Second Circuit Holds Arbitrators Cannot, Under the Federal Arbitration Act, Compel Pre-Hearing Discovery of Documents of Third Parties, Except That Production May be Compelled at a Preliminary Hearing Before an Arbitrator

Life Receivables Trust v. Syndicate 102 at Lloyd’s of London
2008 U.S. App. LEXIS 24977 (Nov. 25, 2008)

The Second Circuit held that section 7 of the Federal Arbitration Act (“FAA”) does not permit an arbitrator to compel pre-hearing document discovery from non-parties to the arbitration. However, the court noted that a non party could be subpoenaed to produce documents at a preliminary hearing on non-merits issues before one or more arbitrators.

The case arose out of a dispute involving mitigation of risk in purchasing life insurance policies of still-living individuals. Life Settlements Corp. d/b/a Peachtree Life Settlements (“Peachtree”) purchases life insurance policies from elderly insureds and offers them a cash payment at a discount to the face value of the policy. Peachtree’s purchase price is based on a variety of factors including an estimated life expectancy. Peachtree buys some policies for itself, and others for Life Receivables Trust (the “Trust”), a special purpose vehicle created for this sole objective. Peachtree still performs actuarial and financial work for all the policies purchased, but it transfers its interest in the policy to the Trust. As a hedge against the possibility that the insured may live beyond his or her projected life expectancy, Peachtree purchases contingent cost insurance from Syndicate 102 for the benefit of the Trust. When Syndicate 102 refused to pay the net death benefit on two certain policies, the Trust initiated an arbitration claim against Syndicate 102. Peachtree was not a party to the arbitration.

In an arbitration proceedings, Syndicate 102 sought discovery of Peachtree through the Trust in a variety of unsuccessful manners. Finally, Syndicate sought and was issued a subpoena by the arbitration panel to compel Peachtree to produce documents. Peachtree refused to comply with the subpoena and commenced a federal lawsuit to quash the subpoena on the basis that an arbitration panel could not compel pre-hearing discovery of a non-party.

The trial court granted Syndicate 102’s motion to enforce the subpoena against Peachtree holdings that there was “no reason to disturb the arbitration panel’s issuance of a subpoena to an entity that, while not a party to the specific arbitration at issue, is a party to the arbitration agreement.” Peachtree complied with the subpoena, and then filed an appeal arguing that the arbitration panel lacked authority to issue a pre-hearing document subpoena to a non-party. The only provision of the FAA related to subpoenas is section 7. Section 7 provides that “the arbitrators…may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record document, or paper which may be deemed material as evidence in the case.”

On appeal, the Second Circuit recognized that the circuits were split over whether section 7 of the FAA may be invoked as authority for compelling pre-hearing depositions and pre-hearing document discovery from non-parties. The Eighth Circuit held that although section 7 does not “explicitly authorize the arbitration panel to require the production of documents for inspection by a party…implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” The Third Circuit held that section 7 “unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time.”

The Second Circuit recognized that the FAA was enacted at a time when pre-hearing discovery in civil litigation was generally not permitted, and in fact Section 7 of the FAA mirrors the prior version of Rule 45 of the Federal Rules of Civil Procedure (“FRCP”). Although Congress subsequently amended Rule 45 of the FRCP to endow the poer to issue subpoenas for discovery on the federal courts, Congress did not similarly amend the FAA. The Second Circuit thus concluded that if Congress wanted to expand the arbitral subpoena authority, it was fully capable of doing so, yet had not yet done so. The Second Circuit thus joined the Third Circuit in holding that section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not parties to the arbitration proceedings.

The Second Circuit observed that its construction of section 7 “does not leave arbitrators powerless” to order the production of documents. Consistent with the Third Circuit, it stated that arbitrators may, consistent with section 7, order “any person” to produce documents so long as that person is called as a witness at a hearing. Further, arbitral section 7 authority is not limited to witnesses at merits hearings, but extends to hearings covering a variety of preliminary matters. And, arbitrators also “have the power to compel a third-party witness to appear with documents before a single arbitrator, who can then adjourn the proceedings.”

Click here for full text opinion provided courtesy of LexisNEXIS.

This entry was posted in Arbitration and tagged , . Bookmark the permalink.