129_optiononemotionforreconsideration

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UNITED STATES BANKRUPTCY COURTEASTERN DISTRICT OF LOUISIANA

NEW ORLEANS

In re: : Chapter 13:

RON WILSON, SR. & : Case No. 07-11862LaRHONDA WILSON, ::

Debtors. :

OPTION ONE MORTGAGE CORPORATIONS MOTION FORRECONSIDERATION, ALTERATION OR AMENDMENT OF

ORDER DENYING MOTIONS TO QUASH DISCOVERY

TO THE HONORABLE ELIZABETH W. MAGNER, U.S. BANKRUPTCY JUDGE:

Option One Mortgage Corporation (Option One)1

files this Motion for Reconsideration,

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 Ones 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 USTs 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

of discovery requests that are otherwise unavailable to the UST.

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.

1 Option One is now known as Sand Canyon Corporation.

Case 07-11862 Doc 129 Filed 02/17/09 Entered 02/17/09 16:56:39 Main DocumentPage 1 of 16


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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

appear on June 26, 2008 for a hearing. [D.I. 30].

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

amounts due on the Debtors mortgage. [D.I. 46].

6. On July 24, 2008, $10,000.00 was paid to the Court for the sanctions previously

ordered against Dory Goebel and Option One. [D.I. 53].

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 Options relief

from stay motion, the Debtors opposition thereto, and the activities of Fidelity National

Mortgage Solutions. [D.I. 66].

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.

9. On or about October 1, 2008, the UST served Interrogatories and Document

Requests (the Discovery Requests) on Option One.

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.

See Wilson, 2009 WL 304672, at *2.

13. Although the Order to Show Cause was a final order,2

the Court stated in its

Reasons that it continued the hearing on the Orders to Show Cause, noting that the continuation

was to explore the possibility of furthersanctions. Id. at *2 (emphasis added); at *3 (This

Court specifically reserved the right to award further sanctions and continued the hearing on the

Orders to Show Cause to a later date.).3

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 ofthe sanctionable conduct that precipitated the order to

show cause. Id. at *3 (emphasis added).4

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 sanctionorder is final if (1) a finding of contempt is issued, and (2) an appropriate sanction is imposed.).

3The Court did not generally reserve the right to issue further sanctions of any kind. The Courtspecifically 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 theissue of sanctioning Option One has concluded.

4 Option One did not ignore the hearing. This Court denied as untimely Option Ones request tocontinue the hearing. In any event, the Court did not sanction Option One solely for failing toappear in lieu of sanctions for the conduct that precipitated the hearing. The Court sanctionedOption One for failing to appearandfor 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[5] have been

conducted on the subject. To require the UST to file Motions for 2004 Examination at this stage

would be duplicative. Id. at *5.

15. Having concluded that, in the Courts opinion, Option One had the opportunity to

raise arguments in opposition to the Discovery Requests, the Court authorize[d] the propounded

discovery by utilizing its inherent authority under 105(a). Id. at *5.

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.

III. Argument and Authorities

A. Requiring Compliance with Rule 2004 Would Not Be Duplicative.

1. The UST Is Not a Party to These Order to Show Cause Proceedings

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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18. The UST served Discovery Requests as if it were a party to an adversary

proceeding or contested matter with Option One. See Fed.R.Civ.P. 34(a) (Any party may serve

on any otherparty . . .) (emphasis added); Fed.R.Civ.P. 33(a) (any party may serve on any

otherparty . . . ) (emphasis added).

19. As this Court has recognized, the UST is nota party to this Courts 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

Orders to Show Cause without initiation of an adversary proceeding. As a consequence, no

debtor, trustee, creditor, or United States Trustee was a plaintiff.) (emphasis added).6

20. In fact, at the November 11 Hearing, this Court explained as follows:

I stated to the Trustee if Im not mistaken that he needed to file anadversary, or a 2004 request, or some vehicle to formally enter into thisproceeding because the Order to Show Cause was between the two of us.

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. Trustees 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 ShowCause proceedings. Option One is not aware of any basis (or precedent) upon which an entitycould intervene in Order to Show Cause proceedings and align itself together with a court as jointadversaries against another party particularly where the Court would rule on the appropriatenessof discovery (and other) requests served by its co-party. Such a process is entirely unfair.



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Internatl, 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.,

169 B.R. 130, 134 (Bankr. S.D.Ohio 1994)).

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 USTs serving

of Discovery Requests also improperly avoided the requirement of serving a subpoena as

required by Bankruptcy Rule 2004(c).

a. The UST Should Be Required to Prove Good Cause for a

Rule Examination.

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

forits Rule 2004 examination.

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 Ones 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 itsname. Option One is now known as Sand Canyon Corporation.



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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 orthe

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 eliminatedfrom

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 orthe United States trustee

in Section 1307(c) of the Bankruptcy Code is to conclude that the UST is nota 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

States Trustee to be completely meaningless and mere surplusage.

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

33 and 34. See Wilson, 2009 WL 304672, at *4.



