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Court Affirms Ruling Requiring Accounting Firm to Produce Workpapers in Chapter 15 Case

An accounting firm in the United States must produce workpapers to a chapter 15 foreign representative even if the law where the foreign main proceeding is pending would not permit such production.  CohnReznick LLP v. Foreign Representatives of Platinum Partners Value Arbitrage Fund L.P. (In re Platinum Partners Value Arbitrage Fund L.P.),  No. 18-5176 (DLC), 2018 U.S. Dist. LEXIS 109684 (S.D.N.Y June 29, 2018).

In her recent decision, District Judge Denise Cote stated that principles of comity and chapter 15’s discovery rules require the accounting firm to produce its papers.  Her decision affirmed a ruling by Bankruptcy Judge Shelley Chapman, a decision that Judge Cote said was “thorough and well reasoned.”  See In re Platinum Partners Value Arbitrage Fund L.P., No. 16-12925 (SCC), 2018 Bankr. LEXIS 1156 (Bankr. S.D.N.Y. Apr. 17, 2018).  The accounting firm has appealed Judge Cote’s ruling to the Second Circuit.  No doubt, we’ll learn later this year or next if the panel there agrees with the two rulings to date.

The debtor was a hedge fund that invested and traded in U.S. and non-U.S. financial instruments.  It had a master fund, an offshore feeder fund as well as an international fund.  Management was located in New York.  The feeder and international funds were located in the Cayman Islands.  By 2016, the funds had failed to honor many redemption requests. 

The two funds located in Cayman were then placed into liquidation.  Underlying the funds’ inability to perform was a massive fraud.  Both a federal grand jury in New York and the US Securities and Exchange Commission indicted members of senior management.

The Cayman liquidators filed chapter 15 cases in New York.  Judge Chapman granted them recognition as foreign main proceedings.  The liquidators also served a subpoena on the accounting firm that had audited the funds in 2014 and 2015.  The subpoena sought the accounting firm’s audit workpapers and other documents concerning the firm’s work for the funds.  The accounting firm objected and refused to produce. 

Judge Chapman overruled the accounting firm’s objections.  The firm had argued that the production sought would not be allowed under Cayman law.  Judge Chapman said the evidence presented didn’t support that conclusion.  But, even it did, she said chapter 15 and comity would lead to the same result.  Bankruptcy Code section 1521(a)(4) permits a liquidator to seek “information concerning the debtor’s assets, affairs, right, obligations or liabilities.”  Courts also allow liquidators to utilize section 542 and Bankruptcy Rule 2004 to obtain discovery from accountants that relate to a debtor’s property or financial affairs.  And, Judge Chapman, noted, “[c]omity plays a significant role in cross-border insolvency proceedings.”  2018 Bankr. LEXIS 1156, at *13.

The accounting firms also sought to enforce arbitration clauses contained in their engagement letters with the funds. They argued that the discovery issues should be resolved in arbitration and not in the bankruptcy court.  The arbitration clauses applied to any “dispute, controversy, or claim” concerning the accounting firm’s services.  But the liquidators asserted that no “claim” had been filed.  They were just seeking documents from the accounting firm as part of their investigation.  Judge Chapman agreed with the liquidators that she, and not an arbitration panel, should resolve the matter.

The funds sought a stay pending appeal to the District Court.  Judge Cote denied the request.  She ruled that the accounting firm had not shown a likelihood of success in an appeal or on the merits.  Her review of chapter 15 and principles of comity led her to the same conclusion that Judge Chapman had reached.  Citing Bankruptcy Code sections 1521(a)(4) and (7), 542(e) and Bankruptcy Rule 2004, she said, “The bankruptcy court’s April Order authorizing discovery fits comfortably within this broad grant of powers.  After all, discovery of an auditor’s workpapers and related documents and communications for the two-year period immediately preceding a massive business failure of any entity would be highly relevant.”  2018 U.S. Dist. LEXIS 109684, at *12.  She added that “neither the principles of comity nor any foreign discovery requirement weigh against granting the Liquidators’ motion to compel.  In the analogous context of 28 U.S.C. § 1782 proceedings, the foreign discoverability rule has been roundly rejected, and this Court declines to impose such a rule for [c]hapter 15 proceedings.”  Id. at *15.

Judge Cote also agreed with Judge Chapman that the arbitration clauses in the engagement letters didn’t require the courts to yield to arbitration in this circumstance.  “Again, the bankruptcy court was entirely correct when it observed that its discovery order did not violate the Arbitration Clause.”  Id. at *14.

Finally, Judge Cote ruled that other factors didn’t favor granting a stay pending appeal.  The accounting firm didn’t show irreparable injury; the liquidators, not the accounting firm, could face “substantial injury” if a stay was granted because delay could harm their investigation and they faced the expiration of statutes of limitations; and a stay of the bankruptcy Court’s order pending an appeal wouldn’t serve the public interest.