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In Westernbank Puerto Rico v. Kachkar, No. M8–85 X3, 2009 WL 856392 (S.D.N.Y. Mar. 27, 2009), the court refused to transfer a motion seeking compliance with a subpoena issued from that court based on the fact that the forum court, the District of Puerto Rico, would not have personal jurisdiction over the subpoenaed party.
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M8-85 X3 (Part I).
March 26, 2009
Related to Civ. Action No. 07-1606 (ADC-BJM) United States District Court District Court of Puerto Rico
OPINION ORDER
Before the Court is a Motion to Compel Production of Documents by Non-Party filed by Movants Kachkar, Handley, Hunter, Green, Goldschmidt, Benkovitch and Inyx, Inc. ("Movants"). Movants are the Defendants, and certain of them are counterclaim-plaintiffs, in an underlying litigation brought by Plaintiff Westernbank Puerto Rico ("Westernbank") currently pending in the United States District Court for the District of Puerto Rico. Movants filed their motion in this Court on February 23, 2009. Westernbank filed its opposition on March 10, 2009. Movants filed their reply on March 16, 2009. Oral argument on the motion was heard on March 19, 2009. For reasons stated on the record, the Motion was granted in part and denied in part. This Opinion and Order is issued to further explain the reasons underlying my decision on the Motion to Compel.
I. FACTUAL BACKGROUND
The underlying litigation concerns certain loans made by Westernbank to Inyx, Inc. and its operating subsidiaries (the "Inyx Loans"), as well as personal guarantees by Defendants Kachkar and Benkovitch, Inyx, Inc.'s chief executive officer and his wife (the "Puerto Rico Action"). The Puerto Rico Action involves claims of breach of contract, common law fraud and RICO violations. In particular, Westernbank alleges that Defendants made material misrepresentations regarding the value of its accounts receivable that served as collateral for the asset-based loans.
In February 2008, W Holding Company ("WHI"), the publicly traded holding company of Westernbank, announced that it was restating its audited financial statements for the year ending December 31, 2006; WHI later also disclosed that it would be restating its 2005 financial statements as a result of accounting errors with respect to the Inyx Loans. WHI and Westernbank hired Crowe Horwath LLP ("Crowe"), an independent accounting firm, to provide assistance and advice to management regarding the accounting effects of the Inyx Loans in connection with the restatement of the financial statements. Earlier this year, WHI reported that it had not yet completed the preparation of its restated financial statements, but that the goal for filing the company's 2007 10-K Report, which would include the restatements, was March 31, 2009.
Movants served Crowe with a subpoena duces tecum at its New York City office on December 4, 2008 for production of documents. The return date was December 19, 2008. On the return date, instead of producing any documents, Crowe served general objections to each request by letter. Crowe's senior counsel confirmed that Crowe has a file of documents relating to its engagement by Westernbank with respect to the Inyx Loans, but stated that it was her understanding that Westernbank intended to intervene to object to the production of that file. Counsel for Westernbank did object on the grounds of the work product doctrine and self-evaluative privilege. Subsequently, Westernbank moved for a protective order in the Puerto Rico Action.
Crowe is headquartered in South Bend, Indiana, and its principal office is in Oakville, Illinois. Crowe maintains a small satellite office in New York City, and does not dispute that the subpoena was properly served on it in this District.
Movant filed their motion to compel the production of documents pursuant to subpoena. In particular Movants sought the production of three categories of documents: (1) Crowe's work papers relating to the Inyx Loans; (2) communications between Inyx and Westernbank relating to the restatement of Westernbank's financial statements; and (3) certain other documents created by other parties but in Crowe's custody relating to forensic reviews of the Inyx Loans (specifically, a report prepared by KPMG (the "KPMG Report") and a report prepared by the Joint Administrators of Inyx's operating subsidiaries in the UK, who are partners at Ernst Young in the UK appointed by Westernbank (the "UK Administrators Report")). In opposition to the Motion to Compel, Westernbank contends that, due to its superior and intimate knowledge of the issues in the underlying litigation, the Motion to Compel should be transferred to the District Court of Puerto Rico. In the alternative, Westernbank asks this Court to defer its determination on the Motion to Compel pending the Puerto Rico court's resolution of Westernbank's motion for protective order. In opposing the merits of the motion, Westernbank argues that the documents are privileged under the work product doctrine and the self-evaluative privilege. For its part, Crowe has not officially opposed the Motion to Compel, and has represented to the Court that it will comply with any order that is entered regarding Crowe's obligation to produce documents.
