Publications

Champerty Clarified

May 2010
The Bankruptcy Strategist

Participants in the secondary distressed debt and bankruptcy claims markets rely heavily on the notion that assignments of distressed bank debt or claims include the rights to enforce the underlying obligation and to bring litigation against any previous owner(s) (i.e. the upstream seller(s)) of the debt or claims for breach of a representation or warranty that impairs the purchaser’s recovery. This concept is formalized in both the standardized distressed bank debt purchase and sale agreement, promulgated by the Loan Syndications & Trading Association, Inc. (“LSTA”), and typical bankruptcy claims assignment agreements, which provide that the purchaser succeeds to all of the seller’s rights against the original borrower and any upstream sellers.

 

In a decision of great significance to secondary market distressed debt and claims purchasers, the New York Court of Appeals (the “Court of Appeals”) recently held that this type of “standard” assignment of claim does not violate New York’s champerty statute, N.Y. Jud. Law § 489(1). Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. v. Love Funding Corp., 13 N.Y.3d 190, 201-02 (2009) (“Love Funding”). The statute forbids the assignment of litigation claims if the purpose of the assignment is to collect damages by means of a lawsuit for losses on a debt instrument. N.Y. Jud. Law § 489(1).