Court Opinion

ID: 4680958
Source: CourtListenerOpinion
Date Created: 2021-04-26 14:00:32.723048+00
Date Added: 2024-06-11T08:03:58.407728
License: Public Domain

USCA11 Case: 20-13549   Date Filed: 04/26/2021   Page: 1 of 17

                                                         [DO NOT PUBLISH]

            IN THE UNITED STATES COURT OF APPEALS

                   FOR THE ELEVENTH CIRCUIT
                     ________________________

                            No. 20-13549
                        Non-Argument Calendar
                      ________________________

                 D.C. Docket No. 1:20-cv-00201-KD-N,
                    Bkcy No. 1:17-bk-01568-HAC

In Re: JERRY DEWAYNE GADDY,

                                                                        Debtor.

_____________________________________________________

SE PROPERTY HOLDINGS, LLC,

                                                          Plaintiff-Appellant,

                                versus

GADDY ELECTRIC & PLUMBING, LLC,
SHARON GADDY,
ELIZABETH GADDY RICE,
REMBERT LLC,
SLG PROPERTIES LLC,

                                                        Defendants-Appellees.
         USCA11 Case: 20-13549        Date Filed: 04/26/2021   Page: 2 of 17

                           ________________________

                    Appeal from the United States District Court
                       for the Southern District of Alabama
                           ________________________

                                  (April 26, 2021)

Before MARTIN, BRANCH, and ANDERSON, Circuit Judges.

PER CURIAM:

      SE Property Holdings, LLC (“SEPH”) appeals from the bankruptcy court’s

approval of a compromise in a Chapter 7 bankruptcy proceeding in which it was a

creditor. SEPH had sued the debtor, Jerry Gaddy, in federal district court, alleging

numerous fraudulent transfer and conspiracy claims. When Gaddy petitioned for

bankruptcy, the district court stayed the litigation, the bankruptcy court appointed a

trustee to administer the estate, and the Trustee became a party-in-interest in the

district court litigation. Eventually, the Trustee and Gaddy asked the bankruptcy

court to approve a compromise. When the bankruptcy court rejected this first

compromise, the Trustee and Gaddy proposed a second compromise—this time for

more than double the amount of the first proposed compromise. SEPH objected to

both proposed compromises because they would have foreclosed SEPH’s ability to

pursue its claims in the district court litigation. The bankruptcy court approved the

second compromise because it found that the compromise was fair, reasonable, and

adequate. On appeal, SEPH contends that the bankruptcy court abused its

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discretion by approving the second compromise. Because the second compromise

did not fall below the lowest point in the range of reasonableness, we affirm.

                                  I.      Background

      In 2006, Jerry DeWayne Gaddy (and others) guaranteed two business loans

by Vision Bank to Water’s Edge, LLC to develop a real estate project in Alabama.

The project failed, and Water’s Edge defaulted on the loans. Vision Bank

eventually merged with SEPH and sold the Gaddy loans to SEPH.

      In October 2010, Vision Bank (and later SEPH) sued Water’s Edge and the

loan guarantors in Alabama state court. In December 2014, SEPH obtained a

judgment against Gaddy and the other guarantors for approximately $9 million.

      In 2016, SEPH sued Gaddy, his wife, his daughter, and several family-

owned businesses in federal court, alleging numerous Alabama fraudulent transfer

and conspiracy claims. SEPH alleged that from 2009 to 2014, Gaddy transferred

property to his family and others with knowledge of the potential default of

Water’s Edge. SEPH alleged the following fraudulent transfers:

      • On October 16, 2009, after Vision Bank warned Water’s Edge that it
        would take legal action to enforce any potential default, Gaddy
        transferred two parcels of land to Rembert, LLC (a company that Gaddy
        formed approximately two weeks later) for $100.
      • On November 2, 2009, Gaddy transferred a 46% interest in his
        company—Gaddy Electric & Plumbing, LLC—to his wife. As a result,
        Gaddy’s wife owned a controlling share of 51% in the business.
      • On November 20, 2009, Gaddy transferred three parcels of land to his
        wife.

