FINANCIAL REGULATION--The Ancient Doctrine of Champerty and a First for the New York Court of Appeals.
The requirements of standing have safeguarded the court system from being subjected to unwarranted claims and unworthy parties, yet exceptions to standing have created the need to further expand these protections; while the doctrine of maintenance and champerty pre-dates the standing requirements, it was adopted to prevent the courtroom from becoming a trading floor for claims and frivolous litigation by disinterested third parties. (1) New York codified their stance on champerty, which asserts that parties cannot purchase financial instruments or claims "with the intent and for the purpose of bringing an action or proceeding thereon." (2) In Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, (3) the New York Court of Appeals addressed whether the appellant's purchase of notes from a third party and subsequent suit against the respondent constituted champerty, and if the transaction fell under the "safe harbor provision" established in the statute. (4) The Court ruled that the proper interpretation of the New York statute finds this transaction champertous, and that the appellant was not protected under the "safe harbor provision." (5)
In 2003, Deutsche Pfandbriefbank AG (DPAG) devoted nearly EUR180 million to notes offered through two portfolios that were managed and sponsored by WestLB AG (WestLB). (6) During the global financial crisis of 2007-2008, both DPAG and WestLB experienced massive losses, and the notes became virtually worthless. (7) The losses DPAG suffered with regards to the notes was attributed to investments made in mortgage-backed securities through the portfolios WestLB managed, even though the securities fell short of their investment guidelines. (8) This provided DPAG with an opportunity to recoup damages during a time of substantial recession, but DPAG feared that their supportive funding from the German government would be jeopardized if they pursued a claim against WestLB; as a result of the global recession, the German government now predominantly owned WestLB. (9) DPAG's political concerns stopped them from bringing a claim against WestLB directly, but in order to alleviate their financial damages, DPAG opted to have a third party bring the claim. (10) In April 2010, a deal was reached between DPAG and Justinian Capital SPC (Justinian) that stipulated DPAG would assign the notes to Justinian in exchange for capital and specific proceeds related to subsequent litigation; days later Justinian brought the claim against WestLB. (11)
The Sales and Purchase Agreement (the Agreement) assigned the notes to Justinian along with "all the Seller's legal, beneficial and equitable rights and claims ..." for an aggregate purchase price of USD1 million. (12) The first motion to dismiss resulted in the court ordering the parties to conduct further discovery based on the champerty defense raised by WestLB, mainly because Justinian had not revealed the Agreement in its entirety. (13) Subsequently, discovery exposed that DPAG still retained ownership rights of the notes and merely subcontracted its right to litigation to Justinian. (14) Although the Agreement provided that Justinian was to pay USD1 million, they had not yet transferred any money to DPAG prior to commencing litigation. (15) Even more troubling was that Justinian had agreed to remit 80-85% of the proceeds from successful litigation back to DPAG in exchange for the remaining 20-25% of the judgment. (16) The Supreme Court of New York had little trouble finding this Agreement champertous, focusing much of their attention to precedent and the interpretation of the champerty statute. (17) As did the Supreme Court Appellate Division, who reiterated much of what the lower court had already established. (18) It was not until the case reached the New York Court of Appeals before that it seemed Justinian would have an opportunity to successfully argue their case, although the lower courts had recognized New York as the "financial capital of the world," the Court of Appeals was sensitive to an issue that could disrupt major complex commercial transactions. (19) Nevertheless, the Court of Appeals affirmed the decisions of the lower courts; Justinian initiated appeal with the intention of resolving whether WestLB's malfeasance would be recouped and dismissing the concerns of champerty. (20)
The modern common law doctrine of maintenance and champerty finds its origins in medieval times and was structured to protect ethics in the legal profession. (21) From as early as ancient Greece through 19th Century England, judiciaries were very cautious about parties other than the litigants having a stake in the claim at bar. (22) Issues of champerty even arose when agreements similar to contingency fees for the successful outcome of a claim were arranged between attorney and client, although these instances have since been taken care of by legal ethics codes. (23) While the historical foundations of maintenance and champerty still provide a clear context of what the offense entails, the development of the modern world has convoluted when an offense of this nature may occur. (24) Through various case law and statutes, it is clear that jurisdictions have developed their own understanding of when a champertous act has taken place and how the offense should be handled. (25)
Important as it is to recognize the foundations for this doctrine, it is the world around it that has reduced it to an ancient legal theory that survives in few jurisdictions. (26) There are some jurisdictions that follow the precedent that has developed their acceptance of champerty, while few have codified the concept in statute. (27) New York, a jurisdiction that has a specific champerty statute, has tried to keep the offense relevant with the current affairs. (28) It is important to note New York City is the capital of the world financial market that regularly practices debt-trading techniques that legal minds could interpret as champertous. (29) So while some may argue that champerty, as the 19th Century English courts developed it, is dead, others realize that it has evolved similar to the markets it looks to regulate. (30)
The New York codification of champerty was recently rewritten to adapt to the climate of the 21st Century. (31) The first subsection of the statute provides that it cannot be the primary purpose of an entity to obtain financial instruments in order to bring a claim upon them. (32) This was illustrated in Moses v. McDivitt, (33) which established a "primary purpose test" that has been in force since its inception, focusing on the language of the statute--which has been retained in the newly revised statute-- the Moses court looked at whether a transaction was made "with the intent and for the purpose" of commencing litigation and not just incidental to the transaction. (34) The second subsection is a "safe harbor provision" which exempts transactions from being considered champertous under the first subsection if the transactions exceed USD500,000; that is intended to prevent champerty claims from intervening in complicated Wall Street transactions and deter financiers from practicing in New York. (35) Subsection one retains much of the language from New York's previous champerty statute; while subsection two is a recent development that allows for some dealings to fall within the "safe harbor provision" which exempts otherwise champertous transactions from being unenforceable. (36)
In Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, (37) the Court of Appeals of New York held that the agreement between Justinian and DPAG was in fact a champertous act and not protected by the "safe harbor provision" of the statute. (38) The Court found that it was clear Justinian had acquired the notes "with the intent and for the purpose of bringing an action or proceeding thereon." (39) Justinian's principal made an effort to show that litigation was one of many possible sources of recovery, but the court did not entertain this idea, notably dismissing other avenues of recovery on the notes as speculation. (40) Next, the Court looked to the "safe harbor provision" to determine if the act was nevertheless permitted even if found champertous. (41) The Court grappled this issue over whether actual payment was necessary when the provision required a "purchase price" of at least USD500,000. (42) Ultimately, the Court determined that actual payment was necessary to qualify for the "safe harbor provision" "purchase price" standard, and the majority affirmed WestLB's summary judgment based on their motion to dismiss the claim on the affirmative defense of champerty due to the interpretation of the "safe harbor provision" which the Court ultimately concluded required that the purchasing party in the transaction actually make payment to qualify for this exemption. (43)
Justice Leslie E. Stein's dissenting opinion addressed both the issue of champerty and the qualifications for the "safe harbor provision." (44) When addressing the champerty issue, the dissenters argued that summary judgment was inappropriate because the "primary purpose" must be a question of fact left to the jury. (45) The deposition of Justinian's principal was the crux for determining whether there was the possibility that Justinian could recoup damages by other means than litigation was, in the majority opinion, it was decisively resolved but, as the dissenters viewed, a question that should have been left to the jury. (46) Further, the dissenters argued that the "safe harbor provision" was wrongly applied to this case. (47) The dissent made no reference to whether it required actual payment but instead focused on the majority's premature decision to deem this transaction a nonbona fide purchase of the notes. (48) The dissent urges that a factfinder is necessary to determine both issues with regards to the actual intent of the parties and that the motion for summary judgment was inappropriately granted. (49)
The Court of Appeals of New York properly found that the agreement between DPAG and Justinian was a champertous transaction, justifying their first ever finding of champerty as a matter of law with precedent and statutory interpretation. (50) Focusing on the Moses "primary purpose" standard--as articulated in subsection one of the statute--the majority found that it was indeed Justinian's sole intention to acquire these notes in order to commence litigation. (51) The decisive evidence for this finding was that Justinian initiated litigation just days after their acquisition of the notes, and Justinian's principal's claims during deposition that the company considered other means in which to recoup the losses accrued on the notes. (52) Although this court has never found champerty as a matter of law, the Moses "primary purpose" test's interpretation of the statute, along with convincing precedent to support a summary judgment finding, made this case a strong candidate to deviate from the status quo. (53) Finding champerty as a matter of law has taken some New York finance participants by surprise, but this case presented a tailor-made scenario for the Court to clarify their stance on the matter. (54) The Court acknowledged that a champertous transaction could be enforceable if the "safe harbor provision" exempts the agreement from the statute. (55)
Scrutinizing the language in subsection two of the statute and reviewing the legislative history, including draft versions of the statute, the court again came to an appropriate conclusion that Justinian's transaction was champertous and not exempt under the "safe harbor provision." (56) The court determined that a "binding and bona fide obligation to pay" was necessary in order to be exempt from champerty, and in order to demonstrate that burden "actual payment of at least USD500,000" is required. (57) This aspect of the case should relieve the concerns of those in the financial market, some of whom may think the court is being overly restrictive by deeming this agreement unenforceable. (58) The court made it clear that if a financier is making a confident investment and willing to have some "skin in the game," then an actual payment of USD500,000 eliminates the legislature's concern that the investment is champertous. (59) The actual payment required to be exempt from the champerty statute proves to the legislature that the investor is not simply buying a claim "in [an] effort to secure costs" but rather for the purpose of enforcing a legitimate claim. (60) The court had determined that Justinian acquired these notes with the primary purpose of commencing litigation, and because they did not make actual payment, it was clear they should not be exempt when truly bringing a claim in an effort to secure costs without any skin in the game. (61)
Though this case displays the court's willingness to intervene in large commercial transactions in the world of financial capital, this decision may only negatively affect smaller firms who do not have the capital to meet the "safe harbor provision" exemption. (62) The clarity of the opinion and strong authority should act as a blueprint for larger firms conducting transactions and looking to avoid champerty issues. (63) There have been mixed reactions with regards to the decision in Justinian, but it should be noted that the transaction in the case is not typical of those who could be effected by the outcome. (64) The objective of the legislature's 2004 revision of the champerty statute was to facilitate New York's debt-trading markets, and because the court dutifully followed the provisions of that statute, it should ease any concerns and set the record straight once and for all. (65) In Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, (66) the Appeals Court of New York examined the ancient doctrine of champerty and for the first time decided a transaction was champertous as a matter of law. The Court followed case law and a strict interpretation of the revised champerty statute in accordance with the legislative intent. The majority opinion made a strong case for deviating from the norm by applying well-established champerty case law. The dissent was justifiably unconvinced that this case should be decided as a matter of law and made fair arguments of their own to establish this point. But when clear application of the law directs the Court in a certain direction, the Court correctly decided the way it did.
(1.) See Warth v. Seldin, 422 U.S. 490, 498 (1975) (explaining standing generally). The Court states, "[i]n essence the question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues." Id. at 498. The three requirements for a party to achieve standing are: (1) injury in fact; (2) a fairly traceable causation; (3) redressability. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992) (elaborating on Constitutionally conceived requirements of standing). See 7 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts [section] 15:1 (4th ed. 1993 & Supp. 2000) (illustrating relation between maintenance and champerty). The treatise explains:
Maintenance consists in maintaining, supporting or promoting the litigation of another, with most courts requiring that the maintaining party act as an officious intermeddler and be without any interest in the litigation. Champerty is a bargain to divide the proceeds of litigation between the owner of the litigated claim and the party supporting or enforcing the litigation. Champerty is said to be a species of aggravated maintenance.
