In our increasingly litigious society, the development of a secondary debt trading market has increased the importance of evaluating litigation claims in connection with investment opportunities in various debt instruments. Especially where the borrower is accused of some financial fraud or misconduct, potential claims of conspiracy, aiding and abetting, and breach of fiduciary duty, among others, against third parties, such as the borrower’s initial or agent lender, have become an important element in the strategy of many hedge funds and other investment vehicles for acquiring debt at exceedingly sharp discounts.

As lenders have increasingly come under attack by subsequent purchasers of the debt who seek windfall profits based on such claims, they have turned to various protective devices including, on occasion, the ancient doctrine of champerty and maintenance. In New York, however, the champerty statute generally has not been applied to secondary transactions in debt instruments despite the acquirer’s clear intent to enforce the obligation through litigation. Now, in Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors Inc. v. Love Funding Corp., No. 123 (N.Y. Oct. 15, 2009) (Merrill Lynch v. Love Funding), the New York Court of Appeals may have finally eliminated any ability to utilize the old doctrine against purchasers of debt that acquire the debt with the intent of collecting through litigation.


Maintenance is defined as the support, promotion, or assistance provided to a litigant by one who has no bona fide interest in the case.1 Champerty, a subset of maintenance, is defined as undertaking to further another’s interest in a suit in exchange for an interest in the claim should a favorable result ensue.2 As explained by the U.S. Supreme Court, “[p]ut simply, maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome.”3 As discussed below, champerty includes the purchase of a claim for the purpose of bringing suit.

History and Policy

The doctrines of champerty and maintenance are ancient, reaching as far back as ancient Greek and Roman law and the doctrines of sykophanteia and calumnia.4 “Commentators have traced the doctrine of champerty, and its doctrinal nearcousins of maintenance and barratry, back to Greek and Roman law, through the English law of the Middle Ages, and into the statutory or common law of many of the states.”5 An early champerty statute was enacted by Edward I in the thirteenth century.6 It provided that “[n]o officer of the King by themselves, nor by other, shall maintain pleas, suits, or matters hanging in the King’s courts, for land, tenements, or other things, for to have part or profit thereof by covenant made between them; and he that doth, shall be punished at the King’s pleasure.”7

Under early English common law, assignments of a cause of action, giving the assignee the right to bring suit in his own name, generally were forbidden.8 To avoid such impediments, wealthy individuals acquired interests in legal claims by agreeing to pay the litigant’s expenses in exchange for a share of the results if successful,9 thus often financing claims against those upon whom the champertors sought to inflict financial or political injury.10

Legal historians view champerty as a final “flaring up” of the feudal era, a last-ditch effort of feudal lords to combat the limits root across Europe in the eleventh and twelfth centuries.11 Efforts to prevent champerty and maintenance were grounded in several concerns: the king’s desire to prevent litigation involving his own interests or those of his supporters; clerical opposition to litigation generally, especially in secular courts; a general dislike of usury, or the practice of loaning money at interest; and the belief that litigation was, in itself, an undesirable and distasteful affair, regardless of the merits of a lawsuit.12

Although much of the common law of champerty has eroded to near obsolescence,13 the core of the doctrine—the public policy against profiteering and speculation in litigation—still survives in many states. The contemporary justification for such laws is far from obvious,14 as many of the policies underlying their development are now gone.15

In fact, courts have increasingly rejected champerty claims and defenses, recognizing that the alleged champertor has a legitimate interest in the action.16

New York Champerty Statute

The doctrine of champerty has been incorporated into Section 489 of the New York Judiciary Law, which prohibits the purchase of a claim with the intent and purpose of bringing suit on the claim.17 Specifically, Section 489 provides:

No person or co-partnership . . . and no corporation or association . . . shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking 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.18

As a criminal statute, whose violation is a misdemeanor, Section 489 is narrowly construed.19

In the past, in assessing whether the champerty statute applied, many New York courts focused on whether the claim was acquired for the sole or primary purpose of bringing suit.20 Thus, in Elliott Associates, L.P. v. Banco de la Nacion, the Second Circuit, in predicting what the New York Court of Appeals would do, concluded that despite its apparent applicability, the statute was not intended to prohibit the acquisition of debt where the primary purpose was collection of the debt, even if litigation was a necessary step in the collection process.21

