FROM RUSSIA WITH LOVE: 11TH CIRCUIT AFFIRMS THE UTILITY OF 28 U.S.C. §1782 IN INTERNATIONAL DISCOVERY
The tool kit of the international litigator, both foreign and domestic, has long included the powerful discovery device set forth in 28 U.S.C. §1782. The statute is the product of nearly 150 years of efforts by Congress to provide federal court assistance in gathering evidence for use in foreign tribunals.1 The statute currently provides in pertinent part:
“The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal....The order may be made...upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court....To the extent that the order does not prescribe otherwise, the testimony or statement shall be taken, and the document or other thing produced, in accordance with the Federal Rules of Civil Procedure.”2
The statute “authorizes, but does not require,” that district courts provide judicial assistance to §1782 applicants.3
The utility of the statute and the broad discretion of the district courts in giving it effect was significantly bolstered by the 11th Circuit’s recent decision in Sergeeva v. Tripleton International Ltd., Nos. 15-13008 & 15-15066, 2016 WL 4435616 (11th Cir. Aug. 23, 2016). In Sergeeva, the court held that the §1782 applicants may reach documents located outside of the U.S. if they are in the possession, custody, or control of a U.S. resident, and that a party that refuses to comply with an order requiring the gathering and production of such documents may be subject to monetary sanctions and be held in contempt.4
The Facts and Reasoning in Sergeeva
In Sergeeva, former spouses Mikhail Leopoldovich Dubin and Anna Sergeeva commenced a proceeding in their home nation of Russia regarding division of their marital assets after a 16-year marriage. Anna was adamant that Mikhail had been concealing and dissipating marital assets through a series of “offshore companies” located around the globe. While Anna attempted to obtain discovery relating to these offshore entities, Mikhail opposed her efforts at every turn, often employing tactics that served no other purpose but to evade or delay the production of documents. The clash between the former husband and wife took the legal dispute to places such as Cyprus, Latvia, and the Bahamas — and eventually the United States. In the U.S., Anna sought documents from an Atlanta-based corporation, Trident Corporate Services, Inc. (Trident Atlanta), which she believed possessed information that would evidence her ex-husband’s beneficial interest in a Bahamian corporation. When Trident Atlanta did not comply, Anna filed an action pursuant to 28 U.S.C. §1782 in the district court with the goal of receiving judicial assistance in obtaining documents from Trident Atlanta. After review, a magistrate judge granted Anna’s ex parte application and authorized service of two subpoenas — one of which was directed at Trident Atlanta.
Critically, the subpoena issued to Trident Atlanta referenced other Trident Corporate Services’ entities located outside of the United States, and instructed Trident Atlanta to furnish all responsive documents in its “possession, custody, or control, regardless of whether such documents or material are possessed directly by [Trident Atlanta] or by any of [Trident Atlanta’s] agents, representatives, attorneys, or their employees or investigators.” Trident Atlanta objected to the subpoena on numerous grounds, most notably that the subpoena required the production of documents located outside of the United States. Trident Atlanta also moved to vacate the magistrate judge’s ex parte order and quash the subpoena but was unsuccessful, as the magistrate judge denied the motions and required Trident Atlanta to produce all documents responsive to the subpoena in their “possession, custody, or control.”
Ultimately, Trident Atlanta produced a mere 23 pages of documents from its Atlanta office only and objected to the magistrate judge’s orders upholding the subpoena and requiring production. The district court judge overruled these new objections, and Trident Atlanta filed an appeal. While this appeal was pending, Anna sought sanctions as a result of Trident Atlanta’s failure to produce the responsive documents. The district court granted her motion, holding Trident Atlanta in contempt and ordering Trident Atlanta to pay attorneys’ fees and costs and to produce the responsive documents or pay a sanction of $500 per day for up to 60 days for “any continued non-compliance.” Trident Atlanta requested relief from the contempt order — which was denied — and a second appeal to the 11th Circuit ensued. For purposes of judicial economy, the 11th Circuit consolidated Trident Atlanta’s first and second appeal.
