Case of the Day: Development Specialists v. Li
Posted on May 15, 2017
I cannot recommend today’s case of the day, Development Specialists, Inc. v. Li (In re Coudert Bros. LLP) (S.D.N.Y. 2017), highly enough. It’s an excellent piece of work by Judge Kenneth M. Karas, a rare tour de force through FRCP 4 and its interplay with the Service Convention. Coudert Brothers, a New York law firm, had dissolved in 2005 and filed a Chapter 11 bankruptcy petition in New York in 2006. A plan of liquidation was confirmed in 2008. The plan allowed Coudert’s former partners to enter into a settlement agreement with Development Specialists, the plan administrator. According to the plan administrator’s declaration, Rupert X. Li, one of the former partners, who resided in Hong Kong, did not executed the agreement or otherwise participate in the plan. The administrator brought an adversary proceeding against Li for breach of contract and avoidance of fraudulent transfers.
In 2013, the administrator moved to compel arbitration of its claim, since the Coudert Bros. partnership agreement required arbitration, in New York, of any disputes relating to the partnership agreement. The bankruptcy judge granted the motion, and the administrator commenced an arbitration against Li and others before the ICDR. Li, according to the administrator, did not participate in the arbitration, which resulted in an award against him for damages. The administrator then moved to confirm the award. The bankruptcy judge issued proposed findings of fact and conclusions of law in favor of the administrator. Li did not participate in the proceedings, and the case was before the District Court judge for action on the proposed findings and conclusions.
The issue was service of process. Li had been served in Hong Kong via FedEx. If you’ve been reading my blog for a while, take a moment and consider how you think the case should come out. I’ll give you one hint: China’s objection to service by postal channels under Article 10(a) of the Hague Service Convention does not apply in the Hong Kong SAR.
Okay. First, because there is no objection to service by postal channels in Hong Kong, we know that China’s objection to service under Article 10(a) is irrelevant. Second, let’s just assume (with lots of justification) that FedEx, a private courier service, is part of the “postal channel.” (I addressed this point briefly in a 2012 post, and I deal with it in greater depth in the new ABA treatise).
Now, you might look at FRCP 4(f)(1) and think it gives the answer. The rule allows for service
by any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents.
Article 10(a) is about service by postal channels. So surely the service was proper? Take a look back at this post on the somewhat loose wording of the question presented in the Water Splash v. Menon case now before the Supreme Court:
The question, as it appears in the petition, is: “Does the Hague Service Convention authorize service of process by mail?” The key word, the problematic word, is “authorize.” The question presented in the case is whether Article 10(a) has anything at all to do with service of process by mail or whether it only applies to service of documents other than the summons or other process. But the word “authorized” raises an entirely different question, on which there is also a (possible) circuit split but which is not part of the case before the court.
In Ackerman v. Levine, 788 F.2d 830 (2d Cir. 1986), as interpreted by Papir v. Wurms, No. 02 Civ. 3273 (RCC), 2005 WL 372061 (S.D.N.Y. Feb. 15, 2005), the Second Circuit held that Article 10(a) affirmatively authorizes service of process by mail. That is, service by mail is proper under FRCP 4(f)(1), which authorizes all internationally agreed methods of service, and it is unnecessary to look to FRCP 4(f)(2)(C)(ii) or 4(f)(3). This has important procedural consequences. Under Ackerman/Papir, it is not necessary for the clerk to address and send the papers, as it is under FRCP 4(f)(2)(C)(ii), nor is it necessary to seek leave of court, as it is under FRCP 4(f)(3).
In Brockmeyer v. May, 383 F.3d 798 (9th Cir. 2004), on the other hand, the Ninth Circuit held that Article 10(a) merely permits service by mail. The procedural implication is that service by mail in a Convention is state is not authorized by FRCP 4(f)(1), and it’s necessary to find another provision in the law of the forum, such as FRCP 4(f)(2)(C)(ii) or 4(f)(3).
The Supreme Court should be careful, in its decision, not to use the word “authorized,” or if it does, at least to note that it is not deciding whether the Convention authorizes or merely permits service by mail.
We see that some courts have read the Second Circuit’s Ackermann decision to hold that Article 10(a) affirmatively authorizes service by mail. If this reading is right, then yes, FRCP 4(f)(1) makes the service on Li proper. Judge Karas rejected this reading of Ackermann for a few reasons. First, the case was decided before Rule 4 was amended in 1993 to expressly mention the Convention. Second, in Ackermann, the question was the enforceability of a German judgment in a US court where the German plaintiff had served process in accordance with the Convention but not in accordance with FRCP 4: thus the case “did not suggest that service effected in a United States District Court need not comply with Rule 4, only that Rule 4 does not limit the types of service the Hague Convention permits on defendants residing in the United States.” The judge went out of his way to reject Papir and similar cases and to adopt the reasoning of Brockmeyer, the Ninth Circuit case holding, on the base of the plain language of Article 10(a), that the Convention merely permits but does not affirmatively authorize service by mail.
So despite first appearances, FRCP 4(f)(1) does not provide a basis for the service. Kudos to Judge Karas for not simply adopting the holding of several other district court decisions but giving the text of the Convention and Ackermann itself a fresh look. His reasoning is all the more remarkable because he was working sua sponte: Li did not appear in the case.
Judge Karas, good decision, you’ve done enough. What’s that? You’re not finished yet?
The judge went on to consider whether the service was proper under FRCP 4(f)(2)(A), which authorizes service “as prescribed by the foreign country’s law for service in that country in an action in its courts of general jurisdiction.” Under Hong Kong civil procedure, service by “registered post to the defendant at his usual or last known address” is sufficient if accompanied by an affidavit stating that “in the opinion of the deponent … the copy of the writ, if sent to … the address in question ,will have come to the knowledge of the defendant within 7 days thereafter,” and that “the copy of the writ has not been returned to the plaintiff through the post undelivered to the addressee.” Now, in Brockmeyer, the Ninth Circuit case the judge had just cited favorably, the court held that FRCP 4(f)(2)(A) does not permit service by mail (for reasons having to to with the rulemaking history of FRCP 4). Judge Karas rejected that holding based on the plain language of the rule. I agree. But why, then, do we need FRCP 4(f)(2)(C)(ii), which authorizes service by mail “unless prohibited by the foreign country’s law?” Because there is space between authorizing and forbidding service by mail. I think that’s just right.
The judge went on to hold that FRCP 4(f)(3) didn’t apply, because the administrator had not sought leave to make use of its provisions; and that FRCP 4(f)(2)(C)(ii) did not apply because the plaintiff, not the clerk, sent the papers. Both of these holdings are plainly correct.
I’ll say it again: very well done. It’s very rare to see such sustained attention to the Convention, particularly at the district court level.