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       • On October 4, 2010, one week after Vision Bank/SEPH sued Water’s
         Edge and its guarantors, Gaddy transferred a parcel of land to his
         daughter.
       • On April 18, 2012, while the Water’s Edge litigation was pending, Gaddy
         transferred two parcels of land to SLG Properties, LLC (a company that
         Gaddy’s wife formed two months prior) for “good and valuable
         consideration.”
       • On December 15, 2014, days before SEPH obtained the state court
         judgment against Gaddy, Gaddy transferred a 41% interest in his
         company—Gaddy Electric—to his wife.
       • On December 23, 2014, days after SEPH obtained the state court
         judgment, Gaddy transferred approximately $294,000 to Gaddy Electric.
       • On an unknown date, Gaddy transferred his entire interest in Rembert,
         LLC to his daughter.

       The defendants requested a jury trial. The parties then conducted some

discovery in the initial stages of the litigation. SEPH subpoenaed several banks,

received appraisals and valuations for some of the properties at issue, and received

some responses to interrogatories and requests for production. On April 26, 2017,

Gaddy filed for Chapter 7 bankruptcy, which stayed the pending litigation.1 And

after the bankruptcy court appointed Terrie Owens as the Chapter 7 Trustee, the

Trustee became the party-in-interest in the stayed litigation.

       On May 9, 2019, the Trustee and Gaddy filed a joint motion in the

bankruptcy court to approve a compromise, which sought to release the fraudulent

       1
          When a debtor voluntarily petitions for bankruptcy, that petition triggers an automatic
stay that protects a debtor “against actions to enforce, collect, assess or recover claims against
the debtor or against property of the estate.” United States v. White, 466 F.3d 1241, 1244 (11th
Cir. 2006) (citing 11 U.S.C. § 362(a)); In re Feingold, 730 F.3d 1268, 1276 (11th Cir. 2013)
(recognizing that § 362(a) applies in Chapter 7 proceedings).

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           USCA11 Case: 20-13549          Date Filed: 04/26/2021      Page: 5 of 17

transfer claims against the estate in federal district court for $375,000. Union State

Bank (“USB”)—the only other creditor of the bankruptcy estate besides SEPH—

supported the compromise. 2 SEPH, however, opposed the compromise and

offered to pay the Trustee $400,000 to pursue the fraudulent transfer claims on its

behalf. In light of SEPH’s offer, the bankruptcy court denied the joint motion to

compromise. It then ordered the parties to mediate the fraudulent transfer claims,

but the parties ultimately could not reach an agreement.

       On November 15, 2019, the Trustee and Gaddy filed a second joint motion

to approve a new compromise, which would release the fraudulent transfer claims

against the estate for a “premium” of $825,000. USB supported the compromise.

SEPH, however, again objected to the proposed compromise. SEPH argued that it

had a “high probability of success on the merits of the [fraudulent transfer] claims”

in the district court proceeding. SEPH further contended that more discovery was

necessary to evaluate the Trustee’s proposed compromise. Additionally, SEPH

filed a motion to approve its pursuit of the fraudulent transfer claims in the district

court on behalf of the estate. SEPH supported its motion with a declaration from

its vice president that “guarantee[d] a minimum [recovery] of $825,000 to the

Estate.”

       2
         SEPH filed a claim against the estate for approximately $2.5 million; USB filed a claim
for approximately $1.87 million.

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      The bankruptcy court held an eight-hour evidentiary hearing on the second

motion to approve a compromise. The Trustee, Gaddy, and SEPH’s vice president

testified at the hearing. The bankruptcy court later issued an order approving the

compromise. Applying the factors set forth in Wallis v. Justice Oaks II, Ltd. (In re

Justice Oaks II, Ltd.), 898 F.2d 1544 (11th Cir. 1990), the bankruptcy court found

that the compromise was fair and reasonable.

      SEPH appealed the bankruptcy court’s order to the district court. The

district court affirmed the bankruptcy court. SEPH timely appealed to this court.

