Alerts

Champerty Clarified: A Victory For Activist Distressed Debt and Claims Investors

November 3, 2009

In a decision to be hailed by buyers of distressed debt and bankruptcy claims on the secondary loan market, on Oct. 15, 2009, the New York Court of Appeals (the “Court”), in a fact-specific ruling, held that an assignment of claim does not violate New York’s champerty statute (forbidding trading in litigation claims) if the purpose of the assignment is to collect damages by means of a lawsuit for losses on a debt instrument in which the assignee holds a pre-existing proprietary interest. Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates v. Love Funding Corp. 2009 WL 3294928, (N.Y. Oct. 15, 2009) N.Y. Slip Op. 07323 (“Love Funding”). The Court issued its ruling in response to a request from the United States Court of Appeals for the Second Circuit for clarification as to the proper interpretation of the New York champerty statute, which prohibits the “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.” Perhaps, more important to the secondary loan and claims trading market, however, the Court expanded upon its narrow holding, stating that “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.” The Court thus clarified one need not have a “pre-existing” proprietary interest in a debt instrument to safely purchase a claim for purposes of pursuing an activist and/or litigation strategy.