Bluebird v. First Fid. Bank

• Decision Date: 11 May 2000
• Citation: 709 N.Y.S.2d 865,731 N.E.2d 581,94 N.Y.2d 726
• Parties: BLUEBIRD PARTNERS, L.P., Appellant, v. FIRST FIDELITY BANK, N. A., et al., Defendants, and UNITED JERSEY BANK, Respondent. (And Another Action.) (And a Third-Party Action.)
• Court: New York Court of Appeals Court of Appeals

94 N.Y.2d 726

731 N.E.2d 581

709 N.Y.S.2d 865

BLUEBIRD PARTNERS, L.P., Appellant, v. FIRST FIDELITY BANK, N. A., et al., Defendants, and UNITED JERSEY BANK, Respondent. (And Another Action.) (And a Third-Party Action.)

Court of Appeals of the State of New York.

Argued March 28, 2000.

Decided May 11, 2000.

Kasowitz, Benson, Torres & Friedman, L. L. P., New York City (David M. Friedman, Michael C. Harwood and Howard W. Schub of counsel), and Henry Paul Monaghan for appellant.

Kaye, Scholer, Fierman, Hays & Handler, L. L. P., New York City (Lester M. Kirshenbaum and Gregory R. Fidlon of counsel), for respondent.

Chief Judge KAYE and Judges SMITH, LEVINE, CIPARICK, WESLEY and ROSENBLATT concur.

OPINION OF THE COURT

BELLACOSA, J.

Champerty is a venerable doctrine developed hundreds of years ago to prevent or curtail the commercialization of or trading in litigation. It is currently codified in New York as Judiciary Law § 489. In this case, the statute's evocation as an affirmative defense attempts to squeeze the ancient prohibition into a modern financial transaction and its resulting dispute.

Bluebird Partners, L.P. brings this action, essentially alleging a breach of fiduciary duty against various trustees involved in the bankruptcy of Continental Airlines, Inc. The question before us, initially raised by United Jersey Bank (UJB) in a motion to dismiss, is whether Bluebird engaged in champerty when it purchased the second series certificates in question. The Appellate Division found that the primary purpose was champertous and dismissed the complaint as against UJB on that ground, as a matter of law.

We reverse the order of the Appellate Division and reinstate the champerty-contested aspect of Bluebird's complaint. Neither the history of the doctrine nor the case law of this Court support a matter of law application of the champerty doctrine to the acquisition of rights to claims that are integrated within the sophisticated market transactions like these.

I.

This action, Bluebird's fifth overall, was commenced in March 1997. All defendants moved jointly to dismiss the complaint. UJB filed an additional motion to dismiss the complaint as against it on champerty grounds and requested that this separate motion be treated as one for summary judgment. After considerable procedural meanderings, Supreme Court eventually denied UJB's separate champerty motion.

The Appellate Division unanimously reversed Supreme Court's denial of UJB's champerty motion, granted that motion, and dismissed the complaint as against UJB, stating:

"even were we to accept plaintiff's assertion that it began purchasing the second series certificates in order to gain leverage for the settlement of an unrelated lawsuit, it admittedly continued to purchase more such certificates in large quantities for nearly two years after that litigation was settled. The record leaves no doubt that plaintiff's `primary purpose' * * * in purchasing those certificates was the maintenance of this litigation against the second series trustee, and, accordingly, the complaint should have been dismissed as against it on the ground of champerty (Judiciary Law § 489) as a matter of law" (Bluebird Partners v First Fid. Bank, 259 AD2d 273, 274 [citations omitted]).

This Court granted Bluebird leave to appeal only with respect to UJB's motion premised on champerty.

This suit arises as a result of events related to Continental Airlines' bankruptcy, a chapter 11 reorganization. The bankruptcy was filed on December 3, 1990, and Continental's Plan of Reorganization was confirmed on April 16, 1993. The certificate purchases by Bluebird at issue occurred after this period, but it is impossible to understand the import of the parties' assertions without some appreciation of the events that occurred prior to and during Continental's bankruptcy.

On March 15, 1987, Continental Airlines and four trustees entered into a Secured Equipment Indenture and Lease Agreement, pursuant to which Continental issued a $350 million debt offering, secured by collateral. The offering consisted of three series of certificates, with first series certificate holders having priority for payment over second series holders, who in turn had priority over third series certificate holders.

