Cayman Islands: Appleby Successfully Assists Butterfield Dispose Of Dishonest Assistance And Breach Of Mandate Claims
Last Updated: 11 April 2019

Appleby has successfully assisted its corporate banking client, Butterfield Bank (Cayman) Ltd, in disposing of long-standing litigation which saw the Grand Court of the Cayman Islands grapple with a variety of fundamental banking law issues. The case provides a timely reminder of the serious challenges faced by those seeking to bring claims against what are doubtless seen by potential claimants as deep-pocket defendants, and the subsequent costs consequences that may arise if the claim fails.

In 2018 the Hon. Mr Justice Williams in the Grand Court of the Cayman Islands dismissed – in their entirety – breach of mandate and dishonest assistance claims that had been brought against Butterfield by a corporate client of the Bank, arising out of a USD 875,000 fraud in the case of Ritter v. Butterfield (Grand Court, 29 May 2018). The appeal initiated in June 2018 has now been withdrawn, concluding the litigation between the parties.

The fraud involved theft from the corporate bank account by one director forging his co-director's signature on wire transfer requests on eight occasions over a period of 2 years.

When the fraud eventually came to light, the Plaintiff initially sought to recover the stolen funds directly from his fraudulent co-director, and was initially re-paid USD 875,000 within 6 days of discovery of the fraud. But when that strategy failed (as he was sued for the recovery of that "repayment"), and with the fraudulent co-director by that time residing in HMP Northward having been convicted and sentenced to 5 years' imprisonment for theft, the Plaintiff belatedly informed, and then turned its sights on, the Bank, in order to attempt to recover some of the stolen funds.

In dismissing the claims, Justice Williams handed down a 128 page Judgment dealing with a number of fundamentally important principles of banking law. The Judgment also applied, for the first time as a matter of Cayman law, an estoppel by representation based on what is known as the Greenwood duty, owed by banking customers as a matter of common law, to report known forgery to their bankers as soon as they become aware of it.

The follow on Costs Judgment that was handed down on 31 December 2018 provided an interesting discussion on the leading cases as to the principles that are to be applied to in application for indemnity costs (which were awarded to the Bank on the dishonest assistance part of the claim). The Costs Judgment also deals with (and ultimately rejected) the novel and bold attempt by the Plaintiffs to cap recoverable costs. Following a review of English case law, Justice Williams found that the Cayman Islands Court does not have the power to make such an order absent clarification of the applicable costs provisions in the Grand Court Rules and applicable Practice Direction.

The Plaintiffs in the proceedings were a corporate captive insurance client of Butterfield, Geneva, and its director and sole shareholder, Mr Ritter. Geneva was managed by Monkton, the corporate vehicle of Mr David Self.

Having previously banked with RBC, in 2008 Geneva opened an account with Butterfield (the Geneva Account). The relevant account opening documentation required both Mr Ritter and Mr Self to sign wire transfer requests to make payments from the Geneva Account.

Between December 2008 and September 2010, Mr Self forged Mr Ritter's signature on wire transfer requests for eight fraudulent transactions (in amounts ranging from USD 435,100 to USD 15,005). Each of the wire payment transfer requests contained some superficially plausible explanation in the description such as "Capital Funds for Captive", "Management Fees", "Inter-company loan" etc.

On 1 September 2011, when Mr Ritter was seeking to close down Geneva's operations in Cayman, and there was a shortfall in the amount Mr Self was able to arrange to be returned from the Geneva Account; having initially claimed he could not send any more funds due to "minimum capital requirements", Mr Self eventually admitted to Mr Ritter that he had "borrowed" USD 875,000 from the Geneva Account, by repeatedly forging Mr Ritter's signature.

Having promised Mr Ritter that he would repay the stolen funds, Mr Self then stole another USD 825,000 by way of two further wire transfers from the accounts of two other captives he managed (Warco and Canadian Livestock) to Monkton's account at Cayman National Bank.

On 5 September 2011, Mr Ritter arrived in the Cayman Islands, to meet with Mr Self the following day. In that meeting, Mr Self told Mr Ritter that USD 800,000 had already been sent from "family money" in England to Mr Ritter's personal account in Texas, and he provided Mr Ritter with a wire transfer form by way of supposed documentary support. Mr Ritter asked Mr Self "is some of this money coming from other customers, other clients?" to which Mr Self replied "No." During the course of the meeting, Mr Ritter also said: "I really don't want you to go [to prison] and I don't want to wreck your business. I don't want to wreck your livelihood and I'm not looking to do the most aggressive things possible. I just want my money and go away. That's all...I think the best thing for me to do is ... probably need to get a lawyer and probably need to visit with an accountant in worse case. My problem is once I start things sometimes they get a little uncontrollable so I am going to be a little hesitant to do much there".