                               II.   Standard of Review

      When reviewing a decision of the bankruptcy court, we “sit[] as a second

court of review and . . . examine[] independently the factual and legal

determinations of the bankruptcy court and employ[] the same standards of review

as the district court.” In re Daughtrey, 896 F.3d 1255, 1273 (11th Cir. 2018)

(quotation omitted). Thus, we review the bankruptcy court’s legal conclusions de

novo and its factual findings for clear error. In re Cox, 338 F.3d 1238, 1241 (11th

Cir. 2003) (per curiam). “A factual finding is not clearly erroneous unless, after

reviewing all of the evidence, we are left with ‘a definite and firm conviction that a

mistake has been committed.’” In re Daughtrey, 896 F.3d at 1273 (quotation

omitted).

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      We review the bankruptcy court’s approval of a compromise for abuse of

discretion. Id. at 1273. “A bankruptcy court abuses its discretion when it either

misapplies the law or bases its decision on factual findings that are clearly

erroneous.” Id. at 1274.

                                    III.   Discussion

      SEPH argues that the bankruptcy court abused its discretion in approving the

compromise for three reasons. First, SEPH contends that the bankruptcy court

misapplied the Justice Oaks factors. Second, SEPH maintains that the Trustee did

not diligently investigate the case and, thus, the bankruptcy court approved the

compromise without being fully informed of the facts. Third, and relatedly, SEPH

argues that the bankruptcy court should not have approved the compromise without

permitting SEPH to take discovery related to the proposed compromise. SEPH’s

arguments are without merit.

      A.      The bankruptcy court did not abuse its discretion in approving the
              compromise.

      First, we consider the bankruptcy court’s application of the Justice Oaks

factors. The bankruptcy court may approve a compromise “[o]n motion by the

trustee and after notice and a hearing.” Fed. R. Bankr. P. 9019(a). In Justice Oaks,

we explained that a bankruptcy court evaluating a proposed compromise must

consider:

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         USCA11 Case: 20-13549       Date Filed: 04/26/2021    Page: 8 of 17

      (a) The probability of success in the litigation; (b) the difficulties, if
      any, to be encountered in the matter of collection; (c) the complexity
      of the litigation involved, and the expense, inconvenience and delay
      necessarily attending it; (d) the paramount interest of the creditors and
      a proper deference to their reasonable views in the premises.

898 F.2d at 1549 (quotation omitted). Under these factors, the bankruptcy court is

tasked with determining “the fairness, reasonableness[,] and adequacy of a

proposed settlement agreement.” Chira v. Saal (In re Chira), 567 F.3d 1307,

1312–13 (11th Cir. 2009) (quotation omitted). Our review of a bankruptcy court’s

application of the Justice Oaks factors is quite limited. We will reverse only when

the bankruptcy court approved a compromise that fell “below the lowest point in

the range of reasonableness.” Martin v. Pahiakos (In re Martin), 490 F.3d 1272,

1275 (11th Cir. 2007).

      Here, the bankruptcy court carefully considered the Justice Oaks factors.

The bankruptcy court considered the probability of success of each of the

fraudulent transfer claims in detail. The bankruptcy outlined applicable Alabama

law, addressed each individual claim and relevant defenses (like the statute of

limitations), and estimated an amount likely to be recovered in each case. The

bankruptcy court then concluded that the proposed compromise amount of

$825,000 likely exceeded any potential recovery that SEPH could win if it litigated

the fraudulent transfer claims.

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          USCA11 Case: 20-13549       Date Filed: 04/26/2021   Page: 9 of 17

      The bankruptcy court also found that the difficulty for the Trustee in

collecting was “irrelevant or neutral because collection difficulties for the [T]rustee

related to the settlement amount are not at issue.” Nevertheless, the bankruptcy

court did consider the difficulty in collection when it evaluated the probability of

success of the litigation.

      The bankruptcy court carefully considered the complexity of the litigation,

its expense, and the inconvenience and delay associated with litigating the

fraudulent transfer claims. The bankruptcy court considered numerous factors,

including: (1) that the Trustee was an experienced bankruptcy lawyer who had

evaluated “hundreds of fraudulent transfer claims” in her capacity as a Chapter 7

trustee since 2012; (2) that the Trustee examined the record in the district court

case, engaged in informal discovery with the debtors, and hired another

experienced bankruptcy lawyer to assist her evaluation of the case; (3) that

litigating the fraudulent transfer claims would delay closing the estate for several

more years because the litigation would require extensive discovery and fraud

claims are rarely decided at the summary judgment stage (thus necessitating a

trial); and (4) that such litigation would be costly to the estate. The bankruptcy

court concluded that these factors weighed in favor of the compromise.

