Justinian Capital SPC ex rel. Portfolio v. Westlb AG
| Decision Date | 27 October 2016 |
| Citation | 65 N.E.3d 1253,28 N.Y.3d 160,43 N.Y.S.3d 218,2016 N.Y. Slip Op. 07047 |
| Parties | JUSTINIAN CAPITAL SPC, for and on Behalf of Blue Heron Segregated Portfolio, Appellant, v. WESTLB AG, New York Branch, et al., Respondents. |
| Court | New York Court of Appeals Court of Appeals |
Grant & Eisenhofer P.A., New York City (James J. Sabella, Jay W. Eisenhofer, Deborah A. Elman and Robert D. Gerson of counsel), for appellant.
Hughes Hubbard & Reed LLP, New York City (Christopher M. Paparella, Marc A. Weinstein, Savvas A. Foukas and Seth Schulman–Marcus of counsel), for respondents.
Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C. ( Derek T. Ho of counsel), and Burford Capital LLC, New York City (Melissa P. Sobel of counsel), for Burford Capital LLC, amicus curiae.
The concept of champerty dates back to French feudal times (Bluebird Partners v. First Fid. Bank, 94 N.Y.2d 726, 733–734, 709 N.Y.S.2d 865, 731 N.E.2d 581 [2000] ). In the English legal system, the word "champart" was used "as a metaphor to indicate a disapproval of lawsuits brought ‘for part of the profits' of the action" (id. at 734, 709 N.Y.S.2d 865, 731 N.E.2d 581 [citations omitted] ). As we have explained, the champerty doctrine was developed "to prevent or curtail the commercialization of or trading in litigation" (id. at 729, 709 N.Y.S.2d 865, 731 N.E.2d 581 ). New York's champerty doctrine is codified at Judiciary Law § 489(1). As pertinent here, the statute prohibits the purchase of notes, securities, or other instruments or claims with the intent and for the primary purpose of bringing a lawsuit (see id. at 735–736, 709 N.Y.S.2d 865, 731 N.E.2d 581 ).
Justinian Capital SPC, a Cayman Islands company, brings this action against WestLB AG, New York Branch and WestLB Asset Management (US) LLC (collectively, WestLB), alleging that WestLB's fraud (among other malfeasance) in managing two investment vehicles caused a steep decline in the value of notes purchased by nonparty Deutsche Pfandbriefbank AG (DPAG). Justinian acquired the notes from DPAG days before it commenced this action.
In this appeal, we must first decide whether Justinian's acquisition of the notes from DPAG is champertous as a matter of law. If the answer is "yes," we must then decide whether the acquisition falls within the champerty statute's safe harbor provision codified at Judiciary Law § 489(2). The safe harbor provides that the champerty doctrine of section 489(1) is inapplicable when the notes or other securities are acquired for "an aggregate purchase price of at least five hundred thousand dollars" (Judiciary Law § 489[2] ).
As set forth below, we hold that Justinian's acquisition of the notes was champertous and, further, that Justinian is not entitled to the protection of the safe harbor provision. Therefore, the order of the Appellate Division should be affirmed.
In 2003, nonparty DPAG invested close to € 180 million (approximately $209 million) in notes (the notes) issued by two special purpose companies, Blue Heron Funding VI Ltd. and Blue Heron Funding VII Ltd. (collectively, the Blue Heron portfolios). The Blue Heron portfolios were sponsored and managed by defendants WestLB. By January 2008, the notes had lost much (if not all) of their value.
After the value of the notes declined, DPAG considered its options. In the summer of 2009, DPAG's board of directors approved filing a direct lawsuit against WestLB. Both DPAG and WestLB are German banks and, at the time, DPAG was receiving substantial support from the German government and WestLB was partly owned by the government. Because of these relationships the DPAG board expressed concerns about pursuing a direct action to vindicate its rights for fear that the government would withdraw support from DPAG if it sued WestLB. This fear of repercussions from bringing a direct lawsuit led DPAG to consider another option in which a third party would bring the lawsuit and remit a portion of any proceeds to DPAG. In February 2010, DPAG discussed this option with plaintiff Justinian, a Cayman Islands shell company with few or no assets. A presentation submitted by Justinian in this action described Justinian's business plan as:
"(1) purchase an investment that has suffered a major loss from a company so that the company does not need to report such loss on its balance sheet; (2) commence litigation to recover the loss on the investment; (3) remit the recovery from such litigation to the company, minus a cut taken by Justinian; and (4) partner with specific law firms ... to conduct litigation."
Ultimately, the DPAG board approved the option of having Justinian bring suit because it presented the "best risk return profile" for DPAG.
