Court Opinion

ID: 9324955
Source: CourtListenerOpinion
Date Created: 2022-12-13 19:00:25.024679+00
Date Added: 2024-06-11T17:14:58.493339
License: Public Domain

Case: 21-10776      Document: 00516576341          Page: 1    Date Filed: 12/13/2022

            United States Court of Appeals
                 for the Fifth Circuit                                  United States Court of Appeals
                                                                                 Fifth Circuit

                                                                               FILED
                                                                       December 13, 2022
                                    No. 21-10776                          Lyle W. Cayce
                                                                               Clerk

   Banca Pueyo SA; Banco BIC Portugues SA; Banco Bilbao
   Vizcaya Argentaria SA; BlackRock, Incorporated;
   Carlson Capital, L.P.; CQS (UK), L.L.P.; DNCA Finance;
   Pacific Investment Management Company, L.L.C.;
   River Birch Capital, L.L.C.; TwentyFour Asset
   Management, L.L.P.; VR-Bank RheinSieg eG;
   Weiss Multi-Strategy Advisers, L.L.C.; York Capital
   Management Global Advisors,

                                                             Plaintiffs—Appellees,

                                       versus

   Lone Star Fund IX (US), L.P.; Lone Star Global
   Acquisitions, L.L.C.; Hudson Advisors, L.P.,

                                                         Defendants—Appellants.

                   Appeal from the United States District Court
                       for the Northern District of Texas
                             USDC No. 3:18-MC-100

   Before Jones, Stewart, and Duncan, Circuit Judges.
   Edith H. Jones, Circuit Judge:
          The principal issue in this appeal of a 28 U.S.C. § 1782(a) discovery
   order is whether, in response to the ex parte order authorizing discovery by
   “interested parties” for use in foreign litigation, the respondents have a right
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   to challenge the order’s validity pursuant to statutory requirements and the
   Supreme Court’s “Intel factors.” See Intel Corp. v. Advanced Micro Devices,
   Inc., 542 U.S. 241, 124 S. Ct. 2466 (2004).           The district court here
   misconstrued our precedent and erroneously rebuffed respondents’
   challenge on its face.
          Accordingly, we must REVERSE and REMAND.
                                I. Background
          In 2014, the second largest Portuguese bank, Banco Espírito Santo
   (“BES”), reported losses over €3.5 billion. The Bank of Portugal, Portugal’s
   central bank, attempted to salvage BES by incorporating a new bank, Novo
   Banco, and transferring BES’s assets and liabilities to it. The Bank of
   Portugal next tried to sell Novo Banco to investors, but was unsuccessful.
          To better market Novo Banco, the Bank of Portugal retransferred a
   large amount of Novo Banco’s liabilities back to the insolvent BES. This
   retransfer included approximately €2.2 billion worth of debt on senior notes
   held by various investors, including some of the appellees. Following the
   retransfer, and likely as a result of it, those notes became worthless.
          After the retransfer, Novo Banco was again posted for sale. Nani
   Holdings, SGPS, S.A., then purchased a 75% stake. Appellant Lone Star
   Fund IX owns 14% of Nani Holdings and thus indirectly owns about 11% of
   Novo Banco. 1 The remaining 25% of Novo Banco stayed in the hands of a
   Portuguese government-run financial fund (“Resolution Fund”).
          The debt transfers and Nani Holdings’ acquisition of Novo Banco
   spawned two sets of civil litigation in the Lisbon Administrative Court. In
   the first set of proceedings, the “Retransfer Litigation,” eight plaintiff

          1
             Lone Star Global Acquisitions, L.L.C., and Hudson Advisors, L.P., had an
   advisory role in Novo Banco’s acquisition, but otherwise were uninvolved.