Id. See also Restatement (First) of Contracts 8 540 (Am. Law Inst. 1932) (providing black letter law definitions for champerty and maintenance). The definitions were omitted from the Restatement (Second) of Contracts; Williston asserts this is due to evolution of legislation on this topic that has relinquished the need for an explanation of the common law concepts. Williston, supra. Although Williston's description may sound like an attorney contingent fee, which in essence is the "support" in exchange for a "bargain to divide the proceeds of litigation," it is distinguished as a means of providing legal services to someone who may not be able to afford it, as well as building a sense of camaraderie between the attorney and client as a partnership. See Restatement (Third) of The Law Governing Lawyers [section] 35, cmt. b (Am. Law Inst. 2000); see also Restatement (Third) of The Law Governing Lawyers [section] 36 cmt. b (Am. Law Inst. 2000) (dissecting contingent fee versus champerty). This section renders certain characteristics that separate contingent fees and champerty, specifically the reasonableness of the fee, the attorney's expenditures that justify the fee, and so on. Id.
(2.) N.Y. Judiciary Law [section] 489 (McKinney 2004) (detailing elements of champertous behavior and when they are exempt). The statute reads in pertinent part:
1. 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; provided however, that bills receivable, notes receivable, bills of exchange, judgments or other things in action may be solicited, bought, or assignment thereof taken, from any executor, administrator, assignee for the benefit of creditors, trustee or receiver in bankruptcy, or any other person or persons in charge of the administration, settlement or compromise of any estate, through court actions, proceedings or otherwise. Nothing herein contained shall affect any assignment heretofore or hereafter taken by any moneyed corporation authorized to do business in the state of New York or its nominee pursuant to a subrogation agreement or a salvage operation, or by any corporation organized for religious, benevolent or charitable purposes. Any corporation or association violating the provisions of this section shall be liable to a fine of not more than five thousand dollars; any person or co-partnership, violating the provisions of this section, and any officer, trustee, director, agent or employee of any person, co-partnership, corporation or association violating this section who, directly or indirectly, engages or assists in such violation, is guilty of a misdemeanor.
2. Except as set forth in subdivision three of this section, the provisions of subdivision one of this section shall not apply to any assignment, purchase or transfer hereafter made of one or more bonds, promissory notes, bills of exchange, book debts, or other things in action, or any claims or demands, if such assignment, purchase or transfer included bonds, promissory notes, bills of exchange and/or book debts, issued by or enforceable against the same obligor (whether or not also issued by or enforceable against any other obligors), having an aggregate purchase price of at least five hundred thousand dollars, in which event the exemption provided by this subdivision shall apply as well to all other items, including other things in action, claims and demands, included in such assignment, purchase or transfer (but only if such other items are issued by or enforceable against the same obligor, or relate to or arise in connection with such bonds, promissory notes, bills of exchange and/or book debts or the issuance thereof).
Id. The phrase "with the intent and for the purpose of" has been the subject of litigation and is at issue in the case-in-chief. See Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 65 N.E.3d 1253, 1260 (N.Y. 2016); Moses v. McDivitt, 88 N.Y. 62 (1882) (establishing standard "primary purpose test" for champerty issues); Bluebird Partners v. First Fid. Bank. 731 N.E.2d 581, 587 (N.Y. 2000) (adopting Moses standard interpretation). The court distinguishes "a purpose" from the statutory language "the purpose." See Bluebird Partners, 731 N.E.2d at 587. Subsection two is referred to as the "safe harbor provision" by the court and it is intended to "exempt large-scale commercial transactions in New York's debt-trading markets from champerty statute in order to facilitate the fluidity of transactions in these markets." Justinian Capital SPC v. WestLB AG, 65 N.E.3d 1253, 1258 (N.Y. 2016) (explaining justification of "safe harbor provision").
(3.) 65 N.E.3d 1253 (N.Y. 2016) (citing case-in-chief).
(4.) See id. at 1254 (establishing issue of champerty). The court gives a brief recitation of the facts and lays out the issues as, first, deciding whether the transaction was champertous under the statute, and second, whether the appellant's transaction falls within the scope of the "safe harbor provision." Id. If an act is deemed champertous, it may still be enforceable if the "safe harbor provision" exempts the transaction. See id. See generally N.Y. Judiciary Law [section] 489 (McKinney 2004) (codifying statute of champerty and exemptions).
(5.) See Justinian Capital SPC, 65 N.E.3d at 1254. The court's decision reflects the adoption of its analysis in Moses and Bluebird, determining the correct meaning of "the primary purpose" as found in the statute. See Bluebird Partners, 731 N.E.2d at 587 (analyzing in depth interpretation of primary purpose standard). The second issue is resolved through the court's interpretation and reading of the legislative history. See Justinian Capital SPC, 65 N.E.3d 1258 (indicating court's analysis of legislative session which produced statutory text).
(6.) Justinian Capital SPC, 65 N.E.3d at 1254 (describing initial transaction between Deutsche Pfandbriefbank AG (DPAG) and WestLB AG (WestLB)). Although DPAG is a major participant in the facts leading up to this suit, it is very important to note that they are considered a "nonparty" to this litigation. Id. The notes offered to DPAG were done so through "two special purpose companies, Blue Heron VI Ltd. and Blue Heron VII Ltd." (collectively, portfolios). Id. The portfolios are parties to litigation, but are represented on behalf of Justinian Capital SPC (Justinian). Id. at 1253.
(7.) See Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 981 N.Y.S.2d 302 (2014) (summarizing transaction and subsequent failure of notes). The court does not go into great detail with regards to WestLB's mistreatment of the portfolios, once WestLB asserted the affirmative defense of champerty that was immediately the main focus of the court. See Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 952 N.Y.S.2d 725, 730-34 (2012).
(8.) See Justinian, 981 N.Y.S.2d 303-04 (providing limited insight into WestLB mismanagement of notes). The claims mentioned include breach of contract and fraud. Id. Hindsight should explain the loss of value, investing in mortgage-backed securities in 2007 did not end well for most investors. See The Origins of The Financial Crisis Crash Course, The Economist, Sept. 7, 2013, available at http://www.economist.com/news/schoolsbrief/ 21584534-effects-financial-crisis-are-still-being-felt-fiveyears-article (explanation of risk involved in investing in mortgage-back securities at this time).
