Ahmed A. Ramadan

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
AHMED A. RAMADAN
DEBTOR
CASE NO.
11-02734-8-SWH
ORDER ALLOWING MOTION FOR RECONSIDERATION
AND STRIKING ORDER OF FEBRUARY 24, 2012
The matter before the Court is a motion filed by Gary Annino and Gennaro Vitale
(“Movants”) for reconsideration of the ex parte order entered on February 24, 2012 directing the
debtor to produce certain documentation to Designer Glass of Louisburg (“Designer Glass”)
under Rule 2004 of the Federal Rules of Bankruptcy Procedure. Pursuant to that order, debtor’s
counsel produced a copy of a confidential settlement agreement between the debtor and the
Movants to Designer Glass’ counsel before the Movants’ motion for reconsideration could be
filed or heard. 	A hearing was held on March 20, 2012, in Raleigh, North Carolina. At the
conclusion of the hearing, the court took the matter under advisement but directed counsel for
Designer Glass to secure and prevent the distribution of all copies of the settlement agreement
until further order. For the reasons that follow, the motion for reconsideration will be allowed.
SO ORDERED.
SIGNED this 12 day of April, 2012.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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BACKGROUND
Debtor Ahmed A. Ramadan owns G&G of Raleigh, LLC (“G&G”), which does business
as Mirage Night Club & Sushi Lounge. On October 20, 2010, Designer Glass initiated an action
against Ramadan and G&G in Wake County Superior Court seeking damages relating to labor
performed and materials delivered to the Mirage Night Club in the amount of approximately
$50,000 (the “state court lawsuit”). Subsequent to that, Ramadan and G&G instituted an action
in Wake County Superior Court against Gennaro Vitale, Gary Annino, and GG Mirage, LLC (a
limited liability company owned by Annino) relating to business and financial issues which had
arisen between those parties (the “GG Mirage lawsuit”). The GG Mirage lawsuit was resolved
with a confidential settlement agreement executed by the debtor, the Movants (Annino and
Vitale), and GG Mirage (the “Settlement Agreement”).
On April 7, 2011, Ramadan filed a chapter 13 case in this court. The case was converted
to a case under chapter 7 on June 1, 2011, and David Warren was appointed chapter 7 trustee.
Designer Glass is listed as an unsecured nonpriority creditor on the debtor’s schedules.
On November 22, 2011, after becoming aware of its existence through conversations
with the debtor and others, Designer Glass moved, in the state court litigation, to compel the
production of the Settlement Agreement. 	The Movants objected to its production based on,
among other things, the confidentiality provision contained in it. However, since the Superior
Court granted a stay of all proceedings in the state court lawsuit pending the conclusion of the
debtor’s bankruptcy case, there has been no ruling on the motion to compel production of the
Settlement Agreement.
On February 21, 2012, Designer Glass filed an ex parte motion in the bankruptcy case
pursuant to Rule 2004 seeking production of the Settlement Agreement from the debtor. The
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motion was not served on the Movants. 	Although the motion discloses that the debtor has no
objection to production, it does not disclose that the other parties to the Settlement Agreement
previously had objected to production of the document in state court or that such objection
remained pending in that court. 	On February 24, 2012, this Court granted Designer Glass’
ex parte Rule 2004 motion in accordance with Local Rule 2004-1 (2011), which sets out the
ex parte procedure and provides for reconsideration of the order, if necessary.
The debtor’s counsel produced the Settlement Agreement to Designer Glass’s counsel via
email on the morning of March 1, 2012.1 Later that same day, after learning of the entry of the
Rule 2004 order, counsel for the Movants contacted counsel for Designer Glass to request that
the attachment to the email delivered by debtor’s counsel (and containing the Settlement
Agreement) not be opened. 	He was then advised that the attachment had in fact already been
opened. The Movants then filed a motion seeking reconsideration of the Rule 2004 order in
which they asked that the ex parte Order be stricken.
DISCUSSION
Bankruptcy Rule 9024 provides that Rule 60 of the Federal Rules of Civil Procedure
applies in bankruptcy cases. That rule permits reconsideration of an order for six listed reasons,
the last of which is for “any reason that justifies relief.” Rule 60(b)(6) F.R.Civ.P. As is set out
below, the court finds that the facts provide sufficient justification for reconsideration of its
February 24, 2012 order allowing Designer Glass’ ex parte Rule 2004 motion.
1 The Settlement Agreement contains a confidentiality provision, which sets out an exception
to confidentiality in that the agreement is to be disclosed to third parties in response to a valid
subpoena or judicial order compelling disclosure.
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Rule 2004 of the Federal Rules of Bankruptcy Procedure provides that the court may
order the examination of any entity relating “only to 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.” Rule 2004(a). The
rule also permits the court to order the production of documents. Rule 2004(b). The scope of a
Rule 2004 examination is broad and is often referred to as a sanctioned “fishing expedition”;
it is in many ways a “pre-litigation device for assessing whether grounds exist to commence an
action,” Szadkowski v. Szadkowski (In re Szadkowski), 198 B.R. 140, 141 (Bankr. D. Md.
1996). A Rule 2004 examination is an inquisitory rather than an accusatory tool, and as such, is
properly conducted during pre-litigation rather than pretrial. In re Symington, 209 B.R. 678, 684
(D. Md. 1997).
Because Rule 2004(a) provides that the court may order the examination of any entity,
its plain meaning grants to bankruptcy courts complete discretion in determining whether a
Rule 2004 examination is appropriate. 	French, 145 B.R. at 992; see also McLaughlin v.
