Skip J. Di Massa

Jarret Hitchings

The Bankruptcy Code and the Federal Rules of Bankruptcy Procedure provide many avenues through which a creditor can investigate a debtor’s conduct. For example, Rule 2004 authorizes the bankruptcy court to order the examination of any entity, including the debtor, involved in a bankruptcy case. Similarly, a debtor who is a party to an adversary proceeding may be deposed pursuant to Bankruptcy Rule 7030. Additionally, Section 343 of the Bankruptcy Code provides that a “debtor shall appear and submit to examination under oath at the meeting of creditors under Section 341(a)” held at the outset of a bankruptcy case.

This final example—that the debtor appear and submit to examination at the Section 341 meeting—is a routine and fundamental process that affords creditors an opportunity to question the debtor on a range of issues. Indeed, courts have expressly recognized that the Section 341 meeting “is a fishing expedition allowed, even encouraged, by the statutes and the rules so long as the subject of the questioning related to the bankruptcy case,” as in Clippard v. Russell (In re Russell), 392 B.R. 315, 359 (Bankr. E.D. Tenn. 2008). Yet, while Sections 341 and 343 together permit creditors to conduct a broad investigation of a debtor under oath, the ultimate utility of that examination may be of limited effect, because a court may well decline to treat the Section 341 meeting record as reliable testimony.

Recently, in In re Avery, (Bankr. S.D. Miss. Nov. 30, 2018), the U.S. Bankruptcy Court for the Southern District of Mississippi was presented with a motion for summary judgment that relied on sworn testimony given during the debtor’s Section 341 meeting in order to establish that there was no genuine dispute of material fact on the merits of the underlying adversary proceeding.  In ruling on the motion for summary judgment, the bankruptcy court declined to consider the transcript from the debtor’s Section 341 meeting as reliable evidence. Consequently, the court denied the summary judgment motion because the movant had not established the absence of a genuine dispute of material fact.

In Avery, the debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code. Two months after filing his petition, Matthew Avery appeared at his Section 341 meeting. One of Avery’s creditors attended the Section 341 meeting and examined the debtor under oath. Four months later, the creditor filed an adversary complaint to determine the dischargeability of Avery’s debt to the creditor pursuant to Section 523 of the Bankruptcy Code. The creditor alleged that Avery had acted fraudulently in pledging certain investment accounts to the creditor as collateral for a guaranty given to the creditor while, at the same time, liquidating the same investment accounts without the creditor’s knowledge. All of the facts evidencing this alleged scheme were obtained during the Section 341 meeting and were reflected in the meeting transcript. Avery filed an answer denying all of the allegations in the complaint and asserting generic affirmative defenses.

The creditor then filed a motion for summary judgment. In support of its motion, the creditor submitted the Section 341 meeting transcript and various loan and guaranty documents that Avery had signed. Interestingly, Avery did not file a response or objection to the creditor’s motion for summary judgment.

In ruling on the motion, the bankruptcy court noted, as a preliminary matter, that the creditor relied “heavily on the meeting of creditors transcript” to establish an absence of genuine dispute as to any material fact. The bankruptcy court also noted that Avery did not respond to the motion for summary judgment and, therefore, did not object to the use of the meeting transcript as evidence in support of the motion. Nevertheless, the bankruptcy court determined that it could not consider the Section 341 meeting transcript as evidence in support of the motion for summary judgement because the transcript did “not qualify as a ‘deposition’ taken under Rule 7030 that can be used as evidence in an adversary proceeding under Rule 7056(c)(1)(A)[.]”

Federal Rule of Bankruptcy Procedure 7056(c)(1)(A), which incorporates Federal Rule of Civil Procedure 56, requires that that “a party asserting that a fact cannot be … genuinely disputed must support the assertion by citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials.” In turn, Federal Rule of Bankruptcy Procedure 7030, which incorporates Federal Rule of Civil Procedure 30, describes the scope and process of a “deposition by oral examination.” According to the bankruptcy court, the Section 341 meeting did not qualify as a “deposition” under Rule 7030 because it “lacks the safeguards and protections of the discovery rules.” In reaching this conclusion, the bankruptcy court relied on earlier cases which explained, among other things, that “the rules of procedure do not give the debtor a right to discovery from … any interested party for the purpose of preparing a defense for the meeting of creditors because there is nothing to defend. The statutes and rules do not make the meeting of creditors into a mere discovery deposition subject to all the procedural rules governing discovery.” Consequently, because the bankruptcy court determined that the Section 341 meeting was not a true “deposition,” under Rule 7056(c)(1)(A), it could not properly consider the meeting transcript in support of a motion for summary judgment.

Notably, the bankruptcy court stated that it could properly have considered the Section 341 meeting transcript as evidence in connection with the summary judgment motion had both parties consented. However, in this case, the bankruptcy court determined that no such agreement was evident from the record.

The language of Bankruptcy Rule 7056(c)(1)(A) appears to be relatively broad and provides the reader with a nonexclusive sampling of materials that might be relied upon in connection with a motion for summary judgment. In reviewing and deciding such motions, courts universally shy away from materials that lack substance or reliability: “conclusory allegations” or “unsubstantiated assertions” do not pass muster for summary judgment purposes.

Certainly, the sworn testimony elicited during a Section 341 meeting could be deemed both reliable and substantive. Moreover, the party defending a motion for summary judgment would have the opportunity to submit counter affidavits to explain or clarify the testimony elicited at the Section 341 meeting. In fact, in Avery, the debtor did not even file a response to the creditor’s summary judgment motion.

Nevertheless, and as noted above, the bankruptcy court reasoned that Section 341 meetings are held for the purpose of disseminating information and are neither viewed nor intended as adversarial-type proceedings. Given the Bankruptcy Code’s “primary purpose … to give a ‘fresh start’ to the ‘honest but unfortunate debtor,’” the court declined to rely on any testimony from the Section 341 meeting, found that genuine issues of fact remained, and denied the creditor’s motion.

In light of Avery and similar cases, practitioners should appreciate that facts established on the record during a Section 341 meeting may still need to be confirmed through formal written discovery or oral deposition in order to be useful in supporting a motion for summary judgment. Alternatively, before relying solely on a Section 341 meeting transcript, creditors’ attorneys should obtain consent from the debtor and other parties that statements made on the record and under oath during the meeting may be relied upon by all parties in seeking or opposing summary judgment.

Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors’ rights.

Jarret P. Hitchings, an associate with the firm, practices in the area of commercial finance, financial restructuring and business bankruptcy.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.