by George Benaur and Ben A. Rozenshteyn
The world of cross-border litigation is exploding and with it comes the emergence of parallel international litigation. Because the U.S. financial institution touches so many parts of the world, foreign litigants pursuing claims in other countries often need to seek discovery, either by way of document productions or depositions, from companies and individuals located within the jurisdiction of the U.S. In recent years, American jurisprudence on the types of cases where U.S. courts could provide avenues for seeking discovery in the U.S. has evolved, and given current trends, we believe that the amount of foreign litigants coming to U.S. courts will increase.
The Notion of Discovery in the U.S.
The U.S. is both exalted and bemoaned for its expansive, sometimes extra-jurisdictional mechanism of discovery. In the federal courts, the U.S. discovery process is regulated under Rule 26 of the Federal Rules of Civil Procedure (the “FRCP”). Under Rule 26, civil discovery is permitted into any evidence that is “relevant to any party’s claim or defense and proportional to the needs of the case.”
With the upward trends in cross-border litigation, U.S. Code Section 1782 (“§ 1782”) has become the weapon of choice for international litigants seeking discovery in the U.S. in aid of foreign proceedings. § 1782 allows an “interested person” (such as a foreign litigant) to apply for discovery over a person or entity “found” in the U.S. “for use” in a proceeding “in a foreign or international tribunal.” The subject matter of § 1782 overlaps to some extent with the subject matter of the Hague Evidence Convention, a treaty to which the U.S. and approximately sixty other nations are signatories. Historically, foreign parties have been required to use stringent diplomatic measures, letters rogatory or those implemented under the Hague Evidence Convention, to obtain evidence located in the United States. § 1782 was codified so as to simplify the process and provide foreign proceedings a less formal yet effective method for obtaining judicial assistance from U.S. courts. In at least two respects, when a non-U.S. party seeks evidence from the United States, there are advantages in using § 1782, as opposed to its diplomatic alternatives: first, there is no need to have first requested the discovery from the non-U.S. tribunal; and second, in certain instances, § 1782 discovery may be granted even before an action is commenced outside the United States.
An application pursuant to § 1782 presents a district court with two threshold inquiries: first, whether the district court is authorized to grant the request; and second, if so, whether the district court should exercise its discretion to do so, which will be further discussed below. This issue of “discretion” for the Court is a theme that is common in many aspects of federal court procedure. For example, it can be found in the forum non conveniens defense, where courts weigh whether to exercise jurisdiction over a foreign litigant’s claim in the United States (i.e. whether a foreign litigant can try to obtain some relief in the U.S. courts), or whether such a claim or cause of action should be litigated in another country. It also appears in other “discretional” rules that courts have to evaluate (such as whether it is too late to add new claims to a case), as well as other certain federal procedural rules.
§ 1782 applications, in order to be successful, require skilled legal representation to present the client’s story in a cohesive and convincing manner, so that the judge can be convinced that granting the application is in the interests of justice. As shown below, such applications have been successfully pursued in different types of cases, including divorces in other countries and bankruptcies. We believe the trend is bound to grow, especially given the trends in cross-border litigation and private international arbitration.
The Petitioner Must Satisfy the Requirements of Section 1782
In order for a federal court to authorize discovery under § 1782, three requirements must be met:
(1) the application must be made by an interested party or upon application of a foreign or international tribunal;
(2) the party from whom discovery is sought must “reside” or be “found” in the jurisdiction of the district court where the § 1782 petition has been filed; and
(3) the document or testimony must be for “use” in a foreign or international tribunal.
Our experience is that it is often advisable to obtain an affidavit from the counsel representing the foreign litigant in the other country, in support of such an application, to show that these factors are met. The collaboration between local and U.S. counsel is important in this regard and can definitely present challenges. Indeed, we have observed that many foreign lawyers are not even aware of this option, do not understand U.S. legal process, let alone know what to do or say to be successful in such an application. All of the foregoing issues need to be thoroughly expanded upon through a verified affidavit draft and executed. As part of this process, U.S. counsel will need to work with the local counsel to guide through the process for the application, as well as its’ potential opposition, such as a motion to quash, for example, which could be filed to try to either delay or get the application dismissed altogether. Same with a potential motion to compel that would need to be filed if the party that is being subpoenaed fails to abide by the court’s order, which in practice, is unfortunately more common than not.
The District Court Must Be Convinced To Exercise its Discretion in Petitioner’s Favor
As discussed above, a lawyer drafting a § 1782 application is tasked with presenting the client’s story in a cohesive and convincing manner, so as to convince the court that granting the application is in the interest of justice. The Supreme Court has identified four discretionary factors that a district court must consider when ruling on a § 1782 application:
(1) whether the person from whom discovery is sought is a participant in the foreign proceeding;
(2) the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance;
(3) whether the § 1782 request conceals an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States; and
(4) whether discovery would be unduly intrusive or burdensome. Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 264-65 (2004).
The practical aspect of these standards is that many of them have already been litigated and are established by precedent (i.e. what constitutes “participation,” “proceeding,” “receptiveness to U.S. federal-court judicial assistance,” as well as “undue intrusion or burden” on the counterparty). Since Intel, many litigants have successfully invoked § 1782, giving rise to a rich jurisprudence on the application of the four discretionary factors identified by the Supreme Court.
