Sale of Notes Was Champertous—Seller Subcontracted Out Its Litigation for Political Reasons In Violation of Judiciary Law 489 (1)

The First Department determined plaintiff’s purchase of notes was champertous. Champerty “is the purchase of claims with the intent and for the purpose of bringing an action that [the purchaser] may involve parties in costs and annoyance, where such claims would not be prosecuted if not stirred up . . . in [an] effort to secure costs”. Champerty is prohibited by Judiciary Law 489 (1). Although purchases of claims for more than $500,000 are not subject to the champerty prohibition (Judiciary Law 489 (2)), the First Department held that the $500,000 must actually be paid.  Here the price was set at $1,000,000 but nothing had been paid. The court determined the seller of the notes had subcontracted out its litigation to plaintiff for political purposes:

The purported sale of the notes is champertous since [the seller] maintained significant rights in the notes and expected the lion’s share of any recovery from defendants … . There is every indication that plaintiff entered into the Purchase Agreement with the intent of pursuing litigation on [the seller’s] behalf in exchange for a fee; plaintiff’s intent was not to enforce the notes on its own behalf …. Indeed, plaintiff could not enforce all of the rights under the notes, since, as the motion court noted, “No reasonable finder of fact could conclude that [plaintiff] was making a bona fide purchase of securities.” On the contrary, “[t]he only reasonable way to understand the [Purchase Agreement] is that [the seller] was subcontracting out its litigation to [plaintiff] for political reasons.” Accordingly, the sale of the notes violated Judiciary Law § 489(1). Justinian Capital SPC v WestLB AG, 2015 NY Slip Op 04381, 1st Dept 5-21-15