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IN RE CORSO

August 8, 2005.

In Re: PHILIP C. CORSO AND DEBRA J. CORSO Debtors.


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.

  I. BACKGROUND

  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 present.
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, 2003.

  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 Contempt Order.

  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 of ...


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