In Justinian Capital SPC v. WestLB AG, etc. et al., 2015 N.Y. Slip Op. 04381 (1st Dep’t May 21, 2015), the Appellate Division affirmed the February 25, 2014 decision of the New York County Supreme Court, Commercial Division (Kornreich, J.), 43 Misc. 3d 598, holding that actual payment for the transfer of rights to a legal claim is required in order to qualify for the champerty doctrine’s safe harbor provision.

This case arose out of the 2007 collapse of an investment portfolio managed by non-party WestLB, AG, a German bank and parent of defendants WestLB, New York Branch and WestLB Asset Management (US) LLC (together, “Defendants”). Plaintiff Justinian Capital SPC (“Justinian”) brought claims regarding Defendants’ alleged mismanagement of the investment portfolio. Justinian, however, was not an investor in the portfolio, rather it acquired claims from non-party Deutsche Pfandbriefbank AG (“DPAG”)—the actual purchaser of notes in the failed investment. For political reasons, DPAG decided not pursue its claims directly, and instead sold its right, title and interest in the notes, subject to certain limitations, to Justinian via an April 1, 2010 purchase agreement. Although Justinian agreed to pay $1 million for the specified rights, it had not done so at the time it commenced the suit. Additionally, the purchase agreement for the notes contained a provision requiring that Justinian pay DPAG 85% of any recovery on the notes and reducing Justinian’s share of any such recovery by the outstanding purchase price. As a result, Justinian was simply a shell company with virtually no assets.

Defendants moved to dismiss the action, arguing that the doctrine of champerty precluded Justinian’s claims. In New York, champerty is codified in Judiciary Law Section 489 and provides that no entity shall purchase a note with the intent and for the purpose of bringing suit on that note. The safe harbor provision, which is codified in Section 489(2), exempts otherwise champertous transactions where the purchaser has paid at least $500,000 for the transfer.

Justinian argued that it was not actually required to pay DPAG the $1 million it had agreed to pay for the rights to pursue the claim against Defendants, and that Justinian’s promise to pay DPAG was sufficient to shield the claims under the safe harbor. The Supreme Court disagreed, finding that the purpose and intent of the transfer was champertous and was not saved by the safe harbor provision. On appeal, the First Department affirmed, holding that reading Section 489(2) so as to allow the mere recitation of payment would “effectively do away with champerty in New York” and would be contrary to the intent of the legislature, which affirmatively “chose to sustain [the doctrine] in 2004, when it voted to adopt the safe harbor provision.”

The First Department further held that the purchase agreement was champertous because DPAG maintained significant rights in the underlying notes—essentially all rights except for the right to bring a legal claim. The court found that DPAG was effectively subcontracting out its litigation to Justinian in violation of the champerty doctrine. By its ruling, the Appellate Division made clear that payment is required if a party wants to acquire the rights to bring a litigation and invoke the Judiciary Law’s safe harbor. Under New York law, you have to pay to play.

 James Salem, a summer associate, is co-author of this article.