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   appellees 2 challenge the retransfer of bonds to BES. Discovery disputes are
   ongoing in the Retransfer Litigation concerning many of the same documents
   sought in this § 1782(a) matter. Only appellee DNCA Finance is also a
   plaintiff in the second set of civil cases, the “Acquisition Litigation,” which
   challenges Nani Holdings’ acquisition of Novo Banco after the bond
   retransfer. The Bank of Portugal has produced discovery in the Acquisition
   Litigation, but discovery disputes remain pending over claims of trade secrets
   and confidential information.
          Asserting that the appellants possess evidence relevant to the foreign
   proceedings, the appellees filed an ex parte § 1782(a) application, supported
   by a Portuguese lawyer’s affidavit and other papers, in the Northern District
   of Texas in late December 2018. The district court granted the application
   with a brief and conclusory opinion (the “Ex Parte Order”) that commenced
   by stating “[t]he following recitation of facts … does not constitute fact-
   finding by this Court.”
          Upon receiving the subpoenas for documents and testimony, the
   appellants moved to quash and for reconsideration on the basis that the
   appellees failed to carry their burden under the statute and the Intel factors
   to obtain § 1782(a) discovery. In a November 2019 Order, the magistrate
   judge declared that the appellants could not challenge whether the subpoenas
   were supported under § 1782(a) or the Intel factors. Instead, relying on its
   interpretation of Texas Keystone, Inc. v. Prime Natural Resources, Inc.,
   694 F.3d 548, 554 (5th Cir. 2012), the magistrate judge stated that “the proper
   mechanism for challenging the [Ex Parte] Order . . . [wa]s a motion to quash

          2
              Banca Pueyo S.A., Banco BIC Portugues S.A., Banco Bilbao Vizcaya Argentaria,
   S.A., DNCA Finance, Pacific Investment Management Company LLC, TwentyFour Asset
   Management LLP, VR-Bank Rhein-Sieg eG, and Weiss MultiStrategy Advisers LLC are
   plaintiffs in the Retransfer Actions.

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   under [Federal Rule of Civil Procedure] 45.” Consequently, the appellants
   would bear the burden to demonstrate their right to relief from the
   subpoenas. Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812, 818 (5th Cir.
   2004). Appellants were then permitted to “file a renewed motion to quash
   under Rule 45 addressing their remaining, specific objections.” 3             The
   magistrate judge did, however, consider appellants’ several arguments why
   the discovery application failed to comply with § 1782(a)’s statutory
   requirements. But the court dismissed their challenge to the Intel factors,
   reasoning that those factors are discretionary and had been weighed by the
   district court already.
          The appellants filed objections to the November 2019 Order, but the
   district court overruled their objections and expressly refused to consider
   their arguments and evidence challenging its original statutory and Intel
   factor analysis. (“December 2019 Order”). Like the magistrate judge, the
   district court claimed Texas Keystone as support for rejecting adversary
   consideration of the § 1782(a) application. The district court stated, “[t]he
   Court finds that Texas Keystone supports its conclusion that once it made the
   threshold decision that Petitioners met the statutory requirements under
   Sec. 1782 and that the Intel factors weighed in favor of granting Petitioners’
   Application, the Federal Rules of Civil Procedure govern the discovery
   dispute at issue.” The district court expressly disregarded the “non-
   binding” decisions of other courts that had allowed reconsideration of the
   statutory requirements and Intel factors pursuant to a motion to quash.
          Following about six more months of wrangling over specific discovery
   requests, and appellants’ premature appeal dismissed by this court for lack

          3
              Appellants argued under Rule 45(d)(3) that compliance with the subpoenas
   would be an unnecessary and disproportionate burden. The terms of Rule 45 do not
   otherwise authorize challenging a discovery order under § 1782(a).

