Mike Meier,
Attorney at Law, summary of legal development: Second Circuit sets the minimum
requirements in determining whether the § 1782 applicant seeking discovery is
an “interested person,” and whether the discovery sought is “for use” in a
foreign proceeding
Plaintiffs-appellants
are certain funds, accounts, and/or investment vehicles managed by affiliates
of Fortress Investment Group, LLC (“the Funds”) who held interests in two Saudi
conglomerates, the Saad Group (“Saad’) and Ahmad Hamad Algosaibi and Brothers
Company (“AHAB”). The Funds hold interests in the Golden Belt 1 (“GB1”) sukuk,
a financial instrument issued by Saad, and various other investments issued by
Saad and AHAB, including participation in a Cayman Islands holding corporation
for Saad’s assets outside of Saudi Arabia, valued at $35 million.
When
in 2009 AHAB began reporting financial problems, traced to fraud and
embezzlement of Saad owner Maan Al Sanea, the Saudi Arabian Monetary Authority
froze all of Al Sanea’s assets. This was followed by other international
regulatory authorities, including the Central Bank of Bahrain, which seized
control of several subsidiaries of Saad and AHAB, and the Grand Court of the
Cayman Islands, which issued a worldwide freezing order against Al Sanea,
including the companies in which the Funds held their $35 million interest.
These resulted in all of the financial instruments of Saad and AHAB being in
default and various legal actions being instituted in several countries in the
wake of the conglomerates’ default.
Nearly
five years after the Saudi conglomerates’ default, the Funds sought leave to
take discovery against KPMG International Cooperative, PricewaterhouseCoopers
L.L.P., and PricewaterhouseCoopers International Limited (collectively, “the
firms”), the audit firms, filing an ex parte application in the United States
District Court for the Southern District of New York pursuant to 28 U.S.C. §
1782 seeking documents and other evidence relevant to these foreign
proceedings. KPMG L.L.P. and PricewaterhouseCoopers L.L.P. are United
States-based accounting firms (“the U.S. firms”), while KPMG International
Cooperative and PricewaterhouseCoopers International Limited are firms
incorporated in Switzerland and England (“the international firms”). The Funds
contended that the firms were likely to have information about the finances of
the two conglomerates because their affiliates in Saudi Arabia, Egypt and Dubai
audited various companies owned by AHAB and Saad that were involved in the
offerings and investments that the Funds held. As the Funds argued, these
documents would be highly useful and relevant to the pending proceedings in the
various foreign jurisdictions, as well as in the several legal actions that it
planned to initiate directly.
The
district court denied the Funds’ § 1782 application, holding that the Funds
sought documents primarily from the international firms, which are both
different entities from the New York-based U.S. firms. The international firms
were not “found” in the judicial district in which the application was filed;
the information the Funds sought was not “for use” in a foreign proceeding,
because the Funds were not a party to any of the pending proceedings, and there
was no “discernible procedural mechanism” whereby the discovered material would
actually be used in the foreign proceedings; and the Funds had failed to
demonstrate that they were “interested person[s]” in the context of the pending
foreign proceedings, because they had no role in those proceedings and did not
establish that they had a right to submit evidence to the foreign tribunals in
question.
The
district court concluded that the Funds failed to meet the statutory requirements
that establish the court’s authority to order discovery under § 1782, thus it
did not reach the discretionary factors that determine whether to grant the
application. The Funds appealed.
The
United States Court of Appeals for the Second Circuit affirms the district
court’s judgment.
The
key issue here is the meaning of terms “interested person” and “for use” under
28 U.S.C. § 1782.
“28
U.S.C. § 1782 provides, in pertinent part: ‘The district court of the district
in which a person resides or is found may order him to . . . produce a document
. . . for use in a proceeding in a foreign or international tribunal . . . upon
the application of any interested person. . . .’ We have summarized the statute
as setting forth three requirements: that ‘(1) the person from whom discovery
is sought resides (or is found) in the district of the district court to which
the application is made, (2) the discovery be for use in a proceeding before a
foreign tribunal, and (3) the application be made by a foreign or international
tribunal or any interested person.’ Brandi-Dohrn v. IKB Deutsche Industriebank
AG, 673 F.3d 76, 80 (2d Cir. 2012). […]”
The
court reviews this case de novo.