(9.) See Aktionarsstruktur, WestLB AG, (June 2, 2008) (on file with author), http:/ /www. westlb.de/sitecontent/westlb/ir/de/konzerninformationen/as.standard.gid-N2Fk NDZmMzU40WFmYTIyMWM3N2Q2N2QOYmUlNmIOOGU_.html (portraying WestLB shareholder structure mid-2008). The diagram reveals that nearly 99% of WestLB was held in publicly held corporations operated by the German government. Id. See Annual Report 2009, Deutsche Pfandbriefbank AG, (2010), available at https://www.pfandbriefbank.com/fileadmin/user_upload/downloads/investor_rela tions/reports/1003_pbb_Annual_2009_e.pdf (recapping fiscal year 2009 for global economy and internal services). The document acknowledges that DPAG required support from German Bundesbank (German Federal Bank), among other publicly managed financial institutions. Id. at 34. This is what is referred to colloquially as a "bail out." Id.
(10.) See Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 10 N.Y.S.3d 41, 42 (2015) (offering glimpse into DPAG's concerns). While DPAG was desperate to recover funds from the mismanaged notes, they acknowledged that if the German government were to withhold funding in retaliation of the suit it would "imperil [DPAG's] very existence." Id. The board of directors weighed their options and decided to find a third-party to purchase the notes. Id. Rather than sell the notes to a third party directly, the court points out that it was DPAG's intention to have the third-party remit a certain percentage of the proceeds from litigation back to DPAG. Id.
(11.) Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 65 N.E.3d 1253, 1255 (N.Y. 2016) (outlining transaction and subsequent suit). Although the parties agreed to a specific price tag amount for the notes, the money never actually changed hands. Id. The agreement had a price listed for Justinian's purchase of the notes as well as stipulations regarding the proceeds of litigation, but eventually the court came to understand that these were really one in the same. Id.
(12.) Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 952 N.Y.S.2d 725, 730-34 (2012) (providing pertinent aspects of the Agreement). The aggregate purchase price should be noted, as this will be discussed when examining the "safe harbor provision." Id. The USD1 million was the sum of both notes, which were listed at USD500.000 each. Id. See also N.Y. Judiciary Law [section] 489(2) (McKinney 2004) (detailing elements of "safe harbor provision").
(13.) Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 952 N.Y.S.2d 725, 727-29 (2012) (detailing what was originally provided from the Agreement). Because Justinian originally initiated the claim, there was very little information regarding the transaction between DPAG and Justinian. Id. It seems that WestLB was skeptical of any transaction for worthless notes, so they insisted that the court grant them leave in order to conduct further discovery as to the transaction between DPAG and Justinian. Id. When discussing the limited information Justinian originally provided with regards to the Agreement, the first motion to dismiss opinion included a footnote that read in part: "Another added benefit would be that the company that suffered the loss could remain anonymous ..." showing the court's premonition into what was actually going on. Id. at 733.
(14.) See Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 981 N.Y.S.2d 302, 308 (2014) (analyzing Agreement after further discovery revealed details). The court started to realize the scheme between Justinian and DPAG. Id. The agreement truly shed light on what was taking place, the lower courts even pointed out that this appeared to be a "sub-contracted" means of litigation. Id.
(15.) See id. at 304 (introducing arguments of "safe harbor provision"). It is important to note "though the [Agreement's] stated sale price is $1 million ($500,000 for each note), it is undisputed that Justinian, a shell company with no assets, did not pay the sale price nor does it have the means to do so." Id. The principal for Justinian was on record in deposition as claiming that there might have been other means of recovering the debt on the notes, but the court scrutinized this position heavily. Id.
(16.) See id. at 308 (analyzing details of litigation proceed sharing). The court found it troubling that if Justinian were commencing this litigation on their own behalf, why they would not be seeking 100% of the proceeds of litigation rather than a nominal 15% and remitting "the lion's share" back to DPAG. Id. See also Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 10 N.Y.S.3d 41, 43 (2015) (questioning proceed sharing method of Agreement).
(17.) See Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 65 N.E.3d 1253, 1255-56 (2016) (explaining procedural history). Throughout the entire procedural history, no court overturned a lower court's decision. Id.
(18.) See id. (discussing further prior history). The Supreme Court stayed WestLB's first motion to dismiss and on the second visit treated the same motion as a motion to dismiss, in which they granted. Id.
(19.) See id. at 1256-60 (elaborating further than lower courts and introducing first dissenting opinion). The court discussed what constitutes the champertous acts in greater detail than the Supreme Court divisions and the Court of Appeals failed to reach a unanimous decision, offering a dissenting opinion that sheds light on what Justinian could have done in order to appease the court. Id.
(20.) See id. at 1263 (delivering court order); Id. at 1253 (explaining Justinian's appeal effort). Justinian brought the appeal to try to, first, dismiss the claims of champerty against them, second and more importantly, to bring the court's attention back to the fact that WestLB had committed malfeasance in the handling of these notes and rendered them virtually worthless. Id.
(21.) See Max Radin, Maintenance by Champerty, 24 Cal. L. Rev. 48 (1935) (exploring ancient roots of champerty). Radin goes back as far as ancient Greece to discuss the philosophy behind champerty. Id. at 50-51. From this account, early Greeks would settle their disputes in front of a judge accompanied by a large group of their family and friends to offer testimony in support of their claim. Id. It was a serious offense to the court if one of the members of the group had not professed who they said to be and were merely appearing on behalf of the litigant in order to receive compensation. Id. Radin explains that these groups accompanying litigants eventually developed into what we would describe as political parties today, but laid the foundation for which medieval England would use to develop the modern understanding of champerty. Id. The concept of champerty as is understood today is traced to a practice in medieval England in which doubtful or even fraudulent claims would be brought to the attention of wealthy and influential men who had a much greater chance at victory in litigation due to their reputation than the common man who actually endured the injury or supposed injury, so the wealthy men would basically buy these injuries from the underprivileged. See Jern-Fei Ng, UK: The Role of the Doctrines of Champerty and Maintenance in Arbitration, Mondaq (July 12, 2010), http://www.mondaq.eom/x/103272/Arbitration+Dispute+Resolution/The+Role+of+ the+Doctrines+of+Champerty+and+Maintenance+in+Arbitration. To combat these practices, the common law rule was to treat these transactions as crimes or torts, and contracts developed under these practices were rendered unenforceable. Id.