Pursuant to the Agreement, the four trustees protected the interests of the certificate holders. A collateral trustee monitored the over-all interest in the collateral, and separate trustees represented the holders of each of the three series. UJB was the original trustee for the second series certificates.

Continental filed its chapter 11 petition in December 1990. At that time, there existed a total outstanding obligation pursuant to the three certificate offerings of over $180 million, the collateral was worth approximately that same amount.

Shortly before confirmation of Continental's Reorganization Plan, the successor to UJB as second series trustee filed a lawsuit challenging the priority rules of the Indenture Agreement. This priority action sought a declaration that all certificate holders would share equally in all consideration received by the collateral trustee, rather than in declining order of priority pursuant to the Indenture Agreement.

By the time Continental emerged from bankruptcy in April 1993, the value of the collateral had declined to an approximate value of less than $50 million. This amount was not enough to compensate fully even the first series certificate holders. The Bankruptcy Court found that the trustees had failed to take available measures to preserve the interests of the "secured" creditors and denied the trustees' motion for compensation for lost value of $119 million. This purported failure constitutes the basis of the breach of duty claims against the trustees.

The trustees appealed that Bankruptcy Court decision. Various Federal appeals ensued between April 1993 and January 6, 1997, when, finally, the United States Supreme Court denied certiorari (Bank of N. Y. v Continental Airlines, 519 US 1057). This result ended any hopes or expectations of recovering the full value of the collateral.

In the interim, the priority action remained pending. The collateral trustee would only distribute to the first series certificate holders the pro rata share they would receive if the priority action succeeded, rather than the larger recovery to which they were entitled pursuant to the Indenture Agreement. The withholding of funds made it apparent that any possible further recovery on the first series certificates would not occur until the priority action was resolved.

Also in the interim, on January 14, 1994, Gabriel Capital, L.P. and its affiliates, a variety of investment-related limited partnerships, formed Bluebird, with Gabriel Capital as its general partner. From 1991 to early 1993, Gabriel and its affiliates had purchased approximately $70 million worth of Continental's outstanding first series certificates. The cost, though, was approximately $26 million—a massive discount from face value due to the pending bankruptcy. In January 1994, Gabriel and its affiliates transferred their Continental first series certificates to Bluebird.

Beyond acquiring the first series certificates, Bluebird also made several purchases of second series certificates from January 28, 1994 through June 26, 1996, at significantly reduced prices: between January 28 and February 24, 1994, Bluebird purchased a total of $28,995,000 worth of the outstanding second series certificates for a cost of approximately $577,000 (an average cost of two cents on the dollar); on November 9, 1994, Bluebird purchased $1.5 million worth of second series certificates for $13,125 (.875 cents on the dollar); on December 20, 1995, Bluebird purchased $8 million worth of second series certificates for $50,000 (.625 cents on the dollar); and, in June 1996, Bluebird purchased $1.8 million worth of second series certificates at a cost of only $4,500 (approximately .25 cents on the dollar).

Jack Mayer, a research analyst with one of the Gabriel affiliates, testified at a deposition that he requested that the broker make the January 1994 purchases "with all legal right or rights" because he didn't want any question as to whether Bluebird had acquired such rights when it purchased the certificates. The trade ticket for the February 1994 purchase of second series certificates bore a similar notation. When asked whether he purchased these second series certificates with the idea of suing the second series trustee because of its conduct during the Continental bankruptcy, Mayer responded, "I certainly considered that I might sue them. I certainly considered that that's an aspect of it." The analyst added that at the time of the purchase of second series certificates in January 1994, he knew that a lawsuit against the second series trustee was "the direction we were certainly headed in. No question about that."

Mayer also specifically testified that he bought the second series certificates for two reasons:

"Basically, there was this priority action. And I did think that as a practical matter in order to settle it that one would have to give the Second Series bonds something. * * * Number two, if I were to embark on a course of buying more of these at some point, I would be in a position to direct the Second Series trustee if I thought that that was desirable and/or I would come to a point where it was economically indifferent to me that the priority action was settled."

Next, Bluebird filed its first complaint against UJB in Federal court, asserting breaches of fiduciary duty. Subsequently, in June 1994, Bluebird consented to a priority action settlement in the range of three to four cents on the dollar. The settlement was not finalized immediately, and by the time the settlement agreement was approved by the Bankruptcy Court on December 28, 1995, approximately .68 cents on the dollar was paid to second series certificate...