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In re Recoton Corp.

United States Bankruptcy Court for the Southern District of New York

April 13, 2004, Decided

Chapter 11, Case No. 03-12180 (ALG) (Jointly Administered)





I. Factual Background

Before the Court is a motion brought by the Official Committee of Unsecured Creditors in the above-captioned bankruptcy proceedings, dated March 1, 2004, pursuant to which the Committee seeks an order under §§ 1103 and 1109(b) of the Bankruptcy Code and Rules 2004 and 9016 of the Federal Rules of Bankruptcy Procedure authorizing the issuance of subpoenas for the production of documents and the oral examination of witnesses. The Motion is objected to by four [**2]  former directors and officers of the Debtors, Robert L. Borchardt, Stuart Mont, Arnold Kezsbom and Tracy Clark (collectively, the "Former D&Os"), from whom discovery is sought. 1

The facts relevant to the Motion are largely undisputed. The Debtors filed voluntary petitions for relief under the Bankruptcy  [*755]  Code on April 8, 2003; the Committee was appointed on April 21, 2003. In or about June and July 2003, six complaints were filed in the United States District Court for the Middle District of Florida against certain of the Debtors' present and/or former officers and directors alleging violations, inter alia, of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934. These actions were consolidated in September 2003; it appears that the Florida plaintiffs have recently been given leave to file a consolidated class action complaint.

Based upon interviews with former employees of the Debtors and the allegations contained in the original class action complaints,  [**3]  the Committee seeks discovery from fifteen individuals in order to determine whether potential claims exist against them or others in favor of the Debtors and their estates. The Former D&Os object to the Motion on four grounds, asserting that the Rule 2004 discovery: (i) is an impermissible attempt to obtain discovery relating to upcoming litigation certain to be brought by the Committee; (ii) is "vast, immediate, overbroad and hugely burdensome;" (iii) would deny them as defendants in the Florida securities class actions the protections of the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998 by allowing the Committee to obtain discovery that should be stayed pending a decision on a motion to dismiss in the class action cases; and (iv) would circumvent the protections provided to Recoton and its board of directors under New York's demand rule in stockholder derivative actions.

II. Discussion

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307 B.R. 751 *; 2004 Bankr. LEXIS 500 **

In re: RECOTON CORPORATION, et al., Debtors.

Subsequent History: Motion denied by In re Recoton Corp., 2004 U.S. Dist. LEXIS 12452 (S.D.N.Y., July 1, 2004)

Disposition:  [**1]  Objections to requested Rule 2004 discovery overruled. Committee's requested discovery under Rule 2004 granted.


discovery, class action, debtor in possession, cases, discovery request, investigate, shareholder, bankruptcy proceedings, protective order, potential claim, circumvent, shares

Bankruptcy Law, Bankruptcy, Case Administration, Examinations of Debtors, Civil Procedure, Discovery & Disclosure, General Overview, Committees, Reorganizations, Entry of Judgments, Stays of Judgments, Automatic Stays, Securities Law, Civil Liability Considerations, Securities Litigation Reform & Standards, Stays of Discovery, Federal Preemption, Blue Sky Laws, Offers & Sales, Class Actions, Derivative Actions, Subject Matter Jurisdiction, Federal Questions, Postoffering & Secondary Distributions, Securities Exchange Act of 1934 Actions, Heightened Pleading Requirements, Reorganizations, Debtors in Possession, Duties, Committees