Latest Irish Madoff Ruling: Supreme Court orders High Court to determine relative liability of alleged wrongdoers

Background

Bernie Madoff's massive Ponzi scheme fraud led to litigation around the world, including in Ireland. A recent Irish Madoff claim (apparently worth circa US$540 million) hinged on whether an Irish fund defrauded by Madoff could still sue its custodian for negligence after it had settled with Madoff. The Supreme Court ruled that the High Court was wrong to dismiss the claim in a preliminary ruling rather than resolving the issues at a full trial. The case will now go back to the High Court for trial.

The case required the Courts to consider complicated provisions under the Civil Liability Act 1961 (the CLA) dealing with the situation in which several parties (concurrent wrongdoers) share responsibility for the same loss. Although various technical arguments were raised under the CLA, this note will focus on the most important issue in the appeal. 

In essence, a party injured by concurrent wrongdoers can sue any of the parties responsible for its injury. Even if only one of the wrongdoers is sued, the injured party can still recover 100% of their loss from that wrongdoer. However, the sued wrongdoer can seek a contribution from the other wrongdoers towards the award to the injured party, with the contribution amount being based on the Court's assessment of each wrongdoer's degree of fault.

Example 1

Drivers Jack and Jill crash into each other.

Paul, a passenger in Jack's car, suffers injuries of €10,000. He successfully sues Jill for €10,000 but doesn't sue Jack (his friend), who was equally responsible.

Jill sues Jack for contribution towards the damages she had to pay to Paul.

The Court must apportion fault "justly and equitably" between Jack and Jill. It apportions liability 50:50.

Jack must therefore pay Jill €5,000, effectively halving her liability.

The situation becomes more complex if the claimant settles with one wrongdoer and sues another. The claimant cannot recover twice for the same loss, but, if the settlement only partly indemnifies him or her, can the claimant recoup the balance from the other wrongdoer?  The CLA provides that the claimant must be identified with (i.e. step into the shoes of) the settling wrongdoer in their action against the non-settling wrongdoer. The provisions are complicated but, in practice, the claim will generally be reduced by the share the settling wrongdoer would have been liable to contribute if the claim had been paid by the non-settling wrongdoer.  

Example 2

As in Example 1, Paul sues Jill for €10,000.

However, this time, Paul settles with Jack for €3,000 before suing Jill.

As Paul has settled with Jack, Paul is considered to step into Jack's shoes for the purposes of Paul's action against Jill due to the CLA.

In Paul's action against Jill, the Court determines Paul's losses to be €10,000, but apportions fault for those losses at 50:50 between Jack and Jill.

As Paul has stepped into Jack's shoes for the purposes of this action, this means that he can only recover €5,000 from Jill.

Therefore, notwithstanding that his total loss was €10,000, Paul will only recover €8,000 in total. On the one hand, his settlement with Jack ultimately reduced his total recovery. On the other hand, it ensured that he at least made a partial recovery, reducing the litigation risk.

The Defender litigation focussed on the application of the CLA in such cases. Defender had settled with the Madoff Trustee and separately sued HSBC, claiming negligence.  The trial ended much earlier than expected due to a preliminary ruling early in the proceedings, avoiding a five month trial.

The High Court concluded that, if HSBC were found to be negligent, they would be concurrent wrongdoers with Madoff. As Madoff's criminal fraud primarily caused the loss, it would have been just and equitable to apportion fault at 100% to Madoff and 0% to HSBC (which was alleged to have been, at most, negligent). As Defender had settled with Madoff, it was identified with Madoff under section 17 of the CLA (i.e. it stepped into Madoff's shoes) for the purposes of dividing liability between Madoff and HSBC. 

The 100% apportionment of liability to Madoff meant that, having settled with Madoff which bore 100% of the fault, Defender no longer had any claim against HSBC (even if HSBC had been negligent). The High Court accordingly dismissed the claim, holding that a party which is merely negligent will normally be entitled to a full indemnity from a criminal concurrent wrongdoer. 

The Supreme Court Decision 

The Supreme Court rejected Defender's contention that the CLA should be interpreted so that the plaintiff should always recover full damages caused by wrongdoing. The Court concluded that the CLA requires the remaining defendant only to pay its ‘fair’ share - the plaintiff must bear any consequent deficiency as a result of the settlement. Whether that section of the CLA was constitutional was a separate question and the Court did not express a view on that issue. 

However, for the preliminary issue to have succeeded, the High Court needed to have found that HSBC's share of culpability was zero. The Supreme Court was not satisfied that there was no prospect of any apportionment of fault other than 100% (Defender/Madoff) to 0% (HSBC). 

The Supreme Court concluded that, even if it was considered that fraud was more serious than “mere” negligence, the proposition that fraud almost always obliterated negligence in terms of fault could not be safely adopted to dismiss a claim at a preliminary stage. The Supreme Court questioned the proposition that the tort of deceit would always absolve a concurrent wrongdoer from a contribution obligation.

Accordingly, the Supreme Court held that, while the High Court was correct in its construction of the CLA, it was wrong to conclude at a preliminary stage that the only possible outcome was a 100% apportionment against Madoff/Defender. The decision left open the possibility that the Court could conclude that a 100% apportionment was appropriate, but only after a full trial. However, it established that it should simply not be assumed that criminal fraud versus negligence would necessarily result in a 100% to 0% apportionment).

While the High Court's determination of a preliminary issue might have prevented a lengthy and expensive trial, the Supreme Court emphasised that case management tools should not be used at the expense of having issues fairly ventilated. An important element of the administration of justice is that all parties should believe that their cases were fairly ventilated and considered. 

It is clear that further complex legal issues could still arise at trial. The Supreme Court judgment of O'Donnell J. noted possible scenarios: 

• HSBC might defeat Defender's claim (in which case no apportionment under the CLA would be needed).
• HSBC might be ordered to pay the balance of Defender's claim after allowing for the recovery from the Madoff Trustee (the Madoff settlement is expected to lead to a 75% recovery for Defender so HSBC could be liable for the remaining 25%). If such a 75%/25% apportionment was deemed just and equitable, the proceedings would be resolved on that basis.

However, if HSBC was deemed to be negligent and the Court was to apportion liability to HSBC in an amount less than 25%, this would lead to a shortfall in Defender’s recovery due to section 17 of the CLA. In that eventuality, and only then, the claimant's objections to the constitutionality of the provision would fall to be considered. O'Donnell J. stated that the Plaintiff's arguments as to interpretation and constitutionality should be adjudicated at trial, with the addition of the Attorney General as a party to the proceedings.

As will be seen from the foregoing, the CLA is a difficult enactment to interpret and apply and the Supreme Court noted the need for the CLA to be reviewed and updated by the legislature. O'Donnell J. observed that a failure to amend legislation and to maintain balance between litigants can lead to a provision being found to be inconsistent with the Constitution (sometimes in quite particular circumstances) with the result that a provision which may operate fairly and effectively in most cases is unnecessarily struck down.

The Supreme Court decision answers some questions about the interpretation and application of the CLA, but many remain. It has yet to be seen whether these will be determined when the Defender claim returns to trial in the High Court.

For further information please contact Liam Kennedy, Partner, Dr Stephen King, Senior Associate, Niamh Lucheroni, Solicitor or a member of the A&L Goodbody Litigation & Dispute Resolution team.

Date published: 29 July 2020