Life Receivables Trust v. Syndicate

Issue Discussed: Third Party Issues

Submitted by Michele L. Jacobson, Esq., Andrew S. Lewner, Esq.

Date Promulgated: November 25, 2008

Issue Decided: Whether An Arbitration Panel Is Empowered To Compel Pre-Hearing Document Discovery From Non-Parties To An Arbitration

In Life Receivables Trust v. Syndicate 102, the United States Court of Appeals for the Second Circuit held that Section 7 of the Federal Arbitration Act (the “F.A.A.”), does not empower arbitrators to issue pre-hearing document subpoenas to entities not parties to the arbitration proceeding. This decision reversed the prior order of the United States District Court for the Southern District of New York, which upheld a document subpoena issued by an arbitration panel to a non-party.


Peachtree Life Settlements (“Peachtree”) was in the business of purchasing life insurance policies from elderly insureds. Life Receivables Trust v. Syndicate 102, 549 F.3d 210, 212 (2d Cir. 2008). Peachtree would pay the insureds a lump-sum payment in an amount less than the face value of the policy, and would then continue to make the necessary premium payments under the policy until the insured passed away, at which time Peachtree would collect the face value amount of the policy. Id.

Aside from purchasing policies for itself, Peachtree purchased policies for several related entities, including Life Receivables Trust (the “Trust”). The Trust was a special purpose vehicle formed for the sole purpose of holding such policies. Id. When purchasing policies for itself and for the Trust, Peachtree based the amount that it was willing to pay upon its own actuarial estimation of the projected life of the insured. Id. As a hedge against the possibility of the insured exceeding his/her projected life span, Peachtree purchased contingent cost insurance from Syndicate 102 on behalf of the Trust. Id. Under this contingent cost insurance, if the insured lived for more than two years beyond his/her life expectancy, Syndicate 102 would pay the Trust the full death benefit under the life insurance policy, and would assume the policy for itself. Significantly, each contingent cost insurance policy was signed by Syndicate 102 as the underwriter, the Trust as the insured and Peachtree as the originator and servicer. Id.

The contingent cost insurance policies each contained an express arbitration clause which, in relevant part, provided that “[a]ll disputes and differences arising under or in connection with this Insurance shall be referred to arbitration under the American Arbitration Association Rules.” Id. at 213. The arbitration clause further provided that “[t]he Arbitration Tribunal may in its sole discretion make such orders and directions as it considers to be necessary for the final determination of the matters in dispute . . . [and the] Arbitration Tribunal shall have the widest discretion permitted under the law governing the arbitration procedure when making such orders or directions.” Id.

The two policies at issue in the litigation applied to life insurance policies purchased by Peachtree for the benefit of the Trust covering the life of an insured named Mr. Wang (the “Wang Policies”). Ultimately, Mr. Wang outlived his calculated life expectancy by more than two years, thereby triggering Syndicate 102’s obligation to pay the Trust the full death benefit under the Wang Policies and assume those policies. Id. Syndicate 102 refused to honor its obligations, and the Trust commenced arbitration. Syndicate 102 defended its refusal to make payment under Wang Policies because the Trust had allegedly fraudulently misrepresented the date on which the Wang Policies had been purchased and had fraudulently calculated Mr. Wang’s life expectancy. Id.

The Disputed Third-Party Document Subpoena

During the course of the arbitration, Syndicate 102 propounded requests for the production of documents upon both the Trust and Peachtree. While the Trust agreed to produce documents in its possession, it objected to the production of Peachtree documents on the grounds that the Trust did not control Peachtree. Upon Syndicate 102’s request, the arbitration panel ordered the Trust to produce all responsive documents relating to Peachtree. When the Trust objected on the grounds that Peachtree had not supplied the requested documents to the Trust, the panel issued a subsequent order requiring the Trust to obtain the requested documents from Peachtree.

Peachtree subsequently informed the Trust that since it was not a party to the arbitration, the arbitration panel had no authority to order it to produce documents, and, hence, Peachtree refused to comply with the arbitration panel’s directive. In response, and at Syndicate 102’s further request, the arbitration panel issued a subpoena requiring Peachtree to produce its responsive documents. After receiving the arbitration panel’s subpoena (issued in December 2006), in January 2007, Peachtree filed suit in the District Court for the Southern District of New York seeking to quash the arbitration panel’s subpoena. Syndicate 102 cross-moved to compel Peachtree to comply with the panel’s subpoena. After a hearing, the district court granted Syndicate 102’s motion to compel, holding that there was “no reason to disturb the arbitration panel’s issuance of such a subpoena to an entity that, while not a party to the specific arbitration at issue, is a party to the arbitration agreement.” Peachtree appealed the district court’s decision.

