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IN RE HILL

United States District Court, S.D. New York


June 2, 2005.

IN RE: APPLICATION OF NICHOLAS T.C. HILL, et al.,

The opinion of the court was delivered by: RICHARD HOLWELL, District Judge

MEMORANDUM OPINION AND ORDER

Ernst & Young LLP, a Delaware partnership, and two of its current and former partners, Peter Holloway and William Kennedy, (collectively "Ernst & Young USA") have moved to vacate this Court's Order issued ex parte on December 15, 2004 (the "December 15, 2004 Order") granting judicial assistance pursuant to 28 U.S.C. § 1782. Ernst & Young USA further move to quash the subpoenas dated December 22, 2004 (the December 22, 2004 subpoenas") and served upon them by the court-appointed liquidators of Akai Holdings Limited ("Akai") and Kong Wah Holdings Limited ("Kong Wah") (collectively, the "Liquidators") pursuant to the December 15, 2004 Order.*fn1 For the reasons set forth below, the Court denies both motions in their entirety.

BACKGROUND

  Akai is the holding company of a number of entities, including Kong Wah, and is incorporated under the laws of Bermuda with its principal place of business in Hong Kong. (Declaration of Nicholas Timothy Cornforth Hill ("Hill Decl.") ¶¶ 1,6.) In 2001, Akai and Kong Wah became subject to a liquidation proceeding under the coordinated supervision of the High Court of Hong Kong Special Administrative Region (the "High Court of Hong Kong") and the Supreme Court of Bermuda. (Liquidators Mem. in Opp'n to Mot. to Vacate the December 15, 2004 Order or Quash the December 22, 2004 subpoenas ("Liquidators Opp'n Mem.") at 2.) Pursuant to that proceeding, the High Court of Hong Kong designated the Liquidators as court-appointed officers charged with the responsibility of locating and distributing the assets of the companies to their creditors. (Id.)

  In the course of discharging these duties, the Liquidators discovered that many of the records concerning transactions and key assets of Akai and Kong Wah had disappeared. (Hill Decl. ¶ 16.) The Liquidators thus sought to obtain information from Ernst & Young's Hong Kong branch ("Ernst & Young HK"), which was the local auditor of both entities, to aid in reconstructing these financial records. (Id.) Beginning from August 29, 2000, the Liquidators repeatedly submitted discovery requests to Ernst & Young HK to provide certain documents relating to Akai and Kong Wah. (Declaration of Eric L. Lewis ("Lewis Decl."), Ex. G ¶¶ 26-41.) When these efforts proved unsuccessful, the Liquidators applied to the High Court of Hong Kong for an order directing Ernst & Young HK to produce copies of financial documents related to the audits of Akai and Kong Wah between 1996 and 1999. The Court ordered the requested relief on October 23, 2003 (the "October 23, 2003 Hong Kong Order"). (Lewis Decl., Ex. H.) In its subsequent memorandum opinion setting forth the reasons for its decision, the court explained that "the documents sought are reasonably required to permit [the Liquidators] to carry out their functions" in light of: the massive scale of the liquidations, the highly unusual or doubtful transactions which had taken place not long before petitions were presented to wind up the Companies, the important gaps in the liquidators' knowledge of the affairs of the Companies, the specific substantial transactions identified by the liquidators as requiring investigation, and the refusal of former directors, officers and related companies to provide meaningful assistance.

 (Lewis Decl., Ex. G ¶ 51.)

  The documents released by Ernst & Young HK subsequently led the Liquidators to believe that Ernst & Young International and Ernst & Young USA had engaged in extensive interoffice communications regarding the debtor companies and possessed "critical information" relevant to the financial condition of the companies. (Liquidators Opp'n Mem. at 9; Lewis Decl., Exs. E and F.) On December 14, 2004, the Liquidators thus filed an ex parte application before this Court, seeking to be appointed as commissioners authorized to take discovery from Ernst & Young USA and Ernst & Young International pursuant to 28 U.S.C. § 1782. On December 15, 2004, the Court issued an order appointing the Liquidators as commissioners. The Liquidators subsequently issued subpoenas to Ernst & Young USA on December 22, 2004, which Ernst & Young USA now seek to quash.

  DISCUSSION

  I. Judicial Assistance Pursuant to 28 U.S.C. § 1782

  28 U.S.C. § 1782 provides, in relevant part, that "the district court . . . may . . . order [discovery] for use in a proceeding in a foreign or international tribunal." 28 U.S.C. § 1782. The statute "is the product of congressional efforts, over the span of nearly 150 years, to provide federal-court assistance in gathering evidence for use in foreign tribunals." Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, ___, 124 S.Ct. 2466, 2473 (2004). The twin aims of the statute are to provide "equitable and efficacious procedures in United States courts for the benefit of tribunals and litigants involved in foreign litigation" and "to encourag[e] foreign countries by example to provide similar assistance to our courts." In the Matter of Lancaster Factoring Co., Limited, 90 F.3d 38, 41 (2d Cir. 1996) (internal citations omitted). In light of these goals, the section has become amenable to "increasingly broad applicability." Id. (internal citations omitted).

  The party seeking discovery pursuant to § 1782 must satisfy a three-part test:

(1) that the person from whom discovery is sought reside (or be found) in the district of the district court to which the application is made, (2) that the discovery be for use in a proceeding before a foreign tribunal, and (3) that the application be made by a foreign or international tribunal or "any interested person."
In the Matter of Euromepa, 154 F.3d 24, 27 (2d Cir. 1998) (quoting In re Esses, 101 F.3d 873, 875 (2d Cir. 1996)). Ernst & Young USA concede that the Liquidators have satisfied the first and third elements of the statute. They contend, however, that the Liquidators have failed to show that the discovery authorized by the December 15, 2004 Order and specifically sought through the December 22, 2004 subpoenas is "for use" in a proceeding in a foreign or international tribunal. (Ernst & Young USA Mem. in Supp. of Mot. to Vacate the December 15, 2004 Order and to Quash the December 22, 2004 subpoenas ("Ernst & Young USA Mem.") at 5.) In response, the Liquidators contend that the liquidation proceedings in Hong Kong and Bermuda are adjudicative proceedings within the meaning of § 1782, and that the requested discovery is "for use" in those proceedings. (Liquidators Opp'n Mem. at 10.)

  A. Adjudicative Proceeding

  The "principal requirement imposed by § 1782 is that the requested discovery be for use in `a proceeding'" in which "an adjudicative function is being exercised." Lancaster Factoring, 90 F.3d at 41 (citing In re Letters Rogatory Issued by the Director of Inspection of the Government of India, 385 F.2d 1017, 1021 (2d Cir. 1967)). In Lancaster Factoring, the Second Circuit explicitly stated that "[a] bankruptcy proceeding, by its nature, is one in which the value of the debtor's estate is adjudicated," and therefore falls "within the intended scope of § 1782." Lancaster Factoring, 90 F.3d at 42.

  Following Lancaster Factoring, however, the Second Circuit qualified that while a bankruptcy proceeding may, in many instances, be considered an adjudicative proceeding, there are some instances in which the proceeding will not be adjudicative in nature (and therefore, § 1782 discovery will not be available). See Euromepa, 154 F.3d at 28. Thus, in Euromepa, a French bankruptcy proceeding was deemed to be merely an enforcement proceeding enabling a corporation to enforce an extant judgment against its insurer already rendered by the French Supreme Court against the insurer's bankrupt estate. Id. Because the prior judgment of the French Supreme Court acted "as res judicata with respect to the merits of the dispute in the French bankruptcy proceeding," the pending French bankruptcy proceeding did not involve the adjudication of any claims or rights vis-à-vis the insurer and insured. Id. Accordingly, the Second Circuit affirmed the district court's decision denying the § 1782 petition on the ground that the identified French bankruptcy proceeding could not serve as the predicate foreign action for the purposes of the statute. Id.

