Defender Ltd v HSBC Institutional Trust Services (Ireland) Ltd

• Jurisdiction: Ireland
• Court: High Court
• Judge: Mr. Justice Twomey
• Judgment Date: 04 December 2018
• Neutral Citation: [2018] IEHC 706
• Date: 04 December 2018
• Docket Number: [2013 No. 12439 P]

BETWEEN

DEFENDER LIMITED

PLAINTIFF

AND

HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED

DEFENDANT

AND

RELIANCE MANAGEMENT (BVI) LIMITED, RELIANCE INTERNATIONAL RESEARCH LLC, FIMAN LIMITED

AND

DAVID WHITEHEAD

THIRD PARTIES

[2018] IEHC 706

Twomey J.

[2013 No. 12439 P]

[2013 No. 177 COM]

THE HIGH COURT

COMMERCIAL

Preliminary issue – Negligence – Breach of contract – High Court seeking to hear a preliminary legal issue – Whether s. 17(2) of the Civil Liability Act 1961 applied to this case

Facts: The plaintiff, Defender Ltd, an investment fund, claimed $141 million against the defendant, HSBC Institutional Trust Services (Ireland) Ltd, an Irish based subsidiary of the HSBC group. The essence of Defender’s claim was that pursuant to the terms of a custodian agreement, Defender invested over half a billion dollars ($540 million) with Mr Madoff’s company, which led to significant losses as Mr Madoff was the creator of the world’s largest Ponzi scheme. Defender claimed that, inter alia, HSBC was negligent and in breach of contract in its role as custodian because of its knowledge of Mr Madoff and its failure to properly monitor him and his company. After the opening submissions in this case which was due to last for five months, the High Court decided before the first witness began to give evidence that it was appropriate to hear a preliminary legal issue concerning the claim, since it had the potential to decide the case and thereby save five months of court time. The preliminary legal issue was the reliance by HSBC in its defence on s. 17(2) of the Civil Liability Act 1961. The reliance on s. 17(2) arose because Defender settled its claim for the return of $540 million with Mr Madoff’s company for at least 75% of that sum and was suing HSBC in these proceedings, as an alleged concurrent wrongdoer with Mr Madoff’s company, in relation to the balance of its loss. However, HSBC claimed that because of that settlement, under the terms of s. 17(2) and s. 35(1)(h) of the 1961 Act, Defender must be ‘identified with’ Mr Madoff’s company in its claim in these proceedings to recover damages from HSBC. HSBC said that Mr Madoff’s company would, in its view, be 100% liable for the loss caused to Defender, if there was to be any judicial determination of the respective contributions owed by Mr Madoff’s company and HSBC to Defender for its loss. Accordingly, HSBC claimed that Defender must, under s 17(2) be ‘identified with’ this 100% liability of Mr Madoff’s company. That view, regarding the respective contributions of Mr Madoff’s company and HSBC, was based on the contention that Mr Madoff’s company was fraudulent, while HSBC was, at most, negligent, guilty of breach of contract or otherwise vicariously liable for the loss. As a result therefore, HSBC claimed that Defender could not pursue the claim against HSBC since s. 17(2) makes clear that the effect of a plaintiff, such as Defender, being ‘identified with’ a concurrent wrongdoer, such as Mr Madoff’s company, is that its claim against the other concurrent wrongdoer, such as HSBC, must be ‘reduced’ by the amount of the contribution of the other concurrent wrongdoer (Mr Madoff’s company), which HSBC said must be 100%. A 100% reduction of Defender’s claim against HSBC would mean that Defender had no claim against HSBC. On that basis, HSBC said that there was no justification for Defender pursuing these proceedings against HSBC in light of its settlement with Mr Madoff’s company.

Held by Twomey J that s. 17(2) applied to this case so that Defender’s claim against HSBC for $141 million is reduced by 100%, as a result of Defender’s prior settlement with Mr Madoff’s company. The Court concluded that it was just and equitable for HSBC, the wrongdoer who was assumed to have been guilty of civil wrongdoing, to be entitled to 100% contribution from Madoff, the wrongdoer which was involved (as the corporate vehicle of Mr Madoff) in criminal wrongdoing, because of the qualitative difference between the respective wrongdoing of the two concurrent wrongdoers.

Twomey J held that Defender’s claim against HSBC must be reduced by 100% as required by s. 17(2).

Judgment approved.

Judgment of Mr. Justice Twomey delivered on the 4th day of December, 2018

Introduction

1 This is a case involving a claim for $141 million by the plaintiff, Defender Limited, an investment fund, (‘Defender’) against the defendant company HSBC Institutional Trust Services (Ireland) Limited (‘HSBC’), an Irish based subsidiary of the HSBC group, which is, this Court was told, the largest bank in the world, outside of China.