The crux of Trident Atlanta’s argument on appeal was that the provisions of §1782 did not permit litigants to reach documents located in foreign countries because “American courts were not intended to serve as clearing houses for requests for information from courts and litigants all over the world” (the so-called “extraterritoriality argument”).5 The 11th Circuit found this argument to be unpersuasive. Noting that this was a matter of first impression in the circuit — and that there was a dearth of caselaw elsewhere — the 11th Circuit undertook an analysis grounded principally in the text of §1782, which echoed the sentiments of the lower court.6 The court reasoned that the very language of §1782 authorized the production of documents in accordance with the Federal Rules of Civil Procedure, the significance of which was twofold.7 First, the federal rules require that documents — whether in tangible or electronic form — must be produced if they are in the possession, custody, and control of the party to whom the subpoena is directed.8 Secondly, the only geographical limitation imposed by the federal rules in this context relates to the act of production, not where the documents themselves are located.9 As a result, it was immaterial where the documents requested of Trident Atlanta were located so long as those documents were in its possession, custody, or control. The court reasoned that a narrow reading of the statute, as urged by Trident Atlanta, would directly conflict with and curtail the broad scope of the federal rules in the discovery context — something the 11th Circuit expressly declined to do.10 The 11th Circuit, therefore, affirmed the orders requiring the production of the responsive documents located in foreign countries and holding Trident Atlanta in contempt and subject to monetary sanctions.11
Comity and Judicial Discretion
The decision in Sergeeva sends a signal to the world that U.S. federal courts can and will extend their reach worldwide to serve the legitimate interests of foreign litigants. The decision is sound when viewed not only in the light of the broad reach of discovery under the federal rules but in the light of this country’s long history of extending comity in international judicial matters.12 At its core, comity rests on the notion that U.S. courts should lend assistance in foreign judicial proceedings to the extent such assistance is not inconsistent with local law or public policy.13 The U.S. has long been, for example, one of the most receptive nations when it comes to the recognition and enforcement of foreign judgments. Importantly, the extension of comity serves not only the interests of foreign litigants and courts but also the vital interest of U.S. citizens.14 Extending comity serves the vital interest of U.S. citizens by making it more likely the foreign courts will reciprocally lend assistance to U.S. citizens and U.S. courts when they become entangled in matters involving international discovery or the recognition and enforcement of U.S. judgments.15
The decision is likewise sound because it reiterates that assistance under the statute is always committed to the sound discretion of the district courts.16 This allows the district courts broad leeway to deal with thorny issues that arise in the context of international discovery, such as the problem of 1) litigants who are seeking information that would not be admissible in the foreign proceedings; 2) litigants that are seeking information in direct violation of foreign court orders or laws; and 3) litigants who will be sanctioned civilly or criminally if they cooperate in U.S.-based discovery.17 These difficult issues can be dealt with on case-by-case basis.
For litigants seeking to invoke judicial assistance under §1782, it should be kept in mind that federal courts have established four prima facie requirements that must be met before a district court may exercise its authority under the statute: 1) The request must be made “by a foreign or international tribunal” or by “any interested person”; 2) the request must seek evidence, whether it be the “testimony or statement” of a person or the production of “a document or other thing”; 3) the evidence must be “for use in a proceeding in a foreign or international tribunal”; and 4) the person from whom discovery is sought must reside or be found in the district of the district court ruling on the application for assistance.18 If the litigant meets these requirements, the district court then has discretion to decide whether and how to grant an applicant’s request for relief under §1782.19 The decision in Sergeeva makes clear that such discretion includes the power to compel a U.S. resident to gather and produce documents located outside the U.S. and to enforce such order through the court’s power of contempt. The decision serves as an important reminder that §1782 is a powerful tool that should be kept on the top shelf of any international litigator’s tool kit.
1 Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 247 (2004).
2 28 U.S.C. §1782(a).
3 United Kingdom v. United States, 238 F.3d 1312, 1318-19 (11th Cir. 2001) (The decision of whether to grant a request for assistance under §1782, and to what extent, is committed to the discretion of the district court.); Intel Corp., 542 U.S. at 255, 264.
4 Sergeeva, 2016 WL 4435616 at *4-6.
5 Id. at *3.
6 Id. at *4.
11 Id. at *5-6.
12 See, e.g., International Nutrition Co. v. Horphag Research Ltd., 257 F.3d 1324 (Fed. Cir. 2001) (affirming lower court ruling granting comity to French court decision determining who owned U.S. patent under terms of French contract); Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994) (holding that Mexican law mandated stay of U.S. district court proceedings where related action was pending in Mexican court).
13 Pravin Banker Associates, Ltd. v. Banco Popular De Peru, 109 F.3d 850 (2d Cir. 1997) (“[C]ourts will not extend comity to foreign proceedings when doing so would be contrary to the policies or prejudicial to the interests of the United States.”).
14 See Laker Airways, Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909, 937 (D.C. Cir. 1984) (stating that “the decisions of foreign tribunals should be given effect in domestic courts, since recognition fosters international cooperation and encourages reciprocity, thereby promoting predictability and stability through satisfaction of mutual expectations”).
