Professions and Financial Lines Brief: latest decisions March 2020
In this briefing, we consider the latest significant court decisions impacting claims arising from professional liability and financial lines policies and products. Issues covered include: trustee and fiduciary duties, the applications of CPR Parts 36 and 25, confirmation by the Court of Appeal that no credit is to be awarded to allegedly dishonest parties and further clarification on the jurisdiction of US securities claims.
Court of Appeal confirms that no credit is to be awarded to parties facing allegations of receiving undisclosed profits
FM Capital Partners Ltd v Marino [26.02.20]
The defendant, Mr Marino, was a director of the claimant company, a joint venture used to manage investments for a Libyan sovereign wealth fund. Between 2009 and 2011, Mr Marino received commission payments without accounting for them, used funds to induce further payments to companies owned by him and received and paid bribes. The claimant company issued proceedings in 2014 against Mr Marino and other parties to the dealings alleging breach of fiduciary duty, dishonest assistance and bribery. The total sums claimed were $83 million. Owing to the number of defendants and disparate issues, the court ordered that the claims be dealt with by way of two trials, the first to deal with the undeclared financial payments and the second to deal with allegations that the directors’ mismanagement caused loss to the claimant company.
In 2016 a second director, against whom issues were to be heard in both trials, paid $2.8 million in a global settlement although the terms of the settlement itself were confidential. The claimant company, subsequently successful at the first trial, allocated the settlement payment against the costs incurred in bringing and settling the claim, interest and the value of the claim. As the settlement covered all of the claims against the second director, some of which were to be dealt with in the second trial, the claimant company apportioned the settlement between the different trials and ultimately prorated the payment and gave credit for 17% of the settlement sum. The court at first instance agreed with the allocation owing to the absence of information on the merits of the matters to be dealt with at the second trial. It held that the claimant company was entitled to do so as long as those claims to be dealt with were not obviously unsustainable. The Court of Appeal concurred with this approach, and found that it would be unreasonable to hear the full arguments regarding claims against a defendant who had settled and it would be contrary to public policy if claimants had to prove the nature of the case against a defendant that settled. Further, where the claim concerned an individual who had made a gain from committing a civil wrong, the appropriate claim was for restitution of the monies improperly obtained and was not concerned with losses the claimant had incurred. Consequently, a claimant’s recovery from third parties did not affect a defendant’s liability to account for any bribes or profits made.
This decision, although based on somewhat unusual circumstances with separate trials for the claims involved, serves as a reminder that defendants subject to allegations of receiving undisclosed profits cannot expect to receive significant credit for the settlements of co-defendants and the courts will not subject claimants to onerous requirements to prove settled claims solely for the sake of determining the credit that should be given for them.
Jurisdiction of US courts to hear US securities claims clarified
Stoyas & Automotive Industries Pension Trust Fund v Toshiba Corporation [28.01.20]
Whilst Toshiba’s shares are traded on the Tokyo Stock Exchange, Toshiba has unsponsored American Depository Receipts (ADRs) trading in the US (i.e. the ADRs were set up by US depository banks without Toshiba’s involvement). After an accounting scandal, Toshiba received a US Securities Class Action (the SCA), asserting claims under both US and Japanese securities laws.
The SCA was initially dismissed by the Los Angeles District Court on the basis that the ‘over-the-counter’ (OTC) markets on which the ADRs were traded were not a US national exchange and there was no securities transaction in the US between the ADR investors and Toshiba. The Plaintiffs, however, appealed the ruling to the 9th Circuit.
Reversing the District Court’s decision, the 9th Circuit, following the Supreme Court’s earlier decision in Morrison v NAB, held that US securities laws only apply to: (1) “transactions in securities listed on a US exchange”; or (2) “domestic transactions in other securities”. In order to determine whether there had been a domestic transaction, the 9th Circuit adopted the irrevocable liability test (i.e. whether the parties incurred irrevocable liability to purchase or sell as security in the US) – but considered the Plaintiffs had failed to adequately particularise a claim to meet this threshold. The 9th Circuit therefore remanded the matter back to the District Court and, following the Plaintiffs filing a Second Amended Complaint which sought to establish that the ADR transactions were US ‘domestic transactions’, Toshiba renewed its Motion to Dismiss.
On 28 January 2020, the District Court denied Toshiba’s Motion to Dismiss on the basis that the Plaintiffs’ amended complaint sufficiently alleged that their purchase of the ADRs was a US ‘domestic transaction’ on the basis that they had sufficiently pleaded that they had incurred a ‘irrevocable liability’ for the securities in the US. The claim therefore continues against Toshiba.
