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.