FEDERAL COURT OF AUSTRALIA

Ceramic Fuel Cells Limited (In Liq) v McGraw-Hill Financial, Inc (No 2)

[2016] FCA 1059

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application dated 23 June 2016 is dismissed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(Delivered ex tempore, revised from transcript)

WIGNEY J:

1    The applicant in this representative proceeding, Ceramic Fuel Cells Limited, has applied for leave to issue and serve subpoenas on two foreign entities. One of those entities, Euroclear SA/NV Euroclear Bank, is an entity located in Belgium. The other, Clearstream Banking SA, is an entity located in Luxembourg. Ceramic’s purpose in having the subpoenas issued and served is to obtain the names of persons and entities who are likely to be members of the class or group on whose behalf it has commenced the representative proceeding. The group members are persons who between 2006 and 2008 acquired interests in, and suffered loss as a result of, reliance upon the rating given to certain financial products known generally as Duke CDOs or Duke notes. Both Euroclear and the Clearstream are said to have acted as so-called “clearing houses” in respect of the issue of the Duke notes. As such, it is believed that they are likely to have documents which may identify the holders of the Duke notes during the relevant period.

2    This is, in fact, the second occasion on which Ceramic has attempted to obtain documents containing information which will assist it in identifying the group members. In March this year, the Court granted Ceramic leave to issue and serve a subpoena on an entity domiciled in the United States. That entity, US Bank National Association, was the current trustee of the Duke notes. In communications with Ceramic's lawyers, US Bank National Association had indicated its willingness to produce documents which might identify the holders of the Duke notes, but only if subpoenaed to do so. There was no indication that US Bank National Association would object to, or take issue with the enforceability of, a subpoena issued by an Australian court. A subpoena was in due course issued, and served in accordance with the Hague Convention. Unfortunately, however, US Bank National Association reneged on its apparent assurance that it would produce documents in answer to a subpoena. It advised Ceramic’s lawyers that it considered that the subpoena was not enforceable in the United States, and that it would only comply with a subpoena issued by a United States court.

3    In the Court's reasons for granting leave to issue and serve the subpoena on US Bank National Association, detailed consideration was given to the Court's power to issue and grant leave to serve a subpoena on a foreign entity: Ceramic Fuel Cells Limited (In Liq) v McGraw-Hill Financial, Inc [2016] FCA 401 (Ceramic No 1). The reasons in Ceramic No 1 also discuss the relevant factual background, including the nature of the substantive representative proceeding and Ceramic's past endeavours to ascertain the identity of the group members. It is unnecessary to rehearse that factual background in these reasons.

4    In relation to the Court's power to issue a subpoena on a foreign entity, in Ceramic No 1 it was concluded that the Court has power pursuant to rules 10.44, 24.01 and 24.12 of the Federal Court Rules 2011 (Cth) to grant leave to issue and serve a subpoena on a foreign entity. It was also concluded that, in a representative proceeding, the Court has power pursuant to s 33ZF of the Federal Court of Australia Act 1976 (Cth) to issue a subpoena which is directed to identifying group members.

5    Central to the conclusion in Ceramic No 1 concerning the power to issue such a subpoena was the finding that considerations of international law and international comity did not require that either the relevant rules or s 33ZF of the Federal Court of Australia Act be read down so as to exclude entirely the power to issue and serve a subpoena on a foreign entity. In exercising its power to issue and grant leave to serve a subpoena on a foreign entity, however, the Court is required to consider whether such a subpoena might breach international law or international comity. The Court must also exercise care and restraint. The Court would be unlikely to issue and grant leave to serve a subpoena on a foreign entity in circumstances where that would involve a clear breach of international law or international comity.

6    Consideration was also given in Ceramic No 1 to another important discretionary factor in deciding whether to issue and grant leave to serve a subpoena on a foreign entity. That consideration was that the Court has no effective power to enforce such a subpoena. That consideration was not found to be a weighty factor in deciding whether to issue a subpoena to US Bank National Association given the assurance that had apparently been given in relation to compliance with the subpoena. Of course, the subsequent refusal by US Bank National Association to comply with the subpoena only serves to highlight the importance of giving close consideration to the evidence as to whether compliance with the subpoena is likely to be an issue.

