When a court-appointed trustee or liquidator is tasked with liquidating an entity, they need to gain possession of all of the entity’s assets. In crypto cases, this task can prove difficult when trying to identify and control all of the entity’s different digital assets and obtain cooperation from the entity’s former operators. Unfortunately, in the case of Three Arrows Capital (“3AC”), the two founders have refused to cooperate with recovery efforts and have absconded to unknown foreign countries. Without the founders’ voluntary cooperation, 3AC’s joint liquidators (the “JLs”) resorted to seeking relief from the Bankruptcy Court for the Southern District of New York in order to serve the founders and related entities with subpoenas outside of the United States. In an interesting and fairly unprecedented ruling, the bankruptcy court authorized service of a subpoena via social media and email.
3AC’s Worldwide Liquidation Efforts
On June 27, 2022, 3AC, a crypto hedge fund incorporated in the British Virgin Islands (“BVI”) and operating out of Singapore, commenced liquidation proceedings in the BVI. The filing was attributed to the sharp decline of the price of two cryptocurrencies, Terra LUNA and TerraUST, and subsequent declarations of default by many of 3AC’s lenders.
The JLs were appointed and authorized to collect and liquidate 3AC’s assets. On July 1, 2022, the JLs filed a chapter 15 petition in the U.S. and have since filed several other recognition proceedings worldwide (Singapore, Canada, Seychelles, Cayman Islands). The purpose of these proceedings is to obtain documents and information from interested parties and recover 3AC’s worldwide assets.
The JLs have been significantly stymied in their investigation by the lack of cooperation from 3AC’s founders, Su Zhu and Kyle Livingstone Davies, both of whom are believed to still have possession or control over certain assets. To further complicate matters, the physical whereabouts of the founders are unknown.
Subpoena Motion & Service Motion
On October 14, 2022, in furtherance of their investigative and collection efforts, the JLs filed two motions in the U.S. chapter 15 proceeding. The first motion (the “Subpoena Motion”) requested authorization to issue subpoenas directed to the founders and related parties requesting documents related to 3AC’s assets and related communications. The second motion (the “Service Motion”) requested authorization for the JLs to serve subpoenas upon 3AC’s founders, investment managers, and a former broker via alternative means. The Service Motion also sought authority to serve the subpoenas on the founders via email, the founders’ Twitter pages, and via emails to the founders’ counsel.
On December 2, 2022, the bankruptcy court granted the Subpoena Motion but declined to issue a final ruling on the Service Motion, citing jurisdictional concerns in light of the founders’ uncertain citizenship status. The bankruptcy court instead directed the JLs to submit additional briefing on the Service Motion to address the implications of Rule 45 of the Federal Rules of Civil Procedure. On December 29, 2022, the bankruptcy court granted in part, and denied in part, the Service Motion.
The Court’s Analysis
The Service Motion and subsequent briefing explained that the motion was necessary because the founders and their purported Singapore counsel had all declined to accept service or otherwise cooperate with the JLs’ prior requests for information made via letters, emails, and virtual conferences.
The bankruptcy court separated its Rule 45 discussion between service of the subpoenas on (a) non-U.S. nationals and residents (i.e., Mr. Zhu, 3AC’s two investment managers, and 3AC’s former broker), and (b) United States nationals and residents (i.e., Mr. Davies). As an initial matter, the bankruptcy court denied the Service Motion with respect to the non-U.S. nationals and residents, holding that Rule 45(b)(3) does not expressly authorize serving a non-U.S. national or resident with a subpoena in a foreign country.
However, the bankruptcy court—presuming that Mr. Davies is a United States national—granted the Service Motion as against Mr. Davies pursuant to Federal Rule 45(b)(3). Rule 45(b)(3) incorporates 28 U.S.C. § 1783, which permits service of a subpoena on a U.S. national or resident located in a foreign country so long as the requested information is (a) necessary in the interest of justice, and (b) not possible to obtain in any other manner. The bankruptcy court found that the information requested in the subpoena was “undoubtedly necessary” because Mr. Davies has intimate knowledge of 3AC’s business and assets, and that the information cannot be recovered from others, including Mr. Zhu, given the parties’ lack of cooperation in the chapter 15 case and all other non-U.S. 3AC proceedings.
The final step in the bankruptcy court’s analysis was to determine what means the JLs could use to serve the subpoena on Mr. Davies. Courts in the Second Circuit have authorized service via alternative means, such as email, voicemail message, or fax. Here, the bankruptcy court held that although the JLs had not made a “diligent prior attempt” to serve Mr. Davies with the subpoena, based on Mr. Davies’ recent and actual use of both his Twitter and email accounts, Twitter and email would “reasonably ensure actual receipt” under Rule 45’s “reasonably calculated” due process standard. In support of its holding, the bankruptcy court explained that in applying Section 1783, service must be affected in accordance with both Rule 45 and Rule 4, and because courts have previously authorized service of a summons via email and social media under Rule 4, the JLs could likewise serve Mr. Davies’ subpoena using the same alternative means.
As the 3AC proceedings demonstrate, identifying and taking possession of estate assets can be disrupted when the debtor’s previous owners are obstructionist and live outside of the United States. This is more so the case when it is unclear exactly where the prior owners reside, such as in 3AC. Under such convoluted circumstances, the 3AC decision demonstrates the importance of identifying any U.S. national or resident who is, or previously was, affiliated with the debtor and who may have access to documents or assets. Under Rule 45(b)(3) and Section 1783, a trustee or liquidator may have the ability to creatively serve such U.S. national/resident with a subpoena via email or even social media. Given the decentralized nature of businesses, in particular those companies in the cryptocurrency space, it may become more common for courts to be asked to authorize service of a subpoena via social media (e.g,, Twitter, Facebook, LinkedIn, or perhaps even via TikTok, Vine, or Snapchat). Service via social media is a new concept and has been used sparingly in the past (Wikileaks was served via Twitter in 2018; Gokhan Orun (an individual residing in Turkey) was served via Facebook and LinkedIn in 2016). It remains to be seen how the courts will balance litigants’ need for documents and information with the due process concerns of ensuring notice of a subpoena.
For cross-border insolvencies, it is also important to pursue information in other countries where the subpoena targets reside. For example, in August 2022, the JLs’ liquidation proceeding in the BVI was recognized in Singapore, and the JLs subsequently served banks, exchanges, and 3AC-related entities located in Singapore with subpoenas to initiate discovery. Liquidators of debtors with worldwide assets must remain aggressive and seek recognition of their proceedings in countries where assets and critical information reside – only then can a liquidation proceeding be adequately completed and closed. Time will tell whether the 3AC JLs commence new recognition proceedings in the countries where the founders are ultimately found to be living.