New York’s highest court declined to reinstate breach-of-contract and fraud claims against an asset manager accused of making bad mortgage-based investments, finding that the suit represented a violation of the state’s champerty doctrine.
So reported the New York Law Journal, describing the ruling this week by the New York Court of Appeals in Justinian Capital SPC v. West LB AG, No. 155, 2016 N.Y. LEXIS 3419 (N.Y. Oct. 27, 2016). As the Law Journal explained, “Champerty prohibits the buying of assets for the express purpose of bringing suits and trading or commercializing in litigation” and the Empire State’s highest court said that “Justinian’s ‘acquisition’ of notes from the original holder of bad investments represented a ‘sham transaction’ designed to put Justinian in a position to champertously sue WestLB.”
The court’s opinion began with a discussion of the roots of the legal principles of champerty, and the application of the doctrine to the matter before the court:
The concept of champerty dates back to French feudal times . . . . In the English legal system, the word ‘champart’ was used ‘as a metaphor to indicate a disapproval of lawsuits brought “for part of the profits” of the action’ . . . . As we have explained, the champerty doctrine was developed ‘to prevent or curtail the commercialization of or trading in litigation’ . . . . New York’s champerty doctrine is codified at Judiciary Law § 489(1). As pertinent here, the statute prohibits the purchase of notes, securities, or other instruments or claims with the intent and for the primary purpose of bringing a lawsuit . . . . Justinian Capital SPC, a Cayman Islands company, brings this action against WestLB AG, New York Branch and WestLB Asset Management (US) LLC (collectively, WestLB), alleging that WestLB’s fraud (among other malfeasance) in managing two investment vehicles caused a steep decline in the value of notes purchased by nonparty Deutsche Pfandbriefbank AG (DPAG). Justinian acquired the notes from DPAG days before it commenced this action. In this appeal, we must first decide whether Justinian’s acquisition of the notes from DPAG is champertous as a matter of law. If the answer is ‘yes,’ we must then decide whether the acquisition falls within the champerty statute’s safe harbor provision codified at Judiciary Law § 489(2). The safe harbor provides that the champerty doctrine of section 489(1) is inapplicable when the notes or other securities are acquired for ‘an aggregate purchase price of at least five hundred thousand dollars’ (Judiciary Law § 489). As set forth below, we hold that Justinian’s acquisition of the notes was champertous and, further, that Justinian is not entitled to the protection of the safe harbor provision. Therefore, the order of the Appellate Division should be affirmed.
The full opinion is available here.
The New York Law Journal article, Fraud Suit Violates NY’s Champerty Doctrine, High Court Rules, is available here.