2 The essence of the claim by Defender is that pursuant to the terms of a custodian agreement, Defender invested over half a billion dollars ($540million) with Mr. Bernie Madoff's company, which led to significant losses as Mr. Madoff was the creator of, what is now known to be the world's largest Ponzi scheme.

3 Defender claims that, inter alia, HSBC was negligent and in breach of contract in its role as custodian because of its knowledge of Mr. Madoff and its failure to properly monitor him and his company.

A preliminary issue which might save 5 months of court time

4 After the opening submissions in this case which is due to last for five months, and for the reasons set out below, this Court decided before the first witness began to give evidence that it was appropriate to hear a preliminary legal issue concerning this claim, since it had the potential to decide the case and thereby save five months of court time.

5 This preliminary legal issue is the reliance by HSBC in its defence on s. 17(2) of the Civil Liability Act, 1961. The reliance on s. 17(2) arises because Defender settled its claim for the return of $540 million with Mr. Madoff's company for at least 75% of that sum and is now suing HSBC in these proceedings, as an alleged concurrent wrongdoer with Mr. Madoff's company, in relation to the balance of its loss.

6 However, HSBC claims that because of this settlement, under the terms of s. 17(2) and s. 35(1)(h) of the Civil Liability Act, 1961, Defender must be “ identified with” Mr. Madoff's company in its claim in these proceedings to recover damages from HSBC. HSBC says that Mr. Madoff's company would, in its view, be 100% liable for the loss caused to Defender, if there was to be any judicial determination of the respective contributions owed by Mr. Madoff's company and HSBC to Defender for its loss. Accordingly, HSBC claims that Defender must, under s 17(2) be “ identified with” this 100% liability of Mr. Madoff's company. This view, regarding the respective contributions of Mr. Madoff's company and HSBC, is based on the contention that Mr. Madoff's company was fraudulent, while HSBC was, at most, negligent, guilty of breach of contract or otherwise vicariously liable for the loss.

7 As a result therefore, HSBC claims that Defender cannot pursue this claim against HSBC since s. 17(2) makes clear that the effect of a plaintiff, such as Defender, being “ identified with” a concurrent wrongdoer, such as Mr. Madoff's company, is that its claim against the other concurrent wrongdoer, such as HSBC, must be “ reduced” by the amount of the contribution of the other concurrent wrongdoer (Mr. Madoff's company), which HSBC says must be 100% A 100% reduction of Defender's claim against HSBC would mean that Defender has no claim against HSBC. On this basis, HSBC say that there is no justification for Defender pursuing these proceedings against HSBC in light of its settlement with Mr. Madoff's company.

8 That is the preliminary issue which has to be determined by this Court, and if HSBC is correct, HSBC claims that there is no basis for these proceedings by Defender against it. For the reasons set out in this judgment, this Court finds that s 17(2) applies to this case so that Defender's claim against HSBC for $141 million is reduced by 100%, as a result of Defender's prior settlement with Mr. Madoff's company. Reference will first however be made to the factual background relevant to this issue.

Factual background

9 Defender entered into a Custodian Agreement (‘Custodian Agreement’) dated 3rd May, 2007 with HSBC whereby Defender appointed HSBC as its custodian for cash and other assets delivered to it. HSBC entered into a Sub-Custody Agreement (‘Sub-Custody Agreement’) dated 4th May, 2007 with Bernard L Madoff Investment Securities, LLC (‘Madoff’), a company set up and owned by Mr. Bernie Madoff (‘Mr. Madoff’).

10 The third party companies to these proceedings, Reliance Management (BVI) Limited and Reliance International Research LLC (together ‘Reliance’) were joined by HSBC to this litigation as HSBC alleges that Reliance, and in particular Reliance Management (BVI) Limited, which was engaged on behalf of Defender to establish the Defender investment fund, was, inter alia, aware of Mr. Madoff's secretive and unorthodox approach to investments that “appeared” to give unwavering above market returns to investors, but which was in fact a Ponzi scheme. Furthermore, HSBC claims that as Defender did not have any employees, the knowledge of Reliance in this regard is the knowledge of Defender as its agent and the directing mind and will of Defender.

11 The net claim by Defender against HSBC is for $141 million to take account, inter alia, of $335 million returned to Defender by Mr. Irving H. Picard, the trustee in the liquidation of Madoff (the ‘Trustee’) out of its original investment of $540 million with Madoff under the terms of the settlement to which reference has already been made.

12 It became clear during the opening of the case that Defender expects to recover 75% of the $540 million invested with Madoff, once the Madoff liquidation comes to a conclusion. This is based on the fact that there is a market for the sale of claims in the Madoff liquidation and the current value of those claims indicates that there is...