Plaintiffs must post $4.25M security ahead of Walkers client confidentiality trial

Offshore law firm Walkers has secured a US$4.25 million security-for-cost order against bankrupt, former Brazilian banker Katia Rabello and three Cayman companies she controls, before her trial against the firm, claiming up to US$400 million in damages, can go ahead next year.

In the case, Rabello claims Walkers breached a longstanding legal retainer and related fiduciary duty, duty of care and client confidentiality, when the firm helped “an adverse party” obtain documents in the Cayman Islands.

These documents were then used in litigation in Brazil to hold the Rabello family companies, and Rabello personally, responsible for the losses of another Brazilian company, the bankrupt Petroforte Group.

As a result, Rabello alleges she had to declare bankruptcy and lost the family bank and other assets.

A Grand Court summary judgment by Chief Justice Anthony Smellie in Rabello’s favour was overturned on appeal earlier this year.

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The Cayman Islands Court of Appeal found on 1 Feb. that the chief justice erred in granting a summary judgment without a full trial. The trial is anticipated to take place in the autumn of 2022.

Plaintiff has no money

In its application, Walkers claimed security for its costs because the plaintiffs appeared to have no money. The plaintiffs, in turn, argue they have been rendered impecunious by the firm’s wrongdoing as a fiduciary.

According to Walkers, the seven-year litigation had cost the firm almost $8.5 million by April 2021. Walkers sought two-thirds of that figure as security, claiming that if the firm succeeded at trial, it would be difficult to recover costs from a bankrupt, foreign plaintiff.

A previous security-for-cost application was rejected by the chief justice, who judged that the plaintiffs had proven claims against the defendant in respect of which money was likely to be due to them, not the other way round.

But this security-for-cost judgment could not survive the overturning of the chief justice’s summary judgment, the Court of Appeal found.

The court considered that a security-for-cost order can under certain circumstances be misused to suppress a claim.

However, in this case, the Court of Appeal stated that while the plaintiffs appeared to have no money, they had, without explaining the source of their funds, maintained the costly litigation for years. They therefore could not argue that an order of security would stifle their claim.

Contentious claim

The appeals court refused to be drawn into an analysis of the merits of the claims and their prospect of success, other than to note that the question as to what caused the loss to Rabello and her business empire is highly contentious.

While Rabello claims she had a longstanding legal retainer with the firm, Walkers submitted that there was no record of such an engagement.

The law firm acknowledged that plaintiff companies Arnage Holdings Ltd and Booklands Holdings Ltd had been clients in the past but maintains that no ongoing duties other than client confidentiality were owed to them.

In the case, Afonso Braga, the bankruptcy trustee of Petroforte, alleged that the former owner of the group had stripped away assets belonging to the bankrupt company in collusion with Rabello family companies.

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.

Walkers helped Braga obtain disclosure orders from the Grand Court that showed Rabello was the ultimate beneficial owner of Securinvest.

The courts in Brazil used this information to incorporate the Rabello family assets into Petroforte’s bankrupt estate.

Walkers admits that it should not have acted on behalf of Braga because there was a small risk that documents held by the law firm showing how Securinvest was capitalised could have been leaked, the appeal judgment stated. But Walkers asserts that no documents from the law firm were used in litigation in Brazil.

The law firm maintains that if Rabello had told the truth about her ownership of Securinvest during the proceedings in Brazil, the Cayman disclosure order would have never been necessary, and Rabello’s bankruptcy would have occurred in any event.

In ordering the plaintiffs to pay the $4.25 million security, the appeals court said it had considered the size of their claim and their assertion that they had spent $15 million in legal fees in various jurisdictions around the world “to deal with the consequences of what they allege to be Walkers’ wrongful conduct”.

The security-for-cost order was not extended to one of the plaintiffs, Fernando Toledo, a former managing director of the Rabello family’s Trade Link Bank in Cayman.

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