United States: New York State Supreme Court Finds Litigation By Proxy Impermissible Under Ancient Champerty Doctrine

The New York State Supreme Court last week dismissed a lawsuit at the summary judgment stage in a rare instance of a U.S. court dismissing a case on the grounds of champerty.1 The doctrine of champerty was "developed hundreds of years ago to prevent or curtail the commercialization of or trading in litigation."2 Although champerty has been repealed in many states, New York continues to embrace the doctrine.3 The case, captioned Justinian Capital SPC v. WestLB AG, is an important one because it brings greater clarity to an obscure legal doctrine and the circumstances under which participants in the distressed debt market cannot transfer litigation rights.


The case arose out of an investment by non-party bank, Deutsche Pfandbriefbank AG ("DPAG"), in two special purpose companies that were sponsored and managed by the defendants, WestLB AG and WestLB Asset Management (US) LLC (collectively, "WestLB").4 DPAG had purchased two series of mortgage notes issued by the special purpose companies and, in the wake of the U.S. housing market crisis, suffered substantial losses from these investments.5 Despite having potential claims against WestLB for alleged misconduct, DPAG was reluctant to sue WestLB for political reasons: DPAG relies heavily on the German government for funding, and the German government partially owns WestLB.6 DPAG, however, "still wanted to recoup the hundreds of millions of dollars it lost due to WestLB's alleged fraud."7

The plaintiff, Justinian Capital SPC ("Justinian"), was a fund that, as the Court described, "identified inefficiencies in the market for financial crisis litigation and sought to capitalize on such inefficiencies."8 Justinian never invested with WestLB and never purchased the mortgage notes from DPAG.9 Instead, Justinian and DPAG entered into a "Sale and Purchase Agreement" pursuant to which Justinian agreed to file suit against WestLB, retain 15% of any litigation recovery, and remit the remainder to DPAG.10 Although the Sale and Purchase Agreement had a stated purchase price of $1 million for the subject notes ($500,000 for each note), Justinian did not pay anything to DPAG and did not actually acquire the notes as part of the transaction.11 DPAG simply hired Justinian to prosecute DPAG's claims against WestLB in exchange for a fee in the event of a successful outcome.

Justinian thereafter filed a complaint against WestLB asserting claims for, among other things, breach of contract and fraud. WestLB moved to dismiss the complaint on champerty grounds. The Court found questions of fact with respect to the champerty issue and instructed the parties to conduct discovery on that issue. When this discovery was completed, WestLB moved for summary judgment.


Justice Kornreich's decision focused on the legislative intent and history of New York's champerty statute, which is codified in Section 489 of the New York Judiciary Law. The statute provides that:

[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 . . . any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon. . .. 12 In connection with the distressed debt market, the Court said "the champerty inquiry turns on the difference 'between one who acquires a right in order to make money from litigating it and one who acquires a right in order to enforce it.'"13 While the latter is permissible under New York law, the former is prohibited, although the exact parameters of the champerty doctrine have not always been clear.

In 2004, the New York Legislature narrowed the champerty doctrine by adding a "safe harbor" provision, eliminating the champerty defense for the transfer of litigation claims with an aggregate purchase price of at least $500,000.14 Relying primarily on the legislative history of the safe harbor provision, the Court concluded that, for the safe harbor to apply, actual payment of the purchase price is required.15 The Court reasoned that "requiring actual payment is necessary to avoid the safe harbor effectively doing away with champerty."16

Justice Kornreich first addressed whether the Sale and Purchase Agreement between DPAG and Justinian was covered by the safe harbor provision. Relying on the $1 million purchase price listed in the Sale and Purchase Agreement, Justinian argued that the safe harbor applied. The Court disagreed, and found that the Agreement "cannot merely recite a nominal amount equal to the monetary threshold."17 Because Justinian was a shell company with no assets that did not pay the purchase price to DPAG, the Sale and Purchase Agreement was not covered by the safe harbor.18

The Court next addressed whether the Sale and Purchase Agreement was prohibited under the champerty doctrine. The Court analyzed and reaffirmed recent New York Court of Appeals and Second Circuit precedents, which permit the purchase of distressed debt "for the purpose of enforcing such debt through litigation."19 Put another way, "if an investor buys worthless mortgage backed securities, it can sue the issuer for fraud and, if it wins, it can keep the money."20 In the following ways, Justice Kornreich distinguished that situation from the facts of Justinian, which demonstrated that "[n]o reasonable finder of fact could conclude that Justinian was making a bona fide purchase of securities":

  • Justinian was a shell company formed exclusively for the purpose of litigating DPAG's claims.
  • Justinian paid nothing for the mortgage notes.
  • DPAG would receive 85% of any judgment or settlement.
  • DPAG still effectively controlled the mortgage notes.
  • Justinian could not sell the mortgage notes without DPAG's consent.
  • DPAG imposed significant restrictions on Justinian's ability to settle the action without input from DPAG.21

Under these facts, the Court held, Justinian was engaged in "litigation by proxy," which is prohibited under New York's champerty statute.22 Providing clear guidance for participants in the distressed debt market, Justice Kornreich concluded: "[I]t is not champerty to sue on behalf of debt that you buy for yourself, but it is champerty to sue, on behalf of another and for a fee, for debt that is not really your own."23


Justice Kornreich's decision is significant for participants in the distressed debt market that conduct business under New York law. While the decision breathes life into the ancient champerty doctrine, it also brings clarity in defining when the transfer of a litigation claim is champertous and therefore prohibited under New York law.


1 See Justinian Capital SPC v. WestLB AG, Index No. 600975/2010, 2014 N.Y. Slip. Op. 24046 (Sup. Ct. N.Y. County Feb. 24, 2014).

2 Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d 726, 733 (2000).

3 Justinian Capital, 2014 N.Y. Slip. Op. 24046, at *1.

4 Id. at *2.

5 Id.

6 Id.

7 Id. at *4.

8 Id.

9 Id. at *2.

10 Id.

11 Id. at *2-*3.

12 N.Y. Judiciary Law § 489(1) (emphasis added).

13 Justinian Capital, 2014 N.Y. Slip. Op. 24046, at *1-*2 (quoting Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates v. Love Funding Corp., 13 N.Y.3d 190, 200 (2009)).

14 See N.Y. Judiciary Law § 489(2).

15 Justinian Capital, 2014 N.Y. Slip. Op. 24046, at *3.

16 Id.

17 Id.

18 See id.

19 Id. at *6.

20 Id. (emphasis added).

21 Id. at *6-*7.

22 Id. at *7.

23 Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions