SPV Osus Ltd v HSBC Institutional Trust Services (Ireland) Ltd and Others

• Jurisdiction: Ireland
• Judge: Ms. Justice Costello
• Judgment Date: 05 October 2015
• Neutral Citation: [2015] IEHC 602
• Court: High Court
• Date: 05 October 2015

[2015] IEHC 602

THE HIGH COURT

[No. 10269 P./2014]

[No. 15 COM/2015]

SPV Osus Ltd v HSBC Institutional Trust Services (Ireland) Ltd & Ors

COMMERCIAL

Approved Judgment

No Redaction Needed

BETWEEN

SPV OSUS LIMITED

PLAINTIFF

AND

HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED,

HSBC SECURITIES SERVICES (IRELAND) LIMITED,

OPTIMAL INVESTMENT SERVICES S.A. AND BANCO SANTANDER S.A.

DEFENDANTS

Company – Breach of contract – Damages – Assignment of Claims – Whether assignment of bare cause of action valid – Maintenance and champerty

Facts: The plaintiff sought an order for damages for breach of contract and fiduciary duties against the defendants in relation to the investments by a company X in company B incorporated in United States of America, which went bankrupt thereby causing loss of the investments of company X. The defendants sought a declaration that the assignment of claim made between company X and the plaintiff was void and contrary to public policy and an order for striking out the proceedings against the first and second named defendants. The defendants contended that the assignment of claim did not confer a right to sue for bare cause of action to the plaintiff and the plaintiff company was formed merely to take direct control of interest of allowed customer claims of company X.

Ms. Justice Costello granted an order for the dismissal of the proceedings. The Court granted the declaration to the defendants to the effect that the alleged assignment of claim between company X and the plaintiff as it purported to assign the plaintiff the right to initiate the present proceedings was void, unenforceable and contrary to public policy. The Court held that it was unlawful to assign litigation in return for a share of proceeds unless the assignor had a legitimate interest. The Court observed that an assignment of cause of action incidental to or ancillary to a property right is not champertous but third parties having no link or separate interest in the suit would be guilty of champerty if they made a commercial decision to invest with a hope to achieve monetary gains from the litigation. The Court found that assignment of right to litigate third party claims in the context of sale of shares of the plaintiff company in the secondary market had no bearing or link with the allowed customer claims and other associated rights arising out of the bankruptcy of company B. The Court held that the action of the plaintiff in bringing the subject proceedings would amount to litigation trafficking.

Introduction

1 1. On 11 ^th December, 2008, the world learned of the massive fraud conducted by Bernard L. Madoff and the liquidation of Bernard L. Madoff Securities LLC ("BLMIS") was commenced in the United States Bankruptcy Court for the Southern District of New York. A trustee, Mr. Irving Picard, was appointed to oversee the case under the Securities Investors Protection Act of 1970 ("SIPA") (the "Trustee"). These proceedings are just one of the many proceedings which resulted from the Madoff fraud.

Investment in BLMIS and the BLMIS liquidation

2 2. Optimal Multiadvisers Limited (OML) is an investment company incorporated in the Bahamas and structured as an 'umbrella fund' with several series of shares linked to different investment strategies. It is part of the well known Santander Group. OML typically created a trading subsidiary for each series of shares. In 1997 OML formed Optimal Strategic US Equity Limited ("Optimal Strategic") for the purpose of holding assets linked to OML's series of shares which, in this judgment, are referred as the Strategic Series shares.

3 3. Optimal Strategic invested nearly all of its assets including the Strategic Series shares through a brokerage account at BLMIS. Upon the collapse of BLMIS there were virtually no assets in the estate. In reality, the investment was now represented by the claims Optimal Strategic had in the estate of BLMIS and any non bankruptcy claims against third parties as it might have for the loss it had sustained.