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   of jurisdiction, the district court issued a final discovery order. See, e.g.,
   Banco Pueyo et al. v. Lone Star Fund et al., 978 F.3d 968, 974 (5th Cir. 2020).
   Appellants timely appealed and this court stayed discovery.
                             II. Standard of Review
           In § 1782(a) litigation, this court reviews de novo whether a party
   satisfied § 1782(a)’s statutory prerequisites, and we review a district court’s
   weighing of the Intel factors for abuse of discretion. See Ecuadorian Plaintiffs
   v. Chevron Corp., 619 F.3d 373, 376 (5th Cir. 2010).
                                    III. Discussion
           The decisive issue raised by appellants, among a bevy of difficult
   issues, 4 is whether the district court’s ex parte approval of the § 1782(a)
   application was immune from adversarial testing. We hold that it was not.
           A few background comments preface our discussion. Section 1782(a)
   seeks to facilitate third-party discovery in American district courts, from
   subjects that reside or are found in the district, in aid of “interested parties”
   in “foreign proceedings.” 28 U.S.C. § 1782(a); Intel, 542 U.S. at 246,
   124 S. Ct. at 2472. The statute, according to the Court, aims to provide
   efficient assistance to parties litigating in foreign tribunals and, by example,
   to encourage foreign assistance in U.S. Courts. Intel, 542 U.S. at 252,
   124 S. Ct. at 2476. In Intel, the Supreme Court resolved some lower court
   conflicts that had arisen in applying § 1782(a) and in so doing gave a “broad”
   reading to the statute. See 8 WRIGHT, MILLER & MARCUS, FED. PRAC. &
   PROC. § 2005.1 (3d ed. 2010). Pertinent here, the Court interpreted the term
   “interested parties” broadly and held that the material sought in this country

           4
             Some of the other issues pertinent to the granting of the Sec. 1782(a) application
   will be noted in the discussion of harmless error below.

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   need not be discoverable in the foreign jurisdiction. Id. at 86-88; Intel, 542
   U.S. at 256, 259–63, 124 S. Ct. at 2478, 2480–82. 5
           At the same time, however, the Court cautioned that granting these
   discovery requests is discretionary for the district courts. 542 U.S. at 24,
   124 S. Ct. at 2473. This court has provided a shorthand description of the
   Court’s “Intel factors,” the considerations that should inform the district
   courts’ exercise of discretion, as follows: (i) whether the person from whom
   discovery is sought is a “participant in the foreign proceeding,” such that the
   person, unlike a nonparticipant, is amenable to discovery in the foreign forum
   and the discovery may be unobtainable in that forum; (ii) the nature of the
   foreign tribunal, the character of the foreign proceedings, and the receptivity
   of the foreign government or forum to U.S. federal court assistance;
   (iii) “whether the 1782(a) request conceals an attempt to circumvent foreign
   proof-gathering restrictions….”; and (iv) whether the request is “unduly
   intrusive or burdensome.” Ecuadorian Plaintiffs, 619 F.3d at 376, n. 3,
   quoting Intel, 542 U.S. at 264-65, 124 S. Ct. at 2482-84. 6 Lower courts have
   both granted and denied applications for § 1782(a) discovery following Intel.
   See cases cited in 8 WRIGHT, MILLER & MARCUS, FED. PRAC. &
   PROC. § 2005.1, n. 51 (3d ed. 2010 and 2022 Supp.).
           We agree that it is not unusual for § 1782(a) applications to be made
   initially on an ex parte basis to the district courts, though this does not seem
   to be routine practice. There is no reason to disapprove ex parte applications.

           5
             Section 1782(a) itself specifies, however, that it shields from discovery materials
   that are subject to legally applicable privilege claims in the foreign jurisdiction. 28 U.S.C.
   § 1782(a).
           6
             Judge Posner correctly observed that “[t]he section 1782 screen—the judicial
   inquiry that the statute requires—is designed for preventing abuses of the right to conduct
   discovery in a federal district court for use in a foreign court.” Heraeus Kulzer, GmbH v.
   Biomet, Inc., 633 F.3d 591, 597 (7th Cir. 2011).