  The issue therefore is whether the circumstances surrounding the liquidation proceeding in Hong Kong bear a closer resemblance to the facts in Lancastor Factoring or Euromepa.*fn2 As an initial matter, Hong Kong is "a sister common law jurisdiction whose winding-up law is derived from the British Companies Act." In re Axona International Credit & Commerce Ltd., 88 B.R. 597, 610 (Bankr. S.D.N.Y. 1988). Hong Kong's analogous "winding up" provision, the Companies Ordinance, "is strikingly similar to [the U.S. Bankruptcy Code] and provides a comprehensive procedure for the orderly and equitable distribution of assets to all creditors." Id.*fn3 Moreover, a compulsory winding up in Hong Kong, such as is the case here, "necessarily involves judicial proceedings and is throughout a judicially-supervised procedure in which the liquidator, a court-appointed officer, exercises both administrative and adjudicative powers." (Declaration of Phillip St. John Smart ("Smart Decl.") ¶ 4.) Acting in a quasi-judicial capacity, liquidators are empowered to take into their custody all property and choses of action; to identify, pursue and realize assets of the company; to receive, evaluate and adjudicate creditor claims; and to distribute assets to creditors. (Id. ¶¶ 6-7.) In the present dispute, the Liquidators maintain that the liquidation proceeding in Hong Kong has been commenced with the "common aim of the recovery of assets, the adjudication of creditors' claims and the distribution of assets to valid creditors worldwide pursuant to applicable insolvency law." (Hill Decl. ¶ 6.) Moreover, the Liquidators represent that the liquidation proceeding relating to both Akai and Kong Wah is ongoing to date. (Id.) Ernst & Young USA argue that the proceeding is not adjudicative for the reason that the Liquidators will be unable to assert tort claims against third parties directly in the Hong Kong liquidation proceeding and would be required to bring such claims (against Ernst & Young HK, for example) in a separate court proceeding. (Declaration of Rupert Skrine ("Skrine Decl.") ¶ 3.) The Liquidators counter that the "bringing of misfeasance proceedings against an officer or of an action against a third party for damages for breach of contract or in tort are both normal parts of the proceedings in a compulsory winding up as contemplated" under Hong Kong law. (Smart Decl. ¶ 13.)

  Whether the Liquidators are able to assert third party tort claims directly in the present proceeding or would be required to institute an ancillary proceeding does not appear determinative as to the adjudicatory nature of the liquidation proceeding. Even if, as Ernst & Young USA asserts, some claims are properly asserted in a separate litigation, it appears that the object of the proceeding is generally to "receive, evaluate and adjudicate creditor claims." (Id. ¶ 6.) Moreover, there is no indication that the proceeding serves merely to enforce prior judgments (as in Euromepa) or will not involve the resolution of competing creditors' claims and a determination of the value of the debtors' estates. Accordingly, the Court concludes that the Hong Kong liquidation proceeding is adjudicative by nature, thereby falling "within the intended scope of § 1782." Lancaster Factoring, 90 F.3d at 42.

  B. "For Use" in a Proceeding

  Ernst & Young USA nevertheless assert that even if the Hong Kong liquidation proceeding qualifies as an adjudicative proceeding under § 1782, the requested discovery is not "for use" in that proceeding. (Ernst & Young USA Mem. at 9.) Specifically, Ernst & Young USA maintain that the Liquidators are "brazenly trawling for information to determine whether any claims [against third parties] exist," that such claims must be asserted in separate proceedings and therefore, that the discovery will be "for use" in those proceedings as opposed to the Hong Kong liquidation proceeding. (Id. at 6-7.)

