Lehman Brothers Inc.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
……………………………………………………….x
In re:
LEHMAN BROTHERS INC., Case No. 08-01420 (JMP) SIPA
Debtor.
……………………………………………………….x
MEMORANDUM DECISION GRANTING MOTION OF DCP PARTIES FOR
LEAVE TO CONDUCT 2004 DISCOVERY
APPEARANCES:
HENNIGAN, BENNETT & DORMAN LLP
865 South Figueroa Street, Suite 2900
Los Angeles, California 90017
Counsel for the DCP Parties
Bruce Bennett, Esq.
Michael A. Morris, Esq.
A. Brent Truitt, Esq.
Of Counsel
HUGHES HUBBARD & REED LLP
One Battery Park Plaza
New York, New York 10004
Counsel for James W. Giddens,
Trustee for the SIPA Liquidation of Lehman Brothers Inc.
David W. Wiltenburg, Esq.
Of Counsel
JAMES M. PECK
United States Bankruptcy Judge
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In this decision, the Court considers the limited question of whether a list of
names and addresses maintained by Lehman Brothers Inc. properly falls within the scope
of Rule 2004 of the Federal Rules of Bankruptcy Procedure. For the reasons noted
below, the Court holds that this list is discoverable and grants the Motion for Leave to
Conduct Discovery under Rule 2004 of the Federal Rules of Bankruptcy Procedure (the
“Motion”).
The parties seeking Rule 2004 discovery are certain former employees of
Lehman Brothers Inc. and predecessor firms (“LBI”) who were participants under and
who have unspecified claims for compensation and other relief arising with respect to
deferred compensation plans identified as the Lehman Brothers Kuhn Loeb Deferred
Compensation Plan and/or the Executive and Select Employees Plan (together with the
individual agreements that comprise such plans, the “DCPs”).
The DCPs were offered by LBI for the benefit of qualifying LBI employees.
Altogether, the claims for unpaid deferred compensation for parties covered under the
DCPs (“Movants” or the “DCP Parties”) may total as much as $500 million. Movants
are certain DCP Parties who have retained the law firm Hennigan, Bennett & Dorman
LLP to represent them in the LBI case with respect to their interests in the DCPs.
Before seeking relief from the Court, counsel for Movants asked James W.
Giddens, as trustee for LBI (“Giddens” or the “Trustee”) appointed pursuant to the
Securities Investor Protection Act of 1970, as amended (“SIPA”), to furnish a list of
contact information for all of the DCP Parties. Giddens, through his counsel, was
unwilling to comply with this request, prompting counsel for Movants to bring the
Motion. The main thrust of the Trustee’s objection to turning over the names and
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addresses sought in the Motion is that such information is not properly discoverable
under the plain meaning of Rule 2004 and that Movants are trying to use Rule 2004 for
an improper purpose1.
The information itself should be easy enough for the Trustee to locate and
produce, and so burden is not the issue here. Movants simply want to engage in their
own organizational efforts and to reach out to other similarly situated claimants. Their
purpose is to communicate with additional DCP Parties and recruit them to become part
of a jointly represented group of creditors in LBI’s case. The apparent goals are to
obtain information regarding the nature and amount of claims of former employees
having contractual rights to deferred compensation under the DCPs and to make the
represented group a more formidable and effective force in the SIPA liquidation
proceeding.
The effort seems to be based on the self-evident proposition that there is strength
in numbers. If more DCP Parties are able to identify one another, organize, share
information and work together, their collective efforts to pursue claims for deferred
compensation can be expected to be that much more effective. Additionally, the
increased size of the represented group may be a source of greater potential influence
within the SIPA liquidation proceeding. It goes without saying that a larger and better-
financed group should have more leverage and an increased likelihood of achieving
realistic objectives.
1 The alleged inappropriate use of Rule 2004 is the proposed solicitation of additional clients by the law
firm for Movants. The Trustee makes additional arguments to support denial of the Motion including
preservation of the privacy of the other participants in the DCPs and unjustifiably raising the recovery
expectations of members of the class of DCP Parties. The Court considers these to be secondary points that
are not central to the question of whether discovery should be allowed. Names and addresses of former
employees are not confidential, and expectations, whatever they may be, of the DCP Parties are beside the
point. Neither of these arguments is pertinent to the question before the Court.