      And the bankruptcy court considered the paramount interest of the creditors

and gave proper deference to their reasonable views. Although the bankruptcy

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             USCA11 Case: 20-13549           Date Filed: 04/26/2021       Page: 10 of 17

court noted that it owed some deference to the reasonable views of SEPH as the

majority creditor, the bankruptcy court rejected any suggestion that SEPH was

entitled to veto the compromise. Addressing one of SEPH’s objections, the

bankruptcy court explained that the Trustee was not required to include SEPH in

settlement negotiations after the parties participated in court-ordered mediation.

The bankruptcy court also found that SEPH’s guarantee that it would recover at

least $825,000 for the estate was insufficient to void a compromise for the same

amount given that litigation would likely delay the resolution of the estate by

several years. The bankruptcy court was also concerned that SEPH would put its

interests above the estate’s interests and that SEPH’s offer undermined the

Trustee’s ability to object to SEPH’s proof of claim, if warranted.

         SEPH argues that the bankruptcy court clearly erred in its application of the

Justice Oaks factors. SEPH’s arguments are meritless.

         According to SEPH, there was a high probability of success in the litigation

because the property transfers were marked by “multiple badges of fraud,”3 and

         3
             Alabama law recognizes a non-exhaustive list of factors to support a finding of actual
fraud:

         (1) The transfer was to an insider; (2) The debtor retained possession or control of
         the property transferred after the transfer; (3) The transfer was disclosed or
         concealed; (4) Before the transfer was made the debtor had been sued or
         threatened with suit; (5) The transfer was of substantially all the debtor’s assets;
         (6) The debtor absconded; (7) The debtor removed or concealed assets; (8) The
         value of the consideration received by the debtor was reasonably equivalent to the
         value of the asset transferred; (9) The debtor was insolvent or became insolvent
         shortly after the transfer was made; (10) The transfer occurred shortly before or
                                                   10
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statute of limitation defenses would not be available to the defendants because

Alabama law recognizes the discovery rule in fraudulent transfer cases. But as the

bankruptcy court acknowledged, proving actual or constructive fraud under

Alabama law is rarely an open-and-shut case. Further, the bankruptcy court noted

that most of the transfers were recorded at the time the transfers were made, which

means that—even with the benefit of the discovery rule—several of SEPH’s claims

may have been brought too late. The bankruptcy court was not required “to decide

the merits of those claims—only the probability of succeeding on those claims.”

Justice Oaks, 898 F.2d at 1549. And the bankruptcy court cogently explained why

the probability of success factor favored the compromise. The fact that the

bankruptcy court did not share SEPH’s optimism is not clear error.

       Next, SEPH argues that the difficulties of collection factor weighed against

the compromise because collection would have yielded substantial returns for the

estate. SEPH contends that the bankruptcy court clearly erred by relying on

Gaddy’s testimony about the future of his business, deferring to the Trustee’s

judgment about the liquidation value of Gaddy’s properties, and failing to evaluate

the current value of the properties—rather than the value at the time of transfer.

       shortly after a substantial debt was incurred; and (11) The debtor transferred the
       essential assets of the business to a lienor who transferred the assets to an insider
       of the debtor.

Dionne v. Keating (In re XYZ Options, Inc.), 154 F.3d 1262, 1272 (11th Cir. 1998)
(quoting Ala. Code § 8-9A-4(b)).
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We disagree. In its analysis of the probability of success, the bankruptcy court

estimated the amount that SEPH would recover on each fraudulent transfer claim.

