Option One Mortgage Corporation'S Motion For Reconsideration, Alteration or Amendment of Order Denying Motions To Quash Discovery
Option One Mortgage Corporation'S Motion For Reconsideration, Alteration or Amendment of Order Denying Motions To Quash Discovery
Option One Mortgage Corporation'S Motion For Reconsideration, Alteration or Amendment of Order Denying Motions To Quash Discovery
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In re: : Chapter 13
:
RON WILSON, SR. & : Case No. 07-11862
LaRHONDA WILSON, :
:
Debtors. :
Alteration or Amendment of Order Denying Motions to Quash Discovery, and respectfully states
the following:
I. Preliminary Statement
1. Option One respectfully requests that this Court reconsider, alter or amend its
February 6, 2009 Order denying Option One’s Motion to Quash the Discovery Requests of the
U.S. Trustee (the “UST”). Option One believes that requiring the UST to file a Rule 2004
motion and satisfy the substantive and procedural requirements for a Rule 2004 examination
would not be duplicative of the UST’s service of the Discovery Requests (as defined herein). In
addition, Option One believes that 11 U.S.C. § 105(a) does not provide a basis for the issuance
II. Background
2. On or about September 29, 2007, Ron Wilson, Sr. and LaRhonda Wilson
(“Debtors”) filed a voluntary petition under Chapter 13 of the United States Bankruptcy Code.
The Court entered an order confirming the Debtors’ Chapter 13 Plan on December 21, 2007.
[D.I. 13].
3. On May 9, 2008, the Court issued an Order to Show Cause to explain the amounts
due on the Debtors’ mortgage and ordered Dory Goebel and a representative of Option One to
4. On July 11, 2008, the Court issued an Order jointly sanctioning Dory Goebel and
Option One $5,000.00 for failing to appear at the hearing and jointly sanctioning Dory Goebel
and Option One $5,000.00 for “filing a false affidavit.” [D.I. 46].
5. The July 11, 2008 Order also continued the Order to Show Cause to a hearing on
August 21, 2008 for Dory Goebel and a representative of Option One to appear and explain the
6. On July 24, 2008, $10,000.00 was paid to the Court for the sanctions previously
7. On August 18, 2008, the UST filed an Ex Parte Motion for Order Continuing
August 21, 2008 Evidentiary Hearings in order to conduct discovery concerning “Option’s relief
from stay motion, the Debtors’ opposition thereto, and the activities of Fidelity National
8. On August 21, 2008, a hearing was held on the Order to Show Cause. The Court
continued the Order to Show Cause and ordered the U.S. Trustee to conduct discovery on behalf
of the Court. [D.I. 70, D.I. 71]; 8/21/08 Tr. at 208, l. 24 to 209, l. 2; at 269, l. 4-7.
10. On November 3, 2008, Option One filed its Motion to Quash. [D.I. 80].
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11. On February 6, 2009, this Court entered an Order Denying Motions to Quash
Discovery (“Order”) and the Reasons for Order Denying Motions to Quash Discovery (the
“Reasons”). In re Wilson, Slip Copy, 2009 WL 304672 (Bankr. E.D.La. Feb. 6, 2009).
12. In its Reasons, the Court acknowledged that it had previously “jointly sanctioned
Option One and Dory Goebel $5,000 for failing to appear and $5,000 for filing a false affidavit.”
Reasons that it “continued the hearing on the Orders to Show Cause, noting that the continuation
was to explore the possibility of further sanctions.” Id. at *2 (emphasis added); at *3 (“This
Court specifically reserved the right to award further sanctions and continued the hearing on the
3
Orders to Show Cause to a later date.”). The Court maintained that “[t]o hold otherwise would
encourage a party expecting sanctions to simply ignore an order to show cause and accept
sanctions for missing the hearing in lieu of the sanctionable conduct that precipitated the order to
4
show cause.” Id. at *3 (emphasis added).
14. In its Reasons, the Court then turned to a discussion of whether the UST should
be permitted to conduct discovery pursuant to the Document Requests. The Court found that “a
Motion for Examination under Rule 2004 is the preferable method for the UST to obtain the
2 The Order to Show Cause was a final order. See U.S. Abatement Corp. v. Mobil Exploration &
Producing U.S., Inc. (In re U.S. Abatement Corp.), 39 F.3d 563, 567 (5th Cir. 1994) (a sanction
order is final if “(1) a finding of contempt is issued, and (2) an appropriate sanction is imposed.”).
3 The Court did not generally reserve the right to issue further “sanctions” of any kind. The Court
specifically “reserve[d] the right to award further attorneys’ fees.” See Order to Show Cause at 2.
