Life Receivables Trust v. Syndicate 102, Lloyd's

• Decision Date: 25 November 2008
• Docket Number: Docket No. 07-1197-cv.
• Parties: LIFE RECEIVABLES TRUST, Claimant, Life Settlements Corporation, doing business as Peachtree Life Settlements, Movant-Appellant, v. SYNDICATE 102 AT LLOYD'S OF LONDON, Respondent-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

549 F.3d 210

LIFE RECEIVABLES TRUST, Claimant Life Settlements Corporation, doing business as Peachtree Life Settlements, Movant-Appellant, v. SYNDICATE 102 AT LLOYD'S OF LONDON, Respondent-Appellee.

Docket No. 07-1197-cv.

United States Court of Appeals, Second Circuit.

Argued: October 23, 2008.

Decided: November 25, 2008.

Jesús E. Cuza, (Jeffrey B. Sklaroff, Greenberg Traurig, LLP, New York, NY, Elliot H. Scherker, Greenberg Traurig, P.A., Miami, FL, on the brief), Greenberg Traurig, P.A., Fort Lauderdale, FL, for Appellant.

Evan L. Smoak, (R. Steven Anderson, Michael D. Haupt, Alison J. Shilling, of counsel), Barger & Wolen LLP, New York, NY, for Appellee.

Before: WESLEY and HALL, Circuit Judges, and OBERDORFER, District Judge.¹

WESLEY, Circuit Judge:

This appeal places squarely before us a question that has divided the circuits:² Does section 7 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 7, authorize arbitrators to compel pre-hearing document discovery from entities not parties to the arbitration proceeding? The Eighth Circuit has held that it does, see In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir.2000); the Third Circuit has determined that it does not, see Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 2004); and the Fourth Circuit has concluded that it may — where there is a special need for the documents, see COMSAT Corp. v. Nat'l Sci. Found., 190 F.3d 269, 275 (4th Cir.1999). Like the Third Circuit, we hold that section 7 does not enable arbitrators to issue pre-hearing document subpoenas to entities not parties to the arbitration proceeding, and therefore reverse the order of the United States District Court for the Southern District of New York (Owen, J.).

BACKGROUND

This case arises from the somewhat macabre market for contingent cost insurance which mitigates the risk in purchasing the life insurance policies of still-living individuals. Life Settlements Corp. d/b/a Peachtree Life Settlements ("Peachtree") purchases life insurance policies from elderly insureds, offering them, while still of this world, a cash payment at a discount to the face value of the policies. Peachtree's purchase price is based on a variety of factors, perhaps the most important of which is its own independent estimate of the insured's life expectancy. Upon purchase, Peachtree becomes the new policy owner and beneficiary, and continues to pay premiums until the insured dies.

Peachtree buys some life insurance policies for its own account, and others for the accounts of related entities, including Life Receivables Trust (the "Trust"), a special purpose vehicle created for this objective. In these instances, after Peachtree performs the actuarial and financial legwork needed to purchase the policy, it transfers its interest in the policy to the Trust, but continues to receive contractual fees, although it does not hold a financial interest in or beneficially own the Trust. The Trust, on the other hand, pays the premiums on the policy while the insured remains alive in order to keep the policies in force. Upon the insured's demise, the Trust is paid the "net death benefit" on the policy.

As a hedge against the possibility that the insured might live past his or her projected life expectancy, Peachtree buys contingent cost insurance ("CCI") policies from Syndicate 102 for the benefit of the Trust. If the insured lives more than two years beyond his or her life expectancy, Syndicate 102 pays the Trust the net death benefit and assumes the policy itself.

This litigation centers around Peachtree's August 1, 2000 purchase of two life insurance policies owned by, and for the benefit of, the daughter of the named insured, Mr. Wang. On February 5, 2001, Peachtree, on behalf of the Trust, obtained from Syndicate 102 a CCI policy with a $5 million net death benefit. The policy was signed by Syndicate 102 as underwriter, the Trust as assured, and Peachtree as originator and servicer. It contained a mandatory arbitration clause:

1. All disputes and differences arising under or in connection with this Insurance shall be referred to arbitration under the American Arbitration Association Rules.

. . .

3. The 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; provided that the parties shall each retain the right to appeal errors of law to a court of law having jurisdiction of the matters addressed herein and, each party executing this Insurance hereby consents and agrees that the state or federal courts located in New York shall have exclusive jurisdiction to hear and determine any such matters. The Arbitration Tribunal shall have the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions.

Mr. Wang outlived his calculated life expectancy by more than two years, thereby triggering Syndicate 102's obligation to pay the Trust and assume the policies. When Peachtree requested payment of the net death benefit as provided in the policy, Syndicate 102 refused. In response, the Trust, in accord with the policy, initiated an arbitration claim against Syndicate 102, which withheld payment on the grounds that the Trust had fraudulently misrepresented the date on which it acquired the Wang policies and had fraudulently calculated Mr. Wang's life expectancy.³

Along with its arbitration defense, Syndicate 102 propounded certain discovery requests upon both the Trust and Peachtree, the latter of which is at issue on this appeal. The Trust responded by producing the requested documents, but counseled that with respect to Peachtree, it "does not control" Peachtree and "has no ability to compel the production of documents from" it. Nonetheless, the Trust agreed to produce documents in its possession to the extent that they were directed at Peachtree in its role as "servicer," but not in its role as "provider of life settlements or as originator" of the CCI policy. In July 2006, Syndicate 102 served on Peachtree a separate Notice of Arbitration, and requested that Peacthree "join formally in the pending" Syndicate 102-Trust arbitration. Peachtree refused to consent to joinder, and no joinder was ordered.

At the request of Syndicate 102, the arbitration panel ordered the Trust to produce all responsive documents in its possession relating to Peachtree in any capacity. The Trust argued that Peachtree failed to supply all of these documents, leading to another order from the arbitration panel requiring the Trust to obtain the documents from Peachtree. On August 11, 2006, Peachtree informed the Trust that it "is not a party to the arbitration . . . and that the arbitration panel . . . has no power or jurisdiction over [Peachtree]. Consequently, [Peachtree] is not bound by the arbitration panel's rulings and orders, and will not consider them." Finally, Syndicate 102 requested that the panel issue a formal subpoena, a step not opposed by the Trust. In December 2006, the arbitration panel issued a subpoena requiring Peachtree to produce its responsive documents.

Facing the panel's subpoena, in January 2007, Peachtree filed suit in federal court and moved to quash the subpoena. Peachtree argued that (1) an arbitration panel cannot compel pre-hearing discovery from a non-party, and (2) the policy's terms precluded Syndicate 102 from raising any defenses in arbitration prior to paying the Trust. Syndicate 102 cross-moved to compel Peachtree's compliance with the subpoena.

Following a hearing, Judge Owen granted Syndicate 102's motion to enforce the subpoena, 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," and that a district court could not disturb the arbitration's non-final order refusing to enforce the policy's "pay first" provision. In light of the district court's order, Peachtree complied with the subpoena.⁴ This appeal followed.⁵

DISCUSSION

Congress enacted the FAA in 1925 "to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). Section 7, the only FAA provision to address discovery, states that:

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 material as evidence in the case. The fees for such attendance shall be the same as the fees of witnesses before masters of the United States courts. Said summons shall issue in the name of the arbitrator or arbitrators, or a majority of them, and shall be signed by the arbitrators, or a majority of them, and shall be directed to the said person and shall be served in the same manner as subpoenas to appear and testify before the court; if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.

9 U.S.C. § 7 (emphasis added).

Although this Court has observed that this "express language" refers only to documents brought before the arbitrators...