New York Law Review

Tag: Assignment of Claims

  • Trust for Certificate Holders v. Love Funding Corp., 13 N.Y.3d 190 (2009): Champerty and Assignment of Claims

    13 N.Y.3d 190 (2009)

    A corporation or association that takes an assignment of a claim does not violate Judiciary Law § 489 (1) if its purpose is to collect damages, by means of a lawsuit, for losses on a debt instrument in which it holds a preexisting proprietary interest.

    Summary

    This case addresses the scope of New York’s champerty statute, Judiciary Law § 489, concerning the assignment of claims for the purpose of litigation. The Trust acquired rights to sue Love Funding after settling with UBS, seeking to recover losses on a defaulted loan. The court held that the Trust’s actions did not constitute champerty because it had a pre-existing proprietary interest in the loan and its purpose was to collect on a legitimate claim, not merely to generate litigation. The court clarified that acquiring indemnification rights for past legal actions or seeking a larger recovery than initially demanded does not automatically constitute champerty.

    Facts

    Love Funding originated a loan that was sold to Paine Webber. This loan was then securitized into a trust. The loan defaulted due to fraud. The Trust (representing certificate holders) sued Paine Webber’s successor, UBS, for breach of warranty. As part of the settlement, UBS assigned its rights against Love Funding to the Trust. The Trust then sued Love Funding, alleging breach of representations about the loan’s condition. The Trust already held the defaulted debt obligation when it acquired the right to sue Love Funding.

    Procedural History

    The Trust sued Love Funding in federal court. The District Court initially granted summary judgment to the Trust on the breach of contract claim, then allowed Love Funding to assert a champerty defense. The District Court later held that the assignment was void for champerty and dismissed the Trust’s action. The Second Circuit Court of Appeals certified questions to the New York Court of Appeals regarding the interpretation of the champerty statute.

    Issue(s)

    1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the “primary” intent proscribed by New York Judiciary Law § 489 (1), or must there be a finding of “sole” intent?

    2. As a matter of law, does a party commit champerty when it “buys a lawsuit” that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?

    3. (a) As a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor?

    (b) Is the answer to question 3 (a) affected by the fact that the challenged assignment enabled the assignee to exercise the assignor’s indemnification rights for reasonable costs and attorneys’ fees?

    Holding

    1. The Court found it unnecessary to answer the first question.

    2. No, because the Trust held a pre-existing proprietary interest in the debt instrument.

    3. (a) No, because settling for a transfer of rights with the potential for larger recovery than an earlier settlement demand does not constitute champerty.

    (b) No, because acquiring indemnification rights for reasonable costs and fees incurred in past legal actions does not violate the champerty statute.

    Court’s Reasoning

    The Court reasoned that the doctrine of champerty is intended to prevent the commercialization of and trading in litigation. The champerty statutes are aimed at preventing strife, discord, and harassment arising from the purchase of claims for the purpose of bringing actions. The court emphasized that the prohibition of champerty has always been limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs.

    The Court highlighted the distinction between acquiring a right to make money from litigating it versus acquiring a right to enforce it. Citing Moses v. McDivitt, the court stated: “The real question upon which the case turned was, whether the main and primary purpose of the purchase was to bring a suit and make costs, or whether the intention to sue was only secondary and contingent, and the suit was to be resorted to only for the protection of the rights of the plaintiff, in case the primary purpose of the purchase should be frustrated.” The court also pointed out that, according to past New York cases, the champerty statute does not apply when the purpose of an assignment is the collection of a legitimate claim.

    The Court found that because the Trust held a pre-existing proprietary interest in the loan, its purpose in taking assignment of UBS’s rights under the Love MLPA was to enforce its rights. The court further clarified that acquiring indemnification rights to the costs of past litigation is not champerty. Moreover, settling a dispute by accepting a transfer of rights that has the potential for a larger recovery than one had demanded as a cash settlement is also not champerty.