A year later, in Bluebird Partners v. First Fidelity Bank, the New York Court of Appeals, in an action by investors who acquired certain debt instruments at steep discounts, cautioned that the “conventional notion of champerty,” rooted in medieval land tenure practices, may prove archaic “in the modern setting of sophisticated financial transactions and complicated investment strategies.”22 Thus, when interpreting the statute, the court must follow a “prudent approach” that is “consistent with the limited scope of the champerty doctrine as it originally appeared and developed in the Anglo-American legal system.”23 The court found the key question to be “whether it was [plaintiff’s] asserted business purpose or the admitted consideration of the lawsuit that constituted the primary purpose for the purchases of the second series certificates.”24

Merrill Lynch v. Love Funding

On October 15, 2009, in Merrill Lynch v. Love Funding, at the request of the Second Circuit, the New York Court of Appeals once again addressed the applicability of the champerty statute to modern investment practice.25 Love Funding Corporation (Love) originated mortgage loans for which UBS Real Estate Securities, Inc.’s (UBS’s) predecessor-in-interest provided financing and was ultimately assigned the loans for securitization.26 One such loan was made to Cyrus II Partnership (Cyrus), secured by a mortgage on an apartment complex.27

The Cyrus loan was sold to Merrill Lynch Mortgage Investors, Inc., which loan was then securitized with others under a pooling and servicing agreement pursuant to which a trust (the Trust) was created to hold the loans and mortgages.28 Thereafter, the Cyrus loan was declared in default, and Cyrus’s principals were determined to have committed fraud in obtaining the loans.29 The Trust sued UBS and, after significant litigation, UBS assigned its rights under its agreement with Love to the Trust in exchange for a release.30 In the ensuing litigation by the Trust against Love, U.S. District Judge Shira A. Scheindlin of the Southern District of New York concluded that the Trust’s primary purpose in obtaining an assignment of UBS’s rights was to sue Love.31 Accordingly, Judge Scheindlin held that the assignment was void for champerty and dismissed the action.32 On appeal, the Second Circuit determined that resolution of the appeal depended on significant and unsettled questions of New York law and, therefore, certified the following questions to the New York Court of Appeals:

  1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the “primary” intent proscribed by New York Judiciary Law §489(1), or must there be a finding of “sole” intent?
  2. As a matter of law, does a party commit champerty when it “buys a lawsuit” that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?
  3. (a) As a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor? (b) Is the answer to question 3(a) affected by the fact that the challenged assignment enabled the assignee to exercise the and framework of the monarchy and the capitalistic forces that had begun to take assignor’s indemnification rights for reasonable costs and attorneys’ fees?33

In its decision, the Court of Appeals answered the second question and both parts of the third question in the negative, and the court determined that it was unnecessary to answer the first question because champerty does not depend on whether the acquirer’s intent to bring suit was his primary or sole intent in obtaining the right. 34 Rather, the purpose behind the acquisition is the determining factor.35 In describing the history of the champerty doctrine, the court noted that it had always been “limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs.”36 The court emphasized “the difference between one who acquires a right to make money from litigating it and one who acquires a right in order to enforce it,”37 stating that “the champerty statute does not apply when the purpose of an assignment is the collection of a legitimate claim.”38

The court concluded that the Trust, as the holder of the loan and the party that would directly suffer from a default on the loan, had a pre-existing proprietary interest in the loan.39 Therefore, if the Trust’s purpose in taking the assignment was to enforce its rights with respect to the loan, “then, as a matter of law, given that the Trust had a pre-existing proprietary interest in the loan, it did not violate Judiciary Law § 489(1),” even where the Trust sought to recover more than it had demanded in settlement from UBS including recovery of additional interest and recovery on UBS’s rights of indemnification for reasonable costs and attorneys’ fees.40

In short, even though the Trust acquired the assignment of UBS’s rights specifically to institute suit against Love, its interest in the loan, which predated the assignment, cleared the transaction of any champerty taint.


The doctrines of champerty and maintenance have a long history, originating in medieval times. Today, however, these terms have different meanings and different applications in various states. In New York, it appears clear that where an investor acquires the right to sue a third party with respect to a debt, if that investor also owns an interest in that debt, its separate acquisition of the right to sue will not be subject to a defense of champerty.