Argyle Funds SPC Inc. (in Official Liquidation) v BDO Cayman Ltd

• Jurisdiction: Cayman Islands
• Judge: Sir Alan Moses, JA,Field, JA
• Judgment Date: 08 October 2018
• Court: Court of Appeal (Cayman Islands)
• Docket Number: CICA (Civil) 8 of 2018
• Date: 08 October 2018

Between

Argyle Funds SPC Inc. (In Official Liquidation)

Appellant (Defendant)

and

BDO Cayman Ltd

Respondent (Applicant)

Before:

The Hon Sir Richard Field, J.A

The Hon Dennis Morrison, J.A

The Rt. Hon Sir Alan Moses, J.A

CICA (Civil) 8 of 2018

Grand Court Cause No: FSD 163 of 2017 (RPJ)

IN THE COURT OF APPEAL OF THE CAYMAN ISLANDS

ON APPEAL FROM THE GRAND COURT

Appearances:

Ms. Clare Stanley QC instructed by Mr Ulrich Payne, Ms. Jennifer Fox and Ms. Britt Smith of Ogier of the Appellant

Mr Graham Chapman QC instructed by Mr Andrew Pullinger and Mr Shaun Tracey of Campbells for the Respondent

Field, JA

Introduction

1 This is an appeal by Argyle Funds SPC (“Argyle”) against that part of the order of Parker J dated 23 March 2018 whereby Argyle, acting by its joint official liquidators (“the JOLs”), is restrained from continuing proceedings (“the New York proceedings”) commenced against BDO Trinity Limited (“BDO Trinity”), BDO USA LLP (“BDO USA”) and Schwartz & Co LLP (“Schwartz”) in the Supreme Court of the State of New York, County of Nassau. BDO Trinity, BDO USA and Schwartz are hereinafter referred to collectively as “the Affiliates”.

2 Argyle is a Cayman Islands Mutual Fund which at the relevant time consisted of up to 31 segregated classes. It went into insolvent liquidation on 26 April 2016 at which time Mr David Griffin and Mr Andrew Morrison were appointed as Joint Voluntary Liquidators. On 31 May 2016, Argyle went into official liquidation and Messrs. Griffin and Morrison were appointed as JOLs.

3 There is no appeal against that part of Parker J's order by which Argyle was restrained from continuing the New York proceedings against BDO Cayman Ltd (“BDO Cayman”). The four defendants sued in the New York proceedings, BDO Cayman, BDO Trinity, BDO USA and Schwartz are hereafter collectively referred to as “the New York Defendants”.

4 BDO Cayman, BDO Trinity, and BDO USA are members of BDO International, a global network of public accounting, tax consulting and business advisory firms. Schwartz is an independent accountancy firm and is not a member of BDO International. Instead, it is a BDO “alliance firm” in that its name is on a BDO International list of pre-approved firms that can be used to assist in audits conducted by firms who are BDO International members.

5 BDO Cayman was Argyle's statutory auditor for the audit years ending 31 December 2006 – 2014, in the course of which audits the investments held by certain of Argyle's classes would have had to have been scrutinised.

6 In the period 2004 to 2016, Argyle invested in entities known as “credit advisors” who managed factoring transactions under which accounts receivable were sold at a discounted price as a means of financing. Amongst the credit advisors in which Argyle invested were two companies controlled by a Mr Donald Barrick, ECB Funding LLC (“ECB”) and RMP Capital Corp (“RMP”). ECB and RMP are hereafter referred to collectively as “the Barrick Credit Advisors”. Argyle also invested in a third company, New Solutions Financial (III) Corp (“NSF”), which had no connection to Mr Barrick or the Barrick Credit Advisors.

7 In 2016, it was discovered that large sums under the control of the Barrick Credit Advisors had been misappropriated through the fraudulent actions of Mr Barrick (“the Barrick fraud”). In 2012, it was discovered that NSF had been involved in a fraudulent scheme investing in very risky loans which turned out to be of little value (“the NSF fraud”).