7    The Court ultimately granted leave to issue and serve the subpoena on US Bank National Association having regard to a number of particular facts and circumstances. It is unnecessary to repeat those facts and circumstances here. The question that arises in the present application is essentially whether the facts and circumstances relating to the proposed Euroclear and Clearstream subpoena differ in any material respect from those considered in the context of the US Bank National Association subpoena. Would the issue and service of the subpoenas in question give rise to real issues of international law or international comity? Is the effective inability of the Court to enforce compliance with the subpoenas likely to be an issue in respect of subpoenas served on entities in Belgium and Luxembourg?

8    There does not appear to be any reason to doubt that both Euroclear and Clearstream may have documents that may assist in identifying persons who acquired an interest in the Duke notes during the relevant period. Exactly what those documents are likely to be, and exactly what they might reveal, is somewhat less clear. The nature of the Duke notes and the terms of their issue are matters of some complexity. So too is the involvement of Euroclear and Clearstream. In the almost 300 page Information Memorandum relating to the issue of the Duke notes, Euroclear and Clearstream are first referred to on page 99 under the heading “Clearing Systems” in the following terms:

Beneficial interests in each Global Security will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear Bank S.A./N.V. (“Euroclear”) and its direct and Indirect Participants, including Clearstream, Luxembourg. Transfers between members of, or Participants in, Euroclear (each a “Participant”) and Clearstream Banking, Luxembourg S.A. (“Clearstream, Luxembourg”) will be effected in the ordinary way in accordance with their respective rules and operating procedures. See “Settlement and Clearing”.

9    At Page 207 of the Information Memorandum, under the heading “Settlement and Clearing”, the following is stated:

Global Securities

Investors may hold their interests in a Global Security directly through Euroclear or Clearstream, Luxembourg, if they are Participants in such systems, or indirectly through organizations [sic] which are Participants in such systems. Euroclear and Clearstream, Luxembourg will hold interests in Global Securities on behalf of their Participants through customers’ securities accounts in their respective names on the books of their respective depositaries.

So long as the depository for a Global Security, or its nominee, is the registered holder of such Global Security, such depository or such nominee, as the case may be, will be considered the absolute owner or holder of such Global Security for all purposes under the Indenture and Participants as well as any other persons on whose behalf Participants may act (including Euroclear and Clearstream, Luxembourg and account holders and Participants therein) will have no rights under the related Global Security, the Indenture or the Subordinated Note Issuing and Paying Agency Agreement. Owners of beneficial interests in a Global Security will not be considered to be the owners or holders of the related Offered Security, any Secured Note or Combination Note under the Indenture or any Subordinated Note under the Subordinated Note Issuing and Paying Agency Agreement. In addition, no beneficial owner of an interest in a Global Security will be able to exchange or transfer that interest, except in accordance with the applicable procedures of the depository and Euroclear or Clearstream, Luxembourg (in addition to those under the Indenture or the or the [sic] Subordinated Note Issuing and Paying Agency Agreement (as the case may be)), in each case to the extent applicable (the “Applicable Procedures”).

10    The reference to “Global Security” in these parts of the Information Memorandum is explained in an earlier part of the Information Memorandum which deals with the “form” of the securities in question. Classes of the Duke notes that were sold outside the United States to persons that were not US citizens were to be represented by “global notes” called Global Securities. Fortunately, it is unnecessary for present purposes to fully comprehend what this all means. It is perhaps sufficient to observe that whatever documents may be held by Euroclear and Clearstream in relation the Duke notes or transactions concerning them, they are unlikely to comprise a straightforward list of persons who acquired interests in the Duke notes. Rather, they are likely to include documents recording the details of the accounts of customers of Euroclear and Clearstream that traded Duke notes during the relevant period. Those customers would not necessarily be the beneficial owners of interests in the Duke notes.

11    As they did prior to seeking leave to issue the subpoena to US Bank National Association, Ceramic’s lawyers contacted both Euroclear and Clearstream to ascertain what relevant documents they might hold and what their response would be to a subpoena issued by the Court requiring them to produce documents. The responses of both Euroclear and Clearstream to those inquires are important. They reveal potentially significant issues relating to compliance with the proposed subpoenas.

