The Movant complains that the Trustee previously had agreed in out-of-court conversation to provide the Movant with the requested documents. But those conversations took place outside of Court, no doubt in an effort to resolve an issue, and during a time when the Movant did not appear to even have been a creditor of the estate. It would be wholly inappropriate for the Court to penalize the Trustee for attempting to settle a potential dispute and minimize the need for additional litigation. See Fed. R. Evid. 408.

The distinction between the Movant and the Data Breach Plaintiffs is further confirmed by the...