High court allows pretrial seizure of foundation assets in a libel case

Private foundation protections voided by high court, creating a new tool for attacks on free expression

Court approves pretrial asset freeze in libel case
by Eric Jackson

On July 17 the PRD-controlled Supreme Court issued an interlocutory decision that is likely to have far-reaching implications for both Panama's offshore finance industry, access to justice for those involved in disputes with major corporations and for freedom of the press. In a unanimous decision by the high court's Civil Bench, Mireya Moscoso appointee Alberto Cigarruista, supported by Martín Torrijos appointees Harley Mitchell and Oydén Ortega, upheld a freeze on the assets of Canadian citizen Peter Gordon and the Fundacion Geelong in a $5 million libel suit brought by HSBC bank.

HSBC, whose top local exec at the time, Joseph Salterio, was being fed information about discussions on an English-language email discussion group run by Don Winner by current American Society president Charles Garcia and by insurance salesman Kevin Bradley, brought the suit against Gordon and the Fundacion Geelong, a private foundation he created and into which he parked substantial assets. In a series of email messages, Gordon complained about the poor quality of service he and his foundation received from HSBC. Bradley, in a collusive move with Salterio and HSBC, wrote a letter to the bank and said that as a result of Gordon's emails he was withdrawing a little over $400 that he had on deposit there and would not direct people to do business with HSBC. In addition to emails forwarded to Salterio by Garcia and Bradley's letter, HSBC attached letters by Gordon to an HSBC official, whom Gordon accused of misleading him and being unresponsive to his communications as part of its proofs.

Panamanian private foundations have been widely touted by this country's offshore finance industry and corporate law firms as a shield against lawsuits and sold as such. But here the court ruled that, as the alleged defamation arose from a dispute over the bank's handling of foundation assets deposited within it, Gordon's statements can be properly attributed to the foundation.

As this was an interlocutory ruling about the asset freeze and the truth or falsity of Gordon's statements about HSBC's service have yet to be determined by an court, the court didn't get into that issue, other than to hold that HSBC had stated an arguable defamation case and under the law has the right to sequester the defendants' assets to ensure that it can collect on any potential judgment.

The effects of the court's ruling don't appear on the face of its 10-page decision.

To the extent that this ruling can be narrowly construed to mean that Panamanian private foundations are impervious to litigants' piercings except for acts directly by the foundations, the lawyers who set up such legal persons might be able to go on as before, advising their clients to keep their foundations' business to themselves. But the decision also means that a bank or a corporation or any other person might mismanage, embezzle or otherwise attack the assets of any private foundation and retaliate for any complaint about this with a libel suit and asset freeze. At the very least it signals this Supreme Court's willingness to weaken the protections afforded by private foundations and allow litigants who have arguments with the foundations' owners to seize foundation assets before trial.

In the world of international offshore business, perceptions mean nearly everything and the ruling will probably effectively kill the phenomenon of Panamanian private foundations. Tax collectors in jurisdictions such as the United States, Canada and the United Kingdom would view such a development favorably, but a lot of law firms and financial management companies in Panama stand to lose substantial business. For that matter, so do a lot of Panama's banks, into which private foundations' assets are typically deposited.

HSBC in particular will lose money over this interlocutory legal victory. Yes, their hardball legal tactics may (or may not) in the end win them $5 million from the Fundacion Geelong and Peter Gordon. However, every foreigner who has dealt with this country's banks knows that the services they give are wretched by international standards, and sooner or later she or he will realize that they are nearly uniformly wretched by way of laws and regulations essentially written by the banks themselves and by anti-competitive agreements within the banking industry. But now HSBC has earned a reputation for being worse than most --- they notoriously will move to seize the assets of any customer who complains and surely they are going to see fewer customers because of the lawsuit they brought against Gordon and Geelong.

Within the Panamanian legal profession, the ruling effectively promotes corruption. The seizure of defendants' assets by plaintiffs in order to leave those who are sued without the ability to defend themselves is an increasingly common tactic, and often it is combined with the bribery of cops or prosecutors to bring bogus criminal charges against parties or attorneys in a civil dispute. Here, the courts have been shown at most a bit under $500 of arguably provable damages --- and even then not sincerely arguable, as Kevin Bradley's letter is on its face a collusive document concocted for the purpose of supporting HSBC's lawsuit --- and the bank has been allowed to seize far greater assets. Magistrates Cigarruista, Mitchell and Ortega well know about the abuse of sequestrations (and also of bogus criminal charges) to rig the outcomes of lawsuits and have approved such abuses. The increased prevalence of such abuses, in addition to the questions raised in this case about the effectiveness of private foundations, will surely attract international attention and drive foreign money away from Panama's banking center.

When sequestering an opposing party's assets, a litigant must post a bond so that if the sequestering party loses, the sequestered party gets his, her or its assets back with interest. But when a business is sequestered the party that seizes it tend to go on a trashing binge and a ruined shell is all that comes back. When an amount of money is frozen and the freeze is then lifted, the interest paid rarely makes up for the financial loss incurred by the inability to use those funds. Those are the realities of litigation among the rich.

But when a huge business can sequester the assets of a much smaller business, or of an individual, that quite frequently has the effect of denying the smaller party any practical recourse to the law at all. This is one of the growing incidences of the growing inequality in Panamanian society. This sort of inequality before the institutions of Panamanian law --- no matter the constitutional ban on discrimination due to social class --- is a major factor in the wave of land grabs up and down Panama's coasts, wherein people who clearly have squatters' rights to beachfront lands they have occupied for decades are being dispossessed by a wealthy and politically connected criminal element.

And then, this is a libel case. While most of the attention to Panama's attacks on freedom of expression have to do with the abuse of the criminal defamation (calumnia e injuria) laws against journalists --- now, thanks in large part to a recent high court decision overturning the pardons of more than 70 journalists, there are more than 100 journalists facing such charges in this country --- this is not the first abuse of a pretrial sequestration in a civil case.

There is also the notorious example set by Mitchell, Ortega and Cigarruista's colleague Winston Spadafora. El Siglo editor Jean Marcel Chery, then a reporter for El Panama America, wrote a true story about how a rural road was built to serve the farms of Spadafora (at the time Minister of Government and Justice) and another high government official and almost nobody else. Spadafora brought criminal charges and Chery and co-defendant Gustavo Aparicio were found not guilty of calumnia (publishing defamatory and false statements) but convicted of injuria (publishing a true statement that made Spadafora look like the sort of person that he in fact is, and thus injuring the fake "reputation" that he would project to the public). Chery and Aparicio were pardoned, but the court just revoked those pardons. Meanwhile, Spadafora filed a civil suit and seized a month's salary from Chery without the matter having come to trial.

Thus, the ruling in HSBC v Fundacion Geelong and Gordon is a defeat for both freedom of expression that will strengthen the Norieguistas and others who want to stifle the press, and a blunting of the basic weapon that consumers in countries that have the rule of law tend to enjoy --- the right to complain to other consumers about a company's poor service.

To read the Panamanian Supreme Court decision that is reported herein in its Spanish original, see http://www.thepanamanews.com/Caso_HSBC_v_Gordon.pdf