At the meeting, Mr Ritter also said: "I guess my only hope if your relatives don't come through is the bank I guess. Because the instruments are forged, they would have a duty."

Initially doubting whether payment would be received (saying "the miraculous relative loan has failed to materialize"), by 7 September 2011, Mr Ritter had received into his personal account in Texas full repayment of the USD 875,000 stolen by Mr Self from Geneva. He said at the time that "this can only be good news", but admitted that it was "hard to believe!"

Following receipt of a Krys Global forensic investigation report which Mr Ritter had commissioned, CIMA appointed Controllers over Monkton (the Controllers). The Controllers met with Mr Self within 2 days of their appointment, and Mr Self again confessed to the forgeries, as well as to other misappropriations from other captives he had managed. The Controllers obtained a worldwide freezing order against him, and he was arrested by RCIPS for theft. The Controllers then promptly issued proceedings against Mr Self, quickly obtaining a default judgment with damages to be assessed. In settlement of those proceedings, Mr Self granted a Power of Attorney to the Controllers for the sale of all of his worldwide assets, which the Controllers began to use by selling his Cayman and US property, shares, and his car. By July 2012, three further default judgments totaling USD 988,881.20 were obtained against Mr Self by three of the captives that he had managed and defrauded: Warco, Landis and Landrin.

Having learned of Mr Self's "repayment" to Mr Ritter, on 9 August 2012, the Controllers issued claw-back proceedings in Texas to seek to recover the USD 875,000 stolen from other customers to fund Mr Ritter's repayment. Those proceedings were eventually concluded by settlement, with Mr Ritter repaying USD 500,000 of the USD 875,000 stolen customer funds he had received by way of "repayment". Less than three weeks after the Texas proceedings were issued, and by that time with Mr Ritter's "repayment" from Mr Self in jeopardy through those proceedings, by letter dated 27 August 2012, Geneva finally informed the Bank of the fraud on the Geneva Account, and that Mr Ritter was challenging the debits in respect of the unauthorized payments that had been made based on Mr Self's forgeries of Mr Ritter's signature.

Williams J's detailed Judgment sets out the essential legal principles which are to be applied as a matter of Cayman banking law (following Lord Tomlin's Judgment in Greenwood v. Martins Bank [1932] AC 180 (HL)), in determining whether there was an estoppel which acted as a complete defence to a claim: (1) silence of the customer, in breach of the duty to inform the bank immediately of known forgery; (2) that that silence was deliberate or intentional to lead the Bank to believe the relevant debits were in order; (3) that the Bank relied on the debits being in order by acting or failing to act in a certain way; and (4) that the bank suffered material prejudice or detriment as a result.

The Judge went on to conclude, on the facts, that the Bank had established all the elements of the estoppel on the facts and the claim was barred in its entirety. There was a legal representation that the debits made to the Geneva Account in respect of the forged wire transfer requests were in order because Mr Ritter had failed to inform the Bank immediately of the forgery, which he knew about from Mr Self's admission on 1 September 2011. The first time the Bank was informed that the debits were being challenged was by letter almost a year later on 27 August 2012. The Court held that none of Mr Ritter's three calls with the Bank on 1 September 2011 constituted him notifying the Bank of the fraud. The Court did not agree with Mr Ritter that sending the Krys Global Report to CIMA and the call and correspondence he had with CIMA from December 2011 onwards somehow discharged his duty to immediately inform the Bank. To complete the representation, the Judge found that Mr Ritter's failure to tell the Bank of the forgery was deliberate: "I am satisfied on the evidence that Mr Ritter made a conscious decision not to tell the Bank at [the] time as he feared that this might create problems in receiving the funds DS promised to transfer into his personal account in the USA ... Mr Ritter's evidence is not convincing and has the character of someone, after the event, searching for and creating excuses for deliberately not doing what he clearly should have done at the time, namely immediately report the detail of the fraudulent activity on the Geneva Account to the Bank....it is conceded by Mr Ritter that his primary focus was to ensure that the funds were recovered from DS and this meant receiving them from DS into his personal account...Even after receiving the funds in the account and despite having concerns about the source of funds he still deliberately failed to inform the Bank and this was consistent with Plan A. It was only when his Plan A began to fall apart, due to the then imminent Texas proceedings, after he decided to move on to Plan B which involved him coming after the Bank for recovery, that adequate disclosure about the existence and detail of the forgery was given" (paragraphs 93 - 98 of the Judgment).

