SPV Osus Limited -v- HSBC International Trust Services (Ireland) Limited & ors  IEHC 602 arose out of the Madoff fraud. Optimal Strategic US Equity Limited (OS) invested nearly all of its assets in Madoff funds and had a claim as an unsecured, non-preferential, creditor in the Madoff bankruptcy (the Allowed Customer Claim). In addition, OS had potential claims against third parties arising out of the investment losses. OS transferred its Allowed Customer Claim to the Plaintiff (SPV) by an assignment of claim (the Assignment) “together with any affirmative claims of the assignor against third parties.”
The defendants were the HSBC Custodian and Administrator to OS and it was claimed that they were guilty of misrepresentation, negligence and breaches of contract and fiduciary duties in the services provided by them. The damages claimed totalled almost US$2.2 billion.
The defendants argued that SPV was unconnected with the underlying contracts which give rise to the claims and the Assignment was the assignment of a bare cause of action and was void as being champertous, contrary to public policy, and unenforceable.
The Court adopted the definition of champerty set out by Clarke J in Thema International Fund plc v HSBC Institutional Trust Services (Ireland) Limited  3 I.R. 654:- "Champerty is a particular form of maintenance whereby the person concerned obtains a share in the subject matter or proceeds of litigation in return for assisting with funding the litigation concerned.” and noted that the Irish courts will not enforce any agreement which savoured of maintenance or champerty because it offended against Irish public policy and it was irrelevant whether or not the disputed agreement was valid in another jurisdiction.
The Court comprehensively reviewed a number of Irish and English authorities and noted that the following principles:-
- It is unlawful to fund or assign litigation in return for a share of the proceeds unless the funder or assignee has a lawful interest or some other legitimate concern in the litigation.
- The assignment of a bare cause of action for purposes which the law does not recognise as legitimate savours of champerty.
- Trafficking in litigation is contrary to public policy.
- Wanton and officious intermeddling in the litigation of others is contrary to public policy.
- The scope of the law of maintenance and champerty must accommodate itself to modern social realities.
- The law in relation to maintenance and champerty must be considered in the light of the constitutional right of access to justice.
- The law in relation to maintenance and champerty must not place any unnecessary obstacles in the path of persons with a legitimate claim.
- The assignment of a cause of action that is incidental or ancillary to a property right or interest is not champertous.
- The interest which a party maintains or enjoys in a suit which he is maintaining must exist independently of the agreement which gives him a share in the proceeds of the suit.
- The assignment of a cause of action to a party who has a genuine commercial interest in the cause of action is not champertous.
- A shareholder or creditor of a company (or other entity) who already has an indirect link to the impecunious company (or other entity) may have an indirect and therefore legitimate interest in the litigation of the company (or other entity) and may lawfully fund the company’s litigation.
- Professional third party funders who make a commercial decision to ‘invest’ in litigation in the hope of making a profit commit the torts of either maintenance and/or champerty.
- In considering whether an agreement is champertous, the Court should look at the totality of the transaction.
- The Court is concerned with substance rather than the form of a transaction in considering whether if offends the law of maintenance and/or champerty.
SPV argued that the assignment of the third party rights was ancillary or incidental to the assignment of the Allowed Customer Claim and therefore was not an assignment of a bare right to litigate. It also argued that it has a genuine commercial interest in the enforcement of the third party claim.
The defendants argued that the third party claims did not become incidental or ancillary to the Allowed Customer Claim simply because they were assigned in the same document and instead were stand alone claims.
The Court rejected the argument that the assignment of the third party claim was incidental to the assignment of the Allowed Customer Claim. In the Court's view, for a cause of action to be incidental to the assignment of a property right or interest (such as the Allowed Customer Claim), it must relate to the protection or realisation of that other interest and could not encompass non-bankruptcy third party claims.
With regard to SPV's argument that it had a genuine commercial interest in the enforcement of the third party claim the court noted that SPV had not been incorporated when the wrongful events were alleged to have occurred. The Court held that in considering the issue of a genuine commercial interest the critical issue is whether the original wronged parties remain (directly or indirectly) the parties pursing the litigation. This is to be contrasted with such wronged parties realising their interest in the cause of action by selling it to a third party who then pursues it for the benefit of that third party. Accordingly, the Court also rejected the argument that SPV had a genuine commercial interest in enforcing the third party claim.
In the Court's view the transaction involved the sale of litigation and was prohibited by Irish public policy. It described the proceedings as the very type of wanton or officious intermeddling in the litigation of another which had been condemned by the courts for centuries.
Accordingly, the Court declared that the Assignment was contrary to public policy, void and unenforceable as a matter of law and the proceedings were dismissed as being frivolous, vexatious and bound to fail.