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.

Citation: Certain Funds, Account and/or Inv. Vehicles v. KPMG LLP, 798 F.3d 113 (2nd Cir. 2015).

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