It is not often that we examine a case involving the doctrine of champerty. The last time we did so was on March 8, 2023 (here). We also examined the champerty doctrine in 2021 (here), 2020 (here), and 2016 (here).

Today, we examine the champerty doctrine in our discussion of IKB Intl. S.A. v. Morgan Stanley, 2024 N.Y. Slip Op. 01675 (1st Dept. Mar. 26, 2024) (here).

Champerty is the prohibited practice of purchasing claims for the purpose of commencing litigation. It has been described as “a venerable doctrine developed hundreds of years ago to prevent or curtail the commercialization of or trading in litigation.”¹

The doctrine of champerty is codified in New York within Judiciary Law § 489.² Under Judiciary Law § 489, no corporation “shall solicit, buy or take an assignment of … a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.” However, for an assignment of a claim to be void for champerty, the assignee must have made the purchase “for the very purpose of bringing such suit” to the “exclusion of any other purpose.”³ Thus, while assignments “for the primary purpose of obtaining costs or [harassment]” are void as champertous,⁴ assignments are not champertous where the intent to bring a suit is merely “incidental and contingent” to other rights.⁵

Moreover, champerty does not apply where the assignee had a “preexisting proprietary interest” in the subject matter.⁶

IKB began in the years immediately prior to the financial crisis of 2007-2008. Plaintiff IKB International S.A. (“IKB S.A.”) was a commercial bank incorporated in Luxembourg.

IKB S.A. purchased a number of certificates (“Certificates”) for residential mortgage-backed securities from Morgan Stanley, allegedly in reliance on misrepresentations that Morgan Stanley made in its offering documents. In particular, Morgan Stanley allegedly made misrepresentations to IKB S.A.’s investment managers, Standish Mellon and BlackRock, including misrepresentations regarding loan-to-value and combined loan-to-value statistics, owner-occupancy status of borrowers, and adherence to the originators’ underwriting guidelines. The contemporary value of the Certificates collapsed during the onset of the financial crisis as the poor quality of the underlying loans and resulting increased credit risk became apparent. Ultimately, IKB S.A. was placed into liquidation as part of the German government’s bailout of IKB S.A.’s parent, IKB A.G.

In November 2008, IKB S.A. sold the Certificates to IKB A.G. Two weeks later, IKB A.G. sold the Certificates to Rio Debt Holdings (Ireland) Limited (“Rio”), a newly created Irish special purpose vehicle. As part of the sale of Certificates to Rio, IKB A.G. became a junior lender to Rio and also became a portfolio administrator to Rio.

IKB A.G. and Rio subsequently executed an assignment on May 9, 2012 (the “2012 Assignment”) in which Rio assigned to IKB A.G. “all the rights of action and claims against any other party with respect to the Securities it may have obtained in connection with its purchase of the Securities from IKB Deutsche Industriebank AG … except rights of action and claims for the receipt of interest and principal on the Securities.” In exchange, IKB A.G. agreed to provide to Rio “a sum equal to the proceeds of any recovery stemming from a resolution of claims relating to the Assigned Rights, net of all agreed costs, taxes and expenses, which shall be set out and governed by a separate agreement to be executed by the Parties.”

IKB A.G. maintained that under a supplementary deed (the “Supplementary Deed”) and other governing documents, the parties agreed that 80% of the net litigation proceeds would revert to IKB A.G. Rio and IKB A.G. executed the Supplementary Deed on January 11, 2013—after Plaintiffs filed the summons in the action—but gave it retroactive effect from May 9, 2012.

IKB A.G. filed the summons in November 2012 and later filed the complaint on May 17, 2013. The complaint alleged causes of action for fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation. Defendants moved to dismiss the complaint, in part for lack of standing, arguing that the 2012 Assignment of the fraud claims back to IKB A.G. was void as champertous. The motion court denied the motion, finding that Defendants had not shown that “IKB AG’s primary or sole purpose [for the assignment] was not to enforce a legitimate claim, or that the claim was not acquired as part of a larger transaction or for leverage in other disputes between the parties.” The motion court determined that IKB A.G.’s intent in the 2012 Assignment was a factual question that required further development of the record. However, the motion court dismissed the causes of action for fraudulent concealment and negligent misrepresentation.

