New York Law Review

Tag: Champerty

  • Justinian Capital SPC v. WestLB AG, 28 N.Y.3d 160 (2016): Champerty and the ‘Safe Harbor’ Exception

    Justinian Capital SPC v. WestLB AG, 28 N.Y.3d 160 (2016)

    Under New York’s champerty statute, acquiring securities with the primary intent of bringing a lawsuit is prohibited, but a ‘safe harbor’ exists if the purchase price meets a minimum threshold, so long as there is a binding and bona fide obligation to pay.

    Summary

    The New York Court of Appeals addressed the doctrine of champerty, which prohibits the purchase of claims with the intent to sue. Justinian Capital acquired notes from DPAG, a German bank, with the apparent primary purpose of suing WestLB on behalf of DPAG, who wanted to avoid being the named plaintiff. The court found that the acquisition was champertous. It also considered whether Justinian was protected by the champerty statute’s ‘safe harbor,’ which exempts purchases over a certain price. The court held that, while a cash payment isn’t strictly required to meet the safe harbor, the obligation to pay must be binding and independent of the litigation’s outcome, which wasn’t the case here because payment was entirely contingent on winning the lawsuit. Therefore, Justinian could not avail itself of the safe harbor.

    Facts

    DPAG, a German bank, held notes issued by WestLB-managed special purpose companies that declined in value. DPAG considered suing WestLB, but was concerned about government repercussions. It entered an agreement with Justinian Capital, a shell company, for Justinian to acquire the notes and sue WestLB, with Justinian remitting most of any proceeds to DPAG, less a portion for Justinian. Justinian was to pay DPAG $1,000,000 for the notes, but the agreement did not make payment a condition of the assignment or default. Justinian initiated a lawsuit against WestLB days before the statute of limitations expired. WestLB raised champerty as an affirmative defense, arguing Justinian’s purchase was for the primary purpose of bringing the lawsuit. Justinian never actually paid any portion of the $1,000,000.

    Procedural History

    The trial court initially ordered limited discovery on champerty. After discovery, the trial court granted WestLB’s motion for summary judgment, dismissing the complaint, finding the agreement champertous and that Justinian did not qualify for the safe harbor. The Appellate Division affirmed. The Court of Appeals granted Justinian leave to appeal.

    Issue(s)

    1. Whether Justinian’s acquisition of the notes from DPAG was champertous under New York Judiciary Law § 489 (1).

    2. Whether Justinian’s acquisition of the notes fell within the safe harbor provision of Judiciary Law § 489 (2).

    Holding

    1. Yes, because Justinian’s primary purpose in acquiring the notes was to bring a lawsuit.

    2. No, because the payment obligation was not binding and bona fide, as payment was only contingent on a successful lawsuit.

    Court’s Reasoning

    The Court of Appeals stated that under Judiciary Law § 489(1), the acquisition must have been made for the “very purpose of bringing such suit” and the intent to sue must not be merely incidental. The court found the acquisition was champertous because Justinian’s business plan and the agreement’s structure indicated that the lawsuit was the sole reason for the note acquisition. Regarding the safe harbor of § 489(2), the Court determined that while actual payment of $500,000 isn’t strictly required, there must be a binding, bona fide obligation to pay that amount. The court found that here, the $1,000,000 price was contingent upon a successful outcome of the litigation. As such, it did not constitute a binding obligation, denying Justinian the safe harbor protection. The court found, “The agreement was structured so that Justinian did not have to pay the purchase price unless the lawsuit was successful, in litigation or in settlement.”

    Practical Implications

    This case clarifies New York’s champerty laws, particularly regarding the safe harbor exception. Attorneys must carefully analyze the intent behind an assignment of a claim to determine if the primary purpose is to bring a lawsuit. When structuring agreements to take advantage of the safe harbor, a binding and genuine obligation to pay the purchase price must be present, not contingent on a successful outcome. This case highlights that the economic reality of the transaction matters: Courts will scrutinize agreements to ensure that they are not shams designed to circumvent champerty laws. Subsequent cases will likely cite this ruling when analyzing the validity of assignments and the applicability of the safe harbor, particularly in commercial litigation involving large debt instruments or securities.

  • 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.

  • 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.”