Kelley (Trustee of the PCI Liquidating Trust) v Stevanovich and Ors

• Jurisdiction: Bermuda
• Judgment Date: 12 October 2018
• Date: 12 October 2018
• Docket Number: Civil Jurisdiction 2018 No 129
• Court: Supreme Court (Bermuda)

[2018] Bda LR 89

In The Supreme Court of Bermuda

Civil Jurisdiction 2018 No 129

Between:

Douglas Kelley (as Trustee of the PCI Liquidating Trust)

Plaintiff

and

Steven G Stevanovich

Paragon Management Ltd nka Bermuda Administrative Services Ltd

Marshall Diel and Myers

Talisman Capital Talon Fund aka Talisman Captial Talon Master Fund Ltd

Westford Global Asset Management Ltd

Westford Asset Management LLC fka Bridgewater Capital Management LLC

Monahan And Biagi PLLC

Berkeley Square Management Ltd

Groen Brothers Aviation Inc

Groen Brothers Aviation Global Inc

Clean Fuels Technology, Inc

Rudolf W Gunnerman

MLO Products, Inc nka Genisoy Food Company, Inc

John Does #1 – 9,999

Defendants

Ms J Haworth for the Plaintiff

Mr S White for the Defendants

The following cases were referred to in the judgment:

Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434

Netbank v Commercial Money Center [2004] Bda LR 46

Deane v Skadden Arps Slate Meagher & Flom et al [1998] Bda LR 43

Re State of Norway's Application [1987] QB 433

Application to set aside order for examination — Request from US Bankruptcy Court — Ponzi scheme — Powers of the Court to order examination — Fishing expedition — Discretion of the Court

RULING of Subair Williams J

Introduction

1. This matter came before the Court on the Defendant's contested summons application dated 2 July 2018 to set aside my ex parte Order made on 26 April 2018 (“the ex parte order”) for Bermuda Administrative Services Ltd. (“BAS”) to comply with the terms of a Request from the United States Bankruptcy Court for the District of Minnesota (“the Request”) for International Judicial Assistance for a proper representative of BAS to submit to examination under oath by a Bermuda appointed examiner.

2. Having heard arguments from Counsel on both sides, I reserved my ruling and indicated that I would provide written reasons. Regrettably, the delivery of this ruling was necessarily delayed on account of my medical leave from office during the months of August and September 2018.

3. I am particularly grateful to Counsel for their patience and understanding and for their most able and helpful written and oral submissions.

The Background Evidence

4. There were no factual disputes which arose for me to resolve, so the evidence may be summarized briefly. Various companies filed for voluntary bankruptcy in the United States Bankruptcy Court District of Minnesota under Chapter 11 proceedings following the discovery of their involvement in the Thomas Petters' Ponzi Scheme (“the Ponzi Scheme”).

5. Several special purpose vehicles (“SPVs”) were formed as part of the Ponzi Scheme to entice investors to lend or invest money in the SPVs for bonds entitling them to an interest in receivables due to these SPVs. It is alleged that between 2003 and 2009 over a US$83,000,000 in fraud proceeds were paid to the bank account of Paragon Management Ltd (“Paragon”), now known as BAS.

6. The PCI Liquidating Trust was created under a liquidating plan of reorganization for the purpose of recovering the fraud proceeds. The Plaintiff, Mr Douglas Kelly, having been appointed by the US Bankruptcy Court to recover these proceeds which were paid to third party creditors/investors commenced a series of ancillary legal proceedings against third parties on the basis of their allegations that those third parties were recipients of proceeds of the fraudulent scheme. The Plaintiff's tracing claims name one Mr Steven Stevanovich as a Defendant in those ancillary proceedings where it is alleged that he and/or his family and associates were the ultimate beneficiaries of monies which emanated from the Ponzi Scheme.

7. The Plaintiff avers that the monies from which Mr Stevanovich and others benefitted were channeled through both named and unnamed defendants but more relevantly to these proceedings, through BAS. Capital Strategies Fund Limited (“Capital Strategies”) (now known as Barrington Capital Group Limited (“Barrington”)) is in voluntary liquidation in the British Virgin Islands. In the affidavit evidence of Mr Andrew Martin, he deposes that the Plaintiff ‘will require production of evidence concerning the relationship amongst and the transfers between Capital Strategies…, Paragon and other parties who are alleged to be the ultimate beneficial owners of Capital Strategies/Barrington and for whose benefit Paragon Management Ltd…received transfers from Capital Strategies/Barrington.’ This is the evidential basis for the Plaintiff's interest in the beneficial owners on whose behalf Paragon held shares in Capital Strategies.

8. The BAS Defendant filed affidavit evidence in support of its summons sworn by its director and sole shareholder, Mr Luciano Aicardi, and by Counsel Mr Steven White.

9. BAS was initially a named defendant amongst the Plaintiff's various actions for recovery of fraudulent proceeds. However, the action against BAS was dismissed on a without prejudice basis while the same litigation against 14 other named Defendants (and 9,999 unnamed John Doe defendants) has matured into an advanced post-discovery stage. It is against this factual background that the Defendant opposes the US Court's request for assistance.

The Application to Set Aside the Ex Parte Order

10. In addition to the requirement for a BAS representative to be examined under oath, the ex parte Order also required the Defendant to produce various documents specified in paragraph 18 of the Request which stated:

• “a. Particulars of the beneficial owners on whose behalf Paragon held shares in Capital Strategies during the period April 30, 2001 to October 14, 2010, the latter being the date Capital Strategies was placed into voluntary liquidation.

• b. Copy of the custodian or nominee agreement between Paragon and the beneficial owners of the shares in Capital Strategies.

• c. For the period February 1, 2003 to September 20, 2005, bank statements for Paragon's bank account number … with Bank of N.T. Butterfield & Son Limited into which Capital Strategies made the following transfers to Paragon”

  (A tabled chart setting out dates ranging between 27 February 2003 and 31 May 2005, and providing the originating bank account details in addition to various amounts transferred under eight separate transactions is inserted at this part of the Request. These transfers total $8,300,000.00.)

• “d. For the period April 1, 2006 to October 31, 2009, bank statements for the Paragon bank account(s) into which Capital Strategies made the following transfers to Paragon:”

  (Again, a tabled chart setting out the dates, originating bank account details, and the various amounts transferred is inserted at this part of the Request. These transfers totaled $72,116,147.15)

• “e. Particulars of to whom Paragon paid the monies referred to at (c) and (d) above, including copies of all checks, withdrawals debit vouchers, electronic or written transfer application and all other documents relating to such transfers.

• f. Details of to whom Paragon distributed the limited partnership units in Capital Strategies Cayman L.P., a Cayman Islands exempted limited partnership, which it received as a distribution in specie on October 14, 2010, together with all documents relating to such transfers.

11. The application to set aside the ex parte order is made on the following grounds:

• i. The Application for foreign judicial assistance is an attempt to gather information from Bermuda Administrative Services Ltd speculatively as part of a ‘fishing expedition’, for the purposes of pre-trial discovery and/or to establish new lines of enquiry in the present proceedings before the US Bankruptcy Court District of...