Merrill Lynch v. Love Corp.

• Citation: 918 N.E.2d 889,2009 NY Slip Op 7323,13 N.Y.3d 190
• Decision Date: 15 October 2009
• Docket Number: No. 123,123
• Parties: 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, Appellant, v. LOVE FUNDING CORPORATION, Respondent.
• Court: New York Court of Appeals

13 N.Y.3d 190

918 N.E.2d 889

2009 NY Slip Op 7323

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, Appellant, v. LOVE FUNDING CORPORATION, Respondent.

No. 123

Court of Appeals of New York.

Argued September 9, 2009.

Decided October 15, 2009.

Hogan & Hartson LLP, New York City (Ira M. Feinberg and Andowah Newton of counsel), and Hogan & Hartson LLP (Lorane F. Hebert, of the District of Columbia bar, admitted pro hac vice, of counsel), for appellant.

Bryan Cave LLP (Alec W. Farr, of the District of Columbia bar, admitted pro hac vice, and Nikki A. Ott of counsel) and Bryan Cave LLP, New York City (Michael G. Biggers of counsel), for respondent.

Richards Kibbe & Orbe LLP, Washington, D.C. (Lucinda O. McConathy of counsel), and Richards Kibbe & Orbe LLP, New York City (Brian S. Fraser of counsel), for Loan Syndications & Trading Association, Inc., amicus curiae.

Northern Manhattan Improvement Corporation Legal Services, New York City (Kenneth Rosenfeld, James Baker and Matthew J. Chachère of counsel), Cardozo Bet Tzedek Legal Services (Leslie Salzman of counsel), CAMBA Legal Services, Inc., Brooklyn (Kathleen A. Masters and Matthew Chedler of counsel), Empire Justice Center, Rochester (Bryan D. Hetherington of counsel), and Urban Justice Center, New York City (Harvey Epstein of counsel), for Northern Manhattan Improvement Corporation and others, amici curiae.

OPINION OF THE COURT

PIGOTT, J.

The United States Court of Appeals for the Second Circuit has certified to us questions relating to Judiciary Law § 489, New York's champerty statute. We hold that a corporation or association that takes an assignment of a claim does not violate Judiciary Law § 489 (1) if its purpose is to collect damages, by means of a lawsuit, for losses on a debt instrument in which it holds a preexisting proprietary interest.

I.

Love Funding Corporation (Love Funding), a commercial mortgage-banking corporation, entered into a Mortgage Loan Purchase Agreement (the Love MLPA) with Paine Webber Real Estate Securities Inc. (Paine Webber) on April 23, 1999. Under the Love MLPA, Love Funding originated mortgage loans, evaluating the borrowers and performing due diligence, while Paine Webber provided financing and was ultimately assigned the loans for securitization. Love Funding received a fee of 1% of the principal amount of each loan.

In the Love MLPA, Love Funding represented that the loans were not in default. Love Funding further promised that in the event it breached any representation or warranty, and upon prompt written notice, it would cure the breach or, at Paine Webber's option, repurchase the affected mortgage loan. Significantly, in section 9.14 (a) of the Love MLPA, Love Funding agreed to indemnify Paine Webber "from and against all demands, claims or asserted claims, liabilities or asserted liabilities, costs and expenses, including reasonable attorneys' fees, incurred . . . in any way arising from or related to any breach."

In July 1999, Love Funding made a $6.4 million loan to Cyrus II Partnership, secured by a mortgage on an apartment complex, the Arlington Apartments, in Harvey, Louisiana (Arlington Loan). The loan was assigned to Paine Webber under the Love MLPA. As consideration, Love Funding received its 1% fee.

Paine Webber sold the Arlington Loan to Merrill Lynch Mortgage Investors, Inc. on November 1, 1999, as part of a larger securities transaction involving numerous mortgage loans. Under the governing Mortgage Loan Purchase Agreement (the Merrill Lynch MLPA), Paine Webber made representations and warranties concerning the loans, including ones substantively similar to those made by Love Funding in the Love MLPA.

The loans were then securitized, under a pooling and servicing agreement in which certificates secured by the underlying mortgages were issued, and a trust created for the holders of those certificates, who would receive interest payments generated by the loans. The trust was denominated the Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates, Series 1999-C1 (the Trust). ORIX Capital Markets, LLC was named Master Servicer and Special Servicer.

