Buying Distressed Debt to Collect on it Not Champerty

On April 23, 2020, Justice Scarpulla of the New York County Commercial Division issued a decision in Espadarte Partners, LLC v. Riverside Gulf Coast Banking Co., 2020 NY Slip Op. 31436(U), holding that buying distressed debt to collect on it is not champerty, explaining:

The champerty doctrine is codified in Judiciary Law § 489(1), which states in relevant part:

No person or co-partnership, engaged directly or indirectly in the business of collection and adjustment of claims, and no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon...

The purpose of champerty is to prevent or curtail the commercialization of or trading in litigation. In New York, the doctrine is limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs, which, at the time, included attorneys' fees. In fact, while the New York Court of Appeals has been willing to find that an action is not champertous as a matter of law it has been hesitant to find that an action is champertous as a matter of law. Finally, establishing champerty requires that the acquisition be made with the intent and for the purpose (as contrasted to a purpose) of bringing an action or proceeding.

This action is a garden-variety action in which an entity that purchased distressed debt is now seeking to enforce payment on that debt. Champerty-related discovery is not triggered simply because a party raises the issue. Because champerty is a narrow doctrine and Riverside has failed to put forth sufficient factual allegations showing that Espadarte made its acquisition for the sole purpose of commencing a litigation, I dismiss this defense.

(Internal quotations and citations omitted).

The origins of the champerty law are centuries old and the prohibitions against buying claims to sue on them largely have been removed. Still, we from time-to-time see champerty raised as a defense where the plaintiff is not the original beneficiary of a debt or claim. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the enforcability of a claim that has been purchased from the original owner.