BANKRUPTCY DISCOVERY: PREPARING FOR THE FISHING EXPEDITION
With bankruptcy filings ever-increasing, the chances your company may interact with a bankrupt customer, vendor or transaction counterparty continue to rise. If your company recently completed a significant transaction with a bankrupt company, such as a merger or acquisition, recapitalisation or refinancing, significant dividends, or a substantial paydown of outstanding debts, various constituents in a bankruptcy case will be motivated to scrutinise that deal with hyper-focused attention because the transaction may be the difference in certain creditors (usually unsecured creditors) receiving nothing or something on account of their claims in the bankruptcy case.
Most businesspeople understand that bankruptcy cases involve creditors asserting claims and potentially recovering something over time. But what most businesspeople fail to appreciate is that bankruptcy cases often involve significant litigation, usually brought by a debtor, a court-appointed creditors’ committee, or a post-bankruptcy litigation or liquidating trustee.
Unlike traditional litigation where a plaintiff brings a lawsuit before it can begin the discovery process to uncover facts that could establish a claim, Rule 2004 of the Federal Rules of Bankruptcy Procedure provides parties in interest a very powerful tool to obtain pre-litigation discovery, both document and deposition discovery, that permit a ‘fishing expedition’ to uncover facts that support claims and help them survive a motion to dismiss. Debtors and their creditors use this potent pre-lawsuit weapon to target and gain a tactical advantage on their soon-to-be litigation adversaries.
Oct-Dec 2023 issue
King & Spalding LLP