  • Zhong v. East Broadway Mall, Inc., 9 N.Y.3d 785 (2008): Acknowledgment of Debt and Assignment of Claims

    Zhong v. East Broadway Mall, Inc., 9 N.Y.3d 785 (2008)

    A written acknowledgment of a debt, made after the statute of limitations has run on the original contract, can revive the debt and restart the statute of limitations period; furthermore, an assignment of a claim by a dissolved corporation to its sole shareholder can relate back to the original claim, avoiding dismissal even after the statute of limitations has expired.

    Summary

    Zhong, the sole shareholder of Ka Hon Construction, sued East Broadway Mall for breach of contract after the statute of limitations had expired. East Broadway had acknowledged the debt to Ka Hon in writing after the original limitations period. Ka Hon had also been dissolved. The New York Court of Appeals held that East Broadway’s written acknowledgment revived the debt. Additionally, the court found that Zhong’s assignment of the claim from the dissolved corporation to himself related back to the original claim. The court reasoned that dismissing the claim would be unnecessarily formalistic, especially since Zhong, as the sole shareholder, was the real party in interest. This decision emphasizes substance over form where no prejudice exists.

    Facts

    Ka Hon Construction completed work for East Broadway Mall in 1989. A dispute arose regarding payment. By 1994, the statute of limitations for a breach of contract action had expired. On February 22, 1994, East Broadway provided a written acknowledgment of the debt outstanding to Ka Hon. Ka Hon Construction was dissolved by proclamation on September 28, 1994. A judgment was filed against Ka Hon on January 29, 1996. Zhong, as Ka Hon’s successor-in-interest, initiated a breach of contract action on February 18, 2000.
    On September 28, 2001, Zhong obtained a formal assignment of the claim from Ka Hon to himself as an individual.

    Procedural History

    The trial court’s decision is not specified in the opinion. The Appellate Division reversed the trial court, granting East Broadway’s motion for summary judgment. The Appellate Division determined that the assignment to Zhong was ineffective to cure the defect of the dissolved corporation bringing suit. Zhong appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether East Broadway’s written acknowledgment of the debt revived the expired statute of limitations for a breach of contract action.
    2. Whether the assignment of the claim from the dissolved corporation, Ka Hon, to its sole shareholder, Zhong, after the statute of limitations had expired, was effective to cure the defect in the lawsuit.

    Holding

    1. Yes, because East Broadway’s February 22, 1994 acknowledgment reflecting the amount of debt “outstanding to Ka Hon” was sufficient to satisfy General Obligations Law § 17-101 and take this “action out of the operation of the provisions of limitations of time for commencing actions”.
    2. Yes, because the assignment of the corporation’s claim was simply a less cumbersome way of achieving the same result, avoiding dismissal of what appears to be an otherwise meritorious claim.

    Court’s Reasoning

    The Court of Appeals reasoned that the written acknowledgment of the debt by East Broadway satisfied the requirements of General Obligations Law § 17-101, which revives a debt barred by the statute of limitations when the debtor acknowledges the debt in writing and indicates an intention to pay. The court cited Lew Morris Demolition Co., Inc. v Board of Educ., 40 NY2d 516, 521 (1976), stating that the writing must “recognize an existing debt and . . . contain nothing inconsistent with an intention on the part of the debtor to pay it.”
    Regarding the assignment, the court acknowledged that the cause of action properly belonged to Ka Hon Construction, despite its dissolution. The court emphasized that Zhong was the sole shareholder of Ka Hon and had a good faith belief that all corporate business had been completed. The court reasoned that the assignment was a means to correct the error and prosecute the claim. The court further noted that if the corporation had moved to intervene, it would have been permitted to do so, with its claim relating back to the original claim. The court concluded that the assignment was simply a less cumbersome way of achieving the same result, preventing dismissal of a meritorious claim.

  • Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 331 (1971): Assignment of Claims and Champerty

    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.”