Movants represented at oral argument that it no longer seeks production of the KPMG Report or the UK Administrators' Report.
III. DISCUSSION
A. Transfer or Deference to Puerto Rico Court
Rule 45 of the Federal Rules of Civil Procedure provides that a subpoena is to be issued in "the court for the district where the production or inspection is to be made." Fed.R.Civ.P. 45(a)(2). The Rule also imposes territorial limits on the area in which the subpoena may be served, directing that "a subpoena may be served at any place in the district of the court by which it is issued, or at any place without that district that is within 100 miles of the place of the . . . production." Fed.R.Civ.P. 45(b)(2). The Rule further provides that if a party objects to the subpoena, the serving party may "move the issuing court for an order compelling production." Fed.R.Civ.P. 45(c)(2)(B)(i). Further, it provides that it is the "issuing court" that is to rule on a motion to quash the subpoena. Fed.R.Civ.P. 45(c)(3)(A). Finally, it provides that failure to obey a subpoena may be deemed a contempt "of the court from which the subpoena issued." Fed.R.Civ.P. 45(e). Therefore, the text of Rule 45 suggests that, at least initially, "only the issuing court has the power to act on its subpoenas." See In re Sealed Case No. 98-5062, 141 F.3d 337, 341 (D.C. Cir. 1998).
Courts that have faced the question of the "issuing" court's authority to transfer a motion to compel or motion to quash under Rule 45 are divided. Some courts have gone as far as to interpret the text of Rule 45 as "offer[ing] no authorization to transfer a motion to quash and seem[ing] at least implicitly to forbid it." Id.; In re Orthopedic Bone Screw Prod. Liab. Litig., 79 F.3d 46, 48 (7th Cir. 1996) (rejecting transfer of discovery disputes); Prosonic Corp. v. Baker, No. 2:08-mc-007, 2008 U.S. Dist. LEXIS 36035, at *2-3 (S.D. Ohio Apr. 7, 2008) ("It is clear that this Court cannot shirk its responsibility to decide issues arising from the service of a subpoena . . . simply by transferring the proceedings to the court in which the underlying litigation is pending."); Hartz Mountain Corp. v. Chanelle Pharm. Veterinary Prods. Mfg. Ltd., 235 F.R.D. 535, 536 (D. Me. 2006). On the other hand, there seems to be substantial case law that supports a court's authority to transfer a discovery motion to the district where the underlying litigation is pending. E.g., In re Digital Equip. Corp., 949 F.2d 228, 231 (8th Cir. 1991) (court issuing subpoenas pursuant to Rule 45 may remit consideration of objections to court where underlying case is pending); Petersen v. Douglas County Bank Trust Co., 940 F.2d 1389, 1391 (10th Cir. 1991) (finding nothing improper where the court issuing the subpoena transferred a motion to compel to district with jurisdiction over underlying litigation); see also Devlin v. Transportation Commc'ns Int'l Union, No. 95 Civ. 0742 (JFK) (JCF), 2000 U.S. Dist. LEXIS 2527, at *1 (S.D.N.Y. Mar. 6, 2000) (noting the "substantial support in the caselaw, among commentators, and in the Advisory Committee Note to Rule 26(c) of the Federal Rules of Civil Procedure for the proposition that the court from which a subpoena has issued has the authority to transfer any motion to quash or for a protective order to the court in which the action is pending"); 9 A C. WRIGHT A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2463.1 at 79 (3d ed. 2008) ("[I]t is within the discretion of the court that issued the subpoena to transfer motions involving the subpoena to the district in which the action is pending.").