As Debtors’ counsel has not incurred any such fees, Option One respectfully submits that the
issue of sanctioning Option One has concluded.
4 Option One did not ignore the hearing. This Court denied as untimely Option One’s request to
continue the hearing. In any event, the Court did not sanction Option One solely for failing to
appear “in lieu” of sanctions for the conduct that precipitated the hearing. The Court sanctioned
Option One for failing to appear and for filing a false affidavit.
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information it seeks from the Movants.” Id. at *5. The Court, however, concluded that it did not
“lack … the authority to grant the UST's requests.” Id. at *5. In support of its conclusion, the
Court stated “[t]he purpose of a Rule 2004 request is to allow the parties affected an opportunity
to challenge the need and scope of the proposed discovery. Although the UST did not request
permission to conduct discovery under Rule 2004, the Motions to Quash have allowed the parties
affected to assert these arguments. In addition, multiple hearings and conferences[ ] have been
5
conducted on the subject. To require the UST to file Motions for 2004 Examination at this stage
15. Having concluded that, in the Court’s opinion, Option One had the opportunity to
raise arguments in opposition to the Discovery Requests, the Court “authorize[d] the propounded
16. Option One respectfully requests that this Court reconsider, alter, or amend the
February 6 Order and grant the relief requested in the Motion to Quash.
17. This Court sua sponte issued the Order to Show Cause, which means it did so on
its own motion. See Velchez v. Carnival Corp., 331 F.3d 1207, 1210 (11th Cir. 2003) (“Sua
sponte means ‘[w]ithout prompting or suggestion; on its own motion.’”) (quoting BLACK'S LAW
DICTIONARY 1437 (7th ed. 1999)). Thus, the proceedings on the Order to Show Cause are
between this Court, Option One, Fidelity, and the Boles Law Firm.
5 Option One respectfully submits that there was one hearing (November 11, 2008) and one very,
very brief conference (December 30, 2008) regarding the Discovery Requests.
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proceeding or contested matter with Option One. See Fed.R.Civ.P. 34(a) (“Any party may serve
on any other party . . .”) (emphasis added); Fed.R.Civ.P. 33(a) (“any party may serve on any
19. As this Court has recognized, the UST is not a party to this Court’s proceedings
on the Order to Show Cause. See 8/21/08 Tr. at 10, l. 16 to 11, l. 2; Fulton v. McVay, 318 B.R.
546, 555 (D.Colo. 2004) (“In the case at bar, the Bankruptcy Court did not utilize the procedure
required by § 110(j). It entered an Injunction in the main bankruptcy cases based on sua sponte
See 11/21/08 Tr. at 55, l. 8-11; see also 11/21/08 Tr. at 57, l. 21-24 (“what I was really asking for
is that if the U.S. Trustee’s Office was going to be involved that they formally involve
themselves and then we could take up the issue on a Motion for 2004”).
2. The UST Should Not Be Able to Sidestep The Burden of Proving Its
Entitlement to Take a Rule 2004 Examination.
21. Bankruptcy Rule 2004 authorizes, “[o]n motion of any party in interest,”
a bankruptcy court to order an examination of any entity. See Fed.R.Bankr.P. 2004(a). A party
in interest must establish “good cause” for such an examination. See In re Express One
6 The UST has not filed a motion under Bankruptcy Rule 2018 to intervene in the Order to Show
Cause proceedings. Option One is not aware of any basis (or precedent) upon which an entity
could intervene in Order to Show Cause proceedings and align itself together with a court as joint
adversaries against another party – particularly where the Court would rule on the appropriateness
of discovery (and other) requests served by its co-party. Such a process is entirely unfair.
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Internat’l, 217 B.R. 215, 217 (Bankr. E.D.Tex. 1998) (“‘the one seeking to conduct a 2004
examination has the burden of showing good cause’”) (quoting In re Eagle-Picher Indus., Inc.,
22. The UST did not file a motion as required by Rule 2004, thereby depriving Option
One of its opportunity to contest (a) whether the UST is a “party in interest” under Rule 2004
and (b) whether the UST can establish “cause” for such an examination in light of, inter alia, the
fact that Option One does not originate or service residential mortgage loans. The UST’s serving
23. Although Option One understands that this Court intends to move forward with
proceedings on its Order to Show Cause, the UST should be required to establish “good cause”
24. At a Rule 2004 hearing, Option One would be able to challenge the existence of
“good cause” based on the fact that Option One is no longer in the residential mortgage business.
H&R Block Inc. (“HRB”) is the owner of Option One. Effective as of April 30, 2008, HRB sold
Option One’s mortgage loan servicing business to American Home Mortgage Servicing, Inc.