(22.) See Radin, supra note 21, at 53 (describing practice of bringing frivolous claims). Radin notes that it has always been held sacred that there only be three parties involved in litigation, "judges and two litigants ... and that there must be no one else and that any one who intruded himself between the judge and the parties could only mean mischief." Id. at 48.
(23.) See Swinfen v. Lord Chelmsford, 5 H&N 890 (1860) (providing instance of contingent fee argued as champerty). This case had been labeled as part of the "Swinfen will case" that was brought about when one litigant promised her attorney a large share of the estate being litigated over if he succeeded. Id. After a successful attempt, the woman refused to pay her attorney and the attorney subsequently brought suit. Id. At first the woman was ordered to pay her attorney but on appeal the arrangement was voided due to the belief that the contingency fee agreement was an example of champerty and maintenance, therefore unenforceable. Id.
(24.) See John Beisner & Jordan Schwartz, How Litigation Funding Is Bringing Champerty Back To Life, Skadden Arps Slate Meagher & Flom LLP (Jan. 20, 2017) (examining revitalization of champerty in modern world). The authors point out that in today's financial world, it may be difficult to realize the difference between innocent and champertous acts. See id. See also Jacqueline Sheridan, Champerty and Maintenance in the Modern Era, Dismore & Shohl LLP, Jan. 22, 2016, available at http://www.dinsmore.com/champerty_and_maintenance_modern_era/ (considering both historical values and current make up of champerty).
(25.) See Sheridan, supra note 24. The author examines the current state of affairs in the United States with regards to champerty. Id. The approaches range from complete abandonment of the doctrine, common law acceptance through precedent, and strict rigid statutes still enforcing the doctrine. Id. See also Saladini v. Righellis, 687 N.E.2d 1224 (displaying Massachusetts' intent to abandon champerty); Johnson v. Wright, 682 N.W.2d 677 (Minn. Ct. App. 2004) (portraying strict interpretation of champerty).
(26.) See Beisner & Schwartz, supra note 24. The intent of this article is to show how champerty was basically all but forgotten before the third-party litigation-funding industry brought new life to the meaning in those jurisdictions that still wish to enforce it. Id. See also WFIC LLC v. LaBarre LLC, 148 A.3d 812 (Pa. Super Ct. 2016) (explaining scenario where contingent fee and subsequent credit priority dispute revealed champertous acts). This case is another example of an attorney's contingent fee being found champertous. Id. This scenario introduced a third-party litigation-funding firm that financed the attorney's fees on behalf of his client with the agreement that they would be reimbursed through the lawsuit recovery. Id. The court found that the attorney's agreement with the litigation-funding firm met all three requirements necessary under the relevant Pennsylvania statute to establish champerty: "(1) the party involved must be one who has no legitimate interest in the suit; (2) the party must expend its own money in prosecuting the suit; and (3) the party must be entitled by the bargain to share in the proceeds of the suit." See id. (citing Kimberly C. Simmons, 16 Summ. of PA Jur. [section] 4:88 (2d ed. 2017)).
(27.) See Sheridan, supra note 24 (detailing acceptance of champerty by jurisdiction). Sheridan explains that amongst the states there seems to be three views commonly followed, "upholding the common law doctrines of champerty;" "relaxed form of enforcement;" and "the remainder have abolished the doctrine although." See id. The author also references a survey that claims "28 of 51 states permit champerty." Id. (citing Anthony J. Sebok, The lnauthentic Claim, 64 Vand. L. Rev. 61, 98 (2011)).
(28.) See Sprung v. Jaffe, 3 N.Y.2d 6, 8-9 (1957) (discussing prior version of champerty statute). This court explained that transfers of financial instruments are champertous:
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 statute does not embrance [sic] a case where some other purpose induced the purchase, and the intent to sue was merely incidental and contingent.
See id. (citing to Moses v. McDivitt, 88 N.Y. 62 (1882)). The Moses standard for interpreting the primary purpose aspect of the statute has long been held as the standard. See generally Trust for Certificate Holders of Merrill Lynch Mortg. Invs., Inc. v. Love Funding Corp., 818 N.E.2d 889, 894 (2009) (holding champerty case to Moses primary purpose standard); Bluebird Partners v. First Fid. Bank, 731 N.E.2d 581, 587 (N.Y. 2000) (finding Moses primary purpose standard appropriate).
(29.) See Christopher P. Bogart, New York Court of Appeals affirms-style litigation finance transactions, Burford Capital (Oct. 28, 2016) http://www.burfordcapital.com/ blog/ new-york-court-appeals-affirms-burford-style-litigation-finance-transactions/ (analyzing Justinian Capital SPC v. WestLB). Bogart is the CEO of Burford Capital, the premier third-party litigation-funding firm in the world; Bogart wrote an amicus curiae brief on behalf of Justinian in the above-mentioned case. See also Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 65 N.E.3d 1253 (N.Y. 2016) (citing amicus curiae brief submitted by Burford on behalf of Justinian). Obviously financiers disagreed with the ruling of the court, but now Burford's CEO seems to be contradicting himself by claiming the outcome of this case is a victory for his industry. See Bogart, supra. The article mentions that the court respected New York as the financial capital of the world and gave the go-ahead for firms to conduct complex transactions that will likely involve shifting debt amongst firms. Id. Specifically, with regards to Burford, this debt mobilization will certainly involve litigation brought on by debt they acquire. Id. So it is tough to understand how Bogart went from filing on behalf of the losing party to a case that was in the shadow of his business to supporting the very decision. Id. The Bogart article follows the court's reasoning for finding this specific instance an act of champerty, so it could be that although he wished the court would grow more lax in their efforts against champerty and find for Justinian, their loss is a how-to manual for avoiding transactions that will be deemed champertous. See id.
