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Full Disclosure the Best Policy When Applying for Interim Injunction on Ex Parte Basis
London & Bermuda Newsletter
2009 has certainly been an annus horribilis for the offshore funds industry. In the face of the worst economic recession on record and the fallout from a number of failed schemes, funds and their managers are facing heightened scrutiny from regulators and investors alike.
While it is true that fund-related litigation is yielding innovative legal theories, the Bermuda Supreme Court’s decision in Founding Partners Capital (Bermuda) Limited v The Bank of N.T. Butterfield & Son Limited [2009] SC (Bda) 29 Civ. serves as a reminder that such litigation is as likely to succeed, or fail, on the basis of well established legal principles, such as the importance of full and frank disclosure when making an application for an interim injunction on an ex parte basis (i.e., without notice to the opposing side), as it is on the basis of a novel legal theory.
Although Founding Partners operated in Bermuda it was a Florida-based company. On 20 April 2009 the US Securities and Exchange Commission issued proceedings against it and its chair for allegedly defrauding investors of $500 million. The company’s Bermuda bank, the Bank of N.T. Butterfield & Sons Limited, learned of the SEC proceedings and alerted the Financial Intelligence Agency on 28 April in accordance with its anti-money laundering obligations. It then froze the company’s bank account.
Subsequently on 8 May, Founding Partners issued proceedings in the Supreme Court claiming damages against the bank for breach of contract and seeking a mandatory order requiring it to release the funds held in its account. It separately filed an ex parte summons together with an accompanying affidavit, sworn by Mr Robert Hager, seeking that the bank release funds for the limited purpose of allowing the company to pay employee wages, local office expenses, local trade debts and its lawyer’s retainer. In the affidavit Mr Hager implied that he was one of several employees of the company and also that the company was a going concern.
The court granted the ex parte order in the terms sought. However, following a subsequent hearing at which the bank participated, the order was discharged and not renewedAlthough the judge’s decision was influenced in great part by the Financial Intelligence Agency’s refusal to permit the bank to release the company’s funds, he stated that had he known the truth regarding the matters attested to in Mr Hager’s affidavit, he would not have granted the ex parte order in the first instance.
Mr Hager’s affidavit contained suggestions that he was a company employee. On the contrary, a letter dated 29 April, subsequently placed before the court, showed that he believed he had been constructively dismissed by the company and that he was entitled to a severance payment of $150,000. Additional documents also showed that he had attempted to remove $145,000 from the company’s account, a fact that was also not mentioned in his original affidavit. It appears that he attempted to withdraw $145,000 instead of the $150,000 because there was only $145,000 in the account. His attempt was only foiled because account had been frozen. The court held that it was “egregious” for Mr Hager to file an affidavit suggesting that he was still in the company’s employ and entitled to a monthly salary when he had formed the view that he had been constructively dismissed. If his belief had changed between 29 April and 8 May, he should have made this clear in his affidavit.
The court also held that Mr Hager’s affidavit gave the impression that, but for the decision of Butterfield bank to freeze its account, Founding Partner’s Bermuda office had the ability to continue in operation. This however proved to be far from correct: its only employee believed that he had been dismissed, the desire had been expressed to close the Bermuda office and steps were being taken to terminate the office lease, and, moreover, the company had not received any income since August 2008. If Mr Hager had been successful in cleaning out the company’s Butterfield account there would have been insufficient money to discharge any of its local debts.
The outcome of Founding Partners is not surprising and serves as a reminder that applications for ex parte orders must proceed with the highest degree of good faith. The fact that the court is being asked to grant relief in the absence of an adverse party makes it crucial for the applicant to disclose all material facts. As the court is the final arbiter of materiality it is incumbent upon the applicant to make necessary inquiries to uncover facts that may be regarded as material. The applicant is also under a positive duty to inform the court as soon as it is apparent that the court has been given misinformation during an ex parte application.
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