Offshore law firm Walkers has successfully appealed a summary judgment by Chief Justice Anthony Smellie.
That ruling said that Katia Rabello, former principal shareholder and president of Rural Bank in Brazil, was entitled to seek damages because the law firm had breached its duty of confidentiality to her as a client by obtaining an information disclosure on behalf of an “adverse” party.
The Court of Appeal in its judgment on 1 Feb. found that the chief justice was “wrong” in 2019 when he granted the summary judgment application without a full trial.
The process, which lasted 16 days with legal bundles of more than 31,000 pages – including 600 pages of pleadings, 21 affidavits by the plaintiffs and 15 affidavits and statements by Walkers – was “unsuited to summary resolution”, Appeal Justice Alan Moses wrote in his judgment, supported by Appeal Justices Bernard Rix and John Martin.
“Walkers should not have been condemned of serious breaches of their obligations as lawyers on the Islands without a full opportunity to defend themselves at trial,” Moses wrote.
However, the Court of Appeal dismissed Walkers’ appeal against the refusal to strike out the statement of claim.
Rabello sued Walkers in 2014 for alleged breaches of fiduciary duty, breach of contract, breach of duty of care, and breach of confidentiality.
Rabello and fellow plaintiffs Fernando Toledo, formerly of Trade Link Bank in Cayman; and Cayman firms Arnage Holdings Ltd., Brooklands Holdings Ltd., and East Farthing Holdings Limited, were initially claiming up to $400 million in damages.
The plaintiffs say they engaged Walkers as their attorneys from 1985 to 2010.
They claim that Walkers had failed to carry out conflict-of-interest searches before the firm acted for “a new client with interests directly adverse to the plaintiffs”.
This “adverse” client, Afonso Henrique Alves Braga, a Brazilian trustee in bankruptcy of Petroforte Group, was represented by Walkers in 2010 and 2011 in a contested disclosure application that was part of a major multi-jurisdictional fraud investigation.
Braga alleged that assets belonging to the bankrupt Petroforte Group had been stripped away by the former principal of the group in collusion with the Rabello family’s Rural Group.
The alleged fraud involved sham sale and leaseback transactions with Securinvest Holdings S.A., a Brazilian company, whose shares were held by Arnage and Brooklands in the Cayman Islands.
The scheme led the Brazilian courts in 2007 to incorporate the assets of Securinvest in the Petroforte bankruptcy estate.
In 2010, Walkers helped Braga obtain disclosure orders from the Grand Court, which revealed that Rabello was the ultimate beneficial owner of Securinvest.
The courts in Brazil used the information to extend the Petroforte bankruptcy to Rabello’s personal assets, including Banco Rural and the Hotel Nacional in Brasilia. Rabello herself was made bankrupt.
The plaintiffs claim the inclusion of these assets into the Petroforte estate was the direct result of the law firm’s alleged duty breaches by obtaining the information disclosures for Braga.
The attorney-client relationship
The plaintiffs claim that Walkers had been attorneys to the Rabello family since 1985, the year in which the law firm incorporated Trade Link Bank, an investment bank in Cayman, to conduct investments on behalf of the Rabello family and others in Brazil.
In June 2000, Walkers acted on behalf of Arnage and Brooklands in a note purchase transaction from a Brazilian affiliate of Rural Group that was later renamed Securinvest.
Walkers admits that Arnage and Brooklands were clients and were owed ongoing duties of confidentiality but no ongoing contractual, tortious or fiduciary duties after the retainer ended in 2000, almost 10 years before the law firm acted on behalf of Braga.
The law firm, which also acted in two matters related to Trade Link Bank in 2006 and 2007, denies Rabello was a client.
In May 2006, a US attorney acting for the Rabello family instructed Walkers “to take steps to distance the family from Trade Link Bank” in light of the ‘Mensalao’ corruption investigation in Brazil, the judgment said.
Walkers issued notarial certificates that showed that at that time no Rabello family members were named on the register of Trade Link Bank or East Farthing, which held the shares of Trade Link Bank.
When Brazil’s central bank (BCB) investigated the links between the Rabello family, Banco Rural and Trade Link Bank, the Cayman Islands Monetary Authority requested a copy of the register of officers and directors of Trade Link Bank.
Walkers were retained in 2007 to provide legal advice to resist that request. The law firm attempted to restrict the disclosure to only current officers and directors but failed, the appeals judgment said.
Katia Rabello, by then president of Rural Bank, was indicted in March 2006 in the ‘Mensalao’ affair. She was later, in 2012, convicted of conspiracy, money laundering and fraudulent remittance of funds and sentenced to 16 years and eight months in prison, after it was found bribery payments had been routed and arranged through the bank. Her sentence was reduced on appeal to 14 years and five months.
She served time from 2013 to 2017, when she was granted parole. Rabello was pardoned in 2019.
In his summary judgment, Chief Justice Smellie pointed to these retainers and concluded Walkers had no reasonable prospect of avoiding a court finding that the plaintiffs were or had been clients, suggesting the law firm should have known of the implications for the Rabello family of acting for Braga.
However, Walkers stated that there is no written contract with Katia Rabello, no file in her name, no correspondence, nor any instructions by her.
Justice Moses wrote: “These arguments are not conclusive but it does not seem to me possible to say that they are not reasonably arguable. They are ripe for contest and challenge in the light of all the evidence and full disclosure.”
The judgment noted that Walkers had apologised and admitted that the firm should not have accepted the retainer from Braga.
“Walkers accepted that a duty of confidence continues to be owed to a former client once the retainer is over in relation to documents and information generated during the course of the retainer. Walkers admit they had documents showing how Securinvest was capitalised in respect of which there was a small risk of a leak. There was no evidence, we were told, that any of the documents disclosed came directly from Walkers but it was because of the risk that the documents which they continued to hold might be disclosed that they accepted that they should not have acted and apologised,” the judgment said.
Justice Moses noted that when Securinvest in 2009 contested the decision to be added to the Petroforte bankruptcy estate it lied about its beneficial ownership by stating that neither Arnage nor Brooklands had shareholders involved in Rural Group.
“The Plaintiffs now admit that this was untrue because Katia Rabello owned Amage and Brooklands, and therefore Securinvest, and at the time was President of Banco Rural’s Administrative Council,” he wrote.
Walkers argues that if Rabello had told the truth then, Braga would have had no need to go to the Cayman Islands to determine the identity of the ultimate beneficial owner of Securinvest. And her personal bankruptcy and losses would have incurred in any event.
Walkers claims it “only became involved because of her failure to reveal the truth to the [Brazilian court], and her personal bankruptcy and losses were only incurred by virtue of her ownership of the company, Securinvest, which was central to the fraud on Petroforte’s creditors”, the judgment said.