Here, too, certain judges have found transfer to be appropriate, while others have expressly held that there is no authority under the Federal Rules or case law to do so. Compare In re Application for an Order Quashing Deposition Subpoenas dated July 16, 2002, Misc. No. M8-85, 1:02CV00054 (M.D.N.C.), 2002 U.S. Dist. LEXIS 14928, at *20 (S.D.N.Y. Aug. 14, 2002) ("This Court may not transfer the instant motion to quash to the North Carolina court, since `only the issuing court has the power to act on its subpoenas.'" (quoting In re Sealed Case 141 F.3d at 341) with Stanziale v. Pepper Hamilton LLP, Misc. No. M8-85 (Part I) (CSH), 2007 U.S. Dist. LEXIS 11320 (S.D.N.Y. Feb. 9, 1007) (transferring motion to compel to jurisdiction overseeing underlying litigation). In this District, a critical question appears to be whether the third party itself requested the transfer. See Griffith v. United States, Case No. Part I M8-85 (JFK), Related USDC Conn. No. 3:06-cv-56 (AWT), 2007 U.S. Dist. LEXIS 36672 (S.D.N.Y. Apr. 24, 2007) (declining to transfer discovery motion because subpoenaed party had not objected to subpoena or moved for transfer or stay); Stanziale, 2007 U.S. Dist. LEXIS 11320 (noting that nonparty expressed preference for district where underlying litigation was pending); In re Application of FB Foods, Inc., Part I Docket No. M8-85 (JFK), 2005 U.S. Dist. LEXIS 26301 (S.D.N.Y. Nov. 2, 2005) (declining to transfer the motion to underlying litigation in Florida because third party had neither objected to subpoena nor applied for transfer).
The practice commentaries to Rule 45 explain that a motion to compel under Rule 45(c)(2)(B) "should, like the motion to quash or modify . . . be made to the court from which the subpoena issued," which "will presumably be a court in a district convenient to the nonparty" since it is "of course the nonparty whose convenience Rule 45 is most concerned about protecting." David D. Siegel, Practice Commentaries, Fed.R.Civ.P. 45. Thus, courts in this District and in other districts have agreed that "where the nonparty indicates a preference for a forum other than the issuing court, the notes and commentary to the rule suggest that transfer, in the issuing court's discretion, would accord with Rule 45's purposes." United States v. Star Scientific, Inc., 205 F. Supp. 2d, 482, 484-85 (D. Md. 2002); see also Pactel Pers. Commc'ns v. JMB Realty Corp., 133 F.R.D. 137, 138-39 (E.D. Mo. 1999) (transferring motion to compel subpoena compliance pursuant to nonparties' request).
In light of this disagreement, and particularly in light of the disagreement in this District, it is not entirely clear whether this Court has the authority or discretion to transfer the instant motion to the Puerto Rico court. However, I need not decide this issue in this particular case, because here, there is no indication that the Puerto Rico court would have personal jurisdiction over Crowe, the third party to be compelled. Indeed, as several courts have opined, a transferee court would lack the ability to issue a binding order to compel production where it lacks personal jurisdiction over the nonparty. See In re Sealed Case, 141 F.3d at 341 ("The principle that courts lacking jurisdiction over litigants cannot adjudicate their rights is elementary, and cases have noted the problem this creates for the prospect of transferring nonparty discovery disputes.") (citations omitted); id. at 343 (Henderson, J., concurring) (finding the district court abused its discretion in attempting to transfer a discovery motion without first inquiring into whether the transferee court had personal jurisdiction over the nonparty, "a sine qua non for deciding the discovery motions"); Brunn v. DaimlerChrysler Corp., Civil No. 2001/125, 2003 U.S. Dist. LEXIS 24080, at *3 (D.V.I. Aug. 7, 2003) (court lacked jurisdiction to rule on motion to compel where subpoena was issued in another district and nonparty was not located in Virgin Islands); Kruse v. United States, No. 1:99-CV-428, 2000 U.S. Dist. LEXIS 16062, at *3 n. 3 (N.D. Ind. Sept. 29, 2000) (finding any orer on the discovery motion might be uneforceable where nonparty had not consented to jurisdiction and there was no evidence that there was personal jurisdiction over it). Here, Crowe has no offices in Puerto Rico, nor are the documents to be produced located there. Under such circumstances, and absent any indication that Crowe has consented to jurisdiction in Puerto Rico, it would be inappropriate for this Court to transfer the Motion to Compel to Puerto Rico, even if it had authority to do so. Moreover, even if the Puerto Rico court had authority to rule on the motion, it is Westernbank, not Crowe, that has advocated the transfer of the instant motion to compel; following the trend in similar cases in this District, I will follow what seems to be Crowe's preference, and decline to transfer the Motion to the District of Puerto Rico.