(30.) See generally Ng, supra note 21 (outlining brief history of champerty); Sheridan, supra note 24 (detailing contemporary views of champerty); Beisner & Schwartz, supra note 24 (referencing specific financial sector in relation to champerty); Bogart, supra note 29 (analyzing case-in-chief). Together these articles give an overall view of how the doctrine of champerty was developed and where it is going. See supra notes 21, 24, 29.
(31.) See N.Y. Judiciary Law [section] 489 (McKinney 2004), reprinted in New York Bill Jacket, 2004 Assembly Bill 7244 c. 394 (2004) [hereinafter Legislative History] (describing legislative thinking behind champerty statute). This document reflects the "Justifications" for updating the champerty bill in New York and is worth reiterating in this piece:
JUSTIFICATION: Section 489 of the Judiciary Law is the codification of the ancient rule of champerty that prohibits the purchase of lawsuits. Section 489 sought to prohibit persons from acquiring claims for the primary purpose of commencing litigation to recover legal fees and costs. This rule was initially established to prevent abusive litigation. However, it has been almost universally repealed. Today, [section]489 makes New York one of only four states with any champerty statute, and unfortunately a statute which was intended to prevent abusive litigation has led to abusive litigation. Obligors who have no defense to claims in the hands of their original creditors are quick to assert a champerty defense merely because the claim has been purchased. Champerty defenses have routinely been rejected by the courts including the Court of Appeals. Buyers do not invest large sums of money on claims for the purpose of spending more money on legal fees. Claims buyers prevail but only after expensive litigation. Markets have developed for the purchase and sale of claims including claims that are in default. The ability to collect on these claims without fear of champerty litigation is essential to the fluidity of commerce in New York. It is thus necessary to amend this section of law to achieve clarity and certainty in certain transactions and to avoid driving markets for such claims out of New York. In addition, as noted, the bill conforms to the majority of decisions issued by the judiciary in this area.
Id. This gives insight into the rationale behind the restructuring of New York's champerty statute, most notably mentioned is the third paragraph that stresses the need for the law to keep up with the evolution of markets, especially in the State of New York. Id.
(32.) See N.Y. Judiciary Law [section] 489(1) (McKinney 2004) (stating pertinent language). See also Moses v. McDivitt, 88 N.Y. 62 (1882) (establishing primary purpose test); Sprung v. Jaffe, 3 N.Y.2d 6 (1957) (adopting Moses standard); Fairchild Hiller Corp. v. McDonnell Douglas Corp., 270 N.E.2d 325 (1971) (applying primary purpose test to non-attorney champertous actor); Trust for Certificate Holders of Merrill Lynch Mortg. Invs., Inc. v. Love Funding Corp., 818 N.E.2d 889, 894 (2009) (endorsing precedent). Together these cases provide a clear understanding of subsection one of the champerty statute and the primary purpose language. Id.
(33.) 88 N.Y. 62 (1882) (developing primary purpose test).
(34.) See McDivitt, 88 N.Y. at 65 (using language that has since been adopted by court for champerty cases). The McDivitt Court set the primary purpose test along the lines of this language: "to constitute the offense the primary purpose of the purchase must be to enable him to bring a suit, and the intent to bring a suit must not be merely incidental and contingent." Id.
(35.) See Legislative History, supra note 31. The legislature was vigilant of keeping up with the evolving financial markets of New York and looked to accomplish their own goals of maintaining a champerty statute in New York while compromising with the complex Wall Street industry by including a subsection that will exempt the massive debt collection market found in the state. Id.
(36.) See id. The Legislative History includes both the champerty statute that was enacted in 1965 and highlights the additions the legislature was submitting for approval at the time of submission in 2004. Id. Reading subsection two in conjunction with the legislature's justification paragraph, it is clear to see that their goal was to give leeway to massive financial transactions only feasible by Wall Street players. Id.
(37.) 65 N.E.3d 1253 (N.Y. 2016) (transitioning back to case-in-chief).
(38.) See Justinian Capital SPC, 65 N.E.3d at 1254 (N.Y. 2016) (reflecting view of majority). The opinion goes into detail, specifically addressing the two subsections of the champerty statute. Id. The transaction was found champertous due to it being made with Justinian's primary purpose of commencing litigation in an effort to secure costs; and the transaction was not protected by the "safe harbor provision" because Justinian had not made a bona fide purchase of at least USD500,000. Id.
(39.) See id. at 1257 (outlining suspicious Justinian business model). Justinian had presented a business model to DPAG when offering to purchase the notes that included:
(1) purchase an investment that has suffered a major loss from a company so that the company does not need to report such loss on its balance sheet; (2) commence litigation to recover the loss on the investment; (3) remit the recovery from such litigation to the company, minus a cut taken by Justinian; and (4) partner with specific law firms ... to conduct litigation.
Id. at 1255. This made it quite obvious that Justinian had premeditated the litigation prior to purchasing the notes, which would suggest that was the purpose for buying them. See id. The court does recognize that the purpose is different than a purpose so the court entertained the idea that there may have been another idea of how to recoup the value of the notes but it proved unsubstantiated. See id. See also infra note 40 (discussing Justinian's attempt to show other possible avenues of recovery).
(40.) See Justinian, 65 N.E.3d at 1257. Justinian's principal's deposition was made available to the court and revealed the extent of Justinian's effort to pursue other means of recovery rather than litigation. Id. The Court noted, "for example, that there 'might have been' an insolvency or that there 'might have been' a restructuring or distribution between the time of acquisition and 2047 when the Notes were due." Id. The court quickly dismissed the idea that Justinian seriously considered these other remedies, noting that, "such speculation does not suffice to defeat summary judgment." Id. (citing Gilbert Frank Corp. v. Fed. Ins. Co., 520 N.E.2d 512 (1988), quoting Zuckerman v. City of New York, 404 N.E.2d 718 (1980)).
