Action Dismissed for Champerty

On May 21, 2015, the First Department issued a decision in Justinian Capital SPC v. WestLB AG, 2015 NY Slip Op. 04381, affirming the dismissal of an action for champerty, explaining:

Judiciary Law § 489(2) exempts from the general champerty statute the purchase of certain debts and related claims so long as there is an aggregate purchase price of at least five hundred thousand dollars. Plaintiff argues that actual payment is not required, and that the mere recitation of payment, or a promise to pay, is sufficient. We disagree with plaintiff since this reading would effectively do away with champerty in New York, a doctrine the legislature chose to sustain in 2004, when it voted to adopt the safe harbor provision.

In fact, plaintiff submits the affirmation of former New York State Assembly member, Susan V. John, who sponsored the safe harbor bill. John states that the Legislature intended to provide clear protection for transactions where a purchaser pays at least $500,000 in a single transaction or a series of transactions for the assignment or transfer of financial instruments and causes of action. She further states that the rationale underpinning the champerty statute does not apply to sophisticated commercial transactions where the purchaser is paying at least half a million dollars in the aggregate for claims. John's testimony is supported by the safe harbor bill jacket, which provides that so long as the transfers of bonds and causes of action involved, in the aggregate, the payment of more than $500,000, the transfer (and the bonds and causes of action acquired) would be subject to the safe harbor. The justification presented for safe harbor was that buyers are not inclined to invest large sums of money on claims for the purpose of then spending more money on legal fees opposing champerty defenses. Accordingly, we conclude that the intent underlying Judiciary Law § 489(2) requires actual payment of at least $500,000.

Plaintiff concedes that it never made the statutory minimum payment and could not obtain financing in order to do so, and the record indicates that at the time the Purchase Agreement was entered into, DPAG understood plaintiff to be a shell company with virtually no assets. Under these circumstances, plaintiff cannot avail itself of the safe harbor.

The Court of Appeals has stated that the champerty statute does not apply when the purpose of an assignment is the collection of a legitimate claim. What the statute prohibits is the purchase of claims with the intent and for the purpose of bringing an action that the purchaser may involve parties in costs and annoyance, where such claims would not be prosecuted if not stirred up in an effort to secure costs. The purported sale of the notes is champertous since DPAG maintained significant rights in the notes and expected the lion's share of any recovery from defendants. There is every indication that plaintiff entered into the Purchase Agreement with the intent of pursuing litigation on DPAG's behalf in exchange for a fee; plaintiff's intent was not to enforce the notes on its own behalf. Indeed, plaintiff could not enforce all of the rights under the notes, since, as the motion court noted, No reasonable finder of fact could conclude that plaintiff was making a bona fide purchase of securities. On the contrary, the only reasonable way to understand the Purchase Agreement is that DPAG was subcontracting out its litigation to plaintiff for political reasons. Accordingly, the sale of the notes violated Judiciary Law § 489(1).

(Internal quotations and citations omitted). The lesson here is the importance of factoring the champerty law into any transaction assigning claims.