A recent decision from the Southern District of New York represents yet another example of courts recognizing the broad powers conferred on arbitrators under the Federal Arbitration Act (“FAA”) with respect to compelling prehearing discovery from a nonparty to arbitration.  See In the Matter of Arbitration Between Life Receivables Trust and Syndicate 102 at Lloyd’s of London, No. M8-85 (S.D.N.Y. Mar. 12, 2007) (“In re Life Receivables Trust”).

On March 14, 2007, a federal judge denied a motion by Life Settlement Corporation d/b/a Peachtree Life Settlements (“Peachtree”) to quash a nonparty subpoena issued by an arbitration panel that sought the discovery of certain documents.

The underlying arbitration involved a dispute between Life Receivables Trust (“LRT”) and Syndicate 102 at Lloyd’s of London (“Syndicate 102”).  LRT initiated arbitration to recover payments under a policy issued by Syndicate 102.  Peachtree was not a party to the arbitration but it was a signatory to the arbitration agreement entered into between LRT and Syndicate 102 and had been involved in certain life insurance transactions that were at issue in the underlying arbitration.

Syndicate 102 sought the production of certain documents from Peachtree, claiming that such documents were relevant to the central issues in the arbitration.  The arbitration panel issued a nonparty subpoena requesting the production of these documents pursuant to Section 7 of the FAA, which provides that “arbitrators…or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in proper case to bring with him or them any book, record, document or paper which may be deemed material as evidence in this case.”  9 U.S.C. § 7.  Peachtree refused to comply and moved to quash the subpoena in the Southern District of New York.  Syndicate 102 cross-moved to compel compliance.

The court granted Syndicate 102’s motion to compel, despite recognizing that several district courts in New York have refused to enforce subpoenas seeking the production of documents from a nonparty to arbitration.  The court noted that Peachtree, “while not a party to the specific arbitration at issue, is a party to the arbitration agreement.”

In recent years, nonparty discovery under Section 7 of the FAA has been the subject of varied interpretations by courts.  Several jurisdictions have held that Section 7 empowers arbitrators to compel nonparty document discovery prior to the final hearing in a matter but not depositions, while other courts in other jurisdictions have held that arbitrators lack the authority to do either or both.  The In re Life Receivables Trust decision is yet another interesting twist in this area of law, as it involved a nonparty who was a signatory to the arbitration agreement at issue.

LRT has filed a notice to appeal to the Second Circuit and a motion to stay enforcement of the subpoenas pending appeal.  Stay tuned.