15 U.S. v. One Gulfstream G-V Jet Aircraft, 941 F. Supp. 2d 1, 8 (D.D.C 2013) (“[T]he purpose underlying [comity] is to foster international cooperation and encourage reciprocal recognition of U.S. judgments in foreign courts.”).
16 United Kingdom, 238 F.3d at 1318-19.
17 See, e.g., In re Application Pursuant to 28 U.S.C. Section 1782 of Okean B.V. & Logistic Sol. Int’l to Take Discovery of Chadbourne & Parke LLP, 60 F. Supp. 3d 419, 431 (S.D.N.Y. 2014) (quashing a subpoena to nonparty in part because compliance therewith would have subjected nonparty to sanctions in Russia and the Ukraine for violations of those nation’s confidentiality and privacy laws); In re Appl. for an Order for Judicial Assistance in a Foreign Proceeding in the Labor Court of Brazil, 466 F. Supp. 2d 1020 (N.D. Ill. 2006) (holding that discovery sought was not required to be admissible or discoverable in Brazilian court).
18 Consorcio Ecuatoriano de Telecomunicaniones S.A. v. JAS Forwarding (USA), Inc., 747 F.3d 1262, 1269 (11th Cir. 2014) (quoting In re Clerici, 481 F.3d 1324, 1331 (11th Cir. 2007)).
19 United Kingdom, 238 F.3d at 1271.
Michael Tessitore is an AV-rated attorney with Moran Kidd Lyons & Johnson in Orlando and a practitioner of international commercial litigation. He has served as chair of the International Litigation and Arbitration Committee of the International Law Section of The Florida Bar and teaches international litigation and arbitration at the Stetson University College of Law.
Jason Del Rosso is an Associate Attorney for Moran Kidd Lyons & Johnson in Orlando. He graduated with honors from Florida State University College of Law in 2016, where he served on the board of the Florida State Law Review.
This column is submitted on behalf of the International Law Section, Alvin F. Lindsay, chair, and Rafael Ribeiro, editor.
October 27th, 2016 Posted by Rez Legal, in Articles
By: Michael Tessitore and Jason Del Rosso
When a debtor files a petition for relief under the U.S. Bankruptcy Code, an estate is created by operation of law which comprises all property of the debtor wherever located in the world. 11 U.S.C.A. § 541(a); E.g., In re Aldrich, 250 B.R. 907, 910 (Bankr. W.D. Tenn. 2000). A trustee (or a debtor-in-possession in Chapter 11 cases) is automatically appointed to administer this worldwide estate for the benefit of creditors. The trustee is equipped with “strong arm” powers that allow him to recover property of the estate wherever located and to set aside fraudulent transfers wherever in the world they might have occurred. 11 U.S.C.A. § 544(a); In re French, 440 F.3d 145 (4th Cir. 2006) (setting aside pre-petition fraudulent transfer of real property located in the Bahamas). The power of the trustee in these worldwide recovery efforts was significantly enhanced by the recent decision of the U.S. Bankruptcy Court for the Southern District of Florida in In re Kipnis, No. 14-11370-RAM, 2016 WL 4543772 at *1 (Bankr. S.D. Fla. Aug. 31, 2016). In Kipnis, the court held that the trustee would now enjoy a dramatically extended limitations period, a ten-year period, for bringing certain fraudulent transfer claims in cases where the IRS is a creditor.
Facts and Reasoning of Kipnis
Prior to the commencement of his bankruptcy action, the debtor, Kipnis, claimed losses generated from a business transaction on his personal income tax returns for the years 2000 and 2001. The IRS then informed the debtor that these returns were under investigation. On March 22, 2005, the IRS issued an examination report determining that the returns were significantly deficient. The debtor appealed the examination report in the United States Tax Court, but the court ruled in favor of the IRS in November of 2012. The debtor then filed a Chapter 11 bankruptcy case on January 12, 2014 which was converted to a Chapter 7 case on February 6, 2014. A Chapter 7 bankruptcy trustee was appointed, and the IRS timely filed a proof of claim in the case.
On January 15, 2016, the Trustee filed two adversary complaints alleging that shortly after receiving the 2005 examination report from the IRS, the debtor fraudulently transferred a bank account and real property. The recipient of these transfers filed motions to dismiss the complaints arguing that both complaints were barred by Florida’s four-year statute of limitations which applies to fraudulent transfer claims under § 726.110, Fla. Stat. In response, the Trustee argued that since the IRS was an unsecured creditor in the case, under the language of 11 U.S.C. § 544(b), he could “step into the shoes” of the IRS and enjoy a ten-year limitations period which applies to IRS claims under federal law. To wit, 26 U.S.C. § 6502(a)(1) establishes a ten-year statute of limitations from the date of assessment for the IRS to collect taxes.
