New allegation against Ritz developer

The receivership companies behind a Grand Cayman hotel property allege that The Ritz-Carlton, Grand Cayman developer Mike Ryan and one of his companies received US$44 million over seven years from the Ritz companies before Mr. Ryan lost control of them in March 2012. 

The various allegations regarding Mr. Ryan and Orion Developers are contained in documents from an evolving case before the Cayman Islands Grand Court. The defendants argue that the explanation of those allegations are “sparse”.* 

The documents also contain a review by the Deloitte accounting firm showing the Ritz to be “insolvent to the tune of” more than $340 million on a balance sheet basis. That calculation includes a stated $261 million in total assets and $601 million in total liabilities, with about $250 million claimed by the hotel property’s secured lender, based on draft unaudited balance sheets Deloitte examined. 

An auction of the Ritz property has been set for 31 October with a reserve sale price of $240 million. The auction vendor is RC Cayman Holdings LLC, the company that filed a writ in March demanding immediate payment of nearly $234 million from Mr. Ryan.

A matter of $44 million  

In a ruling dated 25 September, Justice Peter Cresswell said the plaintiffs, comprising five companies formerly controlled by Mr. Ryan, are relying on an affidavit by KPMG Senior Manager Alexander William Lawson. 

The affidavit states that bank records show “there appears to be a net outflow of funds to Mr. Ryan during the period 2005 to 2012 totalling $10,307,964. This outflow remains unexplained”. Additionally, Mr. Lawson stated that from 2007 to 2012, bank statements show “a net outflow to Orion Developers of $34,131,626”.

Along with Mr. Ryan, Orion Developers is one of six defendants named in the ruling, with the other defendants also being companies totally owned by Mr. Ryan. The five plaintiffs are receivership companies that were more than 90 per cent owned by Mr. Ryan.

In his ruling, the judge denied applications by the defendants to force the plaintiffs to pay a security of $1.2 million to cover Mr. Ryan’s legal fees if he is able to defend himself successfully against the plaintiffs’ claims. The judge also denied Mr. Ryan’s alternative application for the plaintiffs to advance him $126,152 by way of indemnity and then to pay all future legal costs.

The presiding judge, Sir Peter Cresswell, summarized the defendants’ appraisal of the plaintiffs’ new claim regarding the $44 million in “outflows” to Mr. Ryan and Orion Developers, thusly, “The explanation of the allegations is sparse. The new allegations merely state that the payments were ‘received’ by Mr. Ryan and his affiliated companies. A payment in settlement of a liability or obligation is no basis for an allegation of impropriety. * 

“Having regard to the fact that the financial statements of the receivership companies were audited up until 2010 [by Ernst & Young], it is wrong for the plaintiffs to ask the court to draw an inference that ‘payments’ made to Mr. Ryan and his associates must have been improper, instead of a legitimate payment of some liability or obligation,” the defendants argue. *

Claims, counterclaims  

In addition to the new proposed claim, the plaintiffs allege that Mr. Ryan and his companies are liable to them in several respects, including “that assets belonging to the plaintiffs have been sold in a transaction with no or illusory consideration”; that “the defendants hold rental deposits received from tenants of condo properties at the resort on trust for the plaintiffs”; that “the defendants owe the plaintiffs commission in relation to condo rentals”; and “a number of payments made by the defendants were unexplained, or paid to affiliates of Mr. Ryan improperly”.

On the other side, Mr. Ryan and his companies argue that all of those funds have been properly accounted for and were used for legitimate business purposes. 

In his ruling, Justice Cresswell wrote that the defendants argue: “The defences in this claim have a high degree of potential success. All of the allegations levelled at the defendants in the Amended Statement of Claim and [KPMG director Keith Blake’s] First Affidavit have been comprehensively answered not only by the defendants and their accounting staff, but also by independent accountants from Deloitte.” Furthermore, according to the defendants, the plaintiffs have not advanced a positive case against Mr. Ryan’s “very substantial claims going the other way” that he is in fact owed money. * 

Justice Cresswell wrote, “In my opinion, it is very difficult (if not impossible) in the present case to form a view as to the respective merits of the claims, defences (and counterclaims) at this stage of the proceedings.” **
 
‘Unarguably insolvent’

A 1 August letter from a Deloitte partner indicates that as of 12 March (the date that Mr. Ryan’s former companies behind the Ritz went into receivership) the companies had $261 million in total assets and $601 million in total liabilities, based on draft unaudited balance sheets Deloitte examined.

Other than the approximately $250 million claimed by the secured lender, the remainder of the debt is unsecured, including the CI$6 million the Cayman Islands government claims it is owed. Assuming that the Ritz assets could be sold for book value of $261 million, and that the secured lender’s costs would be $2 million, the remaining surplus after paying off the secured lender would be about $8.5 million, according to Deloitte.

Dividing the $8.5 million in funds by the $351 million in unsecured credit means that, upon liquidation of the companies, “an unsecured creditor could on these figures at best expect a dividend of no more than 2.5 cents on the dollar”, according to Deloitte.

Using that proportion, the Cayman government could expect a dividend of CI$150,000 on the CI$6 million allegedly owed.

‘Mr. Ryan was responsible’  

In his ruling, Justice Cresswell assumes that if the assets are sold and the companies liquidated, the plaintiffs would not be able to pay Mr. Ryan’s legal fees if ordered to do so “(to the extent that such costs are not recoverable from the Receivers)”. ** 

Nevertheless, the judge determined to exercise his discretion not to order the security for Mr. Ryan’s costs, primarily because the actions by Mr. Ryan himself were what led the four companies into $340 million in the red.

“There is one circumstance which is worthy of emphasis and repetition. All of the plaintiff and defendant companies are, I repeat, ultimately over 90 per cent owned by Mr. Ryan,” he wrote. “The plaintiff and defendant companies formed part of the group described above. Mr. Ryan was responsible as director for the affairs of the receivership companies and his conduct (in the broad sense) of the affairs of the receivership companies was such that immediately prior to the receivership their position was, according to Deloitte, US$(340,640,000).”

The judge determined not to grant indemnity, in part because Mr. Ryan was unable to produce the written contract for his “directorship, management and CEO services” that he says contained indemnity provisions. The judge notes that Mr. Ryan’s attorney Ian Huskisson said, “Mr. Ryan recalls there was a contract, but he has not been able to find it.”

 

* Editor’s notes: The annotated paragraphs have been changed from the original story to reflect the fact that the court records quote Mr. Justice Cresswell’s summary of the defendants’ claims; not the judge’s own opinions or statements.  

** This sentence is attributed directly to Mr. Justice Cresswell.

 

1 COMMENT

  1. How did this very expensive hotel with high occupancy rate manage to go bust?

    As usual the Cayman Island Government, that is to say the public, will end up picking up the tab for the unpaid import duties.

    Seems with the Westin is also in financial trouble. How sad for Cayman.

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