Mid-Atlantic Update - Justinian Capital SPC v. WestLB AG

New York Court of Appeals Revives Doctrine of Champerty to Dismiss Claims of Third Party Litigation Financier Justinian Capital SPC v. WestLB AG, 28 N.Y.3d 160, 65 N.E.3d 1253 (2016).

In this case, the New York Court of Appeals affirmed the lower courts’ prior rulings that a transfer of certain notes days before the commencement of the relevant action was champertous and did not fall within the safe harbor under New York’s Judiciary Law § 489(2).

In 2003, a bank purchased notes issued by companies managed by the defendant.  The investment lost much of its value, and the bank entered into an arrangement with the plaintiff in order to have the plaintiff bring suit against the defendant.  As part of the arrangement, the plaintiff and the bank entered into a sale and purchase agreement pursuant to which the plaintiff agreed to acquire the notes from the bank for a base purchase price of $1 million.  The agreement further provided that the plaintiff was entitled to a portion of any recovery received in litigation.  Although the notes were assigned to the plaintiff, the purchase price was never paid.  The terms of the purchase agreement did not provide that failure to pay the purchase price was an event of default.  The only consequence for failure to pay was that the plaintiff was entitled to a lower percentage of litigation proceeds.

New York’s champerty law, Judiciary Law § 489, prohibits the purchase of notes, securities or other instruments or claims “with the intent and for the primary purpose of bringing a lawsuit.”  In order for a purchase to be considered champertous, the “primary purpose of the purchase must be to enable [one] to bring a suit, and the intent to bring a suit must not be merely incidental and contingent.”  The Court of Appeals determined that the bank's transfer of the notes to the plaintiff was done solely for the purpose of commencing a lawsuit.

Moreover, the plaintiff’s action did not qualify under the champerty safe harbor in Judiciary Law § 489(2) that exempts notes or securities that are assigned, purchased or transferred for “an aggregate purchase price of at least five hundred thousand dollars.”  The court clarified that while actual payment was not necessary, transferring securities with a face value exceeding the threshold would not itself suffice to fall within the safe harbor.  There must be a “binding and bona fide obligation to pay $500,000 or more for notes or other securities,” which may be satisfied by actual payment of at least $500,000 or transfer of financial value – such as exchange of funds, forgiveness of a debt, a promissory note or transfer of other collateral – worth at least $500,000.  While the purchase price listed in the agreement between the bank and the plaintiff exceeded the threshold, the court held that because the plaintiff did not pay the purchase price or have an obligation to pay that was not contingent on a successful lawsuit, the plaintiff could not avail itself of the safe harbor.

The dissent noted that determining the “sole purpose” of the purchase was a factual question that should not be decided summarily, finding that the sale and purchase agreement between the bank and the plaintiff was “susceptible to an interpretation that would create an unqualified bona fide obligation to pay $1 million.”