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Discovery

Discovery Under Section 1782 Denied Based on Finding That Chinese Arbitration Organization Was Not a “Foreign or International Tribunal”

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Section 1782(a) permits a person to seek a court order for the production of documents for use “in a proceeding in a foreign or international tribunal. …” To obtain discovery under the statute, the petitioner must meet three requirements: (1) the person from whom discovery is sought must reside or be found in the district where the application was made; (2) the discovery must be for use in a foreign proceeding before a foreign or international tribunal; and (3) the applicant must be either a foreign tribunal or an interested person.

Here, the court relied on precedent in the Second Circuit holding that when Congress enacted section 1782, “it intended to cover governmental or intergovernmental arbitral tribunals and conventional courts and other state-sponsored adjudicatory bodies,” but did not intend to cover “arbitral bodies established by private parties.” Based on this precedent, the court found that the China International Economic and Trade Arbitration Commission (CIETAC) did not qualify as a foreign tribunal under section 1782(a). While the court acknowledged that CIETAC was originally established in 1954 by the Chinese government, the court explained that: (1) CIETAC’s jurisdiction is derived exclusively from the private agreement of the parties to arbitration proceedings; (2) the parties, not the state, are permitted to choose their own arbitrator; (3) the arbitrator’s decision is final and binding upon both parties; and (4) CIETAC itself emphasizes it is “independent of the administrative organs of the Chinese government, and free from any administrative interference in handling cases.” The court also noted that permitting parties to seek discovery through American courts under section 1782(a) would undermine significant advantages of arbitration, specifically, its efficiency and cost-effectiveness, and thereby conflict with the strong federal policy favoring arbitration. The court therefore held that CIETAC is not a “foreign or international tribunal” within the meaning of section 1782(a).

In re Application of Hanwei Guo, No. 1:18-mc-00561-JMF (S.D.N.Y. Feb. 25, 2019).

Trial Deadlines Continued in Collection Action Filed by Reinsurer Related to Fraudulent Transfer Scheme

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We have been tracking Odyssey Reinsurance’s action to collect a $3.2 million judgment against Richard and Diane Nagby, the owners of two companies involved in an alleged fraudulent transfer scheme. See https://www.reinsurancefocus.com/tax-counsel-ordered-to-produce-documents-related-to-odyssey-reinsurances-continuing-quest-to-collect-3-2-million-default-judgment-against-richard-and-diane-nagby/ and https://www.reinsurancefocus.com/post-judgment-collection-efforts-of-reinsurer-continue-in-california-federal-court/. On January 16, 2019, the court denied Diane Nagby’s motion for the court to reconsider its order continuing the pretrial hearing to May 30, 2019. Trial is currently set for July.

Odyssey Reinsurance Co. v. Nagby, No. 3:16-cv-03038 (S.D. Cal. Jan. 16, 2019).

Private Arbitrators Do Not Qualify as a “Tribunal” under 28 U.S.C. § 1782

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Section 1782 allows a district court to order a person who resides in the court’s district to provide testimony or documents to be used in a proceeding before a foreign tribunal. When presented with a section 1782 discovery application, a district court must engage in two inquiries: first, whether the court has authority to grant the application, and second, whether to exercise its discretion to grant the application. As part of the first inquiry, the court must determine whether the foreign body conducting the arbitration qualifies as a “tribunal” under section 1782.

Since the United States Supreme Court decision in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), courts have split on whether private arbitral bodies qualify as a tribunal for purposes of section 1782. In Intel, the Supreme Court discussed the definition of “tribunal” in dicta. A number of courts have relied on this discussion for the proposition that private arbitrations are covered by section 1782. However, in two pre-Intel cases, the Second and Fifth Circuits held that section 1782 does not apply to private arbitrations. Some district courts have stuck to the pre-Intel rule, noting that Intel does not necessarily extend the reach of section 1782 to purely private arbitrations. Of particular note, the Supreme Court’s discussion in Intel did not actually specify whether the term tribunal, as used, in section 1782, included private arbitrations, in addition to state-sponsored arbitrations, or if it only included the latter.