On summary judgment, Defendants again sought dismissal on the basis of champerty. The motion court held that the 2012 Assignment was not champertous “because IKB AG had a preexisting proprietary interest in the subject matter.” The motion court explained that

In order to finance the initial assignment of the Certificates to Rio in 2008, IKB AG and Rio entered into a loan agreement. Pursuant to the 2008 loan agreement between IKB AG and Rio, IKB AG as junior lender was entitled to 80% of the profits from the assets. While Defendants are correct that the loan has since been paid down to one dollar, this does not change the fact that, unlike other champertous assignments, the 2012 Assignment indisputably did not involve a “stranger” to the transaction, but a party with a prior interest.⁷

The motion court also held that Defendants “failed to establish that the sole purpose for the 2012 Assignment was to profit off of litigation, to the exclusion of all other purposes.” The motion court explained that “[a]n assignment is not champertous merely because the parties enter into the assignment ‘for the purpose of collecting damages, by means of a lawsuit.’”⁸ “Rather,” said the motion court, “there is a key distinction between ‘acquir[ing] a right in order to make money from litigating it [champertous] and … acquir[ing] a right in order to enforce it [not champertous].’”⁹

The motion court found that Plaintiffs “provided evidence that they [were] still entitled to 80% of the future cash flows under the 2008 loan agreement with Rio because the loan was not paid off entirely—even though it was paid down almost in its entirety.” “Therefore,” concluded the motion court, “regardless of whether or not the 2012 Assignment’s primary purpose was litigation, Defendants [had] not provided sufficient evidence to establish that the sole purpose, to the exclusion of all other purposes, was to profit off of litigation.” “As such,” said the motion court, “Defendants have failed to establish that the 2012 Assignment is void as champertous.”

The Appellate Division, First Department unanimously affirmed.

As an initial mater, the Court rejected Defendants’ argument (as the Court framed it) that “any assignment of litigation claims — even when fashioned to protect an independent litigation right of the assignee — must necessarily be void,” stating that such a formulation was “not the law.”¹⁰ “Rather,” explained the Court, “the champerty doctrine is intended to prevent opportunistic parties from profiting from litigation claims that otherwise would not have been brought — not preventing the assignment of legitimate claims to a party holding a beneficial interest in those claims to enforce its own rights.”¹¹ “The critical distinction,” noted the Court, was “‘between acquiring a thing in action in order to obtain costs and acquiring it in order to protect an independent right of the assignee.’”¹²

The Court also held that the motion court “correctly found that champerty only prohibits the acquisition of a cause of action by a ‘stranger’ to the underlying dispute.”¹³ The Court found that the evidence “establishe[d] that plaintiff IKB Deutsche Industriebank A.G. had an independent interest in pursuing the claims, and was not a stranger to the action.”¹⁴ “IKB A.G. owns 100% of plaintiff IKB International, S.A., the original purchaser of the assets, and was the assignor’s junior lender beginning in November 2008,” said the Court. “Defendants’ reading of Justinian [did] not compel a different result,” concluded the Court.¹⁵

Footnotes

1. Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d 726, 729 (2000).
2. Ehrlich v. Rebco Ins. Exchange, Ltd., 225 A.D.2d 75, 77 (1st Dept. 1996).
3. See Richbell Information Servs., Inc. v. Jupiter Partners, 280 A.D.2d 208, 215 (1st Dept. 2001) (citing Moses v.McDivitt, 88 N.Y. 62 (1882)). In Justinian Capital SPC v. WestLB AG, N.Y. Branch, the New York Court of Appeals explained that to “constitute the offense [of champerty] the primary purpose of the purchase must be to enable [one] to bring suit, and the intent to bring a suit must not be merely incidental or contingent.” 28 N.Y.3d 160, 166 (2016) (internal quotation marks omitted).
4. See 71 Clinton St. Apts. LLC v. 71 Clinton Inc., 114 A.D.3d 583, 585 (1st Dept. 2014); Trust For the Certificate Holders of Merrill Lynch Mortg. Investors, Inc. v. Love Funding Corp., 13 N.Y.3d 190, 198 (2009).
5. New York Chinese TV Programs, Inc. v. U.E. Enterprises, Inc., 1989 WL 22442, *13 (S.D.N.Y. Mar. 8, 1989).
6. See Love Funding, 13 N.Y.3d at 198.
7. Citing Jamaica Public Service Co., Ltd. v. La Interamericana Compania De Seguros Generales S.A., 262 A.D.2d 73, 74 (1st Dept. 1999); In re Imax Sec. Litig., 2011 WL 1487090, *6 (S.D.N.Y. Apr. 15, 2011).
8. Quoting Universal Inv. Advisory SA v. Bakrie Telecom Pte., Ltd., 154 A.D.3d 171, 180 (1st Dept. 2017).
9. Quoting id.
10. Slip Op. at *1.
11. Id. (citation omitted).
12. Id. (citing Justinian, 28 N.Y.3d at 167) (internal quotation marks omitted)).
13. Id. (citation omitted).
14. Id. at *2.
15. Id.