The Judge held that the Bank had relied on the representation that the debits were authorized, by omitting to bring proceedings against Mr Self, when it would have done so, had it been told the truth by Mr Ritter on 1 September 2011. The lost opportunity of proceeding against Mr Self was sufficiently material detriment to establish the estoppel, given that Mr Self had a material level of known assets on 1 September 2011, whereas by 27 August 2012, he was hopelessly insolvent by being the subject of a worldwide freezing order, three judgments totaling USD 988,881.20, and had granted a Power of Attorney for the sale of all of his worldwide assets to settle a fourth default judgment.

The Plaintiffs' claim in dishonest assistance was tacked on to the common law claims and was essentially based on the same facts, alleging that the Bank through its employees dishonestly closed its eyes and ears to obvious red flags with the fraudulent transactions, including what were said to be the "obviously" forged signatures. The Bank asserted, as a preliminary point, that the dishonest assistance claim was defective, and should be dismissed, as it had been pleaded and advanced improperly in breach of strict procedural rules and practice, including by: (1) not identifying any individual employee of the Bank who it was alleged had been dishonest; and (2) not providing adequate particulars of the alleged dishonesty.

The Court found for the Bank by both dismissing the claim on the preliminary basis above, as well as by formally recording its finding that, notwithstanding that dismissal, neither the Bank nor any of its employees had acted dishonestly: "I do not find that the Plaintiffs have provided evidence sufficient to prove such a serious allegation. I accept that armed with hindsight and with the advantage of later gained knowledge (unknown by anyone at the Bank)....that some additional enquiries maybe could have been made, but this does not make the Bank dishonest when applying the tests set out in the cases analysed herein...There is no evidence that the Bank, as is pleaded, deliberately allowed transactions that were fraudulent to be processed" (Williams J at paragraph 202 of his Judgment).

A Notice of Appeal was filed by the Plaintiffs in June 2018 seeking to challenge the estoppel decision of the Judgment.

The follow on Costs Judgment that was handed down on 31 December 2018 provided an interesting discussion on the leading cases as to the principles that are to be applied to an application for indemnity costs. The basis for the Court to award costs on an indemnity basis can be found at GCR O.62, r.4(11) which states:

"The Court may make an inter-partes order for costs to be taxed on the indemnity basis only if it is satisfied that the paying party has conducted the proceedings, or that part of the proceedings to which the order relates, improperly, unreasonably or negligently."

Bearing this in mind, and having considered leading authorities on indemnity costs, the Hon. Mr Justice Williams found that the discretion of the Court to award indemnity costs is "extremely wide" (Williams J at paragraph 51 of his Costs Judgment). Williams J referred to correspondence from the Defendant which made a formal invitation to the Plaintiffs to withdraw this part of the claim, and found that "it is clear that the Plaintiffs were made aware of the inevitable outcome of this part of the claim and were warned of the potential negative cost implications if they persisted with bringing the same" (Williams J at paragraph 49 of his Costs Judgment). Further, the Judge found that the dishonest assistance claim was "clearly defectively pleaded, a speculative claim involving high risk and evidentially very weak" (Williams J at paragraph 51 of his Costs Judgment) and awarded indemnity costs for this element of the proceedings. The Judge did not award indemnity costs for the entire claim as although he held that Mr Ritter's conduct was unreasonable, he was "not satisfied that it is so highly unreasonable and out of the norm that the Court should impose an order for costs on the indemnity basis for [the entire] claim" (Williams J at paragraph 69 of his Costs Judgement).

Williams J also considered a novel and bold application made by the Plaintiffs pursuant to section 24(3) of the Judicature Law (2017 Revision) and GCR O.62 that sought to cap the recoverable costs of the Bank to the value of the claim, or to the Plaintiff's level of costs. Following consideration of English case law and procedure in this area (for example, the cases of A B & Others v Leeds Teaching Hospitals HNS Trust [2003] EWHC 103 and Black v Arriva North Est Ltd [2014] EWCA Civ 1115, and guidance found in Practice Direction 3F – Costs Capping of England and Wales dated January 2017), and the Cayman Court's more limited case management powers (in particular there being no requirement for the filing of cost estimates), the Judge found that the Court did not have the power to introduce the concept of costs capping for the first time in this jurisdiction. Further, the Judge found that even if he was wrong in his conclusion about the lack of power to make a costs capping order, he was not convinced that the present application which sought to effectively apply a costs cap retrospectively, was appropriate. The Judge held "the intention was and remains that the purpose of costs capping is to case manage costs before they are, or possibly as they are being, incurred" (Williams J at paragraph 104 of his Costs Judgment).

The appeal has now been withdrawn, bringing to an end the long-standing litigation between the parties.

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