FINANCIAL REGULATION-The Ancient Doctrine of Champerty and a First for the New York Court of Appeals

By Kelly, Sean | Suffolk Transnational Law Review, Summer 2017 | Go to article overview

FINANCIAL REGULATION-The Ancient Doctrine of Champerty and a First for the New York Court of Appeals


Kelly, Sean, Suffolk Transnational Law Review


FINANCIAL REGULATION--The Ancient Doctrine of Champerty and a First for the New York Court of Appeals--Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 65 N.E.3d 1253 (N.Y. 2016).

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. …

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