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Conceivably, the group may also be able to identify sources of recovery from
insurers or parties other than LBI who arguably might be liable for some or all of the
deferred compensation claims or to develop creative legal theories that would be more
difficult, in practical terms, to articulate individually. Movants openly acknowledge that
they want the names of other DCP Parties to form a more robust group of jointly
represented creditors. This raises the question of whether discovery unabashedly sought
in aid of soliciting individuals to join a creditor group fits within the broad categories of
permitted discovery under Rule 2004, particularly in the context of a SIPA liquidation.
Argument was presented on November 20, 2008, and the Court took the matter
under advisement. Upon consideration of the stated purposes for the limited discovery
(i.e. obtaining a copy of what is essentially an address list for use in communicating with
the DCP Parties), the nature of a SIPA liquidation proceeding and the wording of Rule
2004, the Court grants the Motion, concluding that the requested disclosure is authorized
under Rule 2004.
The SIPA liquidation of LBI is by far the largest and most complex case of its
kind, but size and complexity do not alter the fundamental nature of a SIPA liquidation
proceeding. By statute, a SIPA case takes on the character of a bankruptcy case and
proceeds substantially “in accordance with, and as though it were being conducted under
chapters, 1, 3, and 5 and subchapters I and II of chapter 7 of title 11.” 15 U.S.C. § 78fff
(b) (2006). Discovery, to the extent applicable, is also borrowed from bankruptcy
practice. Notably, no language intended to limit discovery is contained in the SIPA
statute. As a consequence, discovery allowable under Rule 2004 is not inconsistent with
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the statutory scheme of SIPA and is incorporated into SIPA liquidation proceedings
pursuant to 15 U.S.C. § 78fff(b).
The SIPA statute is structured to protect customers of registered broker-dealers.
See Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa-lll (2006); In re Adler
Coleman Clearing Corp., 204 B.R. 111 (Bankr. S.D.N.Y. 1997); In re Oberweis Sec.,
Inc., 135 B.R. 842 (Bankr. N.D. Ill. 1991). A person holding a claim that qualifies as a
“customer claim” receives preferential treatment in the distribution of assets from the
estate. Because Movants and the other DCP Parties are not within the class of customers
entitled to such preferential treatment, they face extra challenges as members of the
general unsecured class who do not qualify as “customers” and are entitled to receive
distributions only from the proceeds of whatever assets are in the general estate. See 15
U.S.C. § 78fff-2(c)(1)(B); In re A.R. Baron Co., Inc., 226 B.R. 790, 794-95 (Bankr.
S.D.N.Y. 1998); In re Stalvey & Assocs., Inc., 750 F.2d 464, 468 (5th Cir.1985).
Although the SIPA liquidation of LBI is in its early stages, a great deal has
already been accomplished, most notably the transfer of the bulk of LBI’s customer
accounts to Barclays Capital Inc. in an extraordinary transaction that was approved
about twelve hours after commencement of this case. However, at this juncture, prior to
the preparation of a report by the Trustee concerning his investigation into the facts and
circumstances of the LBI case, it is both premature and presumptuous to speculate as to
any distributions that ultimately may be made to unsecured creditors such as the DCP
Parties who look to the general estate for their recoveries.
In the face of this uncertainty, the DCP Parties are in the process of organizing.
The group represented by Hennigan, Bennett & Dorman purports to speak on behalf of
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a class of former and retired employees of LBI who, collectively, are owed substantial
liabilities. It is unnecessary at this point to consider what theories may be articulated or
tactics may be adopted by the DCP Parties to advance the interests of this class of
creditors, but it is sufficient to note that Movants want the discovery to expand the
coordinated activities of the DCP Parties in this case.
The broad scope of Rule 2004 is well recognized. An examination under the
Rule “may relate 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 . . . .” FED. R. BANKR. P. 2004. The request made for a list of
participants in the DCPs fits within this expansive description of permitted discovery.