In addressing these arguments, the court noted that although the IRS was required to prove claims to avoid fraudulent transfers based on applicable state law (such as Chapter 726, Florida Statutes), the statue of limitations for bringing such claims was governed by federal law. As mentioned above, federal law establishes a ten year statute of limitations from the date of assessment for the IRS to collect taxes, and 26 U.S.C. § 6901(a)(1)(A) provides authority for the IRS to pursue avoidance actions against transferees of taxpayer property. Reading these statutes together, the court concluded that it was clear that “[federal law] allows collection from transferees of the taxpayer ‘subject to the same limitations’ applicable to collection from the taxpayer.” Thus, the court concluded that the IRS has ten years from the date of the tax assessment in question to “look back” and pursue an action to avoid a fraudulent transfer of property.
The court also examined the language of Bankruptcy Code §544(b) which provides:
the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title (emphasis added).
It was conceded that the IRS was an unsecured creditor in the case with an allowable claim. Based on the foregoing statutory language and the IRS having an allowable claim in the case, the court concluded that the trustee may step into the shoes of the IRS under § 544(b) and utilize the greatly extended ten year limitations period to his advantage. In reaching this holding, the court primarily analyzed two conflicting cases: Ebner v. Kaiser (In re Kaiser), 525 B.R. 697 (Bankr. N.D. Ill. 2014) (holding that a trustee could utilize the IRS’s longer limitations period under § 544(b)) and Wagner v. Ultima Homes, Inc. (In re Vaughn Co.), 498 B.R. 297 (Bankr. D.N.M. 2013) (holding that a trustee could not avail himself of the IRS’s limitations period for § 544(b) purposes)).
In Vaughn, the court held that IRS immunity from state statutes of limitation was a publically held right and one not applicable to bankruptcy trustees because of the doctrine of nullum tempus occurrit regi (meaning “no time runs against the king”). The Vaughn court further explained that while the federal government should not be bound by state statutes of limitation when performing public functions, Congress did not intend to vest this type of sovereign power in a bankruptcy trustee, as such intent would result in unintended and “dramatic change[s] in the law.” The legal reasoning of the Kaiser decision directly contradicted the arguments offered in Vaughn, and was fully adopted by the court in Kipnis in all but one respect (discussed below). The court in Kaiser found that the clear language of § 544(b) imposed no limitation on the meaning of “applicable law” or on the type of unsecured creditor a trustee can choose as a triggering creditor. Moreover, such a “plain meaning” analysis precludes consideration of policy concerns and legislative intent – which was the crux of the reasoning in Vaughn.
While adopting the logic and reasoning found in Kaiser, it is worth noting the Kipnis court declined to endorse the Kaiser court’s conclusion that a broad interpretation of § 544(b) would have minimal policy implications. To the contrary, the Kipnis court opined that perhaps bankruptcy trustees have not “generally realized that this longer reach-back weapon is in their arsenal.” In so stating, the court left open the possibility that such an interpretation of the statute could bring about major changes in existing practice, thus lending credence to the policy concerns espoused in Vaughn.
Kipnis could be a “game changer” in many Chapter 7 bankruptcy cases. The IRS has an allowed claim in a significant percentage of bankruptcy cases, meaning that in a substantial number of cases the trustee will now enjoy a “ten-year” look period for purposes of attacking transfers of property by the debtor as fraudulent. Kipnis, 2016 WL 4543772 at *5. This represents a significant change when compared to the current custom of trustee’s generally applying a four-year “look back” period when analyzing the transfers by the debtor that might be actionable. The decision portends more litigation as more claims are likely to be brought by trustees seeking to recover property worldwide. It also portends more property being brought into bankruptcy estates to be liquidated for the benefit of creditors. The decision could therefore serve as a boon for trustees and creditors engaged in the worldwide asset hunt and as a significant hurdle for debtors who seek to shelter assets or to transfer property for less than fair value.
Michael Tessitore is an A.V. rated attorney with Moran Kidd Lyons & Johnson in Orlando, Florida and a practitioner of international commercial litigation. Mr. Tessitore has served as Chair of International Litigation and Arbitration Committee of the International Law Section of the Florida bar and teaches international litigation and arbitration at the Stetson University College of Law.
Jason Del Rosso is a law clerk for Moran Kidd Lyons & Johnson in Orlando, Florida. He graduated with honors from Florida State University College of Law in 2016, where he served on the Board of the Florida State Law Review.
October 4th, 2016 Posted by Mike Tessitore & Jason Del Rosso, in Articles