(“AHMS”) an affiliate of WL Ross & Co. LLC.7 As of May 1, 2008, Option One no longer
services any mortgages. Option One does not own any mortgages.
25. This Court indicated that it was interested in the process, the integrity of the
system, the accuracy of the data submitted to this Court, and indicated that it might “require
7 The sale agreement between HRB, Option One, and AHMS required Option One to change its
name. Option One is now known as “Sand Canyon Corporation.”
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certain actions from your client in order to protect the integrity of the system.” See 11/21/08 Tr.
at 52, l. 12-13. Option One has already been sanctioned for filing a false affidavit, has paid those
sanctions, and is no longer involved in the servicing business. There can be no “good cause” to
26. Moreover, absent parameters for any Rule 2004 examination, Option One will be
forced to respond to Discovery Requests untethered to any proceeding between the UST and
Option One. As Discovery Requests must be “reasonably calculated to lead to the discovery
admissible evidence,” see Fed.R.Civ.26(b)(1), there has to be some litigation between the UST
27. If the UST can serve Discovery Requests, then one must also determine whether
initial disclosures and/or a discovery conference are required. See Fed.R.Civ.P. 26(a)(1) and (c).
28. In addition, the UST’s failure to file a motion for a Rule 2004 examination
deprived Option One of its right to argue that the UST is not a “party in interest” under Rule
2004(a).
29. Section 1307(c) of the Bankruptcy Code provides that a motion to dismiss may be
filed by a “party in interest or the United States trustee,” thereby evidencing that Congress drew
and maintains a distinction between the UST and a “party in interest.” See 11 U.S.C. § 1307(c).
Rule 2004(a) authorizes only a “party in interest” to conduct a Rule 2004 examination.
30. As the UST is not a party in interest, the UST cannot satisfy its burden of proving
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31. Any argument that the Congress failed to distinguish between a “party in interest”
and the “United States trustee” is belied by the Bankruptcy Abuse and Consumer Protection Act
(“BAPCPA”). Prior to the BAPCPA, Section 1112(b) provided that a “party in interest or the
United States trustee” could file a motion to dismiss. See 11 U.S.C. § 1112(b) (emphasis added).
32. As part of BAPCPA, the language “or the U.S. Trustee” was eliminated from
Section 1112(b). Congress, however, did not eliminate the language “or the U.S. Trustee” in
Section 1307(c). The BAPCPA amendment unequivocally establishes that Congress drew a
distinction between a “party in interest” and the “United States trustee” when the Bankruptcy
Code was enacted in 1978 and continues to draw that distinction in 2005.
33. As the Supreme Court has instructed, “[t]o avoid ‘deny[ing] effect to a part of a
statute,’” we accord “‘significance and effect ... to every word.’” Rake v. Wade, 508 U.S. 464,
471 (1993) (quoting Ex parte Public Nat. Bank of New York, 278 U.S. 101, 104 (1928)). The
only way to give effect to every word in the phrase “party in interest or the United States trustee”
in Section 1307(c) of the Bankruptcy Code is to conclude that the UST is not a party in interest.
34. Any interpretation of the phrase “party in interest” that includes the United States
trustee is indefensible and would render the one-half of the phrase “party in interest or the United
35. The UST did not file a Rule 2004 motion, so it was not required to establish that it
was a “party in interest.” Nor did Option One have the opportunity to raise this issue.
Nevertheless, this Court relied upon inapposite case law involving Rule 2004 to support its
conclusion that that UST may serve Discovery Requests under Federal Rule of Civil Procedure
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36. In discussing the case law interpreting Rule 2004, the Court stated that the “most
comprehensive discussion of the issue can be found in the opinion In re Countrywide Home
Loans, Inc.,” in which the court determined that the UST had standing to seek and obtain a 2004
examination. Id. at *4 (discussing In re Countrywide Home Loans, Inc., 387 B.R. 467 (2008)).
37. In Countrywide, the bankruptcy court actually raised the issue sua sponte of
whether the UST was a “party in interest” and described it as a “close question.” Id. at 473 and
n.4. The Countrywide court, however, did not address the references in Section 1112 or 1307 to
the phrase “party in interest or the United States Trustee” or the effect of the BAPCPA
amendments. Had Countrywide presented the bankruptcy court with such information, the court
may very well have reached a different conclusion on what it already considered a close
8
question.
