Confirmation Of The Irish Position On Litigation Trafficking

SPV Osus Ltd v. HSBC Institutional Trust Services (Ireland) Limited & Ors [2018] IESC 44

In the landmark decision of SPV Osus Ltd v. HSBC Institutional Trust Services (Ireland) Limited & Ors, the Supreme Court held that the assignment of a right to litigate to an unconnected third party with no legitimate interest in the cause of action giving rise to the litigation is contrary to public policy and void under Irish law. For previous articles on this topic please click here and here.

Background

This case arises from the Bernard Madoff Ponzi scheme fraud. Optimal Strategic US Equity Ltd ("SUS") invested in Bernie L Madoff Investments LLC ("Madoff LLC"). Madoff LLC collapsed due to a large scale ponzi type fraud and the liquidation of Madoff LLC commenced in the Bankruptcy Court of the Southern District of New York which provides for an "Allowed Customer Claims" ("ACCs") procedure which carries an entitlement for investors to be paid in priority in the liquidation process. The SUS Allowed Customer Claims was valued at $1.5billion.

Although the ACC was the most substantial path of recovery for investors, the amount to be recovered was not fixed nor was the recovery immediate. A secondary market developed for Madoff ACCs which would allow those who had invested in entities run by Bernie L. Madoff to crystallise their losses and receive an immediate payment to realise their investment. Due to the structure of SUS, this option was not available to its investors. Consequently, SUS set up a special purpose vehicle, SPV OSUS Ltd ("SPV") and assigned its bankruptcy claim to SPV. The majority of the original investors swapped their shares in SUS for shares in SPV. SPV subsequently sold its shares by way of auction which resulted in distressed debt investors holding approximately 93% of the shares in SPV.

SPV subsequently issued proceedings in Ireland against HSBC, the Irish based custodian and administrator, claiming an entitlement to the net asset value of the investments of SUS in Madoff LLC. HSBC challenged the standing of SPV to bring proceedings on the basis that an agreement assigning the bankruptcy claim to SPV amounted to maintenance and champerty and was contrary to public policy.

The High Court agreed with HSBC and held that the assignment of the bankruptcy claim to SPV was contrary to public policy, constituted litigation trafficking and was therefore void. SPV appealed the decision of the High Court to the Court of Appeal which upheld the...