Ongoing Coverage Dispute Unable to Shield Insurer from Opening its Books under Bankruptcy Court Rule 2004

By Andrew J. Banathy

A Southern District of New York bankruptcy court issued a subpoena for a Rule 2004 examination to Arrowood Indemnity Insurance Company (“Arrowood”) after request was made by a group of unsecured creditors to a bankruptcy estate. In re: The Roman Catholic Diocese of Rockville Centre, New York, Case No. 20-12345 (MG) (S.D.N.Y. September 27, 2023).

The Roman Catholic Diocese of Rockville Centre, New York (the “Diocese”) filed for Chapter 11 bankruptcy on October 1, 2020, but had not yet come to an agreement of terms for its plan of reorganization. The Official Committee of Unsecured Creditors (the “Committee”) emphasized to the bankruptcy court that the adequacy of the Diocese’s cash contribution was pivotal for reaching a consensual plan of reorganization.

The Committee told the bankruptcy court that approximately 358 sexual abuse claims, or roughly 59% of the claims against the Diocese, are covered, at least in part, under policies issued by Arrowood.

The Committee argued that the Rule 2004 examination was needed for it to obtain a complete understanding of Arrowood’s ability to pay under its policies, citing the importance of this information as it relates to the Committee’s assessment of the Diocese’s financial condition.

Arrowood raised numerous objections, including that the request was too broad and that the information sought was premature since Arrowood’s declaratory judgment action was still pending in New York state court.

The bankruptcy court overruled Arrowood’s objections and granted the Committee’s Rule 2004 examination request, reaffirming the broad and unfettered nature of Rule 2004 similar to that of a “fishing expedition”. Moreover, the court noted that it was more inclined to issue a Rule 2004 examination because it was undisputed that Arrowood is currently in a precarious financial condition, leaving uncertainty as to whether the insurer had the financial ability to perform if coverage was found.

The court noted that a Rule 2004 examination is usually not the appropriate means to obtain discovery once an adversary proceeding has been commenced. However, the court further explained that a Rule 2004 examination was essential for negotiating and reaching a consensual plan of reorganization, and therefore did not run afoul to the pending-proceeding rule.

Insurers should be aware of Rule 2004’s broad discovery scope and its potential impact on pending coverage litigation.