McPhail, 707 F.2d 800, 804 (4th. Cir. 1983) (“Rule 205 [now Rule 2004] commits to the sound
discretion of the bankruptcy court the decision whether to require examination of a party.”).
Under the facts and circumstances of this case, the court’s exercise of its discretion results in its
conclusion that the February 24, 2012 order allowing Designer Glass’s ex parte motion for
production under Rule 2004 was improvidently granted.
One recognized limitation on the broad scope of 	Rule 2004 is the “pending proceeding
rule,” pursuant to which courts may preclude discovery under Rule 2004 based on the “existence
of other pending litigation in which such discovery could be obtained.” 	In re International
Fibercom, Inc., 283 B.R. 290, 292 (Bankr. D. Ariz. 2002); see also, e.g., In re Bennett Funding
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Group, Inc., 203 B.R. 24, 28-29 (Bankr. N.D.N.Y. 1996). The pending proceeding rule is often
invoked once an adversary proceeding or contested matter has been commenced in a bankruptcy
case, especially if the discovery sought through Rule 2004 goes “squarely to issues” involved in
the pending litigation, in which case “application of the formal discovery rules is appropriate.”
In re Job P. Wyatt & Sons’ Co., 2011 WL 5909534 (Bankr. E.D.N.C. 2011). In addition, courts
can invoke the rule “where the party requesting the Rule 2004 examination could benefit their
pending litigation outside of the bankruptcy court against the proposed Rule 2004 examinee.” In
re Enron Corp., 281 B.R. 836, 842 (Bankr. S.D.N.Y. 2002). Some courts, however, find the rule
inapplicable in situations where there is only non-bankruptcy collateral litigation. See, e.g, In re
Mantolesky, 14 B.R. 973, 979 (Bank. D. Mass. 1981) (“[T]he law is clear that pending litigation
by others against the person sought to be examined, and the possible use of 205 [now 2004]
testimony in that collateral litigation, is not sufficient reason for denying examination.”).
The “pending proceeding” prohibition of 2004 examinations, in litigation originating in
different forums, is nevertheless subject to exceptions. “Discovery of evidence related to the
pending proceeding must be accomplished in accord with more restrictive provisions of [the
Federal Rules of Bankruptcy Procedure], while unrelated discovery should not be subject to
those rules simply because there is an adversary proceeding pending.” In re Washington Mut.,
Inc., 408 B.R. 45, 51 (Bankr. D. Del. 2009) (citing Bennett Funding, 203 B.R. at 29 (emphasis in
original)). Therefore, a relevant inquiry, when a party requests a Rule 2004 examination and
there is litigation in another forum is whether the Rule 2004 examination will lead to discovery
of evidence related, or unrelated, to the pending proceeding. Washington Mut., 408 B.R. at 50.
The difficult and relevant question is whether Designer Glass’ primary purpose in the Rule 2004
examination/production is to further the administration of the bankruptcy case or to aid its
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pending state court litigation. In light of the fact that a chapter 7 trustee has been appointed in
this case and has represented that he is in possession of a copy of the Settlement Agreement, the
court is satisfied that the interests of the estate and creditors in general will be protected with
regard to any issues that may arise out of the Settlement Agreement, and it is therefore
unnecessary to protect Designer Glass’ interests in procuring unrelated information.
In this case, in light of the posture of the state court lawsuit, it is appropriate to recognize
and apply the pending proceeding exception to the ordinarily broad scope given to Rule 2004
motions. 	Designer Glass attempted to procure a copy of the Settlement Agreement in the state
court lawsuit, and was met with the vehement objection of the Movants, Annino and Vitale, as
evidenced by the necessity for the filing of a motion to compel. 	The court considers Designer
Glass’s use of Rule 2004 on an ex parte basis, without serving or otherwise notifying the
Movants of its intention to seek production of the Settlement Agreement in the bankruptcy case,
to be an intentional “end run” around its lack of quick success in state court. While the ex parte
nature of the motion may technically be in compliance with the local bankruptcy rules, Designer
Glass must have known that if it had given the Movants notice of its intentions, they would have
sought the opportunity to be heard by this court. In essence, Designer Glass took advantage of
the ex parte aspect of the local rule, which is premised on the ability to have orders entered
under 	that 	practice 	readily 	reconsidered. 	The 	problem 	is 	that 	the 	remedy 	of 	“easy
reconsideration” is useless where, as here, the bell cannot be un-rung. 	Once the Settlement
Agreement was produced and reviewed by Designer Glass’s counsel, reconsidering and striking
the order gives the Movants no real relief.
In sum, Designer Glass may have followed the letter of the law, but its crafty use of the
rule veered sufficiently across the line to run counter to the spirit and purpose of the rule it
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purported to use. 	Designer Glass could, after a hearing in which parties objecting to the
production and attempting to enforce the confidentiality provisions had an opportunity to present
opposing arguments, have sought to convince this court that production of the Settlement
Agreement was warranted. 	Its use of speed and lack of notice to preclude the Movants from
having any meaningful opportunity to object was inappropriate and, therefore, the court will
strike the order of February 24, 2012, and prohibit the production of the Settlement Agreement.
Counsel for Designer Glass is directed to return all copies of the Settlement Agreement
to counsel for the Movants and is prohibited from using the contents of the Settlement
Agreement in any manner until and unless a court of competent jurisdiction orders otherwise.
To that end, the court will entertain a motion for relief from stay to enable the Wake County
Superior Court to resolve the motion to compel pending in the action before it.
SO ORDERED.
END OF DOCUMENT
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