New York Law Review

Tag: Real Party in Interest

  • James McKinney & Son, Inc. v. Lake Placid 1980 Olympic Games, Inc., 61 N.Y.2d 836 (1984): Real Party in Interest After Contract Assignment

    James McKinney & Son, Inc. v. Lake Placid 1980 Olympic Games, Inc., 61 N.Y.2d 836 (1984)

    A party that has assigned all rights related to a contract to a surety due to financial difficulties is no longer the real party in interest and lacks standing to sue for claims arising from that contract.

    Summary

    James McKinney & Son, Inc. (“McKinney”) contracted with Lake Placid 1980 Olympic Games, Inc. (“LPOG”) to construct steel structures. LPOG hired Gilbane Building Company (“Gilbane”) as project manager. McKinney encountered difficulties and filed for bankruptcy, triggering a prior indemnification agreement with its surety, Reliance Insurance Company (“Reliance”), which assigned all of McKinney’s contract rights to Reliance. Reliance then settled with LPOG, releasing all claims. McKinney sued LPOG and Gilbane, alleging defective designs caused its failure. The New York Court of Appeals held that McKinney was no longer the real party in interest because it had assigned all its rights to Reliance, thus lacking standing to sue. Summary judgment was granted to both defendants.

    Facts

    In May 1977, McKinney contracted with LPOG to fabricate and erect steel structures for the Olympic Field House.
    LPOG separately contracted with Gilbane to supervise and inspect construction.
    McKinney encountered difficulties meeting design specifications, leading LPOG to terminate the contract on March 31, 1978.
    McKinney initiated bankruptcy proceedings on April 7, 1978.
    Reliance, McKinney’s surety, had performance and payment bonds and an indemnification agreement that automatically assigned all of McKinney’s contract rights to Reliance upon bankruptcy.
    Reliance took over the contract but also failed to complete performance and settled with LPOG, releasing all claims related to McKinney’s contract.
    In 1980, McKinney sued LPOG and Gilbane, alleging defective designs caused its failure to perform.

    Procedural History

    McKinney sued LPOG and Gilbane in an unspecified court.
    LPOG and Gilbane separately moved for summary judgment, arguing that Reliance was the real party in interest and that the release executed by Reliance barred McKinney’s suit.
    The lower court’s decision is not detailed in the Court of Appeals opinion.
    The Appellate Division’s order was modified by the Court of Appeals, which granted Gilbane’s motion for summary judgment and affirmed the grant of summary judgment to LPOG.
    The Court of Appeals answered the certified question in the negative (the content of the certified question is not specified in the text).

    Issue(s)

    Whether McKinney, having assigned all contract rights to Reliance due to bankruptcy, remained the real party in interest with standing to sue LPOG and Gilbane for claims arising from the contract.

    Holding

    No, because by the terms of the continuing indemnification agreement, all rights that McKinney had in its contract with LPOG were fully assigned to Reliance when McKinney filed for bankruptcy. Consequently, McKinney is no longer the real party in interest and has no right to maintain any claims against either LPOG or Gilbane.

    Court’s Reasoning

    The court focused on the indemnification agreement between McKinney and Reliance. The agreement stated that “all rights” of McKinney “in, or growing in any manner out of” a contract guaranteed by any Reliance bond would be completely and automatically assigned to the surety in the event of bankruptcy. The Court found that this agreement effectively transferred all of McKinney’s rights under the LPOG contract to Reliance when McKinney filed for bankruptcy. Since McKinney no longer possessed these rights, it lacked standing to sue LPOG or Gilbane. The court emphasized that Reliance was empowered to execute any release of property received by assignment, further solidifying Reliance’s control over the claims. The court reasoned that allowing McKinney to sue would undermine the purpose of the assignment and the surety’s ability to manage the claims effectively. The court stated, “By the terms of the continuing indemnification agreement, all rights that plaintiff had ‘in or growing in any manner out of’ its contract with LPOG were fully assigned to Reliance, at the latest, when plaintiff filed for bankruptcy.” In light of this holding, the court found it unnecessary to address the effect of the release executed by Reliance to LPOG, as McKinney lacked standing regardless of the release’s validity.

  • 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.”