“To
satisfy the second and third statutory requirements, an applicant for a § 1782
order must be an ‘interested person,’ and must establish that the discovery
sought is ‘for use in a proceeding before a foreign tribunal.’ Brandi-Dohrn,
673 F.3d at 80. The Supreme Court analyzed these statutory requirements in
Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004). […]
[However], [w]e make two preliminary observations about the Supreme Court’s
decision in Intel. First, the Court did not lay down minimum requirements or
tests to be met in determining whether the party seeking discovery is an
‘interested person’ or whether the discovery is sought ‘for use’ in a foreign
proceeding. The Court appeared to regard the case before it as an easy one, in
effect finding that the facts before it were sufficient to satisfy the
requirements of the statute, and not suggesting that facts identical to those
in Intel were necessary to meet those requirements. Second, the Court’s
analysis suggests that, while the ‘interested person’ and ‘for use’
requirements are independent, there is considerable overlap between them. The
applicant’s ‘participation rights’ in Intel, on which the Court relied in
finding that the applicant was an ‘interested person,’ prominently included the
applicant’s ability to use the evidence it sought in the U.S. courts before the
foreign administrative tribunal and courts by submitting the evidence to the
investigating agency in the foreign proceedings.”
The
Court accepts defendant firms’ argument that the Funds are not “interested
person[s]” with respect to the ongoing proceedings in Saudi Arabia, Bahrain and
the Cayman Islands, because they lack the kind of “participation rights”
possessed by the applicant in Intel.
“It
is unquestionably true that the Funds do not have participation rights similar
to the § 1782 applicant in that case. The Funds have made no showing that they
are able to present evidence to any of the tribunals conducting those
proceedings, or to appeal or otherwise seek further review, in courts or other
institutions, of any decision reached in those proceedings, as the applicant
could do with respect to the Commission proceedings in Intel. If such rights
are necessary for an entity to constitute an ‘interested person’ within the
meaning of § 1782, the Funds do not qualify.”
“We
are cautious about reaching that conclusion in the absence of a need to reach
the question, however. As noted above, the Intel Court did not state that such
rights were necessary for an applicant to constitute an ‘interested person,’
appearing to find that ‘participation rights’ such as those possessed by the
applicant there qualified it as an interested person ‘within any fair
construction of that term.’ Id. at 256. Moreover, in rejecting Intel’s argument
that ‘interested person[s]’ under the statute must be ‘litigants’ or formal
parties to a proceeding, the Court cited with approval the expansive definition
provided by Hans Smit, a leading academic commentator on the statute who played
a role in its drafting. Id. at 25657. Professor Smit maintained that the phrase
‘any interested person’ is ‘intended to include not only litigants before
foreign and international tribunals, but also foreign and international
officials as well as any other person . . . [who] merely possess[es] a
reasonable interest in obtaining the assistance.’ Hans Smit, International
Litigation Under the United States Code, 65 Colum. L. Rev. 1015, 1027 (1965).”
However,
on appeal the Funds argued that they are “interested person[s]” in the broader
sense, because they have a reasonable interest in obtaining judicial assistance
in the ongoing foreign proceedings. The Funds based this argument on their
substantial financial interest in the entities that are the subject of the
ongoing proceedings, their ability to influence those proceedings through the
Delegate or trustees pursuing claims in the respective proceedings, and because
of their status as creditors of the Saad and AHAB affiliates being liquidated
in the Cayman Islands and Bahrain. The court rejects this argument, and states:
“Preliminarily,
we doubt that the Funds’ financial interest in the outcome of the foreign
proceedings alone could be sufficient to confer ‘interested person’ status
under the statute. Various entities may have a financial stake in litigation to
which they have no direct connection: Shareholders in a company facing a
products liability suit are likely to have a financial interest in the outcome
of that suit; multiple competitors may have a financial interest in an
antitrust case brought by the government; a wide range of media companies may
have a financial interest in a libel case involving one newspaper. Most legal
cases involve such externalities and have implications, including financial
ones, for persons beyond the parties formally participating in the case.
Congress cannot have intended to confer ‘interested person’ status on all
possible amici curiae when it passed § 1782.”
“Whether
the Funds are ‘interested person[s]’ based on their alleged ability to put
evidence before other persons who are parties to the foreign proceedings, or by
dint of their status as creditors in the liquidation actions, are closer
questions. On the one hand, the ability simply to pass on information to
parties in a proceeding, without more, cannot confer ‘interested person’ status
any more than the ability of amicus counsel to pass along evidence and
arguments to counsel representing one of the parties in litigation. On the
other hand, an established right to provide evidence and have the party
consider it, as the § 1782 applicant had in Intel, 542 U.S. at 256, or a recognized
relationship, such as that of an agent and principal, see Lancaster Factoring
Co. Ltd. v. Mangone, 90 F.3d 38, 42 (2d Cir. 1996) […], may be sufficient to
make an otherwise stranger to the proceeding an ‘interested person.’ Similarly,
the role of a creditor under the relevant jurisdiction’s law might confer
certain procedural rights that allow the creditor to participate and submit
evidence in the proceeding. See, e.g., 11 U.S.C. § 1109(b) (under U.S.
bankruptcy law, ‘[a] party in interest, including . . . a creditor . . . may
raise and may appear and be heard on any issue in a case under this chapter’).”
