SPV Optimal Osus Ltd v HSBC Institutional Trust Services (Ireland) Ltd

• Jurisdiction: Ireland
• Judge: the President
• Judgment Date: 02 March 2017
• Neutral Citation: [2017] IECA 56
• Date: 02 March 2017
• Court: Court of Appeal (Ireland)
• Docket Number: Neutral Citation Number: [2017] IECA 56 [2015 No. 575] [2014 No. 10269 P]

[2017] IECA 56

THE COURT OF APPEAL

Ryan P.

The President

Peart J.

Irvine J.

Neutral Citation Number: [2017] IECA 56

[2015 No. 575]

[2014 No. 10269 P]

BETWEEN

SPV OPTIMAL SUS LIMITED

RESPONDENT

AND

HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED,

HSBC SECURITIES SERVICES (IRELAND) LIMITED,

OPTIMAL INVESTMENT SERVICES, S.A.

AND

BANCO SANTANDER, S.A.

APPELLANT

Negligence – Investments – Public policy – Appellant seeking to institute proceedings against the defendants for negligence and other civil wrongs arising from their stewardship of investments – Whether High Court erred in failing to apply the appropriate standard and burden of proof in an application to dismiss the proceedings

Facts: Optimal Strategic US Equity Ltd was a trading subsidiary of Optimal Multiadvisors Ltd (OML) which was itself a subsidiary of Banco Santander SA Investors put money into two OML Funds which that company transmitted to Optimal Strategic for investment with Bernard L Madoff Investments LLC. The respondents, the two HSBC defendants, were appointed as custodians and administrators in respect of those assets. The activities of Mr Madoff resulted in massive losses and the appointment of a trustee in bankruptcy under the Securities Investors Protection Act 1970. That official sought to recover assets as far as possible and admitted certain losses as being Allowed Customer Claims which would be repaid if sufficient funds could be collected. Optimal Strategic had such a claim admitted in the amount of some US$1.5 billion. The appellant, SPV Optimal SUS Ltd (SPV), received an assignment of the claim from Optimal Strategic which included a bundle of rights and interests. SPV instituted proceedings against the HSBC defendants for negligence and other civil wrongs arising from their stewardship of the investments. SPV maintained the claim on the basis that the assignment encompassed the right to sue HSBC. The two HSBC defendants sought to have the assignment declared contrary to public policy, void and unenforceable as being champertous in nature because it transferred a “bare right to litigate” and otherwise constituted “trafficking in litigation”. It was agreed that the defendants’ claim in this regard would be heard and determined in the High Court as a preliminary issue. On 5th October 2015, Costello J found in favour of HSBC on both grounds and made an order dismissing the proceedings. SPV appealed that decision to the Court of Appeal on the grounds that the High Court erred in: (a) failing to apply the appropriate standard and burden of proof in an application to dismiss the proceedings; (b) finding that the assignment of third party claims was contrary to public policy; (c) finding that the assignment of the third party claims was separate to the assignment of the Allowed Customer Claim; (d) finding that the assignment of third party claims amounted to a bare cause of action, rather than an ancillary or incidental element of the Allowed Claim; (e) holding that SPV did not have a genuine commercial interest in taking and enforcing the assignment of third party rights; (f) finding that the transaction constituted “trafficking in litigation”.

Held by Ryan P that the High Court judge was correct in her analysis of the law and its application to the facts of the case. Ryan P held that the appellant had not established any basis for overturning the result; the court was correct to hold that the impugned transaction gave rise to the potential sale of the right to sue third parties and the court did not have to find that there was an intention on the part of the assignee to engage in trading of litigation, whether professional or otherwise. Ryan P was satisfied that the High Court was correct in the conclusions it reached, and in the order it made dismissing the proceedings.

Ryan P held that the appeal should be dismissed.

Appeal dismissed.

JUDGMENT of the President delivered on 2nd March 2017

Introduction

1 This is an appeal by the plaintiff from a judgment delivered by Costello J. in the High Court on 5th October 2015 and subsequent orders. The case has its origins in the notorious events associated with financial projects operated by Mr. Bernard Madoff in the United States which came to public attention in late 2008. The essential facts are set out in tabular form in the next part of this judgment in generally chronological manner.

2 The relevant parties require some introduction. Optimal Strategic US Equity Limited (Optimal Strategic) was a trading subsidiary of Optimal Multiadvisors Ltd. (OML) which was itself a subsidiary of Banco Santander SA. Investors put money into two OML Funds which that company transmitted to Optimal Strategic for investment with Bernard L. Madoff Investments LLC (BLMIS). The respondents, the two HSBC defendants, were appointed as custodians and administrators in respect of those assets.

