In re Ex Parte Application of CFE Int'l LLC
In re Ex Parte Application of CFE Int'l LLC
2022 WL 19558087 (D. Mass. 2022)
September 19, 2022
Boal, Jennifer C., United States Magistrate Judge
Summary
The court has not yet addressed the issue of ESI, but it is likely that the court will consider the Intel factors in exercising its discretion whether to allow discovery pursuant to Section 1782. The parties are encouraged to confer in an effort to narrow the issues, including the scope of the subpoena and whether a protective order regarding the use of the subpoenaed material is appropriate.
Additional Decisions
In re Ex parte Application of CFE INTERNATIONAL LLC, Petitioner,
v.
DENHAM CAPITAL MANAGEMENT LP, Respondent
v.
DENHAM CAPITAL MANAGEMENT LP, Respondent
Case No. 22-mc-91355-FDS
United States District Court, D. Massachusetts
Signed September 19, 2022
Counsel
David K. Kessler, Pro Hac Vice, Harris Fischman, Pro Hac Vice, Justin D. Lerer, Pro Hac Vice, Michael E. Gertzman, Pro Hac Vice, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, Diana K. Lloyd, Jennie D. Wilusz, Choate, Hall & Stewart, Boston, MA, Mark F. Mendelsohn, Pro Hac Vice, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, DC, for Petitioner.Nicholas K. Mitrokostas, John T. Bennett, Allen & Overy LLP, Boston, MA, Bradley Pensyl, Kendall Robert Pauley, Laila Delimustafic, Allen & Overy LLP, New York, NY, for Respondent.
Boal, Jennifer C., United States Magistrate Judge
REPORT AND RECOMMENDATION ON EX PARTE APPLICATION FOR AN ORDER GRANTING DOCUMENT DISCOVERY AND A DEPOSITION IN AID OF A FOREIGN PROCEEDING PURSUANT TO 28 U.S.C. § 1782 [Docket No. 4]
*1 CFE International LLC (“CFE Int'l”) seeks the issuance of a subpoena pursuant to 28 U.S.C. § 1782 for documents and deposition discovery from Denham Capital Management LP (“Denham”) in aid of a criminal proceeding in Mexico. Docket No. 4.[1] I heard oral argument on September 14, 2022. For the following reasons, I recommend that Chief Judge Saylor grant the application.[2]
I. FACTUAL BACKGROUND
The CFE Int'l Application alleges as follows:
A. Key Players
CFE Int'l is the wholly owned subsidiary of Comision Federal de Electricidad (“CFE”), Mexico's electrical utility. Declaration of Sam Anson (Docket No. 8) (“Anson Decl.”) at ¶¶ 11, 14. CFE Int'l was incorporated in 2015 and was created to manage CFE's United States natural gas pipeline transportation agreements and to procure reliable and affordable long-term natural gas supply in the United States for export to Mexico. Declaration of Fernando Aponte Martinez (Docket No. 7) (“Aponte Decl.”) at ¶¶ 9-10. After purchasing gas in the United States, CFE Int'l sells it to CFEnergia S.A. de C.V. (“CFEn”),[3] which in turn sells it to other subsidiaries of CFE—power generation companies called “GenCos” that convert the gas into electricity for sale to Mexican consumers. Id. at ¶ 10.
Guillermo Turrent Schnaas (“Turrent”) is a former executive of CFE and the former Chief Executive Officer of CFE Int'l. Anson Decl. at ¶ 12. Javier Gutierrez Becerril (“Gutierrez”) is a former executive of CFE and the former Chief Operating Officer of CFE Int'l. Id.
*2 WhiteWater Midstream LLC (“WWM”) is a limited liability company incorporated in Delaware by Matthew Calhoun and Christer Rundlof, among others, with its principal place of business in Austin, Texas. Id. at ¶ 15. WWM is a midstream service provider that operates in the gas delivery and sale business. Id. It commenced formal operations in June 2016. Id. Arlin Travis is the Senior Vice President of Marketing at WWM. Id. at ¶ 12.
Denham is a Delaware entity with headquarters in Boston, Massachusetts that operates a global private equity investment firm specializing in the energy sector. Id. at ¶ 16. Denham claims to have “more than $12 billion of invested and committed capital across multiple fund vehicles.” Id. Denham was WWM's first major investor, committing to funding WWM before that company was awarded any contracts of significance. Id. at ¶ 33.
