Deloitte & Touche, Inc., Trustee of the Estate of Bre-X Minerals Ltd, A Bankrupt Plaintiff v (1) John B. Felderhof (2) Ingrid Felderhof (3) Spartacus Corporation (4) Bank of Butterfield International (Cayman) Ltd Defendants
| Jurisdiction | Cayman Islands |
| Judge | Hon. Justice Henderson |
| Judgment Date | 03 December 2009 |
| Judgment citation (vLex) | [2010] CIGC J0210-2 |
| Docket Number | Cause No. 845 of 1997 |
| Court | Grand Court (Cayman Islands) |
| Date | 03 December 2009 |
Hon. Justice Henderson
On this application, I am called upon to review for the first time a worldwide Mareva Injunction grantedex parte by this Court twelve years ago. No cause of action has been pleaded in the Cayman Islands against the present applicant. The Plaintiff says that the injunction is necessary for the preservation of assets here which may become available to satisfy any judgment obtained in Canada against the first defendant, John Felderhof.
The plaintiff (‘the Trustee’) is the Canadian trustee of the estate in bankruptcy of Bre-X Minerals Ltd. (‘Bre-X’), a company incorporated in Alberta, Canada whose shares were traded publicly on the Toronto, Alberta and Montreal stock exchanges and NASDAQ.
Bre-X was in the business of exploration and mining, particularly for gold. John Felderhof, the first defendant, is a geologist residing in the Cayman Islands. Until May, 1997 Mr. Felderhof was the Vice Chairman and Senior Vice President of Bre-X, responsible forsupervising, exploring and developing its mining claims in Indonesia. Bre-X had development rights in respect of properties located on the island of Kalimantan, Indonesia, in a remote area known as Busang.
On May 10th, 1993 the shares of Bre-X were trading at about 50 cents per share. On that date, a Bre-X press release announced to the world that it had acquired an 80% working interest in a gold project in Kalimantan. A steady stream of press releases throughout the period from May, 1993 to December, 1995 announced increasingly impressive drilling results and predictions based on them. By December 29, 1995 Bre-X shares were trading at $53 CAD per share. The trend continued in early 1996. As excitement among investors grew, Bre-X's share price rose to $286.50 CAD on May 22nd, 1996. On that date the shares split 10 for 1.
By October, 1996 concerns were being voiced publicly about the nature and extent of Bre-X's entitlement to the mineral deposits in question. In March, 1997, a third party questioned the accuracy of Bre-X's drilling results. Bre-X retained Graham Farquharson,President of Strathcona Mineral Services Limited, to perform a technical audit of Bre-X's exploration work. On the same day (March 19), Bre-X announced that Michael De Guzman, a geologist employed by Bre-X, had fallen from a helicopter to his death on his way to the Busang properties.
By March 26th, 1997, Mr. Farquharson and Strathcona had formed the view that Bre-X's drilling samples had been tampered with. The conclusion was that the samples had been ‘salted’ by the addition of gold particles obtained elsewhere. The bubble burst; the share price declined to virtually nothing. Bre-X eventually ceased trading and subsided into bankruptcy.
The Trustee says that Mr. Felderhof, who by virtue of his position would have had intimate and early knowledge of the drilling results, engaged in the insider trading of Bre-X shares on a large scale. It is alleged that while he was in possession of undisclosed material information affecting the value of the shares, Mr. Felderhof sold Bre-X shares between December, 1994 and September, 1996 for a total sale price of some CAD $71 milliondollars. Many of these shares had been acquired at relatively low prices per share.
A number of actions arising from the collapse of Bre-X have been commenced, including:
i. A class action in Ontario against Bre-X, Mr. Felderhof, other directors, officers and employees of Bre-X, and two brokerage houses;
ii. a class action in Ontario against Mrs. Felderhof and Spartacus Corp.;
iii. a class action in Texas against Mr. Felderhof and other officers, directors and employees together with several brokerage and engineering firms;
iv. a derivative action in Ontario in the name of Bre-X brought by a group of investors against Mr. Felderhof and other Bre-X officers and directors; eventually, the Trustee assumed conduct of this action;
v. charges against Mr. Felderhof under the Ontario Securities Act.
On December 19, 1997 the Trustee brought this action in the Cayman Islands. The endorsement on the writ of summons claims damages from Mr. Felderhof for breach of his fiduciary duty and negligence in his capacity as a director, general manager and chief administrative officer of Bre-X.
