572 B.R. 482
Bankr. S.D.N.Y.2017Background
- SunEdison (SUNE) and non-debtor TerraForm Power, Inc./LLC (TERP) entered a 2014 Purchase and Sale Agreement (PSA) that included up to $510M in contingent "Earnout Project Payments" and an "Acceleration Event" clause making unpaid earnouts immediately due from the "Buyers."
- PSA defined "Buyers" to include SUNE and TerraForm LLC; TerraForm Inc. guaranteed TerraForm LLC’s obligations. Shaw contends TERP is severally liable for a $231M accelerated earnout; TERP contends the PSA is ambiguous and denies liability.
- Shaw sued TERP in New York state court for declaratory relief and breach after SUNE’s chapter 11 filing (an Acceleration Event); the state court motion to dismiss is pending. Shaw also filed proofs of claim in the SUNE bankruptcy.
- TERP and the Debtors (SUNE et al.) filed a joint Rule 2004 motion seeking broad discovery from Shaw about PSA rights, amendments, board communications, drafts and the November 18, 2015 letters—arguing the information is needed to value TERP stock and facilitate plan confirmation and financing.
- Shaw opposed, invoking the "pending proceeding" rule (discovery should be pursued in the litigation forum), and argued the Debtors and TERP could obtain discovery in state court; the bankruptcy court denied the motion.
Issues
| Issue | Plaintiff's Argument (Debtors/TERP) | Defendant's Argument (Shaw) | Held |
|---|---|---|---|
| Whether Rule 2004 may be used to obtain discovery from Shaw while state-court litigation is pending | Rule 2004 is needed to assess TERP stock value, finalize plan disclosures, reassure lenders, and evaluate Shaw’s claims affecting the bankruptcy estate | Pending state-court action makes Rule 2004 improper; discovery should proceed under state-court procedures | Denied — pending proceeding rule bars using Rule 2004 to obtain discovery that should be sought in the pending litigation |
| Whether non-party Debtors may use Rule 2004 to probe merits of third-party litigation against a non-debtor subsidiary to value stock the debtor owns | Debtors (not parties in state action) assert they have cause because the state-court outcome materially affects the value of TERP shares and plan financing | Debtors cannot show the discovery is necessary; they already secured financing, settlements, and plan milestones without the requests | Denied — relevance alone insufficient; debtors failed to show necessity or hardship; Rule 2004 does not extend to merits discovery of third-party litigation merely because outcome may affect asset value |
| Whether the joint nature of the motion (Debtors + TERP) changes analysis | Joint motion presented as supporting Debtors’ reorganization and TERP shareholder decisions | Shaw argued joint posture attempts to circumvent pending-proceeding protections and let TERP obtain discovery it should seek in state court | Denied — joint posture reinforced concern that Rule 2004 would be used to evade state-court discovery protections |
| Whether any limiting principle permits such Rule 2004 discovery (e.g., ownership percentage, control) | Debtors suggested scenarios where controlling ownership might justify 2004 discovery | Court found no clear limiting principle and rejected hypothetical bases as insufficiently grounded here | Denied — court refused to extend Rule 2004 absent firm authority and clear necessity |
Key Cases Cited
- In re Drexel Burnham Lambert Grp., 123 B.R. 702 (Bankr. S.D.N.Y. 1991) (relevance alone insufficient for Rule 2004; court must find "good cause")
- In re Enron Corp., 281 B.R. 836 (Bankr. S.D.N.Y. 2002) (once an adversary or contested matter is pending, discovery should proceed under civil rules, not Rule 2004)
- Bennett Funding Group v. Williams, 203 B.R. 24 (Bankr. N.D.N.Y. 1996) (same: pending proceeding rule limits Rule 2004 use)
- In re Petroforte Brasileiro de Petroleo Ltda., 542 B.R. 899 (Bankr. S.D. Fla. 2015) (Rule 2004 may reach valuation/control issues in limited circumstances, e.g., when debtor controls subsidiary and must decide control/ liquidation)
- In re SunEdison, Inc., 562 B.R. 243 (Bankr. S.D.N.Y. 2017) (Rule 2004 proportionality and court discretion in granting examinations)
- In re Hopewell Int’l Ins. Ltd., 258 B.R. 580 (Bankr. S.D.N.Y. 2001) (Rule 2004 grants significant judicial discretion to authorize examinations)