Two 2015 decisions by the U.S. Court of Appeals for the Second Circuit highlight both the expansive application of § 1782 as well as an important limitation. In Mees v. Buiter, 2d Cir., No. 14-1866, 7/17/15, the Second Circuit permitted discovery to take place even before any foreign proceeding had been commenced. Just one month later, the Second Circuit clarified in CertainFunds, Accounts and/or Inv. Vehicles Managed by Affiliates of Fortress Inv. Grp. LLC v. KPMG, LLP, 2d Cir., No. 14-2838, 8/20/15, that, although such pre-action discovery is permitted under § 1782, the foreign proceeding must be reasonably contemplated. These two Second Circuit decisions bring important clarity to the scope and outer bounds of § 1782.
It is not uncommon for divorce proceedings to spill over into a cross-border dispute, as ex-spouses encounter obstacles in tracking down elaborately obscured assets. For example, production of documents was compelled pursuant to a § 1782 application for an ongoing post-divorce litigation of marital assets in Russia in the case between Anna Sergeeva and Mikhail Dubin (In Re Application of Anna Aleksandrovna Sergeeva, WL 12169388 (N.D.Ga. 2013). Ms. Sergeeva intended to present evidence obtained through the discovery in her appeal to the Moscow City Court to establish her ex-husband’s alleged beneficial ownership of at least five companies incorporated and existing under the laws of the British Virgin Islands. In dicta, the court rebuffed contentions regarding admissibility of the requested evidence in the Russian proceeding, stating that “It is neither necessary nor advisable for this |c|ourt to resort to a detailed analysis of the intricacies of the Russian Code of Civil Procedure in order to resolve the dispute regarding the discovery sought under § 1782. Indeed, such a “speculative foray” into foreign law is quite at odds with the purposes of that statute, one of which is to provide “efficient assistance” to foreign tribunals.” However, the court stated that its position would differ if the Russian court were to unequivocally state that new evidence from Sergeeva would not be considered.
Bankruptcy Proceedings and Arbitration
Cooperation between foreign insolvency courts and the U.S. bankruptcy courts has been thoroughly established by chapter 15 of the U.S. Bankruptcy Code. In In re Independência S.A., No. 09-10903 (Bankr. S.D.N.Y. March 26, 2009), the firm’s counsel obtained recognition for a Brazilian reorganization proceeding in the U.S., and also obtained an order granting an injunction against an array of U.S. creditors. Cases of this nature present particularly nuanced and difficult questions. Where chapter 15 can serve as a method for discovery of assets and financial dealings, a shorter and less complex route in bankruptcy cases, however, is § 1782.
In 2017, for example, a Florida district court granted a § 1782 subpoena in In Re MTS Bank, WL 3155362 (Fed. Supp., 2017), denying a former “Transaero” executive’s (A.K.) motion to quash. “MTS Bank” (MTS, Russia) sought ex parte discovery of both testimony and documentary items from both A.K. and the Florida Banks regarding A.K.’s personal financials and account holdings. MTS was therefore able to proceed with obtaining evidence from persons and custodians of records in Florida for use in the Russian bankruptcy court and in a contemplated civil action against Transaero’s former directors and shareholders in the British Virgin Islands and/or Russia for debt recovery, securities fraud, civil money laundering, conversion, and other claims.
Similarly, in 2018, the Southern District of New York (“SDNY”) court granted § 1782 discovery in Deposit Insurance Agency v. Leontiev, WL 3536083 (S.D.N.Y. Jul. 23, 2018). The Deposit Insurance Agency (“DIA”) sought discovery from Probusinessbank’s former president, Mr. Leontiev, as a nonparty to the bank’s ongoing Russian bankruptcy proceeding. Leontiev’s contentions regarding the involvement of two sanctioned individuals, as well as the possibility of the wide-ranging discovery being relayed to Russian prosecutors for an unrelated investigation, resulted in an order to narrow the scope of discovery to the information necessary for the bank’s bankruptcy proceeding.
Earlier this year, in In re Application and Petition of Hanwei Guo, WL 917076 (S.D.N.Y. 2019), the court, following the Second Circuit’s precedent in National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2d Cir. 1999), (“NBC”), held that a private international arbitral tribunal was not a “tribunal” for purposes of § 1782, and thus denied an application for leave to serve a subpoena. In NBC, the Second Circuit reasoned that the text of the statute itself was ambiguous but that the legislative history showed that Congress intended the statute to reach public international arbitrations but not private arbitrations. The booming world of private arbitration, however, is not left entirely without hope. In another very recent decision, In re Application of the Children’s Investment Fund Foundation, 363 F.Supp.3d 361 (S.D.N.Y. 2019), the court, citing an earlier SDNY decision and several decisions from other courts, held that a private arbitral tribunal is a tribunal for purposes of the statute. Because conflicting decisions are now amassing in the SDNY, it is almost inevitable that in the very near future the Second Circuit will be faced with re-evaluating its precedent and providing certainty for prospective litigants.
§ 1782 has emerged as a powerful tool for international litigants seeking discovery in aid of foreign proceedings. We believe the trend is bound to grow, as more cases involving the U.S. Financial system are being litigated abroad. Approaching these cases requires unique expertise not only in the realm of U.S. litigation, but also the wherewithal and an established network for navigating and collaborating with foreign attorneys and clients in helping them structure their § 1782 applications correctly, so as to ensure their ultimate effectiveness. It will be interesting to observe as new decisions come out on the matter and whether the jurisprudence on § 1782 will continue to expand the scope of the applicability of this discovery tool for foreign litigants. In particular, we are tracking the developments on the application of this section to private arbitration proceedings.