38. The UST’s failure to file a Rule 2004 examination also deprived Option One of
the procedural protections afforded by Federal Rule of Civil Procedure 45. In 2002, Bankruptcy
Rule 2004(c) was amended to provide for the production of documents to be compelled “as
provided in Rule 9016.” See Fed.R.Bankr.P. 2004(c). Bankruptcy Rule 9016 incorporates
Federal Rule of Civil Procedure 45, which governs the issuance of a subpoena. Thus, if the UST
8 Concluding that the UST is not a party in interest does not affect the UST’s right to appear, be
heard and raise issues under Section 307. See 11 U.S.C. § 307. The fact that the UST cannot
conduct a Rule 2004 examination does not preclude the UST from appearing, being heard, and
raising issues in court. In chapter 11, parties in interest, including creditors, have a similar right
to appear, be heard and raise issues. See 11 U.S.C. § 1109(a). This clearly does not give
creditors the right to take discovery in matters to which they are not a party just because they
have the right appear in court, raise issues and be heard. If Section 307 enabled the UST to take
discovery, the Countrywide court would not have been required to address whether the UST is a
“party in interest” under Rule 2004(a).
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had proceeded under Rule 2004, the UST would have been required to serve a subpoena. See In
re Aston-Nevada Ltd. P’ship, 2006 Bankr. LEXIS 4111, at *48 n.36 (Bankr. D.Nev. Jan. 25,
2006) (Rule 2004(c) was amended in 2002 “to require those who wish to compel the production
of documents to issue or obtain a subpoena for such documents in accordance with Bankruptcy
Rule 9016 (which incorporates Rule 45 of the Federal Rules of Civil Procedures).”).
39. Instead of requiring the UST to file a Rule 2004 motion, this Court concluded
that its general equitable powers under Section 105(a) of the Bankruptcy Code provided a basis
to dispense with “as duplicative” the requirement that the UST file a motion seeking a Rule 2004
examination and serve a subpoena as required by Rule 9016. Respectfully, Option One believes
40. By simply serving the Discovery Requests, the UST sought to sidestep its burden
of demonstrating that it was a “party in interest,” its burden of establishing “cause” for a Rule
2004 examination, and its obligation to serve a subpoena as required by Rules 2004(c) and 9014.
None of those requirements are imposed on a party that simply serves discovery requests.
41. The UST also recognizes that the procedures for discovery available to parties are
not the same as those provided under Rule 2004. For example, as the UST notes “one
advantage” of discovery available to parties is that a party “get[s] to hear the party state answers
before [it] starts taking depositions.” See 11/21/08 Tr. at 92, l. 5-6.
42. Thus, there is nothing duplicative about prohibiting the UST from taking
discovery available only to parties and putting the UST to its burden of proving that it is entitled
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43. As the November 11 hearing, this Court repeatedly expressed its concern about
the “process” and the “integrity of the system.” See, e.g., 11/21/08 Tr. at 21, l. 3-4; at 22, l. 16;
at 41, l. 15-16; at 46, l. 20; at 52, l. 12-13 and 19-20; at 73, l. 3. Option One also expressed its
concern about the process and the integrity of the system. See, e.g., 11/21/08 Tr. at 44, l. 22 to
54, l. 12. As explained on the record at the November 11 hearing, Option One is concerned
about the fairness of the process where, among other things, its prior counsel clearly held an
adverse interest to Option One in hearings before this Court and disserved Option One’s
9
interests, where Option One was sanctioned for filing a false affidavit without prior notice, and
where proceedings have continued on a sua sponte Order to Show Cause with the UST
participating as if it is were a party aligned with this Court (the movant) against Option One, and
where the UST has served discovery to avoid satisfying the requirements of Rule 2004.
44. Participants in the bankruptcy process, like Option One, are also entitled to a
system that has integrity. In fact, it is critical that the parties who are subject to an Order to
Show Cause participate in a process that does not allow circumvention of the rules to the
9 Among other things, Option One’s prior counsel told this Court that he was prepared to
tell Option to “take it or leave it,” (6/26/08 Tr. at 22, l. 10-14) and that he was “very
sorry” that the Court had to call in Option One regarding its accounting practices (6/26/08
Tr. at 6, 18-21) even though he was holding $1,800 in checks that he did not mention in
the affidavit that he prepared (6/26/08 Tr. at 38, l. 2-9). He failed to put up any contest
to the $10,000 in sanctions levied against Option One although he passionately opposed
the $1,000 in sanctions imposed upon him. Worse yet, he asked Arthur Simmons of
Option One a single question at the August 21 hearing, and did not seek to elicit any
testimony regarding the fact that he (prior counsel) instructed Mr. Simmons not to apply
the payments received by the Debtors. That testimony was elicited upon questioning by
other counsel. See 8/21/08 Tr. at 119, l. 19 to 120; l. 4; at 136, l. 22 to 137, l. 10. This
Court even found some of prior counsel’s comments “disconcerting.” See 11/21/08 Tr. at
48, l. 1-5.