8 In the New York proceedings, Argyle claims compensatory damages of US$86,416,916.21 and punitive damages of not less than US$260 million on the basis that the New York Defendants ought to have but did not alert Argyle in the course of each of the relevant four audits that Argyle was or might be the victim of the Barrick and NSF frauds. Argyle pleads four causes of action, the first three of which are averred against all the New York Defendants jointly, whilst the fourth, a cause of action in contract, is pleaded solely against BDO Cayman. The first cause of action (paras 221–234 of the Amended Complaint) pleads professional and gross negligence alleging a tortious failure to exercise ordinary and reasonable skill in a way that grossly deviated from the degree of care commonly possessed and exercised by auditors in performance of their duties to such an egregious extent as to render the New York Defendants' conduct wilful and/or intentional. The second cause of action (paras 235 – 242) pleads fraudulent conscious concealment of “ red flags” signifying the indicia of fraud in order to avoid the loss of fees collectable from Argyle. The third cause of action (paras 243 – 248) is for unjust enrichment based on the retention by the New York Defendants of the audit fees received from Argyle notwithstanding their breaches of duty to Argyle. The fourth cause of action (paras 249 – 254) pleads that under the audit contracts for the relevant audits BDO Cayman owed and were in breach of the duty to alert Argyle to material errors, fraud, illegal acts and other significant findings encountered when conducting the audits and failed properly to supervise the Affiliates who participated in the audits.

9 The Amended Complaint claims jurisdiction on the basis that the New York Defendants regularly transact business in the State of New York and avers that the chosen venue is proper on the grounds that: (i) the audits involved review of the Barrick Credit Advisors' files in New York State; and (ii) BDO Cayman, BDO USA and BDO Trinity (through one or more “alliance firms”) each maintain an office and conduct audit review business in Nassau County, New York.

The Engagement Letters

10 The terms on which the 2010, 2011, 2012 and 2013 audits were carried out were set out in engagement letters that constituted contracts made between Argyle and BDO Cayman (“the Engagement Letters”).

11 All four Engagement Letters included the following applicable law, exclusive jurisdiction, and dispute resolution clauses:

“ Applicable Law

This Agreement shall be governed by and construed in accordance with the laws of the Cayman Islands.

Jurisdiction

The courts of the Cayman Islands shall have exclusive jurisdiction in relation to any claim or matter arising from this Agreement.

Dispute Resolution Procedure

If any dispute, controversy, or claim arises out of, relates to, or results from the performance or breach of this Agreement, [excluding claims for nonmonetary or equitable relief] 1 (collectively, the “Dispute”), either party may, upon written notice to the other party, request non-binding mediation. A recipient party of such notice may waive its option to resolve such Dispute by non-binding mediation by providing written notice to the party requesting mediation and then such parties hereto shall resolve such Dispute by binding arbitration as described below. Such mediation shall be assisted by a neutral mediator acceptable to both parties and shall require the commercially reasonable efforts of the parties to discuss with each other in good faith their respective positions and different interests to finally resolve such Dispute. If the parties are unable to agree on a mediator within twenty (20) days from delivery of the written notice, either party may invoke the mediation service of the American Arbitration Association (the “AAA”). The venue of the mediation shall be the Cayman Islands and all issues of law, procedure and confidentiality shall be determined by and governed by the law of the Cayman Islands…

Any Dispute not resolved first by mediation between the parties (or if the mediation process is waived as provided herein) shall be decided by binding arbitration. The seat of arbitration proceedings shall be the Cayman Islands, unless the parties agree in writing to a different seat 2, and governed by the prevailing Arbitration Law. In any arbitration instituted hereunder, the proceedings shall proceed in accordance with the then current Arbitration Rules for Professional Accounting and Related Disputes of the AAA, except that the Arbitration Panel (as defined below) shall permit discovery that is consistent with the scope of discovery typically permitted by the Grand Court Rules and/or is otherwise customary in light of the complexity of the Dispute and the amount in controversy. Any

Dispute regarding discovery, or the relevance or scope thereof, shall be determined by the Arbitration Panel (as defined below). The governing law of the arbitration shall be the law of the Cayman Islands and the substantive law of the Cayman Islands shall apply to all issues therein, save where applying the principles of private international law applicable in the Cayman Islands, the law of another jurisdiction would apply.

The arbitration shall be conducted before a panel of three persons, one selected by each party, and the third selected by the two party-selected arbitrators (the “Arbitration Panel”). At least one arbitrator shall be an attorney admitted to practice in the Cayman Islands. The party-selected arbitrators shall be treated as neutrals. The Arbitration Panel shall have no authority to award non-monetary or equitable relief but nothing herein shall be construed as a prohibition against a party from pursuing nonmonetary or equitable relief in the Grand Court of the Cayman Islands. The parties also waive the right to punitive damages and the arbitrators shall have no authority to award such damages or any other damages that are not strictly compensatory in nature. In rendering their award, the Arbitration Panel shall issue in writing findings of fact and conclusions of law. The Arbitration Panel shall not have authority to grant an award that is not supported by substantial evidence or that is based on an error of law, and such absence of substantial evidence or such error of law may be reviewed on appeal to vacate an award based on...