Communications with Clearstream

12    Ceramic’s lawyers first contacted Clearstream by email in early March 2016. After identifying the nature of the representative proceeding, the email advised Clearstream that Ceramic intended to apply for a subpoena to be issued to obtain documents from Clearstream which recorded details of any transactions by which the Duke notes were transferred to and from noteholders, including the details of the noteholders. It was indicated that the reason for seeking the documents was so that the representative proceeding could be brought to the attention of all noteholders who were potential group members.

13    In its reply to the initial communications, Clearstream sought clarification of a number of issues. Those issues included whether the subpoena would be issued by an Australian court and what the “legal effect under Australian law” of the subpoena would be. In response, Ceramic’s lawyers advised that the subpoena would be issued by this Court and that “it will require the subpoenaed party to produce documents that fall within the description of documents required in the subpoena and within the time frame set out in the subpoena”.

14    In its response to this clarification, Clearstream indicated as follows:

Thank you for your clarifications. Given the below, the subpoena should be delivered by letter and not by email. Please note that upon receipt and review of the subpoena, we will need to access the best way to handle it, in compliance with Luxembourg banking secrecy rules, which in principle prevent us from disclosing any customer information to third parties.

15    Ceramic submitted that this response did not suggest either that Clearstream did not have any relevant documents, or that it would not comply with any subpoena that might be issued. That may be so. It seems tolerably clear, however, that Clearstream’s compliance with the subpoena would be subject to Luxembourg’s “banking secrecy rules”. It is equally clear that the banking secrecy rules would effectively prevent Clearstream from producing any documents likely to fall within the proposed subpoena. Those documents would almost certainly involve “customer information”.

16    It should be noted that Ceramic led no evidence in support of its application concerning the laws in Luxembourg relating either to compliance with foreign subpoenas or banking secrecy.

Communications with Euroclear

17    Ceramics lawyers also contacted Euroclear by email in March 2016. After referring to the representative proceeding relating to the Duke notes, the letter to Euroclear stated:

According to an Offering Memorandum dated 11 August 2006 (Memorandum) in respect of the Duke Notes, Euroclear Bank S.A./N.V. (Euroclear) was appointed as one of the settlement services and/or clearing house entities for the Duke Notes. As an entity that was clearing house for the Duke Notes, Euroclear would have been required to maintain a register of the note holders who acquired the Duke Notes and other key transaction documents.

Our client seeks the issue of a subpoena to Euroclear so that we can identify the note holders of the Duke CDO and notify them of this class action. The parties to the proceedings have agreed to participate in a settlement conference and so we are seeking to expedite this process of identification of, and notification to, note holders.

18    After some delay, Euroclear responded in the following terms:

This means that Euroclear Bank holds records of transactions on its books. However, we only have records of transactions of our members (‘Participants’). As we do not have physical persons amongst our Participants who are financial institutions, global custodians and alike we do not have information on the potential underlying beneficial owners.

As a Belgian bank we can also not disclose our Participants to third parties. However, we do have established procedures to pass on information and notifications to our Participants (such as a class action notification).

Therefore, please provide me with the notifications that you would like us to pass on to our Participants and we will inform our Participants accordingly. Once done, I will also confirm this to you.

19    Subsequently, Euroclear retained Australian lawyers to advise it in relation to the proposed subpoena. The involvement of those lawyers was, at least in two respects, quite constructive. Amongst other things, the Australian lawyers suggested revised wording for the proposed subpoena which was more likely to describe relevant documents held by Euroclear. The lawyers also advanced an “alternative proposal” in the following terms:

2    ALTERNATIVE PROPOSAL

2.1    As a Belgian credit institution, our client owes a general duty of confidentiality to its clients. Accordingly, our client would prefer not to disclose confidential information relating to its clients and would not do so unless compelled by law. It goes without saying that our client will comply with the Draft Subpoena if your client successfully applies for leave for it to be issued; however, our client hopes this can be avoided.

2.2    As an alternative, our client is prepared to provide an undertaking to your client to implement its usual practice in respect of class action notifications, which involves:

(a)    sending an electronic notification which includes the content of the Notice to Group Members to all accounts listed as currently holding the Duke CDO; and

(b)    publishing a copy of the Notice to Group Members on its website.

