The case of the day is IJK Palm LLC v. Anholt Services USA, Inc. (2d Cir. 2022). IJK was an investor in Palm Investment Partners, which was a minority shareholder of United Oils Limited, SEZC. United Oils, a Cayman entity, ran palm oil plantations in Peru. It fell on hard times, and its board approved a plan to give new shares to existing debt holders in return for new investment. IJK asserted that some of United Oils’s directors had conflicts of interest because they were both shareholders and debt holders and that their actions were not in the company’s interest. It asserted that it intends to sue the directors in the Cayman Islands, and it brought a Section 1782 application in the District of Connecticut seeking evidence from several people and entities either domiciled or doing business in Connecticut.
The magistrate judge granted the ex parte application, and the targets moved to intervene in order to seek to vacate the magistrate judge’s decision. They argued that the application did not meet the statutory requirements, and they noted that since the date of the application, UOL had entered liquidation proceedings in the Cayman Islands. The main arguments were that because only the liquidator could bring a Cayman action on behalf of the United Oils, the IJK was not an “interested person,” and the evidence sought was not “for use in” a Cayman proceeding.
Interestingly, the liquidator apparently wanted the discovery to proceed but could not afford to undertake it. IJK filed a letter from the liquidator, in which the liquidator stated that IJK was “empowered to investigate the causes of the failure of UOL and the promotion, business, dealings and affairs of the Company and make such reports to the [Cayman] Court as they think fit,” and that the liquidator would “be grateful if the material recovered under any action undertaken by IJK Palm LLC would be available” to it for review. IJK also asserted that it was considering bringing a derivative action in the Cayman courts against the directors, and that it could use the evidence in that proceeding, though the targets argued that the usual Cayman practice was to fund the liquidator’s suit, not to bring an independent derivative claim.
The Second Circuit correctly (in my view) held that the discovery could not be “for use in” an action to be brought by the liquidator, because it was not clear that the liquidator intended to bring a claim. The liquidator stated that it would like to review the fruits of the discovery, but there was no real indication that the liquidator intended to sue, let alone that proceedings were imminent. You might think, as IJK argued, that the case is analogous to Intel itself, since there, the applicant sought evidence to give to the European antitrust authorities, who then would be responsible for pursuing an antitrust claim. But as the Second Circuit noted, in Intel, once the applicant made the complaint to the antitrust authorities, its complaint would trigger an official investigation and a recommendation to the European Commission about whether to bring the claim. The investigation and recommendation process itself was the foreign proceeding in Intel. Here, delivering the evidence to the liquidator would not begin any process or proceeding, except for the liquidator’s deliberation about whether to bring a claim.
I think the court was on shakier ground in holding that IJK was not an “interested person” for purposes of the statute. “Interested person” is, as the court recognizes, a broader category than “litigant” or “party.” IJK’s interest in the evidence and the possible proceedings seems clear beyond question. It’s true that a mere financial interest may not be enough, but here, if the liquidator did sue, it would be suing on behalf of IJK and others.
The remainder of the decision focuses on IJK’s proposed derivative suit. There would be no question, of course, that IJK is an “interested person” with respect to that proceeding. But the court held that there were enough procedural hurdles to bringing the suit to call into question whether the suit ever would be brought. For instance, IJK would need leave of court after the liquidator refused to sue. Again, I don’t find this persuasive. We know, for example, that evidence can be obtained for use in a criminal investigation, and it can hardly be certain that a criminal investigation will lead to a criminal prosecution, particularly in countries where there are necessary preliminaries such as an indictment.
I wonder whether, in retrospect, a Chapter 15 proceeding would have been a better option for IJK? I don’t know enough about the situation in the Caymans to say, but Chapter 15 can be a powerful discovery tool in foreign insolvency cases.