Allen Walsh and Hans Taal v Horizon Bank International Ltd

• Jurisdiction: Bermuda
• Judgment Date: 31 March 2008
• Date: 31 March 2008
• Docket Number: Commercial Jurisdiction 2004 No. 257
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Kawaley J

Commercial Jurisdiction 2004 No. 257

BETWEEN:

1. Allen Walsh

2. Hans Taal

3. Boomer Trading Company Limited

Plaintiffs

and

Horizon Bank International Limited (In Liquidation)

Defendant

Mr N Hargun and Mr C Luthi for the Plaintiffs

Mr J Woloniecki and Ms S Subair for the Defendant

The following cases were referred to in the judgment:

AIC Ltd v ITS Testing Services Ltd (‘The Kriti Palm’)UNK [2007] 1 Lloyds Rep 555

Bristol and West Building Society v MothewELR [1998] Ch 1

Arklow Investments Ltd v MacleanWLR [2000] 1 WLR 594

El Ajou v Dollar Holdings plcUNK [1994] 2 All ER 685

Stolzenberg and others v Mellon Trust Co. LtdUNK [2006] EWCA Civ 827 20

Wai Yu-Tsang v RELR [1992] 1 AC 269

Belmont Finance Corporation v Williams Furniture Ltd (No. 2)UNK [1980] 1 All ER 393

Re H (restraint order: realisable property)UNK [1996] 2 BCLC 500

Re Hallett's EstateELR (1879) 13 Ch D 696 [1996] 2 BCLC 500

Criminal Code s. 336

Fraud — Beneficial ownership of offshore bank — Tracing claim — Scope of investment authority — Breach of fiduciary duty — Conspiracy

JUDGMENT of Kawaley, J

Introductory

1. Although this is a case with a strong Caribbean flavour, the narrative which unfolded through the evidence begins in Toronto, and also features Bermuda and New York. The Plaintiffs claim to have been defrauded by individuals based in Ontario operating through companies incorporated principally in Antigua and Barbuda, The Bahamas, and Saint Vincent and the Grenadines. The Defendant, now in liquidation, called no positive evidence in answer to the various serious allegations made against the company's former management. However, it was contended that for illegality and various other reasons, the Plaintiffs should be denied relief.

2. The trial of this action was originally scheduled to last for ten days. In the event, largely due to exemplary party-driven case management in which the Defendant responded pragmatically to the Plaintiffs' Notices to Admit Facts, the trial only consumed less than seven full days of court time. Although a range of technical legal issues were canvassed by counsel, it appeared to me that there were few (if any) significant differences of pure legal principle. Rather, controversy turned on how principles, the substance of which was common ground, should properly be applied to the relevant facts. The trial was ably and eloquently argued on both sides, making it necessary for the Court to attempt to follow the advice recently given by a retiring English Commercial Court judge:

‘One of the problems in the commercial court is that the quality of advocates is such that you could read one side's argument and think that it was clearly right, then read the other's and think it was clearly right too. In those situations all you can do is explain that the decision was a difficult one to make and be very clear in your justifications.’1

3. After describing the history of the litigation and the highlights of the pleadings, the agreed and contentious facts will be listed and the findings on all contentious issues will lastly be set out. Much of the history is taken from earlier interlocutory rulings.

History of the proceedings

4. On August 19, 2004, the Bermuda Commercial Bank (‘BCB’) issued an Originating Summons seeking directions with respect to the disbursement of funds it held, the ownership of which was disputed. Horizon Bank International Limited (‘HBI’) was joined as 1^st Defendant, and various HBI depositors and the 1^st–2^nd Plaintiffs in the present action were joined in the proceedings. The 1^st-2^nd Plaintiffs had already commenced proceedings in the Superior Court of Justice in Ontario (the ‘Ontario Court’) against DBM Financial Group Inc., Jerry Prucha, Mark Edwards, William Presnail and Daniel O'Connor (the ‘Toronto Defendants’)2 alleging they have been the victims of fraud. On 19^th July 2004, the 1^st–2^nd Plaintiffs were granted by the Ontario Court an Order for interim preservation of assets which orders the Toronto Defendants, inter alia, as the directing minds of HBI/Extant Management Limited (‘Extant’) to freeze assets held in HBI or Extant up to $10 million.