That analysis considered obstacles to collection, such as mortgages, resale value of

real property, and liquidation of Gaddy Electric’s assets. Ultimately, the

bankruptcy court concluded that “the proposed settlement exceeds the likely net

recovery to the estate . . . if successful at trial.” SEPH’s optimism about collecting

on a judgment is speculation. And the risk associated with litigation is precisely

why the bankruptcy court found that a firm compromise was likely to yield more

than a potential judgment award. The bankruptcy court was not required to predict

the future; it was required to identify potential difficulties in collection. The

bankruptcy court fulfilled that obligation. Even if it had not, that shortcoming

would not be an impediment to affirming the bankruptcy court. See Chira, 567

F.3d at 1313 (affirming the approval of a compromise when the bankruptcy court

did not consider the difficulty of collection or the complexity of the litigation

involved “in any meaningful way”). 4

       4
           SEPH also argues that the bankruptcy court was wrong to say that this factor “is
irrelevant because collection difficulties for the trustee related to the settlement amount are not at
issue.” SEPH submits that this factor goes the difficulty of collecting on any judgments obtained
in the litigation and not difficulties the Trustee might encounter in trying to collect on the
compromise. We agree with SEPH’s articulation of the law. But as we have noted, and SEPH
concedes, the bankruptcy court “did separately analyze the various claims and the Trustee’s
assertions regarding the amount that could be collected in the event a judgment was obtained.”

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       Next, SEPH argues that the bankruptcy court clearly erred in its finding that

the complexity, expense, and delay of litigation favored the compromise. SEPH

contends that its guarantee of an $825,000 recovery eliminated concerns about

litigation expense and should have outweighed the interest in resolving the estate

in a timely manner. Again, we disagree. SEPH’s offer was conditioned on

allowing SEPH’s proof of claim notwithstanding any objection and SEPH noted

that it would seek administrative fees and expenses for any recovery over

$825,000. For those reasons, the bankruptcy court was reasonably concerned that

“SEPH would not necessarily put the interests of the estate above its own interests”

and would “usurp[] the trustee’s ability and duty to object to [SEPH’s] claim if

warranted.” Those concerns, coupled with “the possibility of costly and protracted

litigation . . . supports the bankruptcy court’s decision to approve the settlement

agreement.”5 Chira, 567 F.3d at 1313.

       Finally, SEPH contends that the bankruptcy court clearly erred when it

approved the compromise over the paramount interest of the creditors and SEPH’s

reasonable view as a creditor. SEPH candidly acknowledges that it did not possess

       5
          SEPH also maintains that the Trustee bears responsibility for some of the delay in
resolving the estate for her failure to intervene in the district court case for approximately two
years. We fail to see why any purported delay in intervening in a case subject to the automatic
stay provision of the Bankruptcy Code is relevant to the bankruptcy court’s concern about costly
and protracted litigation. Tellingly, SEPH does not suggest that the Trustee delayed her
administration of the estate after Gaddy filed for bankruptcy.

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a veto right over the proposed compromise. Rather, SEPH argues that its offer to

fund the district court litigation “should have carried more weight” because its

position was “completely reasonable.” That argument fails for numerous reasons.

First, USB—which also held a substantial claim against the estate—supported the

compromise. Thus, the bankruptcy court owed deference to the reasonable views

of USB, as well. Second, for the reasons explained, SEPH’s offer was not as

reasonable as it suggests. SEPH’s offer simply matched the amount Gaddy agreed

to pay, but it was conditioned on (potentially years of) delay and blocked the

Trustee’s ability to object to SEPH’s proof of claim. Third, we do not see much

daylight between a “veto” right and SEPH’s suggestion that its offer should have

defeated the compromise. The bottom line is that SEPH’s assertion that it offered

a reasonable plan is insufficient to show that the bankruptcy court’s evaluation of

the creditors’ interests in this case was any less reasonable. Thus, SEPH fails to

show that the bankruptcy court clearly erred.

      In short, SEPH has failed to demonstrate that the bankruptcy court

committed clear error when it applied the Justice Oaks factors. Accordingly, the

bankruptcy court did not abuse its discretion in approving the compromise because

the compromise did not fall “below the lowest point in the range of

reasonableness.” Martin, 490 F.3d at 1275.

      B.      The bankruptcy court did not abuse its discretion in denying SEPH
              additional discovery.
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      Alternatively, SEPH argues that the district court abused its discretion by

denying SEPH’s request for more discovery before it accepted the compromise.

We disagree.