In April 2010, DPAG and Justinian entered into a sale and purchase agreement (the agreement). Pursuant to the agreement, DPAG would assign the notes to Justinian and Justinian would agree to pay DPAG a base purchase price of $1,000,000 (representing $500,000 for the Blue Heron Funding VI notes and $500,000 for the Blue Heron Funding VII notes). The notes were assigned to Justinian shortly after execution of the agreement. The assignment, however, was not contingent on Justinian's payment of the $1,000,000. Nor did Justinian's failure to pay the $1,000,000 constitute an event of default under section 9 of the agreement. According to Justinian's principal and chief negotiator of the agreement, Thomas Lowe, Justinian's failure to pay the $1,000,000 did not constitute a breach of the agreement. Under the terms of the agreement, the only consequences of Justinian's failure to pay by the selected due date appear to be that interest would accrue on the $1,000,000 and that Justinian's share of any proceeds recovered from the lawsuit would be reduced from 20% to 15%. Justinian has not paid any portion of the $1,000,000 base purchase price, and DPAG has not demanded payment.
Within days after the agreement was executed and shortly before the statute of limitations was to expire, Justinian filed a summons with notice in Supreme Court commencing this action against WestLB.1 The subsequent complaint alleged causes of action in breach of contract, fraud, breach of fiduciary duty, negligence, negligent misrepresentation, and breach of the covenants of good faith and fair dealing, all in connection with WestLB's alleged purchase of ineligible assets for the Blue Heron portfolios that caused the value of the notes to deteriorate.
WestLB moved to dismiss, alleging that Justinian lacked standing to bring this action. Justinian opposed the motion. In reply, WestLB raised the affirmative defense of champerty, arguing that Justinian's acquisition of the notes was champertous under Judiciary Law § 489. After oral argument, Supreme Court issued a written decision concluding that there were "questions of fact surrounding Justinian's actual purpose and intent in purchasing the [notes] that require further discovery to resolve" (37 Misc.3d 518, 528, 952 N.Y.S.2d 725 [Sup.Ct., N.Y.County 2012] ). The court ordered discovery limited to the issues related to champerty and reserved judgment on the motion to dismiss.
After champerty-related discovery was complete, WestLB renewed its motion to dismiss, which Supreme Court treated as a motion for summary judgment. Supreme Court dismissed the complaint, concluding that the agreement was champertous because Justinian had not made a bona fide purchase of the notes and was, therefore, suing on a debt it did not own. Supreme Court also concluded that Justinian was not entitled to the protection of the champerty safe harbor of Judiciary Law § 489(2) because Justinian had not made an actual payment of $500,000 or more (43 Misc.3d 598, 981 N.Y.S.2d 302 [Sup.Ct., N.Y.County 2014] ). On appeal, the Appellate Division affirmed, largely adopting the rationale of Supreme Court (128 A.D.3d 553, 10 N.Y.S.3d 41 [1st Dept.2015] ). This Court granted leave to appeal (25 N.Y.3d 914, 16 N.Y.S.3d 519, 37 N.E.3d 1162 [2015] ). We affirm, although our reasoning is somewhat different.
Judiciary Law § 489 is New York's champerty statute. Section 489(1) restricts individuals and companies from purchasing or taking an assignment of notes or other securities "with the intent and for the purpose of bringing an action or proceeding thereon."
In a prominent early champerty case, Moses v. McDivitt , 88 N.Y. 62, 65 (1882), we concluded that the language "with the intent and for the purpose" contained in a predecessor champerty statute2 —language which Judiciary Law § 489(1) has retained—was significant. We determined that simply intending to bring a lawsuit on a purchased security is not champerty, but when the purchase of a security was "made for the very purpose of bringing such suit" that is champerty because "this implies an exclusion of any other purpose" (88 N.Y. at 65 ). Therefore, we held that "[t]o constitute the offense [of champerty] the primary purpose of the purchase must be to enable [one] to bring a suit, and the intent to bring a suit must not be merely incidental and contingent" (id. [emphasis added] ). The primary purpose test articulated in Moses has been echoed in our courts for well over a century. In Trust for Certificate Holders of Merrill Lynch Mtge. Invs., Inc. Mtge. Pass–Through Certificates, Series 1999–C1 v. Love Funding Corp. , 13 N.Y.3d 190, 198–199, 890 N.Y.S.2d 377, 918 N.E.2d 889 (2009), we endorsed the distinction in Moses "between acquiring a thing in action in order to obtain costs and acquiring it in order to protect an independent right of the assignee" and opined that "the purpose behind [the plaintiff's] acquisition of rights" is the critical issue in assessing whether such acquisition is champertous. Similarly, in Bluebird Partners v. First Fid. Bank , 94 N.Y.2d 726, 736, 709 N.Y.S.2d 865, 731 N.E.2d 581 (2000), we held that "in order to constitute champertous conduct in the acquisition of rights ... the foundational intent to sue on that claim must...
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