(41.) See Justinian, 65 N.E.3d at 1257 (explaining exemption from champerty statute). Even if the court determined that the transaction was champertous, it would still need to determine whether or not Justinian had satisfied the "purchase price" requirement in the "safe harbor provision" that would excuse them from being in violation of the champerty statute. Id.
(42.) See Justinian, 65 N.E.3d at 1257-58. The court gave great deference to the Legislative History and reviewed the legislature's rational for adding the "safe harbor provision." Id. at 1258. The Court agreed with the argument made by WestLB that without literal interpretation the purpose and intent of the legislature would be lost, and champerty would basically not exist; all a party would have to do to avoid champerty is have a price tag of USD500,000 or more on the financial instruments. Id. at 1257-58. See also Legislative History, supra note 31 (showing language of historical legislative interpretation).
(43.) See Justinian, 65 N.E.3d at 1257 (affirming "purchase price" standard of "safe harbor provision"). The Court also noted that not only had Justinian not paid any amount to DPAG for the notes, but that the agreement did not provide for breach in the event that Justinian failed to pay at all, only bolstering the idea that this transaction was a complete proxy for litigation. Id. at 1258-59.
(44.) See id. at 1259 (introducing and outlining dissenting opinion). The dissent views the issues as mutually exclusive from one another. Id. Unlike the majority opinion that seems to use one prong to assist in solving the other, the dissent looks to separate them completely and evaluate this situation through a very objective lens. Id.
(45.) Id. at 1260 (arguing need for factfinder). The dissenters, arguing the need for a factfinder, stated:
[W]hile this Court 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." Indeed, until today, we have never found summary judgment appropriate to hold a transaction champertous as a matter of law. This hesitation is understandable because the intent and purpose of the purchaser or assignee is usually a factual question that cannot be decided on summary judgment.
Id. (citations omitted). The dissent pointed out that this would be the first instance in which a court found champerty as a matter of law, something that the majority seemingly ignored. Id.
(46.) Id. at 1263. The dissenters' urge for a factfinder was born from the Justinian principal's deposition testimony that opened the idea that litigation may not have been the only option considered for recovery on the notes. Id. See also supra, note 40 and accompanying text (presenting Justinian principal's deposition testimony).
(47.) Justinian, 65 N.E.3d at 1262. The dissent believes that a literal interpretation of the Agreement showed that the "purchase price" had not yet come due; therefore, it is premature to discuss whether or not that purchase price was met. Id. at 1262-63.
(48.) See supra note 47; Justinian, 65 N.E.3d at 1262. The dissent believes this will cause much unneeded litigation, as parties will now attempt to have a court decipher the language of a contract before anyone has even defaulted. Id. Moreover, the dissent argued that just because there were no boilerplate terms for explaining when one party is in breach of the Agreement, that does not fail to put Justinian in breach if they do not pay the agreed upon price when it becomes due. Id. In the dissenters own words:
A failure to perform one's promise or contractual obligation--such as the payment of $1 million--is the very definition of a breach of contract ... and, therefore, need not be--and rarely is--explicitly identified as such in the contract, itself.
Id. (internal citation omitted). See also supra note 43 (majority's argument with regards to lack of breach stipulations in the Agreement).
(49.) See Justinian, 65 N.E.3d at 1263 (summarizing dissenting opinion).
(50.) See supra notes 39, 42. The Moses primary purpose test has been followed for over a century when addressing champerty, but as mentioned earlier, this court was the first to affirmatively find champerty as a matter of law. Id. This will give courts of the future a guideline to follow when deciding champerty cases based on a matter of law. Id. See also Peter Hammer, New York Top Court Upholds Dismissal of "Champerty" Suit, Legal Solutions Blog Thomson Reuters (Nov. 1, 2016), http://blog.legalsolutions.thomson reuters.com/current-awareness-2/new-york-topcourt-upholds-dismissal-of-champerty- suit/(providing overview of case). The article dissects the case by prong and considers future implications with an "expert reaction." Id. See generally Moses, 88 N.Y. at 62 (leading champerty case).
(51.) See Moses, 88 N.Y. at 65 (describing "primary purpose" standard); Justinian, 65 N.E.3d at 1256 (referencing Moses). Although the case is over 100 years old, Moses is still the hallmark champerty case for the New York courts. Id. The court spends a significant amount of time determining exactly what is meant by "primary purpose," the two cases they rely on being Moses and Bluebird, which both clearly examine that issue as well. Id. See also N.Y. Judiciary Law [section] 489 (McKinney 2004).
(52.) Justinian, 65 N.E.3d at 1253 (reviewing two elements of Justinian's behavior). The timing of the lawsuit, as argued by Justinian, was a result of the approaching statute of limitations expiration date. Id. at 1255. The deposition by Justinian's principal revealed that they had no serious plan other than commencing litigation. Id. at 1257. The majority clearly does not entertain the idea that Justinian "might have" had other means of recouping the debt on the notes. Id. Explaining that "'[m]ere conclusions, expressions of hope or unsubstantiated allegations or assertions are insufficient' to defeat summary judgment." Id. (citing Gilbert Frank Corp. v. Federal Ins. Co., 520 N.E.2d 512, 514 (N.Y. 1988) (internal citation omitted)). They continue to state that, "Indeed, '[t]he moving party need not specifically disprove every remotely possible state of facts on which its opponent might win' to be entitled to summary judgment, particularly when the opponent's 'theorizing' is 'farfetched.'" Id. (citing Ferluckaj v. Goldman Sachs & Co., 908 N.E.2d 869 (2009)). The majority is content with this precedent which lays the foundation for their first finding of champerty as a matter of law. Id. Yet, the dissent does not believe champerty should be decided as a matter of law when there is a material question of fact before the court. Id. at 1259. The dissent argues that because the legislature just recently rewrote the champerty statute, there is no need to go through so much case law to reach a result. Id. The dissent was passionate about not viewing champerty as a matter of law due to the necessity to determine the intent of the party, a job usually reserved for a jury. Id.
