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Dynegy Midstream Services v Trammochem

Issue Discussed: Other

Submitted by Michele L. Jacobson, Esq., Beth K Clark, Esq.

Date Promulgated: June 13, 2006

Issue Adressed: Whether the Federal Arbitration Act authorizes nationwide service of process

In Dynegy Midstream Services LP v. Trammochem, the United States Court of Appeals for the Second Circuit held that Section 7 of the Federal Arbitration Act (the “FAA”), 9 U.S.C. § 7, does not authorize nationwide service of process. The Court also held that, as such, it did not have personal jurisdiction over a Texas resident with no contacts in New York, in a proceeding brought under Section 7 of the FAA to compel compliance with a subpoena issued by an Arbitration Panel sitting in New York.

Respondent-appellee, Trammochem chartered a vessel from Respondent-appellees A.P. Moller and Igloo Shipping, A/S (the “vessel owners”) to carry cargo from Houston, Texas to Antwerp, Belgium. The vessel was chartered pursuant to a contract called the Charter Party. The Charter Party contained an arbitration clause requiring disputes arising thereunder to be arbitrated in New York City. Petitioner-appellant, Dynegy Midstream Services (“DMS”), was hired to provide certain facilities and supplies on the vessel prior to its voyage. After the vessel arrived in Belgium, a dispute arose between Trammochem and the vessel owners, because the cargo arrived contaminated. Their dispute was submitted to arbitration in New York City, pursuant to the Charter Party.

An expert report was prepared in the arbitration that concluded that DMS’ short-flare system was the likely cause of the contamination. A.P. Moller, therefore, tried to vouch in (or implead) DMS into the arbitration; DMS refused to participate. Thereafter, the Arbitration Panel issued a subpoena to DMS requiring that it produce documents related to its short-flare system in Houston, Texas. Respondents served the subpoena on DMS’ registered agent in Houston, Texas.

Fearing that if it complied with the subpoena it would be bound by the Arbitration results, DMS ignored the subpoena. Consequently, Respondents filed a motion to compel DMS to comply with the subpoena, pursuant to section 7 of the FAA, in the United States District Court for the Southern District of New York. DMS fought the motion on the grounds that the district court lacked personal jurisdiction over it, because it had no contacts with New York. The district court granted the motion to compel compliance with the subpoena duces tecum despite DMS’ lack of contacts with the forum.

DMS subsequently appealed the order of the district court to the United States Court of Appeals for the Second Circuit, arguing that the district court lacked personal jurisdiction over it, and that the FAA does not authorize the issuance of documents-only subpoenas. In reversing the district court, the Second Circuit first analyzed whether it had appellate jurisdiction over a district court’s order compelling compliance with an arbitration subpoena. The Second Circuit held that “where, as here, an order compelling compliance disposes of all issues before the district court, it is a final order and immediately appealable.”

Next, the Second Circuit reviewed de novo the district court’s decision that it had personal jurisdiction over DMS. In doing so, the Second Circuit first reviewed Section 7 of the FAA, which provides the method of service for arbitrators’ subpoenas. Specifically, Section 7 provides that a subpoena “shall be served in the same manner as subpoenas to appear and testify before the court.”(Footnote 1) 9 U.S.C. § 7. Turning to Rule 45(b)(2) of the Federal Rules of Civil Procedure, which governs the service and enforcement of subpoenas in federal court, the Second Circuit noted that Rule 45(b)(2) does not provide for nationwide service of process. Instead, the Court pointed out, Rule 45(b)(2) geographically limits both service of process and enforcement proceedings. Similarly, the Court noted that Fed. R. Civ. P. 37(a), another federal rule governing enforcement of subpoenas, provides that a proceeding to compel a non-party to comply with discovery must be made in the court in the district where the discovery is being taken. Fed. R. Civ. P. 37(a). The Second Circuit then observed that, like Rule 45, Rule 37 does not provide for nationwide service of process; rather, it contains territorial limitations.

Rejecting the district court’s holding, the Second Circuit concluded that nothing in Section 7 of the FAA suggests that Congress intended nationwide service of process. Moreover, the Court observed that Section 7 of the FAA permits enforcement of arbitrators’ subpoenas only in “the district court for the district in which such arbitrators, or a majority of them, are sitting.” Accordingly, since the Arbitration Panel was sitting in New York, the FAA required that any enforcement actions be brought there. However, since the district court lacked personal jurisdiction over non-party DMS, and the FAA did not authorize nationwide service of process, the district court could not enforce the arbitrators’ subpoena.

The Second Circuit recognized that, as a result of its ruling, Section 7 of the FAA authorizes the issuance of unenforceable subpoenas. The Second Circuit found that this “gap in enforceability” may have been intended by Congress to limit non-parties’ required participation in arbitrations. Accordingly, the Court declined to adopt the compromise position adopted by the District Court for the Northern District of Illinois in Amgen, Inc. v. Kidney Center of Delaware County, 879 F. Supp. 878, 882-83 (N.D. Ill. 1995), which authorizes attorneys to issue subpoenas to non-parties located far from the situs of the arbitration that can be enforced by the district court in the district where the non-party resides. In rejecting this compromise position, the Second Circuit noted that Section 7 of the FAA only permits arbitrators, and not litigants, to issue subpoenas.

In the end, the Second Circuit pointed out that Trammochem and the vessel owners chose to arbitrate in New York rather than in Texas, where the activities giving rise to the arbitration took place. The parties, thus, had to live with their choice, and the result that they could not enforce a subpoena against DMS, a Texas resident with no contacts with New York (a fact undisputed in the litigation). The Court held, “[t]he parties to the arbitration here chose to arbitrate in New York even though the underlying contract and all of the activities giving rise to the arbitration had nothing to do with New York; they could easily have chosen to arbitrate in Texas, where DMS would have been subject to an arbitration subpoena and a Texas district court’s enforcement of it. Having made one choice for their own convenience, the parties should not be permitted to stretch the law beyond the text of Section 7 and Rule 45 to inconvenience witnesses.”

Since the Court lacked personal jurisdiction over DMS, it did not address the question of whether Section 7 of the FAA permits the issuance of documents-only subpoenas.

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Footnote 1. It also provides that a district court in the district where the arbitrators sit may enforce the subpoena by compelling attendance or punishing a non-attendee for contempt. Id.

* Michele L. Jacobson is a partner in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating her practice on insurance and reinsurance litigation and arbitration. Ms. Jacobson has represented ceding companies, reinsurers, retrocessionaires, liquidators and intermediaries in a vast array of matters in state and federal courts, as well as before arbitration Panels throughout the country.

Beth K. Clark is an associate in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating on insurance and reinsurance litigation and arbitration. Ms. Clark has represented ceding companies in a wide range of matters.