Irrespective of this Court's authority to transfer, or the advisability of doing so, there appears to be no dispute that I have discretion to issue a stay pending the Puerto Rican court's resolution of the motion for a protective order. Numerous courts have found that the issuing court has inherent discretion to stay a determination on a discovery motion while a decision on a motion for a protective order is sub judice in the district where the litigation is pending. See, e.g., In re Sealed Case, 141 F.3d at 342-43; Association of Am. Physicians Surgeons, Inc. v. Texas Med. Bd. (TMB), No. 5:07CV191, 2008 U.S. Dist. LEXIS 56496, at *9-10 (E.D. Tex. July 25, 2008); Floorgraphics, Inc. v. News Am. Marketing In-Store Servs., Inc., Misc. No. 07-27 (PJS/RLE), 2007 U.S. Dist. LEXIS 37686, at *7 (D. Minn. May 23, 2007) ("[W]e conclude that judicial efficiency, as well as the comity which extends between Federal Courts, commends our stay of the enforcement of the Subpoena at issue here, as well as any further consideration of the issues presented, until the District Court for the District of New Jersey considers New America's Motion for a Protective Order, which will soon be heard."); Hartz, 235 F.R.D. at 536-37. Put another way, while the Puerto Rico court, with its superior knowledge and familiarity with the issues in the case, may be in a better position to make determinations as to the relevance of the sought after documents in the underlying litigation, that superior knowledge need not prevent this Court from deciding whether the documents should be produced in the first instance. As it is undisputed among the parties that this Court has authority to rule on the Motion to Compel, it only seems prudent that I do so.
Indeed, "relevance" in the context of Rule 26 of the Federal Rules of Civil Procedure is far broader than the meaning of "relevance" in the context of Rule 401 of the Federal Rules of Evidence. Griffith, 2007 U.S. Dist. LEXIS 36672 at *6. Under Rule 26, a party is authorized to obtain information "regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action" and information "reasonably calculated to lead to discovery of admissible evidence." Fed.R.Civ.P. 26(b)(1). For the purposes of discovery, relevance as it relates to the subject matter of the action is construed broadly "to encompass any matter that bears on, or that reasonably could lead to another matter that could bear on, any issue that is or may be in the case." Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978). In light of the permissive approach to relevance in the discovery context, I find that I am able to determine whether the documents sought by the subpoena are relevant for the purpose of discovery, although their relevance in the underlying litigation ultimately will be determined by the Puerto Rico court.