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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

question.8

c. The USTs Failure to File a Rule 2004 Motion Deprived

Option One of the Procedural Protection Afforded by

Rule 2004(c).

38. The USTs 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, ifthe UST

8 Concluding that the UST is not a party in interest does not affect the USTs right to appear, be

heard and raise issues under Section 307. See 11 U.S.C. 307. The fact that the UST cannotconduct a Rule 2004 examination does not preclude the UST from appearing, being heard, andraising issues in court. In chapter 11, parties in interest, including creditors, have a similar rightto appear, be heard and raise issues. See 11 U.S.C. 1109(a). This clearly does not givecreditors the right to take discovery in matters to which they are not a party just because theyhave the right appear in court, raise issues and be heard. If Section 307 enabled the UST to takediscovery, the Countrywide court would not have been required to address whether the UST is aparty 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. Pship, 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

that this Court erred as a matter of law in reaching that conclusion.

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

notthe 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

to take a Rule 2004 examination.



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B. Section 105(a) of the Bankruptcy Code Does Not Provide a Basis

for Avoiding the Limitations of Rule 2004.

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 Ones

interests,9

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 Ones prior counsel told this Court that he was prepared totell Option to take it or leave it, (6/26/08 Tr. at 22, l. 10-14) and that he was verysorry that the Court had to call in Option One regarding its accounting practices (6/26/08Tr. at 6, 18-21) even though he was holding $1,800 in checks that he did not mention inthe 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 opposedthe $1,000 in sanctions imposed upon him. Worse yet, he asked Arthur Simmons ofOption One a single question at the August 21 hearing, and did not seek to elicit anytestimony regarding the fact that he (prior counsel) instructed Mr. Simmons not to applythe payments received by the Debtors. That testimony was elicited upon questioning byother counsel. See 8/21/08 Tr. at 119, l. 19 to 120; l. 4; at 136, l. 22 to 137, l. 10. ThisCourt even found some of prior counsels comments disconcerting. See 11/21/08 Tr. at48, 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

1329, 1333 (5th Cir. 1993).

46. Moreover, as the Fifth Circuit has held on more than one occasion, a bankruptcy

court cannotutilize 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

(quoting In re Danielson, 981 F.2d 296, 299 (7th Cir. 1992).

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

extension of time for filing based on Section 105(a). Id. at 666.

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

remedies and rights in derogation of the Bankruptcy Code and Rules.



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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 Courts ruling not only rewrites the substantive and procedural

requirements for a Rule 2004 examination, but it also rewrites Rules 7033 and 7034 by making

discovery available to a non-party. Whatever reservoir of equitable power is conferred by

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

not be able to comply with Rule 2004).

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.

Dated: February 17, 2009



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Respectfully submitted,

By: s/ Susan Fahey DesmondSusan Fahey Desmond, Esquire

Louisiana Bar No. 25380Watkins Ludlam Winter & Stennis, P.A.One Hancock Plaza2510 14th StreetSuite 1125 (39501)P.O. Box 160Gulfport, Mississippi 39502Telephone: 504-214-0112Facsimile: 228-864-0516

and

Kurt F. Gwynne, EsquireAdmitted pro hac viceReed Smith LLP1201 Market StreetSuite 1500Wilmington, Delaware 19801Telephone: 302-778-7550Facsimile: 302-778-7575

Counsel for Option One Mortgage Corporationn/k/a Sand Canyon Corporation



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CERTIFICATE OF SERVICE

I certify that on February 17, 2009, a true and correct copy of this Motion for

Reconsideration, Alteration or Amendment of Order Denying Motions to Quash Discovery was

served on the parties below, and notice of this document will be served via ECF notice to parties

registered or otherwise entitled to receive notice in this case.:

Via Email

Elisabeth D. Harrington

Harrington & Myers2901 North Causeway Blvd.Suite 303Metairie, LA 70002

Email: [email protected]

Via Email

Jacob S. Edwards

The Boles Law Firm, APC1818 Avenue of AmericaMonroe, LA 71201Email: [email protected]

Via Email

Carolyn S. Cole400 Poydras StreetSuite 2110New Orleans, LA 70130Email: [email protected]

Via Email

Mary S. Langston

Office of the U.S. Trustee400 Poydras StreetSuite 2110New Orleans, LA 70130



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Via Email

Sean M Haynes

Office of the U.S. Trustee400 Poydras StreetSuite 2110

New Orleans, LA 70130Email: [email protected]

Via Overnight Mail (FedEx)S.J. Beaulieu, Jr.Chapter 13 Trustee433 Metairie Road, Suite 307Metairie, Louisiana 70005

Via Overnight Mail (FedEx)D. Clay Wirtz, Esq.

Attorney at Law1867 Avenue of America, Suite DMonroe, Louisiana 71201

Via EmailMichael P. Cash, Esq.Joseph G. Epstein, Esq.Winstead PC1100 JPMorgan Chase Tower600 Travis StreetHouston, Texas 77002Email: [email protected]@winstead.com

s/ Susan Fahey Desmond

Susan Fahey Desmond


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