The Second Circuit Holds That Arbitration Panels Do Not Have The Authority To Issue Document Subpoenas To Non-Parties To An Arbitration

As the Court discussed, Section 7 of the F.A.A. provides, in pertinent part:

The arbitrators selected either as prescribed in this title or otherwise, or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed to be material as evidence in the case.

9 U.S.C. § 7. Despite this language, the Court noted that a Circuit split had developed as to whether Section 7 might properly be invoked by an arbitration panel as authority to compel pre-hearing document discovery from non-parties to the arbitration.

Before reaching its decision, the Court reviewed the current state of divergent authority on this issue. Specifically, the Court first discussed the Eighth Circuit’s holding in In Re Arbitration Between Sec. Life Ins. Co. of Am., in which the Court there held that “although the statute does not explicitly authorize the arbitration panel to require the production of documents for inspection by a party . . . implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” 228 F.3d at 870-71. The Court noted that the Eighth Circuit’s view had been followed by several courts within the Second Circuit. See Atmel Corp. v. LM Ericsson Telephone, AB, 372 F.Supp.2d 402, 403 (S.D.N.Y. 2003); Integrity Ins. Co. v. Am. Centennial Ins. Co.¸ 885 F.Supp. 69, 71 (S.D.N.Y. 1995).

The Court also noted that the Fourth Circuit has held that while arbitration panels do not have the “authority to order non-parties to . . . provide the litigating parties with documents during prehearing discovery,” an exception existed under which a panel is permitted to issue such a subpoena, but only “upon a showing of special need or hardship.” COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275 (4th Cir. 1999).

Finally, the Second Circuit discussed at length the recent Third Circuit decision in which that Court held that under Section 7 of the F.A.A., an arbitration panel did not have the authority to issue document subpoenas to non-parties to the arbitration. See Hay Group, Inc. v. E.B.S. Acquisitions Corp., 360 F.3d 404, 407 (3d Cir. 2004.). In Hay, then-Judge Alito wrote that the plain language of Section 7 “unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over documents at that time.” Id. at 407. In Hay, the Third Circuit explained that Section 7 of the F.A.A. was based in large part upon Rule 45 of the Federal Rules of Civil Procedure. At the time that section 7 was drafted, Rule 45 did not permit federal courts to issue document subpoenas to non-parties. While Rule 45 has subsequently been amended to grant federal courts the authority to issue such discovery subpoenas upon non-parties, Section 7 of the F.A.A. has not been amended. Id. at 407-09. Following the reasoning set forth in Hay, the Second Circuit held that arbitration panels do not have the authority to issue document subpoenas to non-parties. As the Court explained, “[t]he language of Section 7 is straightforward and unambiguous. Documents are only discoverable in arbitration when brought before arbitrators by a testifying witness.” Life Receivables Trust, 549 F.3d at 216. In fact, the Court reasoned that the amendment of Rule 45 of the Federal Rules of Civil Procedure to permit federal courts to subpoena documents from non-parties demonstrated “that if Congress wants to expand arbitral subpoena authority, it is fully capable of doing so.” Id.

In holding that arbitration panels do not have the authority under Section 7 of the F.A.A. to issue document subpoenas to non-parties, the Court also rejected the argument that the panel should have authority over Peachtree because Peachtree was a closely related entity to the Trust. As the Court explained, “Section 7 contains no discovery exception for closely related entities.” Id. at 217.

While this opinion does limit the ability of arbitration panels to compel the production of documents from non-parties, as the Court noted, the rule set forth therein “does not leave arbitrators powerless to order production of [third party] documents.” Id. at 218. Indeed, the Court explained that, consistent with its holding, an arbitration panel could still order a non-party to produce documents so long as that non-party does so as a witness at a hearing. In fact, the Court explained that the requirement that the documents be produced at a hearing does not even mandate that the hearing be a “merits hearing.” Rather, the Court noted that a third-party could even be compelled to appear at a preliminary hearing to produce documents, or could be compelled to appear before a single arbitrator to make its production. Id.

One final note on the significance of this opinion is that the Second Circuit’s holding appears to be the majority rule. In fact, in reaching its decision, the Court noted that at least one commentator has called the Hay decision, upon which the Second Circuit based its decision, the “emerging rule.” Id. at 216.