In re Three Arrows Capital, Ltd., No. 22-10920 (Bankr. S.D.N.Y. Dec. 29, 2022) [click for opinion]
Three Arrows Capital, Ltd. (the "Debtor") was an investment firm incorporated under the laws of the British Virgin Islands (the "BVI"). The Debtor was co-founded by two founders, a United States citizen founder (the "United States Founder"), and a foreign national founder (the "Foreign National Founder"). Neither resided in the United States.
The Debtor's business collapsed in the wake of extreme fluctuations in the cryptocurrency markets and, in June 2022, the Debtor commenced a liquidation proceeding in the BVI. The BVI court appointed two individuals (the "Representatives") as joint liquidators of the Debtor. The Representatives then commenced a Chapter 15 bankruptcy case in the United States, with a focus on controlling and preserving the Debtor's assets.
The U.S. bankruptcy court issued an order permitting the Representatives to serve subpoenas to attempt to identify and preserve the Debtor's assets.The Representatives issued eighteen such subpoenas, including to the founders, foreign investment managers, and foreign third parties. However, the Representatives were unable to serve these subpoenas or obtain sufficient information through informal means. They then filed a motion to permit alternative service of the subpoenas.
In considering the motion, the bankruptcy court explained that Federal Rule of Civil Procedure 45(b) authorizes service of subpoenas in only one of two ways: (1) by service at any place within the United States; or (2) by service directed to a United States national or resident who is in a foreign country (governed by 28 U.S.C. § 1783). The court found that this Rule places an explicit limit on service. Accordingly, foreign entities and foreign nationals residing in a foreign country cannot be served with a U.S. subpoena.
The court also rejected the Representatives' request for alternative service on these foreign entities and foreign nationals by email or social media. The court determined that a party must first show a statutory basis for service before it is entitled to "alternative" service. Here, the Representatives were not truly seeking alternative service, but an alternative to Rule 45 itself. If the court were to permit such service, it would create an exception that would swallow Rule 45's explicit territorial limits.
The court did, however, grant the Representatives' request for alternative service on the United States Founder outside the United States. Here Rule 45(b)(3) applied, which states that: "28 U.S.C. § 1783 governs issuing and serving a subpoena directed to a United States national or resident who is in a foreign country." Under that statute, service should be allowed if the production of the documents is: (1) necessary in the interests of justice; and (2) not possible to obtain in any other manner.
The court first found that the discovery sought from the United States Founder was necessary and in the interests of justice. The founders had played an integral role in the Debtor's organization, running all facets of the business, and had knowledge about the Debtor's assets that the Representatives needed. Second, the court explained that the Representatives showed that the discovery sought was likely not obtainable via other means. The Foreign National Founder could not be found in the U.S. and could not be served with a U.S. subpoena outside the U.S. Thus, the United States Founder was arguably the only other party with knowledge regarding the nature, extent, and access to the Debtor's assets.
After establishing that Rule 45 and section 1783 supported service of a subpoena on the Unites States Founder, the next issue the court addressed was whether the Representatives were entitled to serve the United States Founder via email and social media. This required the court to determine (1) when alternative service was permissible; (2) what types of alternative service have been recognized as permissible; and (3) whether there was an adequate basis for applying the Representatives' Rule 4 precedents in the context of Rule 45.
On the first issue, the court considered whether prior diligent attempts at service are required. The Representatives explained that they would not know where to begin with a traditional attempt at service, given that the founders had moved between various countries, concealed their locations, and did not appear to be amenable to service via other avenues, like counsel or a registered agent in the United States. The court determined that requiring a diligent prior attempt at service here would be futile, and that the absence of evidence showing a futile attempt was made before the Representatives filed their motion was not a bar to the relief they sought here.
The second issue the court analyzed was whether service by email and social media would provide notice in a manner consistent with the other forms of service endorsed in past cases. The issue was whether service via email and social media provide evidence of actual receipt, or are effectively so difficult for a party to ignore that they can be considered to give notice. The Representatives cited one Rule 45 case where a party was permissibly served via email but it was effectively used as a backup to more widely endorsed methods. However, the Representatives cited a number of persuasive cases where process was permitted to be served via email or social media in the context of service pursuant to Rule 4. Many of these cases permitted service via email or social media as the sole methods of service, and the court found no principled reason for denying the applicability of the Rule 4 alternative service cases to the Rule 45 context.
In concluding that alternative service via email and Twitter would be reasonably calculated to provide notice, the court found it notable that the Representatives proposed to serve the subpoena to the email address that the United States Founder provided to the Representatives for the purpose of fielding informal discovery questions. Additionally, the Representatives included facts showing the United States Founder's recent and actual use of both the Twitter and email accounts. The court also noted that the Twitter use appeared to be somewhat public, and the continued use of public Twitter accounts could ostensibly provide probative evidence of actual receipt of the subpoena.
The court accordingly granted the motion with respect to the United States Founder, and denied the motion with respect to all the other foreign parties.
Jeffrey Butler of the Chicago office contributed to this summary.