(53.) See Moses, 88 N.Y. at 65 (describing "primary purpose" standard); Kevin LaCroix, N.Y. Top Court Rules Litigation Finance Transaction Violates Champerty Doctrine, The D&O Diary (Oct. 30, 2016), http://www.dandodiary.com/2016/10/articles/litigation-financing-2/n-y-top- court-rules-litigation-finance-transaction-violates- champerty-doctrine/ (focusing on case-in-chief). LaCroix acknowledges that, while some investors may be skeptical of the court now deciding this ancient doctrine as a matter of law, the majority made their decision consistent with the legislative intent of the statute. Id. Therefore, it appears the healthy mix of case law and statutory authority gave this court ample support to make a decision as a matter of law. Id.
(54.) See LaCroix, supra note 53. See also Paul B. Haskel et al., In Justinian Capital, New York's Champerty Statute Is Back from the Dead, Richards Kibbe & Orbe LLP (Nov. 3, 2016), available at http://www.rkollp.com/assets/htmldocuments/lL3.16 %20Justinian%20Capital%20Champertyl.pdf (explaining to investors potential implications of Justinian). This "client alert" describes the idle state of the champerty statute prior to the Justinian opinion. Id. at 2. Again, investors seem as shocked by the court's sudden change of heart on the champerty statute; but, with some analytical skills, most recognize that Justinian clearly followed the statute and in order for finance institutions to comply, all they must do is abide by the statute. Id. at 2-3. See also Love Funding, 918 N.E.2d at 894 (dealing with champerty issue). The Love Funding court found it acceptable for a party to "acquire a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation." Id. This theory harks back on the "primary purpose" test as articulated in Moses. Id. See generally Moses, 88 N.Y. 62 (leading champerty case).
(55.) See Justinian, 65 N.E.3d at 1257-59 (holding that champertous activity permissible under safe harbor provision). See generally N.Y. Judiciary Law [section] 489 (McKinney 2004), supra note 2 (detailing elements of champertous behavior and when they are exempt). The statute exempts any otherwise champertous act from being rendered unenforceable through the "safe harbor provision." Id.
(56.) See Legislative History, supra note 31 (providing legislature's justification for revised champerty statute). The legislature's justification passage provided the court with a clear image of what the legislature was looking to accomplish through the "safe harbor passage." Id. See Justinian, 65 N.E.3d at 1261 (introducing "safe harbor" analysis). Having that as a tool, it made the majority's job a lot easier. Id. at 1258.
(57.) See Justinian, 65 N.E.3d at 1257-58 (dismissing argument against actual payment). The majority recognized that Justinian had made no payment on the assignment of notes, they had no assets, no means of raising capital to pay for the notes, and therefore this litigation was exactly the means in which they hoped to pay for the notes. Id. Yet, the dissent believed that because the payment on the notes had not come due yet, there is no way of determining exactly if this was a bona fide purchase; in other words, how could they be in default on the contract if they still had five months before the first payment was due. Id. at 1262.
(58.) See Bogart, supra note 29. The Burford Capital CEO, who wrote an amicus curiae brief on behalf of Justinian, believes this case is still a success for his firm, because their transactions are never under USD500,000 and they always make actual payment. Id. See Haskel et al., supra note 54. This client alert warns that investors who are contributing less than USD500,000 must beware when trading debt. Id. While the initial outcome may have been a shock, investors only had to regroup and analyze what types of investments actually are affected by this decision. See id.
(59.) See Justinian, 65 N.E.3d at 1259 (discussing legislative intent). The Court explains: "The legislature intended that those who benefit from the protections of the safe harbor have a binding and bona fide obligation to pay a purchase price of at least $500,000, irrespective of the outcome of the lawsuit." Id. Again, it would appear that this would alleviate any concerns from investors, because the court is essentially holding that as long as the investor truly takes responsibility of the assignment, they should not fear champerty. See id. at 1258-59.
(60.) See Trust for the Certificate Holders of the Merrill Lynch Mortg. Investors v. Love Funding Corp., 13 N.Y.3d 190, 201 (N.Y. 2009) (quoting Wightman v. Catlin, 113 A.D. 24, 28 (N.Y. App. Div. 1906); Justinian, 65 N.E.3d at 1256. The dissent concedes, "[I]f the obligation to pay was entirely contingent on a successful outcome in this litigation, it would not constitute a binding and bona fide debt." Id. at 1262. The dissent continues to argue that Justinian was required to pay USD1 million irrespective of the outcome of the case, but as mentioned before, Justinian had no feasible way of obtaining that money without litigation, and thus the payment is contingent on the outcome of the case. Id. See Justinian, supra note 57. If the case failed, Justinian would have no choice but to default and return the notes. Id. at 1257 58.
(61.) See Justinian, 65 N.E.3d at 1258-59 (concluding segment of majority deci sion). The majority looks at all the elements and analyzes them together, while the dissent takes each individually, thus failing to recognize that Justinian cannot succeed one element without failing another. See id. See also supra note 60.
(62.) See supra note 58. Initially, investors must have been shocked that the court would enforce this ancient doctrine as a matter of law to defeat a debt-trading transaction, especially because the legislature was looking to ease the burden on the financial market; but it is easily recognized that this case was just the right fit to be decided as a matter of law and too rare for any investor to truly panic. See id.
(63.) See generally supra note 2 (outlining statutory language and brief interpretation standards for specific aspect of statute).
(64.) Compare Haskel et al. supra note 54; Bogart, supra note 29; LaCroix, supra note 53. The reactions from investors and members of the financial industry with regards to the decision made in the case-in-chief. Id. The players of the industry describe their thoughts on the case-in-chief and potential implications in the industry. Id.
(65.) See Legislative History, supra note 31 (outlining legislative objective). See also supra note 50 (illustrating how guidelines should be followed). The court followed the precedent very accurately and came down on the right decision. Id.
(66.) 65 N.E.3d 1253 (N.Y. 2016).
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|Publication:||Suffolk Transnational Law Review|
|Article Type:||Case note|
|Date:||Jun 22, 2017|
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