Discovery under Rule 2004 should be allowed because Movants seek
information that relates both to liabilities of LBI and to matters which may affect the
administration of the debtor’s estate. Finding out the names and addresses of the
members of the class of claimants is a first step in the direction of determining what is
owed to these individuals and collecting from these individuals copies of potentially
relevant documentation evidencing the liabilities of LBI. Importantly, having the
ability to contact people with the same kinds of claims may be helpful both in proving
the deferred compensation claims and identifying any third parties that potentially may
be liable with the debtor.
From a case administration standpoint, there is also a compelling need for
information about others within the class who are impacted by the SIPA liquidation
because, in contrast with the disclosure regime applicable in a chapter 11 case, the
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Trustee is under no obligation to file the lists, statements and schedules that are required
of a debtor under Federal Rule of Bankruptcy Procedure 1007.
Transparency and better communication are to be encouraged. Disclosure of the
contact list, while not a substitute for a filed and publicly accessible list of creditors,
will enable the DCP Parties to exchange information and communicate freely with each
other and with counsel, thereby providing a means for the jointly represented group to
develop a more thorough understanding of the legal and factual grounds for the deferred
compensation claims.
While it is not known if letters to be sent by counsel to prospective members of
the group will produce any increase in the number of DCP Parties who are willing to
work together in this case, the proposed letters may promote coordinated activity.
Disclosure of the names and addresses of a discrete number of claimants should
improve communications within the class of DCP Parties and additionally should lead
to discovery of facts within the group that may be helpful in presenting claims on behalf
of the entire class. Importantly, the exchange of ideas among a wider sample of
similarly situated persons is a positive development. Members of the constituency of
former LBI executives will be better informed regarding the liabilities owed to each of
them individually and to the group as a whole and, as a result, should be better able to
protect and pursue their rights.
From the Court’s perspective, the fact that counsel for the Movants wants to use
the contact list to notify class members about the actions taken by the group to date and
to solicit interest in joining the group has no bearing on the question of whether Rule
2004 extends to the discovery requested. The Motion is focused on discovery of a
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contact list that quite obviously relates to matters “which may affect the administration”
of the LBI estate. FED. R. BANKR. P. 2004(b). This virtually open-ended “may affect
the administration of the debtor’s estate” standard2 is not conditioned upon or limited by
the motivations of the party seeking discovery.3 FED. R. BANKR. P. 2004(b) (emphasis
added). Subjective intent of counsel is not the issue4. If the discovery fits within the
ambit of the Rule, that should end the inquiry.
Moreover, despite the fact that administration in a SIPA liquidation case does not
call for the organization of committees nor does it specify any procedure for formation
of groups of jointly represented parties, there is nothing that prevents such coordinated
creditor activity nor is such activity inconsistent with the purposes of a SIPA case.
Given the unprecedented scale of this SIPA liquidation, the consensual formation of
groups of creditors with common interests and shared objectives may even be beneficial
and simplify certain aspects of case administration.
The forgoing comment is not intended to encourage the formation of other jointly
represented groups of unsecured creditors, and the Court has no reason to expect that
other unsecured creditors will see a need for such joint representation. Nonetheless, the
Court considers the organizational efforts of the DCP Parties, while not directly
contemplated in the SIPA statute, to be a permissible aspect of case administration that
further justifies authorizing the requested discovery.
2 Here, this very broad standard is being applied narrowly to obtain a tightly defined list of names and
addresses and not for purposes of conducting a proverbial “fishing expedition.”
3 The Court does not know what counsel intends to communicate in the letter to be addressed to the DCP
Parties and makes no determination as to the suitability of its proposed content. The Court expects,
however, that the letter will not be misleading and will not violate applicable ethical rules.
4 The Court is not aware of any case in which the intentions of a party seeking an examination under Rule
2004 have even been considered in deciding whether to grant authority to conduct discovery.
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Counsel for Movants shall settle an Order on the Trustee granting the Motion for
the reasons stated in this decision.
Dated: New York, New York
November 26, 2008
s/ James M. Peck
Honorable James M. Peck
United States Bankruptcy Judge
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