Ronald S. Gass
Reinsurance and Insurance Arbitrator and Umpire
Reinsurance and Insurance Dispute Resolution Services Consultant

Second Circuit Rules that FAA Does Not Authorize Arbitrators to Issue Third-Party Pre-Hearing Document Subpoenas

In an important and undoubtedly influential new decision, the U.S. Court of Appeals for the Second Circuit ruled that § 7 of the Federal Arbitration Act (“FAA”) does not authorize arbitrators to compel pre-hearing document discovery from third-parties, thereby siding with the Third Circuit and rejecting the Eighth and Fourth Circuits’ positions on an arbitration discovery issue that has divided the federal appellate courts over the past decade.

This case involved a dispute between a special purpose vehicle, Life Receivables Trust (the “Trust”), and Lloyd’s Syndicate 102, which issued a $5 million contingent cost insurance (“CCI”) policy to the Trust. The policy was intended to protect the Trust against the risk that the projected life expectancy of the original insured under two multi-million dollar life insurance policies, which had been purchased from the insured in exchange for a pre-death discounted cash payment, would exceed that calculated by Peachtree Life Settlements (“Peachtree”). Peachtree was the entity that initially purchased, serviced, and subsequently sold these life insurance policies to the Trust and obtained the CCI protection for it. The CCI policy was executed by Syndicate 102 as the underwriter, the Trust as the assured, and Peachtree as the originator and servicer. It included a fairly typical arbitration clause calling for American Arbitration Association rules and giving the arbitration panel “the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions.” When the insured lived more than two years beyond his anticipated life expectancy, the CCI policy was triggered and the Trust sought payment of its $5 million net death benefit from Syndicate 102. When Syndicate 102 refused to pay, claiming that the Trust had fraudulently misrepresented the date on which it acquired the insured’s policies and fraudulently calculated his life expectancy, the Trust initiated an arbitration.

During the arbitration, Syndicate 102 sought to join Peachtree as a party; however, it refused to consent to joinder, and joinder was not ordered by the panel. Syndicate 102 then sought document discovery from both the Trust and Peachtree, but when Peachtree demurred claiming that it was not a party to the arbitration, the panel, at Syndicate 102’s request, issued a third-party subpoena requiring the production of responsive documents. Peachtree moved to quash the subpoena in New York federal district court, and Syndicate 102 cross-moved to compel compliance. The federal district court judge granted Syndicate 102’s motion and ordered compliance by Peachtree. Although Peachtree complied with the subpoena, it reserved its rights and subsequently filed an appeal to the Second Circuit.

Noting that it had not previously taken a side in the ongoing circuit split over whether FAA § 7 may be invoked as authority for compelling pre-hearing depositions and document discovery from third-parties, the Second Circuit opted for a strict construction aligning itself with the Third Circuit’s decision in Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir. 2004):

A statute’s clear language does not morph into something more just because courts think it makes sense for it to do so. Thus, we join the Third Circuit in holding that section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not party to the arbitration proceedings.

The court rejected the Eighth Circuit’s view that although § 7 did not explicitly authorize the arbitration panel to require third-party production of documents, implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing was the power to order the production of relevant documents from a party prior to the hearing. Security Life Ins. Co. of Am. v. Duncanson & Holt, Inc., 228 F.3d 865 (8th Cir. 2000). It also rejected the Fourth Circuit’s attempt at a compromise. While arbitral powers are bounded by the express provisions of the FAA, which does not authorize third-party pre-hearing discovery, “arbitral efficiency would be ‘degraded if the parties are unable to review and digest relevant evidence prior to the arbitration hearing’”; therefore, the Fourth Circuit read into the FAA an exception under which a party could petition the district court to compel discovery “upon a showing of special need or hardship.” COMSAT Corp. v. National Sci. Found., 190 F3d 269 (4th Cir. 1999).

So where does that leave us with regard to third-party pre-hearing document discovery? Veteran arbitrators know that § 7 of the FAA authorizes panels “to 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 material as evidence in the case.” [Emphasis added.] Thus, third-parties may be subpoenaed to appear before one or more panel members and to bring relevant documents with them. Section 7’s arbitral authority, according to the Second Circuit, “is not limited to witnesses at merits hearings, but extends to hearings covering a variety of preliminary matters.” Under these circumstances, the inconvenience of making a personal appearance may cause testifying witnesses to waive their presence and simply deliver the documents (an observation also made in the concurring opinion to the Hay Group decision). If only one of the three arbitrators in a tripartite arbitration is present for this purpose, he or she can then adjourn the proceedings, which would give the parties an opportunity to digest the produced third-party documents prior to the hearing on the merits. In short, strict compliance with FAA § 7 will be enforced in the Second Circuit and will now require that documents be produced by testifying non-party witnesses with the understanding that the hearing need not be held before all of the arbitrators nor must it necessarily be done at a merits (as opposed to a “preliminary matters”) hearing. Although not expressly addressed by the Second Circuit, enforcement of panel subpoenas seeking third-party pre-hearing deposition discovery outside the confines of a § 7 hearing seem unlikely to succeed in light of this recent ruling.

Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, No. 07-1197-cv, 2008 WL 4978550 (2d Cir. Nov. 25, 2008).


TELEPHONE: 203-858-9936