Court Denies Motion to Dismiss Based on Champerty

On October 28, 2014, Justice Friedman of the New York County Commercial Division issued a decision in IKB International S.A. in Liquidation v. Morgan Stanley, 2014 NY Slip Op. 51548(U), refusing to dismiss an action for lack of standing based on champerty.

In IKB International, the plaintiffs sued the defendants in connection with the defendants' sale of residential mortgage backed securities. The court granted in part and denied in part the defendants' motion to dismiss. This post looks at the court's discussion of the defendants' argument that the plaintiffs lacked standing.

The allegations of the complaint regarding the assignment of plaintiffs' fraud claims are as follows: IKB SA purchased the 25 certificates at issue between June 2005 and April 2007, 22 directly from Morgan Stanley at the time of each securitization, and the remaining three certificates on the secondary market. On November 20, 2008, IKB SA sold 23 of the certificates to plaintiff IKB Deutsche Industriebank, AG (IKB AG), its parent company, and realized the losses at issue in this litigation. On December 4, 2008, both IKB AG and IKB SA expressly assigned all claims arising from the purchase of the Certificates, including claims against the issuers, underwriters and sellers of the Certificates, to Rio Debt Holdings (Ireland) Limited (Rio), concurrently with IKB AG's sale of these certificates to Rio. Rio re-assigned all such claims to IKB AG, without transferring the related certificates, on May 9, 2012.

In moving to dismiss for lack of standing, defendants allege not that the complaint fails to plead an assignment of fraud claims from Rio to IKB AG but, rather, that the assignment is void as champertous. Morgan Stanley contends that the intent and purpose of the assignment of the claims, without the certificates themselves, was to bring suit, and that this purpose may be inferred from the timing of the assignment, which took place on May 9, 2012, after Morgan Stanley, IKB AG, IKB SA, and Rio entered into a tolling agreement on November 16, 2011, and seven days before the tolling agreement expired on May 16, 2012.

Section 489 (1) of the Judiciary Law provides that no corporation shall take an assignment of any claim with the intent and for the purpose of bringing an action or proceeding thereon. This statute is a codification of the champerty doctrine which developed to prevent or curtail the commercialization of or trading in litigation. As the Court of Appeals explained, 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, although the prohibition has been extended to claims against non-attorneys. Moreover, it does not apply when the purpose of the assignment is the collection of a legitimate claim but, rather, bars the purchase of claims with the intent and for the purpose of bringing an action where such claims would not be prosecuted if not stirred up.

As the Court of Appeals also explained, in order for an assignment of rights to a claim to be champertous, the purchaser's or assignee's intent to sue on that claim must at least have been the primary purpose for, if not the sole motivation behind, entering into the transaction. The Court emphasized that the question of intent and purpose of the purchaser or assignee of a claim is usually a factual one to be decided by the trier of facts. Thus, consistent with the limited scope of the champerty doctrine, the Court has been hesitant to find that an action is champertous as a matter of law.

Here, the acquisition of the claims shortly before the expiration of the tolling agreement does not, without more, demonstrate that the claims were acquired for the primary purpose of commencing litigation. The acquisition of the claims without the certificates presents a more difficult question. Morgan Stanley has not, however, shown on this record that IKB AG's primary or sole purpose was not to enforce a legitimate claim, or that the claim was not acquired as part of a larger transaction or for leverage in other disputes between the parties. Given that the question of intent and purpose of the purchaser or assignee of a claim is a factual one, the record must be factually developed as to IKB AG's intent. This intent cannot be determined without evidence as to specific terms of the assignment, which has not been provided on the record, and the business dealings between the parties, including other RMBS purchases. Morgan Stanley must also address the relationship between IKB AG and Rio. Accordingly, Morgan Stanley's motion to dismiss for lack of standing will be denied with respect to the fraud claims brought by IKB AG as the assignee of Rio, which relate to 23 of the 25 certificates at issue.

(Internal quotations and citations omitted) (emphasis added).