4 4. In the 90 days preceding the liquidation of BLMIS, Strategic Series shares to the value of approximately US$151 million had been redeemed on behalf of investors in OML. Under US bankruptcy law, payments made within 90 days of the bankruptcy amount to preferential payments and can be recovered by the Trustee. The Trustee made a demand of Optimal Strategic for the return of US$151 million in respect of the redeemed shares. In return Optimal Strategic had a claim against the BLMIS estate in respect of the investments lost due to the fraud of Mr. Madoff. The net asset value of these investments as of November, 2008 was approximately US$2.9 billion. The net equity value was approximately US$1.5 billion. The value of Optimal Strategic's claim in the BLMIS liquidation therefore depended upon whether the claim was valued on a net asset value or on a net equity basis. There was a dispute between Optimal Strategic and the Trustee as to the correct basis upon which Optimal Strategic's claim should be valued. Ultimately this was resolved in favour of the Trustee and there was a decree by the Supreme Court of the United States of America giving effect to this result in June, 2014, after the Assignment the subject matter of these proceedings.

5 5. Under US bankruptcy law, customers of an insolvent broker dealer, such as BLMIS, who are in a SIPA liquidation, are entitled to preferential treatment in the distribution of assets from the debtor's estate. This is achieved through the creation of a fund, whereby customers holding allowed claims in the bankruptcy are entitled to share in such a fund based on the amount of their 'net equity' (the difference between the amount invested and the amount withdrawn). A claim against a SIPA estate is recognised to be a property interest.

6 6. Before Optimal Strategic would be allowed to share in this preferential customer fund, the Trustee insisted that Optimal Strategic would have to return the US$151 million it owed to the BLMIS estate. On 22 ^nd May, 2009, Optimal Strategic entered into a settlement agreement with the Trustee whereby it returned certain amounts to the estate in exchange for an allowed customer claim in the SIPA case in the amount US$1,540,141,277.60 (which was essentially its net equity claim increased by the amount it was repaying under the Settlement Agreement) (the "Allowed Customer Claim"). The investors in the Strategic Series shares had no claims as individuals to the return of the Allowed Customer Claim. Their claim was indirect through Optimal Strategic.

7 7. The Trustee has brought a multitude of proceedings against many different parties seeking to swell the assets of the estate by means of recoveries from third parties. Inevitably this means that administration of the estate will take some time. There are many uncertainties in the process. This means that it is unknown whether all or part of the Allowed Customer Claim will in fact be paid out and it is unknown when this may occur. It is also not clear whether there will be a surplus to be distributed amongst the unsecured creditors of the estate. To date the Trustee has paid over approximately US$750 million in respect of the Allowed Customer Claim.

8 8. Optimal Strategic has a claim as an unsecured, non preferential, creditor in the BLMIS estate for the difference between any distributions in respect of the Allowed Customer Claim (approximately US$2.9 billion less US$1.5 billion). It is uncertain whether any distribution will be paid to unsecured creditors and, if so, how much. In addition, it has in fact received US$500,000 from the Securities Investor Protection Corporation ("SIPC"). There is also the possibility that it might receive a payment under a victim remission scheme established by the Department of Justice. These claims, together with the Allowed Customer Claim, are referred to as claims in the bankruptcy in this judgment. In addition, Optimal Strategic may have causes of action against third parties arising out of the loss of the investments due to the fraud of Mr. Madoff. In this judgment these are referred to as third party claims or non bankruptcy claims.

9 9. Thus, while obtaining the Allowed Customer Claim was a significant step in seeking the recovery of the lost investment, it did not imply that Optimal Strategic would immediately obtain funds for its investors.

The secondary market

10 10. Beginning in 2010, parties, including distressed debts investors and hedge funds, expressed an interest in purchasing allowed customer claims in the BLMIS liquidation. By 2011, a secondary market of selling and trading allowed claims in the BLMIS liquidation had begun. Several distressed debt investors and hedge funds interested in acquiring such claims contacted OML to inquire about purchasing an interest in Optimal Strategic's Allowed Customer Claim.

11 11. As a result of the emergence of an active secondary market for customer claims in October, 2010 the Trustee sought relief from the Bankruptcy Court to implement procedures for the assignment of allowed customer claims. On 10 ^th November, 2010, the Bankruptcy Court issued a transfer procedures order. It established a procedure whereby the holder of an allowed claim could transfer his or her entire claim to a third party in a pre-approved manner. The Order prohibits the selling or assignment of part of a claim. This requirement was so that the Trustee could easily track the beneficiaries of customer claims and for other reasons of administrative convenience.

12 12. Given the emergence of the secondary market in allowed customer claims in the BLMIS liquidation and the Transfer Procedures Order, there was now a mechanism whereby the Allowed Customer Claim could be sold on to third parties, thereby realising...