The opinion of the court was delivered by: ARTHUR SPATT, District Judge
MEMORANDUM OF DECISION AND ORDER
This appeal arises from a July 8, 2004 Order by United States
Bankruptcy Judge Melanie L. Cyganowski that denied a motion by
Beneficial Homeowner Service Corporation ("Beneficial" or the
"Appellant")) to vacate a Judgment that was previously entered
against it based on its failure to comply with a discovery
subpoena and to compel Marc A. Pergament, the Chapter 7 Trustee
("Pergament" or the "Trustee" or the "Appellee") of Philip C.
Corso and Debra J. Corso (the "Debtor"), to pay Beneficial's
reasonable expenses to comply with the Subpoena. The July 8, 2004
Order also granted a cross motion by Pergament granting him leave to serve an amended subpoena on Beneficial which limited
the scope of the requested documents.
On January 14, 2003, the Debtor filed a voluntary petition for
relief under Chapter 7 of the Bankruptcy Code and Pergament was
appointed the Chapter 7 Trustee. During the first meeting of the
creditors held pursuant to Section 341 of the Bankruptcy Code,
Pergament discovered that the Debtor had participated in a
refinancing transaction with Beneficial regarding the Debtor's
residence located at 30 Patchogue Street, Patchogue, New York
(the "Transaction"). Based on the information provided by the
Debtor, Pergament learned that as part of the Transaction,
despite there being no funds paid to the Debtor, the Debtor paid
origination fees and discounts of 7.25% for the refinancing.
Upon his determination that additional information was
necessary to ascertain whether Beneficial engaged in "predatory
lending," the Trustee subsequently applied to the Bankruptcy
Court pursuant to Rule 2004 of the Federal Rules of Bankruptcy
Procedure ("FRBP"), on notice to Beneficial, for authorization to
compel Beneficial to produce certain documents and to conduct an
oral examination of a representative of Beneficial. In support of
this application, the Trustee indicated that he sought the
following the documents, among others:
1. All loan applications submitted to [Beneficial] or any related entity with respect to real properties in
Nassau County or Suffolk County from January 1, 2002
through the present.
2. All loan files with respect to those loans
identified in response to request Number 1.
3. All agreements between [Beneficial] and Bankers
Life with respect to real properties in Nassau County
or Suffolk County from January 1, 2002 through the
4. All agreements or like documents between
[Beneficial] and IRE Processing from January 1, 2002
through the present.
5. All correspondence between [Beneficial] and
Phillip C. Corso and/or Debra J. Corso from January
1, 2000 through the present.
6. All documents evidencing loans given by
[Beneficial] to Phillip C. Corso and/or Debra J.
Corso from January 1, 1999 through the present.
Significantly, despite being on notice, Beneficial did not
object to this application. On April 28, 2003, the Bankruptcy
Court issued an order authorizing a FRBP 2004 examination of
Beneficial (the "April 28, 2003 Order"). This order authorized
the service of the Rule 2004 subpoena upon Beneficial by
certified mail, and also waived the witness fee. In connection
with this order, on April 29, 2003, the Trustee served a subpoena
on Beneficial by certified mail and regular mail. The subpoena
required Beneficial to produce certain documents on May 15, 2003
and appear for an oral examination on May 27, 2003 at Pergament's
office. Beneficial failed to respond to the subpoena and did not file any objections
or requests for protective orders with the Bankruptcy Court.
On May 19, 2003, the Trustee wrote to Beneficial via certified
mail, enclosing another copy of the subpoena, and the April 28,
2003 Order. This letter also warned Beneficial that "[i]n the
event that the requested documents are not delivered to me by May
22, 2003, I will pursue a contempt citation from the Bankruptcy
Court due to your willful refusal to comply with the Order of the
Bankruptcy Court." Beneficial did not respond to the Trustee's
letter and no representative of Beneficial appeared on May 27,
On May 30, 2003, on notice to Beneficial, the Trustee filed an
application with the Bankruptcy Court requesting that the
Bankruptcy Court issue an Order holding Beneficial in contempt
for failing to comply with the subpoena. The Trustee also
requested that the Bankruptcy Court award sanctions including
attorney's fees and costs in the sum of $1,000.00. Beneficial did
not respond to this application.
On June 18, 2003, the Bankruptcy Court entered an order holding
Beneficial in contempt for its "willful refusal to comply with
the subpoena" (the "Contempt Order"). In addition, the Contempt
Order held that Beneficial "shall comply with the subpoena and
produce the requested documents on or before June 27, 2003, and
appear for a Rule 2004 Examination on or before July 15,
2003. . . ." The Contempt Order further provided for the
imposition of sanctions payable to the Trustee in the amount of $250.00 per day for each day of non-compliance with the
Subpoena after June 27, 2003, in addition to $1,000.00 for
attorney's fees and costs. Beneficial did not appeal from the
On June 20, 2003, Pergament wrote to the Division General
Manager of Beneficial via certified and regular mail, and
provided him with a copy of the Contempt Order and an additional
copy of the Subpoena. Thereafter, on June 30, 2003, the Trustee
received a letter from Ofelia Shah of Beneficial containing only
documents relating to the Debtor.
