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Supreme Court has the Final Say on Litigation Trafficking

AUTHOR(S): Sharon Daly
PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution
DATE: 01.08.2018

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 Trendtex Trading Corporation v Credit Suisse [1] reflects the law in Ireland. The Supreme Court rejected SPV’s argument that the approach of the Court of Appeal of England and Wales in Trendtex should have been preferred by the Irish courts. Therefore, the Supreme Court applied the test adopted by the House of Lords in Trendtex: that is, that an assignment of the right to litigate is unenforceable unless the assignee had a genuine commercial interest in the assignment.
  • It was not desirable for the Supreme Court to adopt a new test that an assignment of a right to litigate will be void if it is established that (a) the assignment has an improper purpose; and (b) the assignment poses an identifiable and real risk to the administration of justice.
  • The assignment in question did not fall within any of the exemptions to the rule against the assignment of a right to litigate ie “could not be accommodated within the existing case law”
  • The assignment in question did not fall within some plausible and permissible extension to the exemptions to the rule against the assignment of a right to litigate.

Commentary

In considering whether the assignment could constitute a permissible extension to the exemptions to the rule against the assignment of a right to litigate the Supreme Court considered if the transfer of the claim could have been achieved legitimately through a series of agreements whereby the original investor in a company transfers all other claims and liabilities to another company, leaving any potential claim against the intended defendants in the original company, and subsequently permit the shares in that company to be sold to unconnected persons who wished to see the claims pursued. The Supreme Court held that the idea that the assignment could be considered a permissible extension by virtue of the fact that the same outcome could be achieved legitimately by structuring the sale of corporate entities in a particular way should be discounted significantly as an argument for recognising and enforcing an assignment which would otherwise be regarded as impermissible. The Court held “the separate legal personality of a company may allow different persons to benefit indirectly, as shareholders, from a claim that company may have, but that in itself is no reason to extend the outcome to persons who are in law different and distinct.”

The decision comes after the recent decision of the Supreme Court in the case of Persona Digital Telephony Ltd & Another v Minister for Public Enterprise & Other. That case addressed the issue of maintenance and champerty in the context of litigation funding, rather than litigation trafficking. There, the Supreme Court upheld the decision of the High Court and Court of Appeal, finding that a litigation funding agreement between the Plaintiff and a professional third-party funder from the UK is unlawful by reason of the Maintenance & Embracery Act (Ireland) 1634. The Supreme Court held that it is a matter for the legislature to develop the law in this area and that sentiment was reiterated by the Supreme Court, albeit in respect of the assignment of the right to litigate, in the SPV OSUS proceedings.

Accordingly, it is clear that third-party funding from a third party with no legitimate interest in the litigation and the assignment of a right to litigate to a third party with no legitimate interest in the litigation remain off limits in Ireland for the foreseeable future.

[1] Trendtex Trading Corp v Credit Suisse [1982] AC 679

[2] Matheson represented the successful Defendants. The factual and legal issues raised in these proceedings are complex and go beyond the scope of this brief update. Should you have any questions, or wish to discuss any aspect of this judgment, please contact the Commercial Litigation and Dispute Resolution Team.

This article has been co-authored by Commercial Litigation Solicitor Valerie Sexton.

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