No cause of action is asserted against the 2nd, 3rd and 4th defendants. Ingrid Felderhof, the second defendant, is the former wife of John Felderhof. The endorsement alleges that she owns three pieces of real property and a boat as nominee or bare trustee for Mr. Felderhof and, alternatively, that any beneficial interest she may have in those assets should be set aside because the transfers to her were carried out with the intention of defeating obligations owed by Mr. Felderhof to his creditors. The writ also alleges that assets in the name of Mrs. Felderhof will be available to satisfy any judgment obtained by the Trustee against Mr. Felderhof. The third defendant, Spartacus Corporation, is no longer in existence. The fourth defendant also is joined for the purpose only of attaching assets which may be available to satisfy any judgment against Mr. Felderhof.
No statement of claim has ever been filed in the Cayman Islands action. On December 18, 1997, the date before the filing of the writ, the Trustee obtained from this Court a worldwide Mareva Injunction freezing the assets of the first, second and third defendants up to a value of CAD $3 billion. The injunction was obtainedex parte. The terms of the injunction were relaxed by subsequent court order to permit Mr. and Mrs. Felderhof the sum of CI $66,000 per month for living expenses and funds for legal representation. Thereafter, no real effort was made to advance the litigation in the Cayman Islands.
In March, 1998 Mr. Felderhof's then attorney in Canada advised the Trustee that he preferred to meet the various claims in a single trial in one jurisdiction; he asked that the substantive claims be determined by a court in Ontario and acknowledged that if the Trustee obtained judgment then enforcement and tracing proceedings in the Cayman Islands would be ‘required’ (first affidavit of Trent Morris, paragraph 6.5).
Mr. Joseph Groia, who was counsel to Mr. Felderhof in February, 1999, wrote at that time to the Trustee's counsel setting out his understanding of how this multiplicity of actions would be handled:
‘My understanding of the Trustee's position had been that it intended to proceed with all of these allegations in Ontario, thereby creating a single omnibus action that we would defend in Ontario. As well, we had understood that the Cayman action would not be proceeded with except insofar as it might be necessary for enforcement or collection purposes should the Trustee be successful on its claim in Ontario.
If the intention is now to proceed on both fronts simultaneously, could you please advise me and we will take such remedies as may be open to us in order to bring about what we consider to be the only fair result for all concerned; a single law suit in Ontario to adjudicate on all of the various matters between your client and ours.’
The Trustee agreed that the Cayman action would not be proceeded with ‘except insofar as it might be necessary for enforcement or collection purposes.’ In her written argument, Mrs. Felderhof provides a detailed ‘timeline’ of the procedural history but makes no mention at all of Mr. Groia's expressed position concerning the Cayman action.
The class action against Mrs. Felderhof and Spartacus was stayed in 1998 ‘pending a determination of the claim against Mr. Felderhof;’ that stay has now been lifted. The class action and the derivative action initiated in Ontario have been the subject of case management and are to be heard together in the Commercial Division in Toronto.
On May 2nd, 2003 I granted a consent order staying this proceeding ‘pending the outcome of either or both of the Ontario derivative action … and/or the Carom class action …’. My order of that date confirmed that the Mareva Injunction would remain in force notwithstanding the stay. All parties were given liberty to apply to discharge or vary the injunction. When she consented to the stay of proceedings, Mrs. Felderhof was aware of a commitment by the Trustee (given in an affidavit sworn December 20th, 2002) that it would move expeditiously to bring the Ontario derivative action on for trial. The Trustee has agreed that the stay of proceedings currently in effect may be lifted for the limited purpose of this review hearing.
The Ontario actions have progressed slowly. Certification for the Texas class action has not been obtained, so that action is at an end. Mr. Felderhof has been found not guilty of the charges under the Ontario Securities Act.
As I have said, no cause of action is asserted against Mrs. Felderhof (or, for that matter, against the third and fourth defendants). The claim advanced against Mrs. Felderhof is that she owns property which will be available to satisfy any judgment the Trustee may obtain against Mr. Felderhof. This is the so calledChabra jurisdiction, which has expanded significantly in recent years. I had occasion to review and summarize the existing decisions in this area in my recent judgment in Ahmad Hamad Algosaibi and Brothers Company v. Saad Investments Company Limited et al (unreported), cause 359/09, November 17, 2009. After reviewing the state of the law, I said (at paragraph 51):
‘From these decisions, I draw the following conclusions:
i. TheChabra jurisdiction is a part...
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