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   The procedural device used should not, however, narrow a respondent’s
   legal rights on receipt of a § 1782(a) subpoena. Yet that is what the district
   court’s decision effected here. 7
           Erroneously interpreting Texas Keystone, the district court concluded
   that after its ex parte approval of the appellees’ discovery requests, the
   appellants’ only permissible response was a “motion to quash” under
   Rule 45. The court relied on snippets from Texas Keystone, including the
   quotation that “with objections based on the fact that discovery is being
   sought for use in a foreign court being cleared away, section 1782 drops out.”
   Texas Keystone, Inc., 694 F.3d at 556 (quoting Heraeus Kulzer, GmbH v.
   Biomet, Inc., 633 F.3d 591, 597 (7th Cir. 2011)). Texas Keystone pointed to
   another quotation stating that the Supreme Court in Intel established a
   threshold standard for access to federal courts’ discovery tools, but how
   discovery proceeds “will be determined by normal discovery rules.” See
   Texas Keystone, 694 F.3d at 554 (quoting Govt. of Ghana v. ProEnergy Servs.,
   LLC, 677 F.3d 340, 343 (8th Cir. 2012)); Heraeus Kulzer, 633 F.3d at 597.
   Nothing in these general statements countenances the district court’s refusal
   to allow full adversary testing, when sought, of the assertions and evidence
   that resulted in the court’s approval of § 1782(a) discovery.
           For several reasons, Texas Keystone cannot be read either for the
   proposition that adversarial testing may be precluded on the merits of a
   § 1782(a) application following an ex parte ruling, or that Rule 45 furnishes
   the only means to challenge the initiation of the subpoenas approved ex parte
   by the district court. To begin, Texas Keystone was appealed by the proponent
   of discovery after the court had granted the respondent’s ex parte motion to
   quash. Far from approving the court’s peremptory ruling, this court reversed

           7
             Here and below, the decisions of “the district court” include for convenience the
   rulings of the magistrate judge.

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   and remanded to give the discovery applicant, Texas Keystone, an
   opportunity to respond to the motion. Id. at 554. The ex parte ruling was held
   an abuse of discretion. Id. Second, no issue about the propriety of discovery
   under § 1782(a)’s statutory criteria or the Intel factors was raised, hence,
   nothing in Texas Keystone specifies, much less limits, the procedures for an
   initial grant or denial of discovery. The only disputed issue was the scope of
   the discovery order under the Federal Rules. Third, Texas Keystone cites with
   approval this court’s decision in Ecuadorian Plaintiffs, in which the district
   court plainly predicated its § 1782(a) ruling on adversarial filings by the
   discovery applicant and the intervenors. Texas Keystone, 694 F.3d at 553, n.2;
   Ecuadorian Plaintiffs, 619 F.3d at 376. Finally, the district court here read far
   too much into some courts’ description that, after a determination has been
   made to approve a § 1782(a) application based on statutory criteria and the
   Intel factors, that inquiry “drops out” and the scope of discovery is then
   adjudged under federal discovery rules. “Drops out” does not prohibit
   further testing of the application’s compliance with § 1782(a), especially to
   provide balance to an ex parte order; it means that the next stage of
   proceedings, after full resolution of the statutory basis for discovery, occurs
   under the Federal Rules for discovery’s scope.
          Pretermitting a full adversary response to the propriety of the
   § 1782(a) application actually runs afoul of Intel, which admonished district
   courts to “ensure an airing adequate to determine what, if any, assistance is
   appropriate.” Intel, 542 U.S. at 266, 124 S. Ct. at 2484 (emphasis added).
   Appellees have cited no circuit court decision in which a district court
   refused, like the court here, to consider or reconsider a respondent’s
   challenge to the merits of the initial § 1782(a) application. And other
   circuits’ rulings reflect that district courts adjudicated these issues after
   presentations by both parties. See, e.g., In re Schlich, 893 F.3d 40, 50 (1st Cir.
   2018) (“Both parties are free to argue their positions, and submit evidence in

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   support thereof, and the district court is then to consider all of that in
   weighing [the Intel factors”); In re Accent Delight Int’l. Ltd., 869 F.3d 121, 136
   (2d Cir. 2017) (the crucible of the adversary process is a great aid to courts in
   “weed[ing] out abusive Section 1782 applications”); Government of Ghana,
   677 F.3d at 342 (reconsideration of § 1782(a) application denied by the
   district court). In light of the district court’s misinterpretation of Texas
   Keystone, such decisions are highly persuasive.
          Appellants’ attempt to shore up the district court’s explanation of
   Texas Keystone fails on other grounds as well. First, this dispute is not
   comparable to a third-party discovery order in U.S. domestic litigation,
   where the order would be determined from the outset under Federal Rules 26
   and 45. The federal court has access to and full comprehension of the scope
   of discovery requests in domestic cases brought under domestic law, whereas
   the legal background to foreign disputes is, well, foreign to a United States
   judge. That is why Congress crafted § 1782(a) with different principles in
   mind than a rote requirement of applying the Federal Rules alone. Even more
   important, to forbid a respondent’s request for reconsideration of the merits
   after an ex parte § 1782(a) discovery order, while affording a respondent duly
   noticed about the same application a full arsenal of legal arguments, is an
   unfair and arbitrary result. The district court’s refusal to reconsider invites
   gamesmanship and even more ex parte applications for discovery.
          Appellants additionally suggest that the appellees did not suffer
   prejudice, and any error in the court’s refusal to reconsider the merits of the
   § 1782(a) application was harmless because, in the end, Intel’s undue burden
   factor is not really different from the Rule 45(d)(3) undue burden defense to
   a subpoena. On the contrary, as appellees themselves argued, the courts have
   differentiated the factors pertaining to initial approval of a § 1782(a) order
   from the discovery rules governing the order’s enforcement. Aside from this
   implicit indication of a disparity, it is important to recall that the burden of

