New York State’s highest court clarified New York State’s “champerty” statute and confirmed that the statute will not generally prevent buyers of distressed debt from enforcing their remedies through litigation when pursuing a legitimate claim.

In Love Funding, a REMIC Trust sued UBS Real Estate Securities, Inc. to enforce its remedies under a loan purchase agreement, alleging that UBS’s predecessor sold the Trust several defaulted loans, and demanding that they be repurchased. The Trust asserted that certain frauds committed by the borrowers put the loans in default at its outset, triggering the repurchase obligations of UBS under the UBS loan purchase agreement.

UBS was not the originator of these loans, but acquired some of them from Love Funding Corporation pursuant to a separate loan purchase agreement. Like the UBS loan purchase agreement, the Love Funding loan purchase agreement contained an analogous representation that none of the loans were in default at the time of the transfer to UBS. The agreement also provided that Love Funding would indemnify UBS for any loss related to said breach.

As part of the settlement arrangement between the Trust and UBS, UBS assigned to the Trust its rights under the Love Funding loan purchase agreement. The Trust subsequently sued Love Funding under the assigned agreement from UBS. The U.S. District Court for the Southern District of New York ruled that the assignment was void for champerty because the Trust’s primary purpose in taking the assignment was to bring a lawsuit against Love Funding. The decision was appealed to the U.S. Court of Appeals for the Second Circuit, which certified to the New York State Court of Appeals certain questions relating to New York State’s champerty statute.

The New York State Court of Appeals stated that New York’s champerty statute is generally limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle to obtain costs. The court confirmed that the concept of champerty does not, therefore, apply when the purpose of the assignment is the pursuit of a legitimate claim. In the instant case, the court found the champerty doctrine inapplicable, because the Trust, as holder of a defaulted loan, would directly suffer the damages of a default. If, as a matter of fact, the Trust’s purpose in taking assignment of UBS’s rights under the Love Funding loan purchase agreement was to enforce its rights, then it did not violate New York’s champerty statute.