This decision demonstrates that US Courts may have jurisdiction to hear US securities claims against non-US listed companies where non-sponsored ADRs have been sold to US investors.
Breach of trustee and fiduciary duties
Auden McKenzie (Pharma Division) Ltd v Patel [20.12.19]
The defendant, Mr Patel, was a director of the claimant company and, alongside a family member, were sole shareholders. Between 2009 and 2014, Mr Patel provided a series of false invoices which resulted in approximately £13.7 million being paid to him and the other shareholder, avoiding income tax, national insurance and corporation tax on those sums, and for which the company received no benefit. In 2015, the claimant company was sold. Unbeknownst to the new owners, Mr Patel settled a subsequent HMRC investigation seeking to clawback the unpaid tax and HMRC confirmed that it would not take any action against the company. Upon discovering the fraudulent invoices and HMRC settlement, the new owners claimed against Mr Patel for breach of fiduciary duty and sought return of the funds and damages.
At first instance, Mr Patel accepted that he was in breach of his fiduciary duties and unsuccessfully opposed an application for summary judgment on the grounds that: (1) the actions which otherwise would be breaches could be authorised or ratified by shareholders; and (2) if the payments had not been made via false invoices, they would have been made by dividends and therefore the claimant could not show any loss. Whilst the first ground was not available to Mr Patel as it is only open where an honest and lawful transaction has taken place, the Court of Appeal was persuaded that the payments would have been made in any event and the parties' positions were ultimately unchanged.
Whilst not suggesting that Mr Patel's defence would succeed if proven, the court believed that it was not unsustainable and set aside summary judgment, remitting the claim back to the High Court to be dealt with at trial.
This decision shows that the courts continue to be open to developing the law surrounding breaches by trustees and fiduciaries. With no certainty that the immediate claim will make it to trial, we could yet be waiting for further clarity on the issue. However this opens a defence for insureds that may be viable in a limited set of factual circumstances.
Related item: Carlyle: an exposition of directors’ duties
Clarification of security for costs where application is late
Fine Care Homes Limited v National Westminster Bank Plc [19.12.19]
The claimant had entered into an interest rate derivative product with the defendant on 19 July 2007 for the notional amount of £4 million over a five year period. The claimant issued proceedings on 3 July 2013, alleging that it was miss-sold the product. The proceedings were stayed to allow the defendant to undergo a review, supervised by the then-FSA (Financial Services Authority), and the defendant subsequently offered £384,258, without an admission of liability, on the basis the claimant would still have entered into a product, albeit a more simplified product. The offer was rejected and the claim proceeded as normal. On 18 November 2019, three months before trial, the defendant applied for security for costs for its costs from that date on the basis that the most recent accounts for the claimant showed assets of £1.3 million against liabilities of £2.3 million.
Whilst the grounds for security for costs were met, the court highlighted that the application was extremely late - well past the first Case Management Conference. In an instance where the defendant was seeking security for its full costs of the action, this would not be appropriate and would have been declined. In this case, whilst the delay was still unsatisfactory, being late alone was not good reason to disbar a defendant from obtaining security for costs for their costs going forward from that date and the court was willing to order security for costs at 80% of the remaining phases of the defendant's costs budget.
This decision shows that whilst defendants will not be able to obtain security for their full costs when applying late, it is possible to obtain some security where this has been left late if the conditions under CPR 25.13 are met.
Is your Part 36 offer compliant?
King v City of London Corporation [18.12.19]
The parties settled a claim between them in 2017 in the sum of £250,000 plus costs "to be assessed if not agreed on the standard basis". On 12 December 2017, Mr King's costs draftspersons made a settlement offer by letter. The letter was headed Part 36 offer and stated that Mr King would be willing to accept £50,000 in full and final settlement of his costs, however the offer expressly stated that it was exclusive of interest. The offer was not accepted. At a hearing on 12 June 2018, Mr King's bill was assessed at £52,470 excluding interest. Mr King submitted that in light of the more favourable Part 36 offer, CPR 36.17 applied and the costs consequences of CPR 36.17(4) should follow.
At both first and second instance, the courts declined to apply CPR 36.17, holding that an offer which was exclusive of interest could not be considered a valid Part 36 offer. At third instance, the Court of Appeal recognised that CPR 36 had evolved over time, most recently in April 2015, and there had been inconsistent judgments particularly in costs proceedings. However, the court found that the requirement of CPR 36.5(4), that the offer was to be inclusive of costs, was mandatory.
This decision emphasises once again the importance for solicitors and costs draftspersons to be fully aware of the requirements of the Civil Procedure Rules. The decision may also lead to a small spike in claims from clients who will lose out from the failure to serve a compliant Part 36 offer.
Related item: Pick and mix your Part 36?