Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 331 (1971)

An assignment of a claim is not champertous under New York Judiciary Law § 489 if the primary purpose of the assignment was part of a larger commercial transaction, even if litigation on the claim is a contingent or incidental purpose.

Summary

Fairchild Hiller Corp. (Fairchild) sued McDonnell Douglas Corp. (McDonnell) as the assignee of a claim originally held by Republic Aviation Corp. (Republic). The claim arose from a contract where Republic manufactured aircraft assemblies for McDonnell. McDonnell asserted that the assignment of the claim from Republic to Fairchild was champertous, violating Judiciary Law § 489, and that Farmingdale Company, who had an agreement with Fairchild to receive 75% of any recovery, was the real party in interest and a necessary party. The New York Court of Appeals held that the assignment was not champertous because it was incidental to Fairchild’s acquisition of Republic’s operating assets and that Fairchild was the real party in interest, making Farmingdale not a necessary party.

Facts

Republic contracted with McDonnell to manufacture aircraft assemblies. Republic claimed defects in McDonnell’s tools and drawings increased its production costs, leading to a claim against McDonnell.
Fairchild acquired Republic’s operating assets, including contracts and related claims. Farmingdale acquired Republic’s non-operating fixed assets (real estate).
Fairchild and Farmingdale agreed that Fairchild would pursue the claim against McDonnell and give Farmingdale 75% of the net proceeds. The agreement gave Fairchild sole discretion over the claim’s settlement or litigation.
Fairchild sued McDonnell for fifteen million dollars after unsuccessful settlement negotiations.

Procedural History

McDonnell moved for summary judgment, arguing champerty, that Fairchild was not the real party in interest, and that Farmingdale was a necessary party.
Fairchild cross-moved to dismiss these affirmative defenses.
Special Term denied McDonnell’s motion and granted Fairchild’s motion.
The Appellate Division reinstated the affirmative defenses, finding questions of fact existed.

Issue(s)

1. Whether the assignment of the claim from Republic to Fairchild was champertous under Judiciary Law § 489.
2. Whether Farmingdale, rather than Fairchild, was the real party in interest.
3. Whether Farmingdale was a necessary party to the action.

Holding

1. No, because Fairchild’s primary purpose in acquiring Republic’s assets was a legitimate business transaction, and the claim assignment was merely incidental to that transaction.
2. No, because the assignment from Republic to Fairchild was absolute on its face, and the sharing agreement between Fairchild and Farmingdale gave Fairchild control over the claim.
3. No, because Farmingdale had no legal title to the claim, and its potential recovery depended entirely on the separate sharing agreement with Fairchild.

Court’s Reasoning

The Court of Appeals reversed the Appellate Division, reinstating the Special Term’s order dismissing the affirmative defenses.
Regarding champerty, the court stated that under Judiciary Law § 489, an assignment is champertous only if made for the “very purpose of bringing suit,” excluding any other purpose. The court cited Moses v. McDivitt, 88 N.Y. 62, 65, and Sprung v. Jaffe, 3 N.Y.2d 539, 544, for the principle that “the statute is violated only if the primary purpose of the purchase or taking by assignment of the thing in action is to enable the attorney to commence a suit thereon.”
The court emphasized that Fairchild’s primary purpose was to acquire Republic’s operating assets, making the claim assignment an “incidental part of a substantial commercial transaction.”
Regarding the real party in interest, the court noted the assignment was absolute, and Fairchild retained control over the claim. Citing Sprung v. Jaffe, Spencer v. Standard Chem. & Metals Corp., Sheridan v. Mayor of New York, and others, the court affirmed that the assignee is the real party in interest regardless of how proceeds are used.
The court found Farmingdale was not a necessary party because it lacked legal title to the claim and depended on the sharing agreement for any recovery. The court distinguished cases where further discovery was needed, noting extensive discovery had already occurred, providing a “record sufficiently complete to justify dismissal of these defenses at this time.”