In February of last year, Blawgletter posted this item:
Often a yoke companion to maintenance, champerty means . . . what?
Our law school Black's Law Dictionary (5th ed. 1979) defines the crime as:
A bargain by a stranger with a party to a suit, by which such third person undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if successful, a part of the proceeds or subject sought to be recovered. . . . "Maintenance" consists of maintaining, supporting, or promoting the litigation of another.
Perfectly clear, right? Financing somebody else's lawsuit in return for a piece of the action.
But the Second Circuit last week said hold up, wait a minute. A district court had declared the purchase of a claim champertous because the transaction had as its "primary purpose" the acquisition of "a lawsuit". It relied on a New York statute that provided:
[N]o 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 of proceeding thereon.
New York Judiciary Law § 489(1).
Finding Empire State decisions on what counts as champerty unclear, the Second Circuit certified questions to the New York Court of Appeal:
1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the “primary” intent proscribed by New York Judiciary Law § 489(1), or must there be a finding of “sole” intent?
2. As a matter of law, does a party commit champerty when it “buys a lawsuit” that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?
3. (a) As a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor?
(b) Is the answer to question 3(a) affected by the fact that the challenged assignment enabled the assignee to exercise the assignor’s indemnification rights for reasonable costs and attorneys’ fees?
Trust for Certificate Holders of Merrill Lynch Investors Inc. Mortgage Pass-Through Certificates 1999-C-1 v. Love Funding Corp., No. 07-1050, slip op. at 26-27 (2d Cir. Feb. 13, 2009).
Blawgletter doesn't pretend to understand the nuances of New York's anti-champerty law, but we do note that the core purpose of deeming champertous conduct a crime lay (as the Second Circuit noted) in discouraging the purchase of claims for the purpose of ginning up fees and expenses and then recovering them.
One may easily imagine a Dickensian lawyer who bought claims (cheap) for the sole purpose of (a) giving him something to do and (b) furnishing him a possible source of income.
We expect the Court of Appeal will recognize the permissibility of selling commercial claims in circumstances that don't suggest a lawsuit incubator and hatchery operation.
The wheels of commerce cannot — must not — be stayed!
Today we got our answer. Which we got exactly right. Trust for Certificate Holders of Merrill Lynch Investors Inc. Mortgage Pass-Through Certificates 1999-C-1 v. Love Funding Corp., No. 07-1050-cv (2d Cir. Jan. 11, 2010) (holding that record failed as matter of law to show champerty).