Justinian Capital SPC ex rel. Portfolio v. Westlb AG, N.Y. Branch, Westlb Asset Mgmt. (Us) LLC

• Decision Date: 24 February 2014
• Citation: 2014 N.Y. Slip Op. 24046,981 N.Y.S.2d 302,43 Misc.3d 598
• Parties: JUSTINIAN CAPITAL SPC, for and on behalf of BLUE HERON SEGREGATED PORTFOLIO, Plaintiff, v. WESTLB AG, New York Branch, WestLB Asset Management (US) LLC, and Brightwater Capital Management LLC, Defendants.
• Court: New York Supreme Court

43 Misc.3d 598

981 N.Y.S.2d 302

2014 N.Y. Slip Op. 24046

JUSTINIAN CAPITAL SPC, for and on behalf of BLUE HERON SEGREGATED PORTFOLIO, Plaintiff,

v.WESTLB AG, New York Branch, WestLB Asset Management (US) LLC, and Brightwater Capital Management LLC, Defendants.

Supreme Court, New York County, New York.

Feb. 24, 2014.

Grant & Eisenhofer P.A., for plaintiff.

Hughes Hubbard & Reed LLP, for defendants.

SHIRLEY WERNER KORNREICH, J.

Defendants WestLB AG, New York Branch and WestLB Asset Management (US) LLC (collectively, WestLB) move for summary judgment and dismissal of the Complaint on the ground of champerty. Defendants' motion is granted for the reasons that follow.

Introduction

Champerty “developed hundreds of years ago to prevent or curtail the commercialization of or trading in litigation.” Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d 726, 733, 709 N.Y.S.2d 865, 731 N.E.2d 581 (2000). The prohibition of champerty has been repealed by many states. ¹ New York, however, continues to recognize the doctrine under Judiciary Law § 489, which provides:

No person shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.

§ 489(1) (emphasis added). When addressing distressed debt, the champerty inquiry turns on the difference “between one who acquires a right in order to make money from litigating it and one who acquires a right in order to enforce it.” Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass–Through Certificates, Series 1999–C1 v. Love Funding Corp., 13 N.Y.3d 190, 200, 890 N.Y.S.2d 377, 918 N.E.2d 889 (2009)( Love III ). The latter is permissible; the former is not. See Justinian Capital SPC v. WestLB AG, 37 Misc.3d 518, 525, 952 N.Y.S.2d 725 (Sup. Ct., N.Y. County 2012)( Justinian I ).

Background

In 2010, plaintiff Justinian Capital SPC (Justinian) commenced this action on behalf of an investment portfolio that was compromised by mortgage backed securities. These securities were allegedly included in the portfolio despite the fact that they did not meet the portfolio's investment guidelines. Justinian sued WestLB, the portfolio's investment manager, for breach of contract and for fraud WestLB allegedly employed in trying to cover up its misdeeds.

Justinian, however, never invested with WestLB. The subject notes were originally purchased by non-party Deutsche Pfandbriefbank AG (DPAG). DPAG, like WestLB, is a German bank that suffered massive losses during the recent economic crisis due to exposure to the U.S. housing market. Since the crisis, DPAG has been heavily reliant on funding from the German government. This presented DPAG with a possible political and public relations conundrum with respect to its grievances against WestLB, which happens to be partially owned by the German government. DPAG did not sue WestLB, which might have imperiled its very existence if the German government took offense and decided to withhold funding. Rather, Justinian offered to sue WestLB and remit the litigation recovery to DPAG minus a 15% cut, which would serve as Justinian's fee. DPAG is not a named plaintiff, and the details of the DPAG/Justinian arrangement were not fully disclosed at the outset of this case.

At oral argument on the original motion to dismiss, the champerty issue became apparent when the Sale and Purchase Agreement between Justinian and DPAG (the SPA) was produced . In an order dated August 15, 2012, the court declined to reach the merits of the motion to dismiss.² The parties were directed to conduct limited discovery on champerty. See Justinian I, 37 Misc.3d at 528, 952 N.Y.S.2d 725.

After completion of such discovery, on September 18, 2013, WestLB moved for summary judgment and dismissal on the ground of champerty. Justinian opposed, arguing that the SPA is not champertous and, even if it is, the statutory safe harbor applies. Oral Argument was held on January 16, 2014. For the reasons that follow, the court finds that the safe harbor does not apply and that SPA is champertous.

