Three Arrows Capital Co-Founder Avoids Contempt and Sanctions in United States, But Bankruptcy Court Previews Worldwide Enforcement Options
On June 27, 2022, Three Arrows Capital (“3AC”), a crypto hedge fund, commenced liquidation proceedings in the British Virgin Islands and thereafter filed recognition proceedings in, among other countries, the United States and Singapore. As we discussed earlier this year, on December 2, 2022, the bankruptcy court presiding over 3AC’s chapter 15 proceeding pending in the Southern District of New York held that the 3AC joint liquidators (the “JLs”) could serve a subpoena (the “U.S. Subpoena”) upon a 3AC cofounder, Kyle Livingstone Davies, via email and Twitter (the “Service Opinion”). At the time of the Service Opinion, Mr. Davies was presumed to be a U.S. citizen.
Mr. Davies failed to respond to the U.S. Subpoena, and the JLs then filed a motion (the “Contempt Motion”) to hold Mr. Davies in contempt and requested that the bankruptcy court impose monetary sanctions until Mr. Davies complied with the U.S. Subpoena. In his response to the Contempt Motion, Mr. Davies argued for the first time that he had renounced his U.S. nationality in December 2020, and therefore the U.S. Subpoena had not been validly served and he was not subject to the bankruptcy court’s jurisdiction. The bankruptcy court thereafter denied the Contempt Motion but suggested two alternative means by which the JLs could seek documents, information, and damages from Mr. Davies.
Background
On January 5, 2023, after entry of the Service Opinion, the JLs served the U.S. Subpoena on Mr. Davies by Twitter and email and requested a response by January 26th. Mr. Davies failed to respond, and on February 7th the JLs filed a motion to compel compliance with the U.S. Subpoena, which the bankruptcy court granted after finding that it was not necessary for the bankruptcy court to reach the issue of personal jurisdiction before compelling compliance with the U.S. Subpoena (the “Compel Opinion”). The court afforded Mr. Davies one final opportunity to contest personal jurisdiction and required Mr. Davies to comply with the U.S. Subpoena within 14 days of the entry of the order.
On June 14, 2023, the JLs filed the Contempt Motion to compel Mr. Davies to comply with the U.S. Subpoena. The JLs argued that (a) Mr. Davies had not rebutted the “substantial showing” made by the JLs that the bankruptcy court has personal jurisdiction over Mr. Davies after service of the U.S. Subpoena, (b) the bankruptcy court should find Mr. Davies in contempt due to his deliberate and continued noncompliance, and (c) sanctions should be awarded for Mr. Davies’ willful contempt.
On August 1, 2023, Mr. Davies filed his opposition to the Contempt Motion and an accompanying declaration, which included seven exhibits to demonstrate that he had renounced his United States nationality on December 15, 2020, and had become a Singapore citizen on January 6, 2021. Mr. Davies requested that the bankruptcy court quash the U.S. Subpoena and vacate the Service Opinion and Compel Opinion because “Rule 45 of the Fed. R. Civ. P. does not allow for service of persons outside the United States who are not U.S. nationals or residents.”
On August 4, 2023, the JLs filed a reply brief arguing that Mr. Davies had waived his ability to contest the bankruptcy court’s previous orders because he had failed to raise those arguments before the deadline to oppose the Contempt Motion.
Order Denying Contempt Motion
Rule 45(b) of the Federal Rules of Civil Procedure, made applicable in bankruptcy proceedings by Rule 9016 of the Federal Rules of Bankruptcy Procedure, governs service of subpoenas. In the Service Opinion, the bankruptcy court noted that although Rule 45(b)(3) permits service of a subpoena on a U.S. national or resident located in a foreign country, the rule does not authorize serving a non-U.S. national or resident in the foreign country.
The bankruptcy court agreed to submit Mr. Davies’ evidence into the record since it was filed before the hearing on the Contempt Motion and held that because Mr. Davies was not a U.S. citizen when the U.S. Subpoena was served on him, the U.S. Subpoena was not properly served in accordance with Rule 45(b). Because valid service is necessary before a federal court may exercise jurisdiction, the bankruptcy court found that the JLs had not established personal jurisdiction over Mr. Davies, and therefore denied the Contempt Motion. The bankruptcy court did not quash the U.S. Subpoena or vacate the Service Opinion and Compel Opinion because Mr. Davies’ supplementation of the record and assertion of defenses was specifically contemplated by the Compel Opinion.
Potential Next Steps
After denying the Contempt Motion, the bankruptcy court discussed two options for the JLs’ consideration. First, the bankruptcy court noted that the JLs’ multi-jurisdiction efforts include a liquidation proceeding commenced in Singapore, and that Mr. Davies’ declaration could “perhaps” be used to gain jurisdiction over Mr. Davies in Singapore to compel his compliance with an outstanding subpoena issued in that jurisdiction (the “Singapore Subpoena”).
Second, the bankruptcy court clarified that its opinion was solely related to service of a subpoena under Rule 45(b)(3), and not whether the bankruptcy court would have personal jurisdiction over Mr. Davies (or 3AC’s other co-founder, Su Zhu) if the JLs commenced an action to recover damages resulting solely from the co-founders’ activities within the U.S. Service of process for a summons and complaint is governed under Bankruptcy Rule 7004, which does not contain the same limitations on foreign services as does Rule 45(b)(3). Specifically, Bankruptcy Rules 7004(d) and (f) state that a summons shall be served under Rule 4 of the Federal Rules of Civil Procedure, and that such service shall be sufficient to establish personal jurisdiction against any defendant. The parties did not brief, and the bankruptcy court did not discuss, whether service of a hypothetical complaint and summons against the co-founders could satisfy Bankruptcy Rule 7004.
Take Aways
Although the JLs lost the battle by having their Contempt Motion denied, the JLs could very well win the war by obtaining documents and information from Mr. Davies in the Singapore proceeding. Through a sworn declaration, Mr. Davies has admitted that he is a citizen of Singapore. The JLs’ goal has always been for Mr. Davies to produce documents and information, and with Mr. Davies’ declaration, the JLs might now be able to compel Mr. Davies to comply with the Singapore Subpoena. In short, the JLs have benefitted by filing several recognition proceedings across the world and may now seek to compel Mr. Davies to respond to the JLs’ outstanding subpoena in Singapore.
The bankruptcy court also reminded the JLs that value could be obtained by seeking damages against Mr. Davies and Mr. Zhu for their U.S. actions. Indeed, Mr. Davies’ eventual response to the Singapore Subpoena could provide the JLs with useful information to commence and/or bolster an action against the co-founders in the chapter 15 proceeding.
The 3AC proceedings will only become more complex over time, and the JLs have wisely commenced recognition proceedings in countries where assets and/or litigation targets may reside. For cross-border insolvencies, flexibility is key – new facts (e.g., the citizenship of a subpoena target) may dictate changing strategies despite spending over half a year seeking similar relief in a different jurisdiction. Nevertheless, thwarted plans in one jurisdiction may produce information that leads to ultimate success in another jurisdiction. Following the bankruptcy court’s order, one should expect the JLs to continue to pursue the co-founders with vigor in both the United States, Singapore, and perhaps other jurisdictions as well.