Merits of the Motion to Compel
It is true that a district court "whose only connection with a case is supervision of discovery ancillary to an action in another district should be especially hesitant to pass judgment on what constitutes relevant evidence thereunder." In re Honeywell Int'l, Inc. Secs. Litig., 230 F.R.D. 293, 301 (S.D.N.Y. 2003). However, where relevance is in doubt, the district court is to be permissive. Id. In light of the breadth of "relevance" allowed in discovery, I find that the documents sought by movants via the subpoena served on Crowe are clearly relevant. The documents sought relate to the restatement of WHI's financial statements, necessitated by Westernbank's failure to properly record the impairment of the Inyx Loans over earlier periods and to disclose weaknesses in internal controls that were identified in the review of the Inyx Loans. Movants argue these issues are highly material to their defenses raised to Westernbank's fraud claims, as the documents are likely to reveal Westernbank's own earlier knowledge of the collateral deficiency resulting from ineligible accounts receivable on which Westernbank bases its fraud claim, and which it claims Inyx concealed. Movants further assert that the work papers sought will document Westernbank's internal control deficiencies, including the failure to record ineligible collateral in its accounting system, further negating allegations that it was misled by the Movants. I agree that these documents will be relevant to Movants' defenses in the underlying litigation. Furthermore, I find that the documents sought in the subpoena are not privileged, as they are not protected as work product, and there is no communicative privilege between accountants and clients. United States v. Adlman, 134 F.3d 1194, 1198, 1202 (2d Cir. 1998) (documents are not entitled to work product protection if they were composed for a business purpose and "would have been created in essentially similar form irrespective of litigation"); Export-Import Bank of the U.S. v. Asia Pulp Paper Co., 232 F.R.D. 103, 114 (S.D.N.Y. 2005) ("there is no privilege protecting communications between clients and their accountant") (citing United States v. Arthur young Co. 465 U.S. 805, 817 (1984)). Furthermore, to the extent the self-evaluative privilege is recognized in this Circuit, which itself is unsettled such a privilege does not apply here.. See, e.g., In re Winsar Commc'ns, Secs. Litig., 01 CV 3014 (GBD), 2007 U.S. Dist. LEXIS 85134, at *8 (S.D.N.Y. Nov. 15, 2007) ("Neither the United States Supreme Court nor the Second Circuit Court of Appeals has ruled that such a privilege exists as a matter of federal law."); In re Ashanti Goldfields Secs. Litig., 213 F.R.D. 102, 104 (E.D.N.Y. 2003) (same); In re Federation Internationale de Basketball, 117 F. Supp. 2d 403, 407 (S.D.N.Y. 2000) (finding the scope of coverage of self-evaluative privilege "has been somewhat limited"); Pkfinans Int'l Corp. v. IBJ Schroder Leasing Corp., Nos. 93 Civ. 5375, 96 Civ. 1816, 1996 U.S. Dist. LEXIS 17375, at * 12 (S.D.N.Y. Nov. 21, 1996) (rejecting claim that defendant's audit documents were protected by self-evaluative privilege because defendant "will likely continue to perform its audits . . . out of an obvious business necessity"); In re Health Mgmt., Inc., CV 96-0889 (ADS), 1999 U.S. Dist. LEXIS 22729, at *19-20 (E.D.N.Y. Sept. 28, 1999) ("The [self-evaluative] privilege applies only to the analysis or evaluation itself, not to the facts upon which the evaluation is based, and must be balanced against the party's need for discovery fully and fairly to determine the issues.") (citations omitted).
Westernbank claims that, to the extent they are relevant and non-privileged, the sought-after documents have already been produced in the underlying litigation. Obviously, any documents that have already been produced to Movants may be "carved out" from the order compelling production.
Therefore, it is:
ORDERED that within ten (10) days of the date of this Order, Crowe will produce:
a. Crowe's work papers concerning the restatement of WHI's financial statements for fiscal years 2005 and 2006 (the "Restatement") and work papers or other documents concerning the related internal control issues disclosed in WHI's Form 10-K Report filed with the Securities and Exchange Commission on March 16, 2009; and
b. Crowe's correspondence with Westernbank or others on which Westernbank is copied concerning the Restatement and the correspondence related to control issues, including emails and attachments thereto, pursuant to search terms agreed to by counsel for Movants and counsel for Crowe; and
c. The Inyx Loan file and raw data provided to Crowe by Westernbank; and it is further
ORDERED that no documents that would be produced pursuant to the previous paragraph need be produced if they have been produced previously in the Puerto Rico Action; and it is further
ORDERED that Crowe will not be required to produce the KPMG Report and related documents that were the subject of Magistrate Judge McGivern's Order dated February 9, 2009 in the Puerto Rico Action; and it is further
ORDERED that Crowe will not be required to produce the UK Administrators Report, or any documents prepared by and/or for, or originating from the Administrators and/or Ernst Young LLP, to the extent that they were listed on a privilege log dated January 7, 2009 provided by counsel for the UK Administrators to counsel for Movants, in accordance with the terms of the stipulation entered or to be entered into by counsel that appeared at the hearing; and it is further
ORDERED that this Court will retain jurisdiction over this matter only to the extent that it will resolve any issues that arise concerning the document production by Crowe.