2.3    We confirm that our client is prepared to undertake the above exercise at its own cost.

20    Initially the lawyers indicated that if the alternative proposal was not accepted, they would accept service of the subpoena once issued. Importantly, however, they also explained that if a subpoena was issued, consideration would then be given to whether the subpoena would be enforceable under Belgian law. The lawyers advised in the following terms:

We otherwise note our instructions to accept service of the Draft Subpoena (once issued) on behalf of our client. Those instructions are, of course, subject to our client’s overarching obligations under Belgian law to comply with its duty of confidentiality with respect to its client. Accordingly, those instructions do not in any way derogate from our client’s requirement that any subpoena served on it must otherwise be enforceable under, and compliant with, relevant Belgian law with respect to such matters. Our client’s rights in this regard are fully reserved.

21    In a subsequent email, the lawyers indicated that their instructions to accept service of the subpoena had been withdrawn. The email relevantly said as follows:

As we have previously stated, our client is most concerned to ensure that it complies with its overarching obligations under Belgian law regarding its duty of confidentiality with respect to its clients. To that end, it is seeking advice from Belgian counsel regarding its obligations with respect to compliance with the Draft Subpoena (once issued).

While this advice is being obtained and to avoid any doubt as to whether service of the Draft Subpoena (once issued) on our firm is effective under Belgian law, our client has withdrawn our instructions to accept service of any subpoena in relation to this matter. We expect that our client’s formal position will be confirmed this afternoon (Australian time).

22    Euroclear’s lawyers thus squarely raised the issue whether service of the subpoena would be effective under Belgian law and whether Euroclear would be required to comply with the subpoena as a matter of Belgian law, particularly having regard to the duty of confidentiality it owed to its clients. There could be little doubt that the enforceability in Belgium of a subpoena issued by a foreign court was a live issue. Ceramic did not lead any evidence concerning Belgian law in this regard.

Should the subpoenas be issued?

23    It is important to emphasise, at the outset, that like the subpoena to US Bank National Association, the proposed subpoenas to Euroclear and Clearstream are unlike the usual subpoenas issued in inter partes litigation. They are not directed to securing documents to tender in the proceeding or otherwise assist with the litigation. Rather, they are directed to obtaining documents so that prospective group members in a representative proceeding may be identified and notified of the proceeding. That is an important consideration which may be relevant in considering whether the subpoenas might be regarded as offending international comity: cf. Ceramic No 1 at [81]. There is no question of Euroclear and Clearstream being compelled or required to produce documents to be used in litigation against them or their clients. Rather, the subpoenas are for the potential benefit of their clients, in the sense that they may ultimately benefit from their participation in the representative proceedings.

24    Nevertheless, considerations relating to international comity and the enforceability of the subpoenas loom large in respect of the proposed subpoenas to Euroclear and Clearstream. That is because there is evidence to suggest that in both Luxembourg and Belgium there are secrecy laws, or laws relating to client confidentiality, that prevent or prohibit financial institutions from producing documents or disseminating information concerning their clients or their clients’ transactions. The content of those laws has not been explored at all in the evidence led by Ceramic in support of its application for leave to issue the subpoenas. Both Clearstream and Euroclear have, however, indicated in their correspondence that secrecy laws, or their duties of confidentiality, would be likely to prevent them from producing, in the ordinary course, some or all of the documents that would likely be captured by the subpoenas.

25    This raises a clear issue of international comity. If issued, the subpoenas would purport to compel Euroclear and Clearstream to produce documents in possible contravention of the domestic laws of Belgium and Luxembourg, respectively. The subpoenas state, on their face, that failure to comply with the subpoenas without lawful excuse would be a contempt of court. It is not difficult to imagine that the governments of Belgium and Luxembourg might consider that an order of a foreign court (in the form of a subpoena) which purported to compel a financial institution domiciled in their jurisdiction to produce documents contrary to their laws would be an invasion of their sovereignty and an affront to international comity.

26    There was no apparent issue concerning laws relating to secrecy or client confidentiality in the United States in the case of the subpoena issued to US Bank National Association. There was no suggestion that US Bank National Association could or would assert that it was prevented by United States domestic law from producing the documents sought by the subpoena. Indeed, when consideration was being given to issuing the subpoena, US Bank National Association had indicated a willingness to produce the documents if a subpoena was issued.

27    In response to this concern relating to international comity arising from the secrecy laws, Ceramic proposed including the following proviso in the subpoena to Euroclear:

Nothing in this subpoena requires you to produce documents or information that is not able to be produced in response to this subpoena by reason of Belgian confidentiality and banking secrecy laws.