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   proof on a motion to quash rests with the respondent, while to obtain
   § 1782(a) discovery, the applicant must either carry its burden or at least
   provide sufficient support to persuade the court. 8 And finally, what is undue
   or burdensome in the context of the transnational litigation factors expressed
   in Intel is not necessarily identical to the burden and oppression standards
   that may limit third-party domestic discovery. See Texas Keystone, 694 F.3d
   at 556 (the threshold standard for § 1782(a) “requires a different analysis”
   from a motion to quash under the Federal Rules of Civil Procedure).
           The argument for harmlessness is further unconvincing in the face of
   the appellants’ challenges to the district court’s Section 1782(a) analysis.
   For instance, appellants’ complaint that the appellee parties to one of the
   civil Lisbon proceedings are not “interested parties” to the other one, as
   explained above, clearly implies that discovery pertinent to one of the
   proceedings should not be indiscriminately doled out to the parties to the
   other proceeding. Intel, to be sure, expanded the definition of “interested
   parties” beyond plaintiffs/defendants in a particular proceeding, but it did
   not countenance promiscuous availability of discovery to those with no
   interest in a particular proceeding. Pertinent to the second Intel factor,
   whether Portuguese courts would be amenable to U.S.-obtained discovery,
   appellants offered an expert affidavit contrary to that on which the district
   court predicated its approval of discovery—but the court never took that into
   consideration. Pertinent to the other Intel factors, appellants showed that the
   discovery requests before the district court largely overlap requests made,
   but subjected to redactions and objections, in the Portuguese courts. Not

           8
              As the First Circuit explained in Schlich, “[t]he Supreme Court has not
   established the appropriate burden of proof, if any, for any of the discretionary factors, or
   the legal standard required to meet that burden.” 893 F.3d at 49. Different courts have
   taken different positions on this question. Id. We take no position on these burden of proof
   questions at this time.

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   only that, but those requests are often for documents in the possession of
   Portuguese defendants who created the documents at issue. These uncontested
   facts suggest the possibility that (a) some of the sought discovery is accessible
   currently in the foreign courts; (b) appellees’ object here is to obtain
   unredacted copies of that which may be protected by law in the Portuguese
   proceedings; and (c) therefore, the requests in many aspects pose an undue
   burden on the appellants. We do not express an opinion on these points, but
   note that they were never thoroughly vetted in the district court because of
   the court’s refusal to reconsider the Intel factors and the truncated discussion
   of “interested parties” under Section 1728(a).
          In the end, “[o]ur entire jurisprudence runs counter to the notion of
   court action taken before reasonable notice and an opportunity to be heard
   has been granted both sides of a dispute.” Granny Goose Foods, Inc. v. Bhd. of
   Teamsters & Auto Truck Drivers Local No. 70, 415 U.S. 423, 439, 94 S. Ct.
   1113, 1124 (1974). By refusing to consider the appellants’ arguments and
   evidence challenging whether the appellees satisfied the statutory criteria
   and the Intel factors to obtain § 1782(a) discovery, the district court
   misapplied the law and abused its discretion. See Sandsend, 878 F.2d at 881;
   Texas Keystone, 694 F.3d at 555.
                               IV. Conclusion
          Accordingly, the judgment of the district court is REVERSED, and
   this case is REMANDED for further proceedings consistent with this
   opinion.

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