New York’s champerty statute alive and well, and means what it says.
A bank’s investment in certain notes lost value, but because of concerns about how a lawsuit would look, the bank was hesitant to sue the investment backer. So, the bank contracted with a Cayman Islands shell company to have the latter take title to the notes in exchange for an agreement to pay $1 million and then have the shell company sue the investment backer. The New York Court of Appeals ruled that this arrangement was indeed champertous as it was the literal purchasing of notes for the sole purpose of suing based on that ownership with an agreement to remit the proceeds of the suit to the bank. The court recognized that the law provides for a “safe harbor” when the value of the investment exceeds $500,000. But the arrangement here did not fall under that safe harbor because payment was contingent on success in the lawsuit. This contingency was contrary to the legislature’s decision to require an actual large investment in order to avoid speculation and the commoditizing of lawsuits without thought of the risk of litigation. The shell company had no risk in the lawsuit but was a complete stranger to the notes’ investment and lost value—something the champerty law directly prohibits.
Case Law Alerts, 1st Quarter, January 2017. Case Law Alerts is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Copyright © 2017 Marshall Dennehey Warner Coleman & Goggin, all rights reserved. This article may not be reprinted without the express written permission of our firm.