      First, SEPH maintains that the bankruptcy court abused its discretion by

relying on the Trustee’s business judgment because the Trustee failed to

investigate the case diligently before proposing the second compromise. SEPH

contends that the Trustee accepted self-serving statements from Gaddy’s counsel

and relied on public tax records rather than requesting independent appraisals of all

properties at issue.

      SEPH neglects to mention the extent of the demands it made on the Trustee

and the representations it made to the bankruptcy court. In short, SEPH essentially

requested full discovery, as if it were litigating the district court case. The

bankruptcy court correctly noted, full discovery would defeat the purpose of a

compromise because, after full discovery, “the parties might as well go ahead and

try the case.” Before accepting the compromise, the bankruptcy court was required

to assess “the fairness, reasonableness[,] and adequacy of [the] proposed settlement

agreement.” Chira, 567 F.3d at 1312–13 (quotation omitted). It was not required

to order full discovery on the merits. Thus, the bankruptcy court did not abuse its

discretion in declining to order full discovery when the Trustee was an experienced

bankruptcy lawyer who had evaluated “hundreds of fraudulent transfer claims” in
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her capacity as a Chapter 7 trustee. Moreover, the Trustee examined the record in

the district court case, engaged in informal discovery with the debtors, and hired

another experienced bankruptcy lawyer to assist in her evaluation of the case.

Nothing in Rule 9019(a) or Justice Oaks suggests that the bankruptcy court must

order the Trustee or debtor to submit to full discovery so that a creditor can be

assured of the reasonableness of the proposed compromise. SEPH has already

conceded that it lacks a veto right over the proposed compromise.

      Second, SEPH argues that the bankruptcy court abused its discretion by

denying SEPH’s request for discovery under Rule 9014. Rule 9014 provides that

“[i]n a contested matter . . . relief shall be requested by motion, and reasonable

notice and opportunity for hearing shall be afforded the party against whom relief

is sought.” Fed. R. Bankr. P. 9014(a). It also provides that “[t]estimony of

witnesses with respect to disputed material factual issues shall be taken in the same

manner as testimony in an adversary proceeding.” Fed. R. Bankr. P. 9014(d).

SEPH’s argument has several flaws. The most obvious problem with SEPH’s

argument is that the bankruptcy court held an eight-hour evidentiary hearing in

which dozens of exhibits were entered into the record. SEPH’s argument also

misapprehends the bankruptcy court’s role in evaluating a proposed compromise.

“[T]he role of the bankruptcy judge is not to decide the numerous questions of law

and fact raised by appellants but rather to canvass the issue and see whether the

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settlement falls below the lowest point in the range of reasonableness.” Pullum v.

SE Prop. Holdings, LLC (In re Pullum), 598 B.R. 489, 492 (Bankr. N.D. Fla.

2019) (quoting Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d

Cir. 1983) (cleaned up)). Finally, we generally “turn a deaf ear to protests that an

evidentiary hearing should have been convened but was not” when “the protestor

did not seasonably request such a hearing in lower court.” Sunseri v. Macro

Cellular Partners, 412 F.3d 1247, 1250 (11th Cir. 2005) (quoting Aoude v. Mobil

Oil Corp., 892 F.2d 1115, 1120 (1st Cir. 1989)). SEPH is an experienced

bankruptcy creditor and knew that as soon as the bankruptcy proceeding

commenced, it was entitled to seek discovery from the debtors under Rule 2004.6

But SEPH waited over two years—from the filing of the bankruptcy petition until

the first proposed compromise—to seek any discovery. In short, SEPH has failed

to demonstrate that the bankruptcy court abused its discretion.

                                         *        *     *

       For these reasons, we affirm.

       AFFIRMED.

       6
           Rule 2004 provides that “[o]n motion of any party in interest, the [bankruptcy] court
may order the examination of any entity.” Fed. R. Bankr. P. 2004(a); see also In re Duratech
Indus., Inc., 241 B.R. 283, 289 (E.D.N.Y. 1999) (“The scope of a Rule 2004 examination is
exceptionally broad and . . . [e]xaminations under Rule 2004 are allowed for the purpose of
discovering assets and unearthing frauds and have been compared to a fishing expedition.”
(citation and quotation marks omitted)).

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