According to CFE Int'l, Calhoun, Travis, Turrent, and Gutierrez have longstanding personal and professional relationships. Id. at ¶ 27.
B. The Waha Connector Agreements
On or around December 9, 2016, CFE granted several long-term natural gas transportation contracts to WWM (the “Waha Connector Agreements”). Id. at ¶ 19. Under the Waha Connector Agreements, WWM was obligated to construct a connector pipeline for CFE—the Waha Connector—and to provide transportation services on this pipeline to one of CFE's pipeline header systems in Texas called the Waha Header. Id. The Waha Connector Agreements also provided WWM with the rights to market and optimize transportation capacity on the Waha Connector and the Waha Header. Id. In addition, in March 2017, CFE Int'l and WWM entered into the Waha Supply Agreement, under which CFE Int'l agreed to buy one million MMBtu/day of natural gas for a fifteen-year term. Id. at ¶ 43.
According to CFE Int'l, Turrent, Gutierrez, and WWM conceived of the Waha Connector Agreements and Waha Supply Agreement as a package deal from the start. Id. at ¶ 31. Before soliciting bids for the Waha Connector Agreements and the Waha Supply Agreement in July and August 2016, Turrent and Gutierrez first negotiated terms for both sets of agreements with WWM. Id. at ¶¶ 32, 35-37. The terms of those agreements are very similar in critical respects to the final contracts ultimately awarded to WWM. Id.
In May 2016, only two months after WWM was formed, Denham's CEO Stuart Porter met with Turrent and a group of representatives from WWM in San Diego, California, to discuss future CFE Int'l and WWM business. Id. at ¶¶ 32, 33. At that time, CFE Int'l had not yet launched a bid process for the Waha Connector Agreements or Waha Supply Agreement. Id. Following that meeting, Turrent emailed Porter on May 28, 2016, stating “[o]n the waha stuff, we will take care of it the [sic] whitewater folks.” Id. Two days later, on May 30, 2016, Turrent signed a memorandum of understanding with WWM relating to what became the Waha Connector Agreements and the Waha Supply Agreement. Id. On July 1, 2016, Denham and another private equity firm made a combined investment of $200 million in WWM. Id. at ¶ 34.
CFE Int'l maintains that Turrent and Gutierrez did not solicit bids for the agreements until after they had negotiated their terms with WWM. See id. at ¶¶ 35-41. According to CFE Int'l, Turrent and Gutierrez awarded the contracts to WWM despite the fact that several more established companies had submitted bids offering lower prices. Id. at ¶ 43.
*3 Denham's investment helped finance WWM's performance under its agreements with CFE Int'l. Id. at ¶ 44. By the end of 2017, Denham, through its Oil & Gas Fund, owned a 100% interest in WWM's holding company, WhiteWater Midstream Investment Holding LLC. Id.
On December 1, 2018, Turrent left CFE Int'l, and on February 1, 2019, Gutierrez left CFE Int'l. Id. at ¶ 45. On February 4, 2019, Denham sold its entire stake in WWM. Id. At the time of that sale, WWM's CEO Rundlof publicly stated: “We are grateful to have had Denham and [the other principal private equity fund investment] as trusted partners. We appreciate their confidence in backing WhiteWater as a first-time team.” Id.
C. The Mexican Criminal Proceeding
On August 4, 2021, CFE Int'l submitted criminal allegations (the “Criminal Complaint”) to the Special Anti-Corruption Prosecutor at the Mexican Federal Attorney General's Office (“FGR”) in Mexico City, Mexico, alleging that Turrent and Gutierrez had, in their capacities as public servants, awarded the Waha Connector Agreements to WWM in contravention of Mexican law. Anson Decl. at ¶ 18. CFE Int'l submitted the Criminal Complaint pursuant to Mexican legal obligations that require CFE Int'l, as a wholly owned subsidiary of CFE in control of public assets, to report likely violations of Mexican law. Id.; see also Aponte Decl. at ¶¶ 19-20, 34. The Criminal Complaint alleges that Turrent and Gutierrez awarded the contracts to WWM without complying with Mexican procurement laws that require CFE to adhere to an open tender bidding process and to document this process. Anson Decl. at ¶ 22; see also Aponte Decl. at ¶¶ 30-32. It also alleges that a conflict of interest existed between Calhoun, on the one hand, and Gutierrez and Turrent in their capacities as CFE public servants, on the other, at the time the contracts were awarded. Aponte Decl. at ¶ 33.