The District Court for South Carolina recently sided with the courts holding that Intel did not expand the scope of section 1782 to apply to purely private arbitrations. As such, the court relied on the Second and Fifth Circuit opinions, which were squarely on point. Those cases noted that “references in the United States Code to ‘arbitral tribunals’ almost uniformly concern an adjunct of a foreign government or international agency” as well as the “silence” of section 1782’s legislative history with regard to whether Congress intended such a “significant … expansion of American judicial assistance to international arbitral panels created exclusively by private parties. . . .” As a result, the court determined that parties to an arbitration before a foreign, private arbitral body may not utilize section 1782 to obtain testimony or documents for use in the foreign arbitration.

However, the court’s determination has been appealed to the Fourth Circuit, so watch this space for further developments.

In re: Servotronics, Inc., Case No. 2:18-mc-00364-DCN (USDC D.S.C. Nov. 6, 2018) (Order);
In re: Application of Servotronics, Inc., Case No. 2:18-mc-00364-DCN (USDC D.S.C. Nov. 30, 2018) (Notice of Appeal).

Subject Matter Jurisdiction Under Section 7 Of The FAA – The Diversity, “Amount In Controversy,” And “Place Of Sitting” Requirements

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Presented with an argument that the court lacked subject matter jurisdiction, the Southern District of New York clarified the diversity, amount in controversy, and “place of sitting” requirements under Section 7 of the FAA – which relates to compelling the attendance of witnesses at arbitration.

With regard to diversity, the court held that, when presented with a Section 7 petition to enforce arbitration summonses, the court need not “look through” the petition to the citizenship of the parties to the underlying arbitration, but rather, should look to the citizenship of the parties to the instant enforcement action, to determine whether diversity jurisdiction exists. The court distinguished a Section 7 petition from petitions brought under Section 4 and Section 10, where courts may look through the petition to determine federal question jurisdiction, but are not required to do so. The court noted that Section 7 petitions, unlike Section 4 and 10 petitions, involve different parties than those in the underlying arbitration.

As to the “amount in controversy” requirement, the court recited the well-established principle that the amount is measured by “the value of the object of the litigation.” “The amount in controversy is not necessarily the money judgment sought or recovered, but rather the value of the consequences which may result from the litigation.” The petitioner here sought at least $134 million in damages in the underlying arbitration. The court noted that, even if the documents responsive to the summons pertained to only a small fraction of the amount sought in the arbitration, the $75,000 amount in controversy requirement would nevertheless be satisfied.

Finally, regarding Section 7’s requirement that a party petition a United States district court “for the district in which such arbitrators, or a majority of them, are sitting,” the court refused to look to the arbitrators’ individual business addresses to determine the arbitrators’ “place of sitting.” Rather, the court looked to the location the arbitrators had selected for the Section 7 hearing. Furthermore, the court stated that the arbitrators are not restricted to a single location. Here, the arbitrators had summoned nonparties to appear for hearings in both New York and Philadelphia. Therefore, the court held that the Southern District of New York and the Eastern District of Pennsylvania were the arbitrators’ “place of sitting” for any contest of the respective Section 7 summonses.

Washington National Insurance Co. v. Obex Group, LLC, Case No. 18-CV-9693 (USDC S.D.N.Y. Jan. 18, 2019).

Post-Judgment Collection Efforts of Reinsurer Continue in California Federal Court

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We have previously reported on Odyssey Reinsurance’s Continuing efforts to collect a $3.2 million default judgment against Richard And Diane Nagby in our blog on numerous occasions. See

  • https://www.reinsurancefocus.com/archives/13102
  • https://www.reinsurancefocus.com/archives/13254
  • https://www.reinsurancefocus.com/archives/12645

Odyssey’s efforts continue in the California federal court. On November 7, 2018, the court issued a temporary restraining order and order to show cause regarding certain California property. See November 7, 2018 Temporary Restraining Order. More recently, on January 4, 2019, the court issued an order compelling transfer of funds from a bank account. See January 4, 2019 Order.

Odyssey Reinsurance Co. v. Nagby, No. 16-CV-3038-BTM (S.D. Cal. Nov. 7, 2018 and Jan. 4, 2019).

This post written by Jeanne Kohler.
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