3 The activities of Mr. Madoff resulted in massive losses and the appointment of a trustee in bankruptcy under the Securities Investors Protection Act of 1970 (SIPA). That official sought to recover assets as far as possible and admitted certain losses as being Allowed Customer Claims which would be repaid if sufficient funds could be collected. Optimal Strategic had such a claim admitted in the amount of some US$1.5 billion. The Appellant, SPV Optimal SUS Limited (SPV) received an assignment of the claim from Optimal Strategic which included a bundle of rights and interests. SPV instituted proceedings against the HSBC defendants for negligence and other civil wrongs arising from their stewardship of the investments. SPV maintains the claim on the basis that the assignment encompasses the right to sue HSBC.

4 The two HSBC defendants sought to have the assignment declared contrary to public policy, void and unenforceable as being champertous in nature because it transferred a ‘bare right to litigate’ and otherwise constituted ‘trafficking in litigation’. It was agreed that the defendants' claim in this regard would be heard and determined in the High Court as a preliminary issue. Costello J. found in favour of HSBC on both grounds and made an order dismissing the proceedings. SPV appeals that decision.

The Facts Summarised in Tabular Form

I. Investors put money into two Optimal Multiadvisers Ltd (OML) Funds—namely:

(1) Optimal Strategic US Equity Ireland US Dollar Fund

(2) Optimal Strategic US Equity Ireland Euro Fund

II. OML transferred the money to Optimal Strategic

III. Optimal Strategic put the money into BLMIS

IV. HSBC provided custodian and administrative services in respect of the assets to BLMIS

V. On 11th December 2008 the liquidation of BLMIS began in the United States Bankruptcy Court for the Southern District of New York and a trustee was appointed under the Securities Investors Protection Act of 1970 (SIPA)

VI. On 22nd May 2009 the SIPA trustee agreed an Allowed Customer Claim for Optimal Strategic in the amount of US$1.54 billion

VII. On 11th November, 2010, the Bankruptcy Court issued a transfer procedures order allowing for claims to be sold but only in whole, not in part

VIII. The directors of OML devised a mechanism whereby the investors in their funds would be able to convert their entitlement to share in the Allowed Customer Claim into money or company shares that could be held or negotiated. This involved setting up a Special Purpose Vehicle which was initially a 100% subsidiary of Optimal Strategic. An Information Circular dated 29th April, 2011, sent to the holders of the Strategic Series shares – above at 1a & 1b – set out the business objective of the SPV at pages 13 and 14:

(1) To hold the Allowed Customer Claim of US$1.54 billion for the benefit of the shareholders of the SPV and to act as a conduit through which the Strategic Series investors may dispose of their pro rata interest in the claim

(2) the Allowed Customer Claim will no longer be held by Optimal Strategic but because of the 100% ownership the shares will continue to represent an indirect interest in the ACC

IX. The SPV was duly established and the shareholders were then offered the options of (a) exchanging their shares for shares in the SPV; (b) exchanging as in (a) and having the SPV shares sold; (c) keeping their existing shares.

X. By an agreement of 6th May, 2011, Optimal Strategic transferred the Allowed Customer Claim to SPV: this is the critical transaction at the centre of the case. In her judgment in the High Court, Costello J. quotes the relevant part whereby Optimal Strategic assigned to SPV:

‘… (a) an undivided 100% interest… in Assignor's right, title, and interest in and to the allowed claim filed by the Assignor [The Allowed Customer Claim]… (b) all rights and benefits of Assignor related to the Purchased Claim including (i) any right to receive cash, securities, instruments, interest, penalties, fees or other property that may be paid or distributed with respect to the Purchased Claim, (ii) any action or claim…of any nature whatsoever, whether against the Debtor [BLMIS] or any other party, arising out of or in connection with the Purchased Claim, (c) all rights of Assignor under paragraph 13 of the [Settlement Agreement]…, (d) any other rights, action or claim arising out of the Assignor's investment in Debtor including, but not limited to, any claim the Assignor may have with respect to any current or future victim remission proceedings developed by the United States Department of Justice, and (e) any and all proceeds of any of the foregoing (collectively as described in clauses (a), (b), (c), (d) and (e) the “Transferred Rights”).’

XI. In the result some 93% of the SPV shares were sold to hedge funds and distressed debt investors in a series of three share auctions prior to May, 2013. As of June, 2011 Allowed Customer Claims in the BLMIS estate were trading at roughly $.70-$.75 on the...