In response to the Criminal Complaint, the Office of the Mexican Anti-Corruption Prosecutor in Mexico City opened an investigation into Turrent and Gutierrez's allegedly criminal abuses of power. Aponte Decl. at ¶ 35. The prosecutors have requested an initial hearing to present an “imputación” against Gutierrez, but not Turrent at this time,[4] in relation to the Criminal Complaint that CFE Int'l filed. Id. at ¶ 37. Presenting an “imputación” is the first step that the FGR takes in court to begin a criminal proceeding. Id.
An initial hearing occurred on May 23, 2022. Id. at ¶ 38. That hearing was adjourned until August 17, 2022 to, among other things, allow the “imputados” additional time to finish reviewing the file. Id. at ¶ 39. The Mexican court held a hearing on August 17, 2022, at which time Gutierrez requested a second adjournment. See Docket No. 23-4 at 13. The court adjourned the hearing to October 26, 2022. Id. At that hearing, the judge will decide if there is sufficient evidence to accept the “imputación” of the accused according to article 19 of the Constitution of Mexico. Aponte Decl. at ¶ 39. In its role as victim, CFE Int'l may continue to present additional evidence to the FGR in advance of the October 26, 2022 hearing. Id. Assuming that the judge proceeds with the “imputación,” and the case proceeds to trial, a victim or injured party as CFE Int'l has the right to present evidence in aid of the ongoing investigation and in subsequent court proceedings. Id. at ¶¶ 21-29, 42.
*4 The ability of the FGR or the Mexican criminal court to obtain evidence directly from any of the accused for use in the proceeding is limited. Id. at ¶ 45. Under Mexican law, individuals who are under investigation, such as Turrent and Gutierrez, have the right to remain silent in criminal proceedings. Id. This right attaches even before a formal criminal charge or arrest and allows an accused person to refuse to turn over any evidence that might prove their liability for the crimes for which they are being investigated. Id.
II. ANALYSIS
A. Section 1782’s Statutory Requirements And The Intel Factors
Title 28, United States Code, Section 1782, “authorizes district courts to order persons residing in their district to participate in discovery ‘for use in a proceeding in a foreign or international tribunal,’ when an application for such discovery is made by a foreign or international tribunal, or by ‘any interested person.’ ” In re Porsche Automobil Holding SE, 985 F.3d 115, 120 (1st Cir. 2021). Granting discovery pursuant to Section 1782 is proper only if:
1) the person from whom discovery is sought “resides or is found” in the district where the court sits; 2) the request seeks evidence (the “testimony or statement” of a person or the production of a “document or other thing”) “for use in a proceeding in a foreign or international tribunal”; 3) the request is made by “any interested person”; and 4) the material sought is not protected by “any legally applicable privilege.”
In re Schlich, 893 F.3d 40, 46 (1st Cir. 2018) (citing 28 U.S.C. § 1782).
Satisfaction of these statutory elements “authorizes, but does not require, discovery assistance.” Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 247 (2004). Rather, courts must consider the following factors in exercising their discretion whether to allow discovery pursuant to Section 1782:
(1) whether the discovery is sought from a participant in a foreign proceeding (thereby suggesting that the foreign tribunal might obtain the discovery “absent § 1782 aid”); (2) “the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad” to assistance from U.S. federal courts; (3) whether a section 1782 request “conceals an attempt to circumvent foreign proof-gathering limits or other policies of a foreign country or the United States”; and (4) whether the subpoena contains “unduly intrusive or burdensome requests.”
In re Porsche, 985 F.3d at 120 (citing Intel Corp., 542 U.S. at 264-265). “[D]istrict courts must exercise their discretion under § 1782 in light of the twin aims of the statute: ‘providing efficient assistance to participants in international litigation and encouraging foreign countries by example to provide similar assistance to our courts.’ ” In re Schlich, 893 F.3d at 46-47 (quoting Intel Corp., 542 U.S. at 252).
B. Section 1782’s Requirements
Based on the information presented only by CFE Int'l at this point, it appears that the first, third, and fourth requirements of Section 1782 are met here. First, there appears to be no question that Denham is found in Massachusetts. See Anson Decl. at ¶ 16. In addition, CFE Int'l is an “interested person” in the Mexican Criminal Proceeding as it submitted the Criminal Complaint and alleges that as an “injured party” of the alleged criminal activity it has “significant participation rights in that proceeding.” Aponte Decl. at ¶¶ 21-23. See, e.g., In re Children's Inv. Fund Found. (UK), 363 F.Supp.3d 361, 372 (S.D.N.Y. 2019), abrogated on other grounds by In re Guo, 965 F.3d 96 (2nd Cir. 2020) (a complainant in a criminal investigation satisfies the “interested person” requirement of § 1782). Also, there is no indication at this time that the application requires disclosure of privileged materials.
