The Cayman Islands Grand Court has granted an application to dismiss proceedings against Walkers by a former Brazilian banker, Katia Rabello, who alleged the law firm had violated her client confidentiality.
In a judgment delivered 28 Oct., Justice David Doyle dismissed an application by Rabello and related companies, Arnage, Brooklands and East Farthing, to set aside or vary an order by the Court of Appeal that forced the plaintiffs to post US$4.25 million as security before the trial could go ahead.
Because the security has still not been provided more than a year after a Court of Appeal order stayed proceedings and gave the plaintiffs 45 days to pay, Doyle dismissed the action for failure to comply with a court order.
“I appreciate that dismissal of an action without consideration of the merits may be regarded as a harsh result but there comes a time when a court must conclude that enough is enough. That time has arrived,” he wrote in his judgment.
The claim
Rabello, the former principal shareholder and president of Rural Bank in Brazil, launched proceedings in 2014 claiming Walkers had acted for “a hostile third party”, while the firm still owed her fiduciary, contractual and client confidentiality duties under a longstanding legal retainer.
Walkers had helped Afonso Braga, a Brazilian trustee in bankruptcy, in 2010 and 2011 to obtain documents that were subsequently 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.
In that case it was alleged that the former Petroforte owner had stripped away assets that belonged 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.
Rabello claimed she had to declare bankruptcy and lost the family bank and other assets as a direct result of the law firm’s actions. She initially sought up to $400 million in damages.
Walkers admitted that Arnage and Brooklands were clients and were owed ongoing duties of confidentiality but no ongoing contractual, tortious or fiduciary duties after a legal retainer ended in 2000, almost 10 years before the law firm acted on behalf of Petroforte’s trustee in bankruptcy.
The law firm denied Rabello was a client, and said there was no written contract with her, no file in her name, no correspondence, nor any instructions by her.
Walkers said the only reason it acted on behalf of the trustee in bankruptcy was because Rabello had lied about her ownership of Securinvest in 2009 in court proceedings contesting the extension of the Petroforte bankruptcy estate to her personal assets.
The firm claimed Rabello’s personal losses and bankruptcy would have occurred in any event.
Rabello was famously embroiled in Brazil’s Mensalao political corruption scandal.
In 2012, Rabello was 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 Rural Bank.
Her sentence was reduced on appeal to 14 years and five months, but she only served four years in prison, from 2013 to 2017, when she was granted parole. In 2019, Rabello was pardoned.
The court proceedings
In the first instance in 2019, then-Chief Justice Anthony Smellie found in favour of the plaintiffs and held Walkers liable in a summary judgment.
That judgment was overturned in 2021 by the Court of Appeal, which ruled that the chief justice was “wrong” in granting a summary judgment application without a full trial.
The Court of Appeal found that “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”.
At the same time, the court dismissed Walkers’ appeal to strike out the claim.
The Court of Appeal judgment noted that Walkers had apologised and admitted that the firm should not have accepted the retainer from Braga, because there was a small risk that internal documents could have been disclosed.
The appeal judgment said Walkers defence was arguable but “ripe for contest and challenge in light of all the evidence and full disclosure”.
Later in 2021, Walkers secured a $4.25 million security-for-cost order against the plaintiffs arguing that the trial had already cost the firm almost $8.5 million by April 2021. Walkers claimed that without the security it would be difficult to recover costs from a bankrupt foreign plaintiff, if the firm were to succeed at trial.
The court accepted that a security-for-cost order could be misused to suppress a claim, but said in this case the plaintiffs, who appeared to have no money, had been able to maintain the costly litigation for years, without explaining the source of their funds.
Application against cost order dismissed
In their application to vary the security-for-cost order, the plaintiffs argued that they cannot pay and it would be unjust and disproportionate to deprive them of access to justice.
Doyle ruled that a security-for-cost order could be varied if there was a significant change in circumstances since the order was made, but the plaintiffs had failed to show that.
The plaintiffs had also not established that their claims had been stifled or that it was otherwise appropriate to set aside or vary the order.
In his judgment dismissing the action, Doyle wrote it would be “unfair and unjust” for the plaintiffs to disregard the security-for-cost order, regard the stay as lifted and proceed with “a free shot” at trial “at no risk as to adverse costs”.
Doyle said he agreed the case was important and there were serious issues to be tried. “It is also important that court orders are complied with,” he wrote.
While dismissing the claims was prejudicial to the plaintiffs, the judge said, it was also prejudicial to the defendant to permit an indefinite stay “which would mean that the serious allegations against a professional firm would remain undetermined for an indefinite period of time”.
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