The Safe Harbor

In 2004, instead of discarding the champerty doctrine, the Legislature added a safe harbor provision to the champerty statute, Judiciary Law § 489(2). The safe harbor precludes a champerty defense when the securities being sold, such as the subject notes, have “an aggregate purchase price of at least [$500,000].” The statute does not indicate whether such money must actually be paid. This is relevant to the subject notes because, though the SPA's stated sale price is $1 million ($500,000 for each note), it is undisputed that Justinian, a shell company with no assets, did not pay the sale price nor does it have the means to do so. Moreover, Justinian's failure to pay the sale price is not considered an event of default under the SPA. The parties, as a result, dispute whether the safe harbor applies where, as here, the buyer does not pay for the securities but merely lists a nominal purchase price of at least $500,000.

Justinian submitted persuasive evidence of § 489(2)'s meaning: the affirmation of Susan V. John (John Aff.), a member of the New York State Assembly from 1991 to 2010. See Dkt. 158. Ms. John was a member of the Judiciary Committee in 2004, when § 489(2) was enacted. Her affirmation was originally submitted in a similar case, styled Bank Hapoalim B.M. v. WestLB AG, Index No. 603458/2009. In that case, which this court dismissed for reasons other than champerty,³ the champerty inquiry was different because at least $900,000 was actually paid for the notes. See John Aff., ¶ 11. The question raised was whether the price of each note must be $500,000, or if the aggregate price can add up to $500,000. Before addressing this issue, Ms. John noted that “[t]he Legislature intended to provide clear protection for transactions where a purchaser pays at least $500,000 in a single transaction or transactions for the assignment or transfer of financial instruments and causes of action.” John Aff., ¶ 9 (emphasis added). Then, with respect to the question of the price of each note, she explained: “[n]or does the fact that Justinian paid certain sellers far less than $500,000—in some instances, only paying certain sellers $1,000—change my opinion. The term having an aggregate purchase price of at least $500,000' was intended to authorize such transfers as long as such transfers were part of a larger commercial transaction where the aggregate amount paid was $500,000.” John Aff., ¶ 12 (emphasis added). Thus, according to Ms. John, § 489(2) requires actual payment of the purchase price. Moreover, according to Ms. John, where there are multiple notes whose contract price is at least $500,000, the purchaser does not have to actually pay $500,000 for each note to avail itself of the safe harbor. Nonetheless, as Ms. John's affirmation makes clear, the SPA cannot merely recite a nominal amount equal to the monetary threshold. Ergo, if the purchase price is not paid—such as here, where Justinian paid nothing—the safe harbor does not apply.

Ms. John's understanding of the safe harbor is reinforced by the legislative history of the bill, which she sponsored. See N.Y. Bill Jacket, 2004 A.B. 7244, Ch. 394. The memorandum supporting the bill states that the safe harbor applies when the buyer “had paid, in the aggregate, at least five hundred thousand dollars ($500,000) in connection with transactions” (emphasis added).

Indeed, requiring actual payment is necessary to avoid the safe harbor effectively doing away with champerty, a measure the legislature chose not to adopt. Clearly, the Legislature could have eliminated champerty as a defense, as most other states have done. Instead, by adopting a safe harbor, the Legislature made the explicit decision to maintain the prohibition. This court cannot adopt a reading of § 489(2) that contravenes the legislative history and its policy decision. Accordingly, the court finds that the SPA is not covered by the safe harbor.

Champerty

The court now turns to the question of whether the SPA is champertous.

In 2009, in Love III, the Court of Appeals had an opportunity to significantly narrow the scope of the champerty law's application to the assignment of distressed debt, such as mortgage backed securities. It did not.

The champerty issues in Love III arose in 2007, when a federal district court ruled that the assignment of an MLPA ⁴ governing commercial mortgage backed securities, made as part of a settlement of litigation involving that MLPA, was champertous because “the purpose of the Assignment was to provide the [plaintiff] with the opportunity to extract money from [defendant] by way of a lawsuit.” See Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass–Through Certificates, Series 1999–C1 v. Love Funding Corp., 499 F.Supp.2d 314, 325 (S.D.N.Y.2007) (Scheindlin, J.) ( Love I ). On Appeal, the Second Circuit reviewed our state court precedents, finding them to be unclear. See Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass–Through Certificates, Series 1999–C1 v. Love Funding Corp., 556 F.3d 100, 110–14 (2d Cir.2009)( Love II ). The Second Circuit found there to be an open question about “ ‘whether the intent to buy a lawsuit’ necessarily equates with the intent proscribed by [ § 489]. Specifically, would it make a difference whether the new lawsuit was purchased (a) to allow the purchaser to profit from the costs and fees that could be generated by that lawsuit, or, instead, (b) to provide a means to enforce an otherwise legitimate obligation.” Id. at 111 (emphasis in original), quoting Love I, 499 F.Supp.2d at 322. This distinction, however, is exceedingly difficult to draw in the...