*5 The requirement that the discovery be “for use in a proceeding in a foreign or international tribunal,” presents a closer call. A foreign proceeding need not be “pending” or “imminent” in order for an applicant to secure relief under Section 1782, but it must be “within reasonable contemplation.” In re Fagan, No. 19-mc-91210-ADB, 2019 WL 2267063, at *3 (D. Mass. May 28, 2019) (citing Certain Funds, Accounts &/or Inv. Vehicles v. KPMG, L.L.P., 798 F.3d 113, 123 (2nd Cir. 2015)). “[A]t a minimum, a § 1782 applicant must present to the district court some concrete basis from which it can determine that the contemplated proceeding is more than just a twinkle in counsel's eye.” Id. In addition, in order to meet the “for use” requirement, the requests for discovery must be relevant to the foreign proceeding. See In re Schlich, 893 F.3d at 52 (“[A] request for discovery under § 1782 that is plainly irrelevant to the foreign proceeding will fail to meet the statutory ‘for use’ requirement, and must be denied before the court reaches the discretionary Intel factors.”).
While CFE Int'l alleges that an investigation and court proceedings have been initiated, it is not clear that a criminal case will in fact go forward against Gutierrez or Turrent. Based on CFE Int'l’s own description of the Mexican proceedings, no court proceedings have been initiated against Turrent and it is possible that the judge may not find sufficient evidence to accept the inputación. See Aponte Decl. at ¶¶ 39-40.
In addition, the relevance of the discovery requests is not entirely clear and, at a minimum, the requests appear overly broad. According to CFE Int'l, it is seeking documents that will show the extent to which Turrent and Gutierrez agreed to award contracts to WWM prior to, and outside of, the required public tender process, or provided assurances to that effect. Docket No. 5 at 15. CFE Int'l argues that Denham is likely to have information bearing on the improprieties in the awarding of the Waha Connector Agreements and Waha Supply Agreement because it was involved in early discussions with WWM and CFE Int'l regarding those projects. Id. CFE Int'l alleges that Denham's CEO, Stuart Porter, met with Turrent and WWM employees shortly before CFE Int'l and WWM agreed to a memorandum of understanding regarding the contracts. Id.
CFE Int'l’s proposed requests, however, are much broader than that. For example, CFE Int'l seeks all information regarding Denham's investment in WWM, not just information regarding the effect of the anticipated contracts in Denham's decision to invest in WWM. See Deposition Topic Nos. 4, 6; Document Request Nos. 3, 4, 5, 7. In addition, CFE Int'l seeks information such as background information regarding the business of Denham and its subsidiaries and affiliates. Deposition Topic No. 1. Finally, CFE Int'l seeks discovery regarding the personal relationships between Denham's employees, directors, consultants, etc., and those of CFE or WWM. Deposition Topic No. 2; Document Request No. 2. While there has been some showing that there were some preexisting relationships between CFE and WWM, there has been no such showing regarding Denham.
C. Intel Factors
The first Intel factor is whether those from whom the applicants seek discovery are participants in the foreign proceeding. When they are, “the need for § 1782 aid generally is not as apparent as it ordinarily is when evidence is sought from a nonparticipant in the matter arising abroad.” Intel, 542 U.S. at 264. Here, Denham is not a participant in the Mexican Criminal Proceeding so this factor weighs in favor of granting the application.
The second Intel discretionary factor is “the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance.” Id. On the record before the Court, there is no indication that the Mexican authorities would not be receptive to information obtained pursuant to a § 1782 subpoena. Indeed, Mexico's criminal proceedings allow for injured parties to participate and present evidence to the court at any time before trial for admission into the record. See Aponte Decl. at ¶¶ 24-29.
*6 Third is “whether the § 1782(a) request conceals an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States.” Intel, 542 U.S. at 265. In this respect, this Court notes that, in connection with similar requests to entities located in Texas, Magistrate Judge Mark Lane from the U.S. District Court for the Western District of Texas expressed concern that CFE Int'l may have been using the Section 1782 process to gather information and documents for purposes other than aiding law enforcement in the Mexican investigation. See Docket No. 23-3 at 13-14.
