In a case of great significance to the United States secondary loan market, on January 11, 2010, the U.S. Court of Appeals for the Second Circuit firmly established that the ancient doctrine of "champerty" – originally a prohibition on the transfer of litigation claims – has no further relevance to transactions in the loan market that are governed by New York law. In particular, a loan purchaser's intent to enforce rights through litigation does not render the purchase of the loan and related litigation claims unlawful champerty under New York law.

As described in previous RK&O Memoranda published on April 29, 2009 and October 15, 2009, which may be found on our website at www.rkollp.com, the Second Circuit requested the New York Court of Appeals to clarify the proper interpretation of New York’s champerty statute, and New York’s highest court held, “[I]f 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 New York Court of Appeals focused on the historical purpose of the statute to prevent attorneys from filing suit as a means of generating fees and costs.

After the New York Court of Appeals interpreted the champerty statute for the Second Circuit, the defendant returned to the Second Circuit, still arguing that the plaintiff had acquired the litigation claim in a champertous transaction. According to the defendant, the plaintiff had acquired the claim for indemnification and litigation fees and costs in settlement of a lawsuit with the intent to sue and the hope of recovering more from the litigation than it could have in a cash settlement.

The Second Circuit rejected the defendant’s argument and explained that champerty is limited to litigation “for the purpose of generating costs” in that very litigation. In other words, the purpose for acquiring the claim has to be to generate new litigation costs, not to enforce a right to indemnification for previously incurred costs. The Second Circuit then concluded that, as a matter of law, the plaintiff’s acquisition of the claim could not be champerty, even if viewed as a “speculative litigation venture.”

These recent champerty decisions by the New York Court of Appeals and the Second Circuit remove any doubt that a loan purchaser may bring suit to enforce its rights under or in connection with the loan.

The case is TRUST FOR THE CERTIFICATE HOLDERS OF THE MERRILL LYNCH MORTGAGE INVESTORS, INC., MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-C1, by and through ORIX Capital Markets, LLC, as Master Servicer and Special Servicer v. Love Funding Corp., Dkt No. 07-1050-cv (2d Cir. January 11, 2010). Richards Kibbe & Orbe LLP partners Brian S. Fraser and Lucinda O. McConathy filed an amicus curiae brief before the New York Court of Appeals arguing for a narrow interpretation of the champerty statute on behalf of The Loan Syndications & Trading Association, Inc.

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