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prejudice of their substantive and procedural rights. Any system with integrity should require
the UST to proceed in accordance with, not in desecration of, the rules.
45. Section 105(a) “does not authorize the bankruptcy courts to create substantive
rights that are otherwise unavailable under applicable law, or constitute a roving commission to
do equity.” In re Sadkin, 36 F.3d 473, 478 (5th Cir. 1994); In re Oxford Mgmt., Inc., 4 F.3d
46. Moreover, as the Fifth Circuit has held on more than one occasion, a bankruptcy
court cannot utilize its powers under Section 105 to dispense with or otherwise alter the
requirements of the Federal Rules of Bankruptcy Procedures. In Sadkin, a party missed the 30-
day deadline for objecting to the dischargeability of a debt. See Sadkin, 36 F.3d at 478. The
bankruptcy and district courts refused to extend relief to such party under Section 105(a) and
enforced Rule 4003 as written. See id. The Fifth Circuit declared that “‘[e]nforcing the
Bankruptcy Rules according to their terms cannot be an abuse of discretion.’” See id. at n.7
47. Similarly, in In re Smith, 21 F.3d 660 (5th Cir. 1994), the Fifth Circuit held that
“[b]ankruptcy courts cannot use their equitable powers created by Section 105(a) to expand the
requirements of Rules 3003(c)(3) and 9006(b)(1). Thus, the district court erred in justifying the
48. Other Courts of Appeal have similarly held that Section 105(a) does not provide a
basis to rewrite or ignore the requirements of the Bankruptcy Rules. See, e.g., In re Scrivener,
535 F.3d 1258, 1265 (10th Cir. 2008) (“Section 105(a) does not empower courts to create
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49. Indeed, one court has specifically held that Section 105(a) does not provide a
basis to avoid the requirements of Rule 2004(a) so that a trustee can perform his duties. In re
Adams, 2008 WL 3876140, at *3 (Bankr. N.D.Ohio Aug. 15, 2008) (the trustee “argues that the
court may properly exercise its equitable power under § 105(a) and grant him the relief requested
in this proceeding since it will permit him to carry out the Chapter 7 trustee duties set forth in
11 U.S.C. § 704(a), which include investigating the financial affairs of the debtor. However,
granting Plaintiff the relief requested in this adversary proceeding is not necessary or appropriate
where Rule 2004 specifically provides the procedural mechanism for obtaining the discovery that
Plaintiff seeks.).
50. In this case, the Court’s ruling not only rewrites the substantive and procedural
requirements for a Rule 2004 examination, but it also rewrites Rules 7033 and 7034 by making
Section 105(a), that power does not provide a basis to ignore, rewrite, or otherwise eliminate the
requirements of several bankruptcy rules (and the related rules of civil procedure).
51. For the foregoing reasons, Option One respectfully submits that this Court erred
in dispensing with the requirements of Rule 2004 as “duplicative” (especially when the UST may
WHEREFORE, Option One respectfully requests that this Court (i) enter an Order
reconsidering, altering, or amending its February 6, 2009 Order and precluding the UST from
taking discovery through Discovery Requests and (ii) grant to Option One such further relief as
is appropriate.
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Respectfully submitted,
and
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CERTIFICATE OF SERVICE
I certify that on February 17, 2009, a true and correct copy of this Motion for
served on the parties below, and notice of this document will be served via ECF notice to parties
Via Email
Elisabeth D. Harrington
Harrington & Myers
2901 North Causeway Blvd.
Suite 303
Metairie, LA 70002
Email: swamplaw@bellsouth.net
Via Email
Jacob S. Edwards
The Boles Law Firm, APC
1818 Avenue of America
Monroe, LA 71201
Email: jacob.edwards@boleslawfirm.com
Via Email
Carolyn S. Cole
400 Poydras Street
Suite 2110
New Orleans, LA 70130
Email: carolyn.cole@usdoj.gov
Via Email
Mary S. Langston
Office of the U.S. Trustee
400 Poydras Street
Suite 2110
New Orleans, LA 70130
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Via Email
Sean M Haynes
Office of the U.S. Trustee
400 Poydras Street
Suite 2110
New Orleans, LA 70130
Email: sean.m.haynes@usdoj.gov
Via Email
Michael P. Cash, Esq.
Joseph G. Epstein, Esq.
Winstead PC
1100 JPMorgan Chase Tower
600 Travis Street
Houston, Texas 77002
Email: mcash@winstead.com
jepstein@winstead.com
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