  The Liquidators respond that the discovery sought will be used in carrying out their liquidation duties as court-appointed officers, including both the reconstruction of financial transactions and the recovery of assets belonging to the debtor companies, and the investigation and litigation of claims by the debtor companies against third parties. (Liquidators Opp'n Mem. at 7-10.) Specifically, the Liquidators assert that while Ernst & Young HK served primarily as the auditor to Akai and Kong Wah, Ernst & Young USA and Ernst & Young Canada "expressed concerns to the management of [Akai]" and Ernst & Young HK regarding certain financial transactions in 1998. (Hill Decl. ¶ 25.) Additionally, Ernst & Young HK, Ernst & Young Canada, and Ernst & Young USA engaged in "extensive communication[s]" regarding issues such as the debtors' accounting practices, issues related to cash flow, corporate governance, management integrity and the genuineness of certain transactions. (Id. ¶ 29.) The facts in Lancastor Factoring bear a striking resemblance to the facts here and dictate the same result. In Lancastor Factoring, the agent for a court-appointed trustee of a foreign debtor sought testimony and documents from the debtor's former attorney regarding possible funds owed to the debtor arising out of a third party's alleged diversion of the debtor's funds. Lancastor Factoring, 90 F.3d at 40. The Second Circuit held that regardless of whether the debtor chose to "exercise its option to acquire whatever claims it may find," the requested information was sufficiently related to the pending bankruptcy proceeding so as to satisfy § 1782. Id. at 42. Similarly, the Liquidators herein are acting as court-appointed trustees pursuing assets on behalf of the debtor estates. Indeed, the discovery requests presently before the Court are the same as those made on Ernst & Young HK and found by the High Court of Hong Kong to be "reasonably required to permit [the Liquidators] to carry out their functions." (Lewis Decl., Ex. G.) The fact that the Liquidators may use the fruits of discovery to pursue potential claims against third parties does not undermine their equally legitimate goals of reconstructing financial records, evaluating key transactions and identifying and recovering the debtors' assets. (Liquidators Mem. at 7.)*fn4 Accordingly, the Court denies the motion to vacate the December 14, 2004 Order.*fn5,*fn6 II. The December 22, 2004 subpoenas

  Ernst & Young USA further move to quash the December 22, 2004 subpoenas, arguing that the subpoenas are overly broad and burdensome.*fn7 (Ernst & Young USA Mem. at 11-13.) The Liquidators respond that the subpoenas are narrowly tailored and entirely consistent with the October 23, 2003 Hong Kong Order concerning the documents necessary for the liquidation proceeding. (Liquidators Opp'n Mem. at 17.)

  Discovery taken pursuant to § 1782 is subject to Rule 26 of the Federal Rules of Civil Procedure. See In re Application of Noboa, Misc No. 19-111, 1995 WL 581713, at *2 (S.D.N.Y. Oct. 4, 1995); Fed.R.Civ.P. 26(c) (the court "may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression or undue burden or expense.") While Rule 45(c)(3) authorizes a court to quash or modify a subpoena if the subpoena "subjects a person to undue burden," Fed.R.Civ.P. 45(3)(A)(iv), the "burden of persuasion in a motion to quash a subpoena is borne by the movant." Resqnet.Com, Inc. v. Lansa, Inc., No. 01 Civ. 3578 (RWS), 2004 WL 1627170, at *2 (S.D.N.Y. July 21, 2004) (internal citations omitted). Ultimately, motions to quash a subpoena are entrusted to the sound discretion of the trial court. In re Fitch, Inc., 330 F.3d 104, 108 (2d Cir. 2003).

  The discovery sought through the Liquidators' subpoenas tracks the documents ordered to be released by Ernst & Young HK under the October 23, 2003 Hong Kong Order. See John Deere, Ltd. v. Sperry Corp., 754 F.2d 132, 137-38 (3d Cir. 1985) (granting § 1782 assistance where analogous forum in Canada had authorized discovery and determined that the requested information was relevant). While Ernst & Young USA argues that the requested discovery impermissibly broadens the scope of the October 23, 2003 Hong Kong Order to companies such as Singer and Semi-Tech (Ernst & Young USA Reply Mem. at 10), the complicated relationship between Akai, Singer and Semi-Tech reveal that the companies' business affairs were "inextricably intertwined" from 1993 until at least 1997. (Supplemental Decl. of Eric L. Lewis ("Lewis Supp. Decl."), Ex. A.) Additionally, Ernst & Young HK, Ernst & Young USA and Ernst & Young Canada audited these three companies from 1991 until 1997, at which point Ernst & Young USA and Ernst & Young Canada withdrew and Ernst & Young HK became the sole auditor. (Lewis Supp. Decl. ¶ 9.) Yet Ernst & Young USA, Ernst & Young Canada and Ernst & Young HK extensively communicated with each other regarding the companies through 1998. (Hill Decl. ¶¶ 25, 29; Lewis Decl., Ex. 8.) As such, the discovery requests are neither overly broad nor burdensome. Accordingly, the Court also denies the motion to quash or modify the December 22, 2004 subpoenas.

  SO ORDERED.


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