New York Champerty Law Bars Suit on Acquired Claim

By Antoinette Gartrell and Joan C. Rogers

Nov. 14 — New York's champerty law bars a company from suing a bank to recover losses on notes that the company acquired for the sole purpose of filing the lawsuit, a divided New York Court of Appeals held Oct. 27 ( Justinian Capital SPC v. WestLB AG, 2016 BL 357806, N.Y., No. 155, 10/27/16 ).

The court ruled 5-2 that the transaction was champertous as a matter of law and didn't come within the statutory safe harbor for deals above $500,000 because the company didn't actually pay the purchase price or have a bona fide obligation to pay it other than from the proceeds of the suit.

“Champerty” is buying into a stranger's lawsuit in return for a share of the recovery. State champerty laws vary widely, and their application to commercial litigation funding isn't fully settled. See 30 Law. Man. Prof. Conduct 378; 26 Law. Man. Prof. Conduct 207.

Litigation funding firm Burford Capital LLC, whose U.S. headquarters is in New York, sees champerty as an outdated concept that's irrelevant to commercial litigation finance. Burford participated in the Justinian case as amicus curiae.

The high court's decision “reaffirms New York’s support of significant litigation finance” and clarifies that the doctrine of champerty, “has no application whatsoever in New York when a payment or investment exceeds $500,000, as is the case with all of Burford’s investments,” according to a statement on Burford's website. “The specific facts in the Justinian case go well beyond conventional litigation finance,” the statement also says.

‘Over the Line.'

The decision stops Justinian Capital SPC, a Cayman Island shell company, from pursuing fraud claims against German Bank WestLB AG to recover losses stemming from the bank's alleged mismanagement of two investment vehicles.

New York's champerty doctrine, codified at Judiciary Law §489, makes it illegal to buy notes or other securities for the purpose of bringing a lawsuit. The law doesn't apply when the notes are purchased for at least $500,000.

The notes transaction “is an example of a deal that went over the line,” New York lawyer John M. Lundin of Schlam Stone & Dolan LLP told Bloomberg BNA in an e-mailed statement. The court's opinion is the “culmination of a number of decisions over the past several years that apply the champerty statute to modern financial transactions,” he said.

Champertous Acquisition

In 2003 Deutsche Pfandbriefbank AG, a German bank not a party to the lawsuit, bought approximately $209 million in notes managed by WestLB. The notes lost nearly all of their value by 2008.

DPAG was concerned that it would lose certain German government support if it sued WestLB directly, so it assigned the notes to shell company Justinian Capital SPC, which filed the lawsuit days later, shortly before the statute of limitations expired.

The agreement was structured so that Justinian didn’t have to pay for the notes unless the lawsuit was successful.

The court of appeals affirmed summary judgment for WestLB. The primary purpose for the assignment to Justinian was DPAG’s desire to sue WestLB and not be named as a party, Chief Judge Janet DiFiore said in the majority opinion.

The safe harbor provision, intended to exempt large-scale commercial transactions in New York's debt-trading market from the champerty law, didn’t protect Justinian because it didn't pay the purchase price or have a bonding and bona fide obligation to pay the purchase price independent of the successful outcome of the suit, DiFiore said.

In essence, the agreement was a sham transaction between the owner of a claim that didn't want to bring it and an undercapitalized assigned that didn't want to assume the $500,000 risk required to qualify for the safe harbor protection, DiFiore said

Judges Sheila Abdus-Salaam, Jenny Rivera, Eugene M. Fahey and Michael J. Garcia concurred.

Dissent Sees Factual Questions

Judge Leslie Stein dissented, saying factual questions existed regarding whether the purchase of the notes violated the New York statute or fell within the statute's safe harbor provision. Judge Eugene F. Pigott Jr. joined Stein's dissent.

Grant & Eisenhofer P.A. represented Justinian. Hughes Hubbard & Reed LLP represented WestLB.

To contact the reporters on this story: Antoinette Gartrell at and Joan C. Rogers in Washington

To contact the editor responsible for this story: Phyllis Diamond at and S. Ethan Bowers at

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