What happens if you assign your right to litigate to a person or company that is unconnected to the event that creates the right to litigate? In the recent Supreme Court case of SPV Osus Ltd –v- HSBC Institutional Trust Services (Ireland) Limited & Ors IESC 44, the Supreme Court held that this sort of transaction is void under Irish law and contrary to public policy.
Madoff ponzi scheme litigation
This case related to the Bernard Madoff Ponzi scheme fraud. Optimal Strategic US Equity Ltd (SUS), a fund that invested with 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, 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 HSBC, the Irish based custodian and administrator to SUS, claiming an entitlement to the net asset value of the investments of SUS. HSBC 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 torts of ‘Maintenance’, ‘Champerty’ and the ‘assignment of bare legal right’
The appeal to the Supreme Court involved a consideration of the law relating to the old torts (and crimes) of maintenance and champerty. Maintenance is the unjustifiable provision of financial support for litigation in which the maintainer has no legitimate interests. Champerty is a particular form of maintenance which involves a person providing financial support for the action in return for a share of the proceeds. Champerty was always regarded as more offensive to public policy than simple maintenance because it contemplated the possibility of pecuniary benefit for the person financing the litigation.
An assignment of a bare cause of action involves the outright sale of a cause of action which is then pursued by the assignee (who has no interest or connection to the action other than that created by the assignment) to the exclusion of the assignor. The Courts consider this type of assignment as being more offensive to public policy than maintenance and champerty.
Application of the Persona1 decision
In England and Wales the crimes of maintenance and champerty have been abolished and the courts have relaxed their approach regarding the assignments of causes in action, particularly where the assignee has a genuine commercial interest in the assignment.2 However, in circumstances where maintenance and champerty remain crimes in Irish law and the legislature has not provided any regulated form of third party funding, O’Donnell J observed that the decision in Persona (discussed previously here and here) must be followed.
Following Persona, if it is offensive to public policy to permit a person to fund a plaintiff’s litigation in return for some part of the proceedings, then the same public policy must apply with more force where the third party purchases the claim outright, removes the party from his or her proceedings, and converts them into a mere witness.
In dismissing the appeal to the Supreme Court, O’Donnell J stated that:
- There was a longstanding prohibition on the assignment of a bare right to litigate where the assignment savoured of champerty;
- Such assignments, if permitted, would allow third parties to traffic in actions where the injured party did not recover for the damage sought, but only a fraction thereof under the assignment; and
- The public policy that grounded such a prohibition remained valid, notwithstanding international developments in the law of maintenance and champerty.
Way forward must come from the legislature
Clarke CJ (concurring), in reflecting on his previous judgment in the Persona case, observed that there is a significant and, arguably, increasing problem with access to justice which arises in the context of the increasingly complex world in which we live. Permitting entirely unregulated third party funding, as was at issue in Persona, or the unregulated assignment of causes of action as a means of solving the problems of access to justice, runs the real risk of creating more problems than it solves.
The Chief Justice called again on the legislature to provide solutions to these problems by means of legislation, and stated that otherwise the courts might be left with no option but to devise its own unregulated change if it became clear that no real effort was being made on the part of the legislature to address these issues.
1 Persona Digital Telephony Limited & Anor v. Minister for Public Enterprise & Ors IESC 27
2 Trendtex Trading Corporation v. Credit Suisse 1 Q.B. 629 (C.A.)
Contributed by: Rebecca MacCann
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