Even though foreign law would not permit discovery of accountants’ work papers, Bankruptcy Judge Shelley C. Chapman of Manhattan allowed a foreign liquidator to demand production of work papers in a chapter 15 case.

The case involved hedge funds being liquidated in the Cayman Islands. The funds were managed in New York, where the U.S. Attorney had indicted the managers for investment advisor fraud. Judge Chapman had previously recognized the Cayman Islands liquidations as the foreign main proceedings under chapter 15.

In informal discovery, the funds’ outside auditors turned over documents admitted to be the funds’ property. However, the accountants refused to turn over their work papers, contending the work papers were their property. The liquidators therefore sought discovery of the work papers under Bankruptcy Rule 2004. The liquidators objected to the discovery demand, contending, among other things, that auditors could not be required to turn over work papers under Cayman Islands law.

Analyzing the parties’ affidavits about foreign law, Judge Chapman concluded that the law in the Cayman Islands is “unsettled.” She said that “any assertion that audit work papers are the sole property of an auditor under Cayman’s law and cannot be produced to a company’s liquidators for that reason is simply unsupported.”

Even assuming that the liquidators could not obtain the work papers under Cayman Islands law, Judge Chapman ruled that “the scope of discovery available in the foreign jurisdiction is not a valid basis upon which this court, in the exercise of its discretion, must limit relief to the liquidators pursuant to the Bankruptcy Code and Rules.”

She went on to hold, “Foreign law does not preclude the availability of additional relief under chapter 15, particularly when granting such relief does not run contrary to the public policy of the foreign jurisdiction.” By alluding to “additional relief,” Judge Chapman was referring to Section 1521(a)(4) and (a)(7), which, subject to specified exceptions, allows a foreign representative to obtain “additional relief that may be available to a trustee” and to examine witnesses, take evidence, and obtain information about the debtor’s assets and affairs.

“Because Cayman law neither prohibits nor is hostile to the discovery sought here under U.S. law, principles of comity decisively weigh in favor of granting the motion” for discovery, Judge Chapman said. Furthermore, she said that “requiring this court to ensure compliance with foreign law prior to granting relief sought pursuant to chapter 15 would require the court to engage in a full-blown analysis for foreign law each and every time a foreign representative seeks additional relief in the U.S.”

Having rejected the auditors’ objection based on Cayman Islands law, Judge Chapman turned to the accountant’s argument based on an arbitration agreement.

The engagement agreement between the auditors and the funds required arbitration of “any dispute, controversy, or claim arising out of” the accountants’ services. The auditors contended that the liquidators were precluded from taking discovery because any claims they found would fall within the scope of the arbitration agreement.

The liquidators responded by contending that the arbitration agreement did not apply because there was no “dispute” or “claim,” only a discovery request. Judge Chapman agreed, saying that “chapter 15 proceedings cannot be held hostage by an arbitration clause where there is no dispute pending.” Furthermore, she said the discovery dispute was “neither a pending proceeding nor a ‘dispute, claim, or controversy’ that falls within the parameters of the arbitration clauses.”