Banca Pueyo SA v. Lone Star Fund IX

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.
2
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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.
3
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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).
4
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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.
5
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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).
6
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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.
7
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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.
11