On July 8, 2003, the Trustee wrote to Beneficial again advising
it of the requirements set forth in the Contempt Order and
requested full compliance with that order. In response, a
representative of Household Finance Corporation ("HFC"), the
parent company of Beneficial, contacted the Trustee regarding
compliance with the Subpoena. On July 21, 2003, Pergament sent
another copy of the April 28, 2003 Order and the Contempt Order
to HFC. There was no response to this letter.
On August 25, 2003, on notice to Beneficial, the Trustee
requested that the Bankruptcy Court enter a judgment based on the
sanctions previously granted at the rate of $250.00 per day from
June 27, 2003 through August 25, 2003, in addition to attorney's
fees in the amount of $1,000.00 that was previously awarded. In
support of this application, the Trustee submitted an affirmation
detailing Beneficial's non-compliance with the subpoena and the
Contempt Order. On August 28, 2003, Doron Zanani, Esq., counsel for Beneficial,
informed the Trustee that the subpoena required it to produce
more than 2,500,000 pages at an estimated cost of $1.5 million.
The Trustee indicated that he was willing to limit the scope of
the subpoena to twenty-five random loan files, the examination of
a representative from Beneficial, and a payment of $16,000 as
required by the Judgment. On that same day, Mr. Zanani confirmed
the substance of this conversation via facsimile. However,
Beneficial did not consent to this request; did not file any
papers with the Court stating that compliance with this subpoena
would cause an undue burden; and failed to oppose the Trustee's
request to enter the judgment.
On September 4, 2003, the Bankruptcy Court entered a judgment
in the sum of $16,000.00 (the "Judgment") against Beneficial.
There was no appeal from this Judgment. On or about December 8,
2003, Beneficial purportedly responded to items 3, 4, and 5 of
the subpoena. In the accompanying letter, Beneficial advised the
Trustee that the cost of compliance would be approximately $1.5
million and that Beneficial will only produce the requested
documents once arrangement has been made for costs and expenses.
However, as indicated by the Trustee's January 8, 2004 letter,
the Trustee was dissatisfied with Beneficial's document
production. The Trustee further emphasized that Beneficial failed
to comply with the subpoena and the Contempt Order.
In a letter dated January 14, 2004, Beneficial indicated that
it would not produce any documents in response to the Subpoena until the
Trustee remitted the $2.8 million expense that Beneficial claimed
it would incur to produce the documents. By letter dated March 9,
2004, Beneficial repeated its position that payment of this sum
was a precondition to the production of the requested documents.
On April 6, 2004, Beneficial filed a motion with the Bankruptcy
Court seeking various relief including: (1) to compel the Trustee
to pay to it $2.8 million to cover the cost of document
production; (2) to deem the Judgment satisfied when Beneficial's
expenses exceeded all sums due on the Judgment; and (3) to stay
execution on the Judgment. In the alternative, Beneficial
requested that the Judgment be vacated as a sanction against the
Trustee because he "issued a subpoena that imposed an undue
burden or expense on Beneficial and he refused to pay
Beneficial's costs and expenses for complying with the Subpoena
in violation of FRCP 45(c)(1)." App. Brf. in Sup. 7. The Trustee
cross-moved to compel Beneficial to satisfy the Judgment and to
produce twenty-five (25) random files as requested during the
August 28, 2003 conversation.
On June 23, 2004, the Bankruptcy Court held a hearing on the
motions. During oral argument, Beneficial argued, that Pergament
"as an attorney who has to comply with the Federal Rules, has no
right to issue a subpoena which of this magnitude, to force us to
comply, get a judgment and then say he doesn't want it because he
only wants 25 files out of the 80,000 files."
By Order dated July 8, 2004, the Bankruptcy Court ordered that: (1) [Beneficial's] motion is denied in its entirety;
(2) the cross-motion of the Trustee is granted in its
entirety; (3) that the Trustee shall serve an amended
subpoena upon Beneficial for the turnover of 25
random loan files subject to the provisions of a
confidentiality order and these documents shall be
delivered to the Trustee on or before July 23, 2004,
and that the amended subpoena shall be deemed an
amendment of the April 29, 2003 subpoena; (4) that
Beneficial shall produce a witness on or before
August 31, 2004, in compliance with the Rule 2004
amended subpoena to be served by the Trustee; 5) that
Beneficial shall also produce a witness, if required
concerning the selection of the 25 random loan files;
and (6) that Beneficial may submit an application for
reimbursement of costs with respect to its production
of the documents in the 25 random loan files.
On August 23, 2004, Beneficial appealed from this Order, and
presents the following issues on appeal:
1. Whether the Bankruptcy Court erred when it denied
Beneficial's motion to vacate the Judgment as a sanction for
Pergament's issuance of the subpoena that allegedly imposed on
Beneficial an undue burden or expense and his refusal to pay any