New York Court Finds Champerty Defense Waived if not Timely Raised

Faegre Drinker Biddle & Reath LLP

Faegre Drinker Biddle & Reath LLP

For many, the term “champerty” might be more readily associated with Monty Python whimsy than sophisticated legal argument. And while champerty is in fact an “ancient legal doctrine” that finds its genesis in medieval England, it still remains relevant today. In short, the doctrine forbids “individuals and companies from purchasing or taking an assignment of notes or other securities with the intent and for the purpose of bringing an action.” Justinian Capital SPC v. WestLB AG, 28 N.Y.3d 160, 166 (2016) (describing New York’s Judiciary Law § 489). In other words, champerty prohibits litigation finance — at least the form of it whereby the financier purchases or takes an interest in a note or security for the purpose of suing on that instrument.

Recently, in Phoenix Light SF Ltd. et al. v. Bank of New York Mellon, the Southern District of New York considered whether a party can waive the doctrine of champerty by failing to raise it in a responsive pleading. No. 14–cv–10104 (VEC), 2020 WL 2950799 (S.D.N.Y. June 3, 2020). The Court answered with a clear “yes.” It found that champerty is an affirmative defense distinct from Article III standing and can therefore be waived if not timely raised.

This case arises from Bank of New York Mellon’s service as trustee of 20 residential mortgage-backed securities trusts (and master servicer of one such trust). The Plaintiffs hold trust certificates with an original face value of $448 million. They filed suit against Bank of New York Mellon in the Southern District of New York in December 2014. Plaintiffs allege that Bank of New York Mellon breached its contractual, fiduciary, and statutory duties in its role as trustee by, among other things, failing to account for and remedy defaults and servicing failures on the loans in the trust.

Five years after the case was filed, and long after the parties had completed fact discovery, Bank of New York Mellon expressed its intent to move for summary judgment on the ground that Plaintiffs lacked standing to bring suit, having received their interests in the trust certificates through a champertous assignment. The Court ordered Bank of New York Mellon to show why it had “not waived ‘the issue of champerty’ by not asserting [it] as an affirmative defense.” The parties filed competing letter briefs on the question in mid-April 2020.

On June 3, 2020, the Court issued an order barring Bank of New York Mellon from arguing that champerty precludes Plaintiffs’ suit. The Court began its analysis by noting that “standing and champerty are conceptually and doctrinally distinct[.]” The Court then described how the doctrine of standing derives from Article III and “is ‘at heart a jurisdictional prerequisite to a federal court’s deliberations.’” As such, standing “enforces institutional limitations” and therefore can’t be waived.

Champerty, by contrast, “was developed ‘to prevent or curtail the commercialization of or trading in litigation.’” Champerty thus represents a set of policy choices distinct from those represented by the doctrine of standing. The Court wrote that “[c]hamperty . . . concerns a party’s motivations behind entering a transaction, and, unlike standing, is an affirmative defense that the party asserting has the burden to prove.” Stated differently, the Court declined to “extend standing’s no-waiver rule to the affirmative defense of champerty” or to find that, by pleading a simple lack of standing, Bank of New York Mellon preserved its champerty argument. The bottom line is that a party must raise a champerty defense in its responsive pleading or risk waiving it.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Faegre Drinker Biddle & Reath LLP | Attorney Advertising

Written by:

Faegre Drinker Biddle & Reath LLP

Faegre Drinker Biddle & Reath LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.