Bermuda Commercial Bank Ltd v Horizon Bank International Ltd and Others

• Jurisdiction: Bermuda
• Judgment Date: 05 April 2005
• Date: 05 April 2005
• Docket Number: Civil Jurisdiction 2004 No. 25
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Kawaley,J

Civil Jurisdiction 2004 No. 25

BETWEEN:

Bermuda Commercial Bank Limited

Plaintiff

and

Horizon Bank International Limited and others

Defendant

Mr J Pachai for the Plaintiff

Mr P Harshaw for the 1st Defendant

Mr D Duncan for the 2nd Defendant

Mr J Williams for the 3rd—7th Defendants

Mr C Luthi for the 8th—9th Defendants

Ms E Christopher for the 10th—13th Defendants

The following cases were referred to in the judgment:

United Mizrahi Bank Ltd v DohertyWLR [1998] 1 WLR 435

Application to fund defence costs from frozen monies — Proprietary funds — Right to mount an effective defence

Ex Tempore Ruling of Kawaley, J

1. In this case Horizon Bank International Ltd. (‘HBI’) applies for permission to draw down out of the frozen monies sufficient funds to enable it to be paid not just its legal fees associated with its defence of these proceedings but also various other operating expenses. In argument, Mr. Harshaw has sensibly focused on the strongest part of his case, which is the important right of a litigant to be able to retain counsel to allow it to effectively mount a defence.

2. The parties seem to be broadly agreed to as the legal principles which apply. Those principles are partly summarised in a extract from Steven Gee, “Commercial Injunctions”, 5^th edition (Sweet &Maxwell: London, 2004), and also in the case decided by Mr. Justice Burton, United Mizrahi Bank Ltd. v Doherty and OthersWLR[1998] 1 WLR 435; [1998] 2 All ER 230. In essence, where it appears that a party to proceedings has no other source of funds other than a disputed fund to which the litigation relates out of which to fund its defence, the Court has a discretion to allow a deduction from the disputed fund to cover the defendant's litigation costs.

3. In the context of a proprietary claim, the Court has a discretionary power in this regard. This discretion is even broader in the context of an ordinary personal claim, where the decision to allow monies to be released to pay such legal expenses does not even potentially involve allowing the defendant to fund his defence out of the plaintiff's money. The position seems to be clear, certainly in the proprietary context, that funds subject to the potential proprietary claim can only be applied where it is clear that those funds represent the only funds available to the relevant Defendant.

4. In this case it seems to me that HBI does not have to meet the proprietary test because, on the facts as I have found them thus far, the Eighth and Ninth Defendants only have a strongly arguable proprietary claim as regards to lowest intermediate balance. And so, accordingly, there are funds which are not subject to a strong proprietary claim of which these funds could be taken. Looking at the position absent the proprietary claim, the real question to my mind is can these funds properly be said to be the only funds available and is there any countervailing injustice that may be suffered by the depositors if in fact the monies that the depositors claim (and some of them admittedly do assert a proprietary claim, but not in my view a good or strongly arguable one) is properly payable to them out of the general assets of the First Defendant, which Bermuda assets appear insufficient to permit such claims to be paid in full. Is there any injustice that the depositors would suffer, if in fact these funds are applied towards the legal expenses of HBI?

5. Dealing with these two crucial issues, assuming that funds subject to the proprietary claim had to be applied towards defence costs, I am not satisfied on the evidence before the Court that the monies in the Bermuda Commercial Bank account are the only monies available to HBI. It seems to me that there is no clear explanation put forward as to why the monies in St. Vincent, the statutory deposit for $500,000 cannot be accessed at this time. Particularly since on the face of the Defreitas Affidavit, HBI is clearly on a cash flow basis insolvent, and has not been carrying on normal business for some several months. There is no obvious reason, and certainly no reason put forward in evidence that I find plausible or credible, as to why those funds can't be accessed to pay the ongoing legal and very limited operational expenses that the Bank must now be incurring, bearing in mind that it is effectively no longer doing any business, all of its business being effectively done in the past through a now frozen account.

6. Putting aside the case of Defendants 8–9, what is the position of the Depositors? Ms. Christopher for the 10^th–13^th Defendants does not object to the payment out. This is perhaps because her clients are in the strongest position amongst the Depositors at this stage, and have a comparatively small balance which they would reasonably expect to be paid out in early course in any event. But it seems to me, looking at the position broadly, that HBI is in a position where it is insolvent on a cash flow basis. There is a real risk, having regard to the prospective position, taking into account the costs that will inevitably be incurred as the litigation goes forward, possibly to the Court of Appeal as well as before this Court, that the total sum that HBI claims belongs to it would be exhausted at some point in the not too distant future in any event.

7. HBI's claim that roughly some $750,000 is beneficially as well as legally owned by it is one which has to be treated with some scepticism in light of the late stage at which this claim is first raised, and the generally murky background to this matter. But assuming this claim to be a good one, it seems to be highly likely that a few months down the road the Horizon Bank will be in the same position where, if in fact nobody behind the Bank is able and willing to fund this litigation, HBI will have to drop out of the picture because of an inability to fund the litigation. In all these circumstances, it seems to me that it would be wrong to potentially prejudice the Depositors in respect of a fund which appears to be insolvent and to allow HBI to draw down on these monies to fund the litigation in circumstances where there is no clear end to that litigation in sight.

8. I do appreciate that if HBI is not represented in these proceedings, certain difficulties may flow from that for the other parties. But those difficulties will have to be met in due course if they in fact arise. Certainly, it seems to me, looking at the situation in a practical commercial way, that if the $750,000 are the only monies available to the Bank to fund its legal expenses and operating expenses, then really the Directors of the Bank should be considering taking appropriate steps to have the company placed under independent management, which can perhaps more coolly and logically assess the best way forward in this difficult litigation.

9. So for all of these reasons, I dismiss the First Defendant's application for payment out of monies towards its defence costs and/or operating expenses.

In The Supreme Court of Bermuda

Kawaley, J

Civil Jurisdiction 2004 No. 25

BETWEEN:

Bermuda Commercial Bank Limited

Plaintiff

and

Horizon Bank International Limited and others

Defendants

Mr. J. Pachai for the Plaintiff

Mr. P. Harshaw for the 1st Defendant

Mr. D. Duncan for the 2nd Defendant

Mr. J. Williams for the 3rd–7th Defendants

Mr. C. Luthi for the 8th–9th Defendants

Ms. T. Davidson for the 10th–13th Defendants

The following case was referred to in the judgment:

P.B.J. Manufacturing Co Ltd v Fahn, FahnWLR [1967] 1 WLR 1059

Mercedes Benz v LeiducELR [1996] AC 284

Westdeutsche Bank v Islington LBCELR [1996] AC 669

El Ajou v Dollar Land Holdings plcUNK [1993] 3 All ER 739

Utilicorp v RefroBDLR [1994] Bda LR 79

Space Investments Ltd v Canadian Imperial BankWLR [1986] 1 WLR 1072

Bishopsgate Investment Ltd v HomanELR [1995] Ch 211

Fraud — Interim relief for tracing claim — Interpleader action — Beneficial owner of 1st defendant — Accounts in bank with fluctuating balances — Equitable remedy — Jurisdiction — Burden of proof — Constructive trust

RULING of Kawaley, J

INTRODUCTORY AND HISTORY OF PROCEEDINGS

When a victim of an alleged fraud to be proved in a foreign court can prove his money was deposited into the account maintained in Bermuda of a foreign bank allegedly controlled by the perpetrators of the relevant fraud and mixed with its depositors funds, what interim relief in support of a tracing claim should the Bermuda Court grant in the context of an interpleader action brought by the account-holding Bermudian bank?

Faced with uncertainties as to who was the beneficial owner of the First Defendant (‘HBI’) and the not wholly unrelated threat on the part of Defendants 8–9 of legal action if the Plaintiff did not preserve the account held by the Plaintiff for the benefit of HBI, they asserted contained their funds, the Plaintiff prudently and properly issued these proceedings to resolve the conflicting claims between Defendants 8–9 and HBI. By its August 19, 2004 Originating Summons, the Plaintiff sought the following substantive relief:

‘That the Plaintiff be entitled and authorized to retain monies held in various accounts in the name of [HBI] totalling $11,964,745.86 as at 12^th August 2004 until such time as an Order is made by this Honorable Court directing the Plaintiff as to the proper disbursement of the said monies.’

On the first return date of the Originating Summons, September 3, 2004, at which all parties save for Defendants 10–13 appeared, an order was made in terms of the Originating Summons, along with other preliminary directions. The course of the proceedings is helpfully summarized in the written submissions of Defendants 8–9, which are reproduced below:

‘4. At the first return date for the originating summons, on the 3^rd September 2004, it was ordered that each of the Second through Ninth Defendants...