Finally, this Court should consider whether the requested discovery is “unduly intrusive or burdensome.” This Court is unable to evaluate a burden argument without the benefit of a response from Denham. However, as noted above, the discovery requests do appear to be overly broad.
This Court, therefore, has serious reservations regarding CFE Int'l’s application for a Section 1782 subpoena. Nevertheless, it recommends that Chief Judge Saylor issue the subpoena subject to Denham's right to challenge the subpoena after it has been served and subject to the procedures set forth below. See In re Fagan, 2019 WL 2267063, at *3 (noting that district courts commonly grant Section 1782 applications ex parte as “[t]he respondent's due process rights are not violated because he can later challenge any discovery request by moving to quash pursuant to Federal Rule of Civil Procedure 45(c)(3)).
III. RECOMMENDATION
For the foregoing reasons, this Court recommends that Chief Judge Saylor grant CFE Int'l’s application for a subpoena pursuant to 28 U.S.C. § 1782. This Court further recommends that Chief Judge Saylor order as follows:
- Upon issuance of an order granting the application, CFE Int'l shall serve the subpoena as well as a copy of this Report and Recommendation on Denham.
- Upon service of the subpoena and report and recommendation, CFE Int'l shall file a motion to unseal this proceeding.
- Should Denham choose not to challenge the subpoena, it shall file a status report informing the Court of its decision not to challenge the subpoena.
- Should Denham choose to challenge the subpoena, before filing a motion, the parties shall confer in an effort to narrow the issues, including but not limited to, narrowing the scope of the subpoena and whether a protective order regarding the use of the subpoenaed material is appropriate.
IV. REVIEW BY DISTRICT JUDGE
The parties are hereby advised that under the provisions of Fed. R. Civ. P. 72(b), any party who objects to these proposed findings and recommendations must file specific written objections thereto with the Clerk of this Court within 14 days of service of this Report and Recommendation. The written objections must specifically identify the portion of the proposed findings, recommendations, or report to which objection is made, and the basis for such objections. See Fed. R. Civ. P. 72. The parties are further advised that the United States Court of Appeals for this Circuit has repeatedly indicated that failure to comply with Fed. R. Civ. P. 72(b) will preclude further appellate review of the District Court's order based on this Report and Recommendation. See Phinney v. Wentworth Douglas Hospital, 199 F.3d 1 (1st Cir. 1999); Sunview Condo. Ass'n v. Flexel Int'l, Ltd., 116 F.3d 962 (1st Cir. 1997); Pagano v. Frank, 983 F.2d 343 (1st Cir. 1993).
Footnotes
On July 20, 2022, Chief Judge Saylor referred the case to the undersigned. Docket No. 9.
Courts disagree over whether a Section 1782 proceeding, or a motion thereunder, is a dispositive motion requiring the magistrate judge to issue a report and recommendation. See In re Application of Ilyas Khrapunov, No. 17-mc-80107-HSG, 2018 WL 3239001, at *4 (N.D. Cal. July 3, 2018) (“Section 1782 applications are not among the eight listed dispositive motions in the Magistrates Act, and Objectors fail to describe why the order here is analogous to those listed.”), rev'd on other grounds, 931 F.3d 922 (9th Cir. 2019); In re Clerici, 481 F.3d 1324, 1331 (11th Cir. 2007) (standard of review for discovery ordered under Section 1782 “is identical to that used in reviewing the district court's ordinary discovery rulings”); In re Qwest Commc'ns Int'l. Inc., No. 3:08mc93, 2008 WL 2741111, at *1-3 (W.D.N.C. July 10, 2008). But see Phillips v. Beierwaltes, 466 F.3d 1217, 1221-22 (10th Cir. 2006) (questioning whether a Section 1782 application for discovery in aid of foreign litigation could be characterized as a non-dispositive matter); Wright & Miller, 12 Fed. Prac. & Proc. Civ. § 3068.2 (2018) (Section 1782 proceedings “qualify as dispositive” because “the sole purpose of the proceeding is to obtain discovery,” and accordingly, a ruling on a “motion to compel such discovery is a final, dispositive matter.”). In view of the conflicting authority, and out of an abundance of caution, this Court will issue a report and recommendation.
CFEn is a Mexican subsidiary of CFE. Aponte Decl. at ¶ 4.
At the September 14, 2022 hearing, counsel for CFE Int'l represented that while there has been no request for a hearing regarding Turrent, the investigation against him is ongoing.