The
Court holds that the Funds have not identified a way in which they can “use”
the evidence they sought in any of the ongoing foreign proceedings. According
to the court, “Without some means of injecting the evidence into the
proceeding, a § 1782 applicant cannot show that it has a role in the
proceeding, such that it may ‘use’ the information, or, as we have recently
said, employ it ‘with some advantage.’ Mees v. Buiter, ___ F.3d ___, 2015 WL
4385296, at *4 (2d Cir. July 17, 2015). Consequently, even assuming that the
Funds are ‘interested person[s]’ in the pending proceedings in Saudi Arabia,
the Cayman Islands, and Bahrain, we agree with the district court that their
application fails to satisfy the statute’s ‘for use’ requirement, because the
Funds have not met their burden of establishing that they are in a position to
use the evidence they seek through their § 1782 application in those ongoing foreign
proceedings.”
The
Court also rejects as misplaced the Funds’ argument that the information they
seek regarding Saad’s and AHAB’s financial status is “for use” in the pending
proceedings and that such information will be “highly relevant” to those proceedings.
“[…]
The relevance of the information sought to the subject of the proceeding is not
sufficient in and of itself to authorize the district court to order
discovery.[7] By adopting the phrase ‘for use,’ Congress plainly meant to
require that § 1782 applicants show that the evidence sought is ‘something that
will be employed with some advantage or serve some use in the proceeding.’
Mees, 2015 WL 4385296, at *4. The key question, therefore, is not simply
whether the information sought is relevant, but whether the Funds will actually
be able to use the information in the proceeding. Framing the question that way
shows that the Funds’ asserted relationships to the parties in the foreign
proceedings and their alleged participation rights are insufficient to
establish that they will be able to use the evidence obtained as required by
the statute.”
Moreover,
as the Funds asserted that a 25% stake in GB1 sukuk is necessary to direct the
Delegate’s actions, while they only held a 20% interest, the court concluded
that the Funds are not in a position to direct the Delegate to consider their
evidence or submit that evidence to the tribunal.
“That
is no different from a third party providing information to a private litigant
that it believes might be useful in a lawsuit, or a witness approaching a
prosecutor’s office claiming to have knowledge of a crime. Such information
might be relevant or interesting to the recipient, but it is not ‘for use’ in
any proceeding in which the recipient is a party unless the recipient takes
some further, independent action to introduce it.”
The
Court also rejects the Funds’ claims that they “may submit probative evidence
to the foreign tribunal”, as well as the assertion that their status as
creditors in the Cayman Islands proceedings authorizes them to “request the
removal of an official liquidator; coordinate with other investors to request
that the liquidator apply to the court for a discovery order[;] request the
ability to participate in an oral examination; apply to the court with respect
to the exercise or proposed exercise of the liquidators’ powers; . . . and seek
to inspect the company’s records.”
“All
of these supposed participation rights allow the Funds, at best, to ‘seek’ or
‘request’ to participate in the proceeding, or, perhaps, to challenge the
liquidator’s decision in a separate proceeding. See In re Ishihara Chem. Co.,
251 F.3d 120, 126 (2d Cir. 2001) (evidence sought was not for use in proceeding
that had concluded, and was instead for use in new, separate proceeding),
abrogated on other grounds by Intel, 542 U.S. 241. Contrast that to the right
of the applicant in Intel to seek review of the agency’s determination within
the proceeding itself, and thus to use the evidence obtained through its § 1782
application in that proceeding. 542 U.S. at 257 (applicant “could ‘use’
evidence in the reviewing courts . . . by submitting it to the Commission in
the current, investigative stage”). Undoubtedly, information that the Funds
could obtain regarding the firms’ audits of the conglomerates might be helpful
to the trustees in the liquidation proceedings in determining the proper
distribution of the conglomerates’ assets. To that end, however, there is
nothing preventing the trustees—or the GB1 Delegate in the Saudi proceeding—from
seeking discovery in U.S. courts pursuant to § 1782. Such information might
also be useful to the Funds in determining whether to attempt to challenge
aspects of the liquidation. But that does not imply that there is any way for
the Funds to introduce that information as evidence in the liquidation
proceedings or on appeal. The Funds accordingly have failed to establish that
any of the evidence they seek could actually be used in any of the foreign
proceedings that were pending at the time they made their application.”
The
Court concludes that the Funds failed to show any way that they could put
before the foreign tribunals the information they sought to discover, and found
no errors in the district court’s conclusion that the evidence sought was not
“for use” in the ongoing foreign proceeding.
The
Court affirms the district court’s denial of plaintiffs-appellants’ § 1782
application.