28    It may be accepted that this proviso would go some way towards alleviating the concerns about international comity. If included in the subpoena, the proviso would make it tolerably clear that Euroclear would not be required to produce any documents that were protected from disclosure by Belgian secrecy laws or client confidentiality. By the same token, on the face of it the proviso would also denude the subpoena of any real utility. Based on what has been said in the correspondence, if the proviso was included in the subpoena it is difficult to imagine any relevant documents being produced. Ceramic led no evidence concerning the secrecy laws to counter that inference.

29    It may be the case, as Ceramic submitted, that when considering whether to grant leave to issue and serve a subpoena, the Court does not usually turn its mind to whether the subpoena is likely to be productive, in the sense of resulting in the production of documents. This is, however, by no means an ordinary case. The likely utility of the subpoenas is a highly relevant consideration given that they are proposed to be served on foreign entities in circumstances which may well be considered to amount to a breach of international comity.

30    A second and related consideration in the circumstances is that, while neither Euroclear nor Clearstream have stated point blank that they will not comply with the subpoena, if issued, both have raised issues or questions concerning the enforceability of the subpoena in their respective jurisdictions. That is particularly so in the case of Euroclear. While Euroclear’s Australian lawyers have usefully proposed an alternative course of action to bring the representative proceeding to the notice of prospective group members, they have also made it clear that Euroclear will seek advice from Belgian counsel regarding its obligations with respect to compliance with any subpoena that may be issued. It is not difficult to imagine that competent Belgian counsel would be likely to advise that, even putting Belgium’s secrecy laws to one side, the subpoena would not be able to be effectively enforced in Belgium.

31    In relation to Clearstream, given that Clearstream has raised the question of Luxembourg’s secrecy laws, it may readily be inferred that it too will seek legal advice concerning the enforceability of the subpoena in Luxembourg. The likely result is that Clearstream will receive advice that the subpoena cannot effectively be enforced in Luxembourg and cannot override Luxembourg’s secrecy laws.

32    Ceramic’s response to the problem or dilemma arising from the unenforceability of the subpoenas in Belgium and Luxembourg might fairly be characterised as being “well, it’s worth a try”, though of course counsel for Ceramic did not put it precisely in those terms. It was submitted that Ceramic or its lawyers were obliged to do what they could to identify and communicate with the group members of the representative proceeding. In Ceramic’s submission, the fact that the subpoenas are unenforceable in Belgium and Luxembourg and both Euroclear and Clearstream are in those circumstances unlikely to comply with them, was no reason not to issue them. That was submitted to be the case particularly in circumstances where it cannot be completely excluded that the secrecy laws may permit some documents to be produced, or that Euroclear and Clearstream might well choose to produce documents in answer to the subpoena even though the subpoenas cannot be enforced.

33    That submission is rejected. The likely limited utility and unenforceability of the subpoenas is a weighty consideration in the circumstances. In relation to enforceability, it serves well to recall the words of Allsop J in Stemcore (A/sia) Pty Ltd v Oceanwave Line SA [2004] FCA 391 at [12], that a subpoena which is not capable of enforcement is “an empty threat, or the equivalent of a mere request couched in imperative terms”. In a case where the foreign entity has indicated a willingness to voluntarily comply with the subpoena, as was believed to be the case in relation to the US Bank National Association subpoena, the unenforceability of the subpoena may well not be seen as an important or definitive consideration. This, however, is not such a case.

34    While it is no doubt important for Ceramic to obtain documents or information which will allow it to identify and communicate with group members, in all the circumstances it would not be appropriate to issue the subpoenas to Euroclear and Clearstream. The potential breach of international comity, the likely lack of utility and the unenforceability of the subpoenas are considerations that together outweigh all other considerations that might otherwise weigh in favour of issuing the subpoena. It is clear that Ceramic may need to explore other potential courses of action to obtain the names of the group members, including, perhaps, the alternative course of action proposed by Euroclear’s Australian lawyers. Other possible alternatives were identified in Ceramic No 1.

35    For all these reasons, the interlocutory application seeking leave to issue and serve the subpoenas on Euroclear and Clearstream is dismissed.

Associate:

Dated:    10 August 2016