Supreme Court Has The Final Say On Litigation Trafficking

In a landmark judgment delivered on 31 July 2018, the Supreme Court has ruled in the case of SPV OSUS Limited v HSBC Institutional Trust Services (Ireland) Limited & Ors 1 that the assignment of a claim to an unconnected third party with the possibility of profit is trading in claims and such an assignment is unenforceable in Irish law.

Facts

The background to this case relates to the Bernard Madoff Ponzi scheme fraud. In this case Optimal Strategic US Equity Ltd (SUS), a fund that invested into Madoff, was entitled to make a claim in the bankruptcy of Bernard Madoff in the US. In order to allow investors in SUS to trade their share in the bankruptcy (which is permitted and commonplace in the US), SUS set up a special-purpose vehicle SPV OSUS Ltd (SPV) and assigned the bankruptcy claim to it. The majority of the original investors in SUS swapped their shares for shares in SPV and then traded the shares in SPV to distressed debt hedge funds. SPV subsequently issued proceedings in Ireland against the Irish based custodian and administrator to SUS claiming an entitlement to the net asset value of the investments of SUS as at 30 November 2008. The custodian and administrator challenged the standing of SPV to bring proceedings on the basis that the assignment of the bankruptcy claim to SPV was contrary to public policy, and should not be enforced by virtue of the rules of maintenance and champerty. The High Court at first instance upheld the custodian's application and dismissed the action, holding that the transaction was void, contrary to public policy, and constituted trafficking in litigation.

SPV appealed the decision of the High Court to the Court of Appeal. The Court of Appeal gave judgment on 2 March 2017 upholding the ruling of the High Court in full and dismissing the claim as trafficking in litigation. The Court confirmed that, under the rules of champerty, an assignment is unenforceable unless one or more of the exceptional circumstances apply that would grant it legality (for example, an assignment of a bare cause of action that is incidental to the property transferred, or the assignment of a debt), none of which applied in this case. The Court further ruled that there was no requirement to prove an improper motive under the principles of maintenance and champerty.

In upholding the decision of the Court of Appeal, dismissing the appeal and striking out the proceedings, the Supreme Court confirmed:

The House of Lords decision in...