The Trust declared the Arlington Loan to be in default in March 2002, for reasons not directly pertinent to this case, and it commenced a mortgage foreclosure action in Louisiana state court.¹ It was discovered that Cyrus's principals had committed fraud in obtaining the Arlington Loan. The Trust informed Paine Webber's successor in interest, UBS.² In the fall of 2002, the Trust commenced litigation against UBS in federal court and in state courts in Texas and New York, related to over 30 loans that Paine Webber had sold. With respect to the Arlington Loan, the Trust's theory was that Cyrus's fraud had put the loan in default from the outset, so that Paine Webber (and, hence, UBS) had necessarily breached its representation in the Merrill Lynch MLPA. By all accounts, the litigation was intense and expensive, with the Trust and UBS purportedly spending some $7 million and over $30 million respectively.

On September 13, 2004, the Trust and UBS settled, with UBS agreeing to pay the Trust $19.375 million with regard to various loans deposited in the Trust. With respect to the Arlington Loan, however, UBS assigned to the Trust, as consideration for its release, all its rights under the Love MLPA: "each and every of the representations and warranties, and related remedies for breach thereof . . . including but not limited to the remedies set out in section 9.14" of the Love MLPA.³

In November 2004, a representative of the Trust approached Love Funding's principals, by telephone and in writing, demanding that Love Funding either cure its breaches of representations and warranties affecting the Arlington Loan or repurchase the loan. According to Love Funding, the Trust representative demanded $10 million to settle. At the same time, the Trust commenced an action against Love Funding in Supreme Court, New York County, alleging that it had breached its representations and warranties that the Arlington Loan was not in default at the time of closing.

The Trust's action was removed to federal court. Both the Trust and Love Funding moved for summary judgment. On October 11, 2005, the United States District Court for the Southern District of New York granted the Trust's motion for summary judgment to the extent of holding that Love Funding breached the Love MLPA. Although denying Love Funding's cross motion for summary judgment, the District Court allowed Love Funding to amend its answer to assert a champerty defense.

In a February 27, 2007 decision, the District Court held that the Trust had "accepted the assignment of the Love MLPA with the primary purpose of bringing a lawsuit against Love Funding. Because the assignment is void for champerty, the Trust is not entitled to any award of damages" (499 F Supp 2d 314, 325 [2007]). The District Court noted that the assignment was the only consideration the Trust took in exchange for releasing UBS with respect to the Arlington Loan, and observed that the Trust had urged the court to find that Love Funding must indemnify the Trust for some of the legal fees UBS incurred defending itself against the Trust. Dismissing the Trust's efforts at settlement as a sham, the District Court concluded that the Trust's primary purpose was to secure a means of suing Love Funding, and dismissed its action.

On appeal, the Trust argued principally that a finding that it had accepted the assignment with the intention of suing Love Funding is insufficient as a matter of law for champerty. The United States Court of Appeals for the Second Circuit decided that resolution of the Trust's appeal depended on significant and unsettled questions of New York law. The Second Circuit certified to us, and we accepted, the following questions:

"1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the `primary' intent proscribed by New York Judiciary Law § 489 (1), or must there be a finding of `sole' intent?

"2. As a matter of law, does a party commit champerty when it `buys a lawsuit' that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?

"3. (a) As a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor?

"(b) Is the answer to question 3 (a) affected by the fact that the challenged assignment enabled the assignee to exercise the assignor's indemnification rights for reasonable costs and attorneys' fees?" (556 F3d 100, 114 [2d Cir 2009].)

We answer the second certified question, and both parts of the third certified question, in the negative. Because—as the Second Circuit itself hinted—"the critical issue to assessing the sufficiency of the champerty finding is not the denomination of the Trust's intent as `primary' or `sole,' but the purpose behind its acquisition of rights that allowed it to sue Love Funding" (556 F3d at 111), we find it unnecessary to answer the first certified question.

II.

The doctrine of champerty developed "to prevent or curtail the commercialization of or trading in litigation" (Bluebird Partners v First Fid. Bank, 94 NY2d 726, 729 [2000]). The doctrine, which has ancient and medieval roots (see Bluebird Partners, 94 NY2d at 733-734; Martin, Syndicated Lawsuits: Illegal Champerty or New Business Opportunity?, 30 Am Bus LJ 485 [1992]; Radin, Maintenance by Champerty, 24 Cal L Rev 48 [1936]), is currently codified in Judiciary...