5. At this juncture HBI's beneficial ownership was unclear and its regulatory status created anxieties amongst several of its depositors as to whether they would be able to retrieve their deposits. The 1^st–2^nd Plaintiffs (‘Walsh and Taal’), however, were convinced that all monies held by BCB represented the proceeds of their property. On February 7, 2005 I found that these Plaintiffs had an arguable tracing claim for monies held by BCB for the account of HBI (based on the lowest intermediate balance principle) and that US $5,631,439.84 should be preserved until trial. I further ordered a trial of the preliminary issue of whether or not Walsh and Taal had a tracing claim for monies in excess of this amount, observing that I found it improbable that all the funds in HBI's accounts with BCB were linked to the transaction of which the 1^st–2^nd Plaintiffs complained3.

6. On April 5, 2005, when I declined an application by the Defendant's then attorneys for payment of their fees out of the Bermuda monies, I indicated that the information then before the Court suggested that independent management should be appointed because of the actual or contingent insolvency of the Defendant. On or about April 21, 2005 Marcus Wide of PricewaterhouseCoopers Toronto was appointed Provisional Liquidator of the Defendant in St. Vincent and the Grenadines (‘SVG’), and fresh lawyers were retained in Bermuda. At a hearing on October 6, 2005 with attempts still being made to finalize an order giving effect to the February 7, 2005 Ruling, Mr. Woloniecki for the Provisional Liquidator placed before the Court his client's First Report. This indicated that: (a) the Plaintiffs appeared to have a good proprietary claim; and (b) that the Defendant was clearly insolvent with additional unsecured creditors not before the Bermuda Court. Counsel further stated that the only live issue was the extent of the proprietary claim. The matter was adjourned to a date to be fixed for further arguments on the terms of the February 7, 2005 Order, and further evidence was directed to be filed within 14 days. This First Report gave credence to the earlier view that the existence of the proprietary claim might not need to be adjudicated by this Court.

7. However, on October 6, 2005, ancillary liquidation proceedings were commenced in respect of the Defendant in Bermuda, and Messrs. Peter Mitchell and Marcus Wide were, on or about November 10, 2005, appointed Joint Provisional Liquidators (‘JPLs’) by this Court in Companies (Winding-Up) 2005: 359. The application was granted by

me primarily on the jurisdictional ground that the Defendant was carrying on business through an agent, the BCB, in Bermuda. The JPLs subsequently consented to the liquidation stay being lifted to permit the Plaintiffs to pursue the present claim. The other depositors, as unsecured creditors, were now prevented by the liquidation stay from further participating in the Bermuda proceedings.

8. By Summons dated April 7, 2006, the JPLs sought orders (a) directing the exchange of pleadings and trial of the Plaintiffs' proprietary claim, and (b) payment out to them of monies in excess of the lowest intermediate balance. On April 26, 2006, by way of response, Walsh and Taal issued a Summons seeking orders that: (a) the issue of whether or not the Defendant was through Kevin Coombes (‘Coombes’) fixed with knowledge of the Toronto Defendants' fraud when it received the Plaintiffs' monies should be tried in Toronto, which was the natural and most appropriate forum, (b) that tracing issues should only be determined after that adjudication, and (c) that the JPLs should not in the interim have recourse to the monies in excess of the lowest intermediate balance amount, which latter amount should be paid out to the Walsh and Taal forthwith.

9. On April 26, 2006, the two Summonses were argued. Mr. Woloniecki opposed trial of the issue of whether the Defendant was a constructive trustee in Ontario because that forum was not a competent jurisdiction. Written submissions on jurisdiction were filed on both sides. The JPLs' position on the fraud issue was tentatively revised to the position that (a) the Plaintiffs' loss was essentially an investment loss, and (b) accordingly, the Defendant did not receive the monies with notice that they were stolen. I encouraged the parties to consider whether, in light of the discovery and the pleadings which I ordered on that date, agreement on the fraud issue could be reached so that only tracing issues need be actually tried in the present proceedings. Such a compromise would obviously save time and costs, and also avoid this Court trying any issues which overlapped with matters likely to be determined in the Ontario action. Pleadings were ordered to be exchanged on the entirety of the proprietary claim, but the Plaintiffs' application for a cross-jurisdictional split trial, as it were, was adjourned, together with the JPLs' application for (a) full discovery, and (b) a permanent injunction restraining the Plaintiffs from seeking to join them as defendants in the Ontario action. The matter was adjourned for a further directions hearing after the exchange of pleadings, which hearing took place before me on September 22, 2006.

10. On September 27, 2006, I refused Walsh and Taal's application for a stay of the present action on forum grounds, principally because I felt it would be unjust to lift the litigation stay against the Defendant to permit the Defendant as a company in liquidation to be joined in the Ontario Proceedings as defendants alongside the Toronto Defendants. Appreciating the undesirability in adjudicating the existence of the proprietary claim in Bermuda as against HBI and in Ontario as against the...