Assignment Was Not Champertous

In a Decision and Order, dated March 1, 2023, in IKB Int’l S.A. v. Morgan Stanley, Index No. 653964/2012, Justice Melissa Crane granted in part and denied in part Morgan Stanley’s motion for summary judgment. Schlam Stone & Dolan LLP represents Plaintiffs in this action. Morgan Stanley argued, inter alia, that the assignment of claims to IKB AG was champertous. The Court rejected this argument, explaining:

The ancient doctrine of champerty is codified in New York within Judiciary Law § 489 (Ehrlich v Rebco Ins. Exchange, Ltd., 225 AD2d 75, 77, 649 N.Y.S.2d 672 [1st Dept 1996]). Under Judiciary Law § 489, no corporation "shall solicit, buy or take 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." However, for an assignment of a claim to be void for champerty, the assignee must have made the purchase "for the very purpose of bringing such suit" to the "exclusion of any other purpose" (see Richbell Information Services, Inc. v Jupiter Partners, 280 AD2d 208, 215, 723 N.Y.S.2d 134 [1st Dept 2001] [emphasis added] [citing Moses v McDivitt, 88 NY 62 (1882)]). Thus, while assignments "for the primary purpose of obtaining costs or [harassment]" are void as champertous (see 71 Clinton St. Apts. LLC v 71 Clinton Inc., 114 AD3d 583, 585, 982 N.Y.S.2d 6 [1st Dept 2014]; Trust For the Certificate Holders of Merrill Lynch Mortg. Investors, Inc. v Love Funding Corp., 13 NY3d 190, 198, 918 N.E.2d 889, 890 N.Y.S.2d 377 [2009]), assignments are not champertous where the intent to bring a suit is merely "incidental and contingent" to other rights (New York Chinese TV Programs, Inc. v U.E. Enterprises, Inc., 1989 U.S. Dist. LEXIS 2760, 1989 WL 22442, *13 [SDNY Mar 8, 1989]). Additionally, champerty does not apply where the assignee had a "preexisting proprietary interest" in the subject matter (see Trust For the Certificate Holders of Merrill Lynch Mortg. Investors, Inc. v Love Funding Corp., 13 NY3d 190, 198, 918 N.E.2d 889, 890 N.Y.S.2d 377 [2009]).

Here, even if the initial alleged injury related to the Certificates accrued to IKB SA, the 2012 Assignment was not champertous, because IKB AG had a preexisting proprietary interest in the subject matter. In order to finance the initial assignment of the Certificates to Rio in 2008, IKB AG and Rio entered into a loan agreement (Loan Agreement, NYSCEF Doc. No. 315, p. 1). Pursuant to the 2008 loan agreement between IKB AG and Rio, IKB AG as junior lender was entitled to 80% of the profits from the assets (Loan Agreement, p. 8; Hennessy Deposition, pp. 57-58; Ex. 110, Schirmer Deposition, NYSCEF Doc. No. 318, p. 147 ["excess cash, is shared by the mezzanine lender and the junior lender [IKB AG] and the split is 80:20"]).

While Defendants are correct that the loan has since been paid down to one dollar (Ex. 109, Kluge Deposition, NYSCEF Doc. No. 317, p. 126), this does not change the fact that, unlike other champertous assignments, the 2012 Assignment indisputably did not involve a "stranger" to the transaction, but a party with a prior interest (see Jamaica Public Service Co., Ltd. v La Interamericana Compania De Seguros Generales SA, 262 AD2d 73, 74, 693 N.Y.S.2d 6 [1st Dept 1999]; In re Imax Securities Litigation, 2011 U.S. Dist. LEXIS 41709, 2011 WL 1487090, *6 [SDNY Apr 15, 2011]).

Defendants have also failed to establish that the sole purpose for the 2012 Assignment was to profit off of litigation, to the exclusion of all other purposes. An assignment is not champertous merely because the parties enter into the assignment "for the purpose of collecting damages, by means of a lawsuit" (Universal Inv. Advisory SA v Bakrie Telecom Pte., Ltd., 154 AD3d 171, 180, 62 N.Y.S.3d 1 [1st Dept 2017]). Rather, there is a key distinction between "acquir[ing] a right in order to make money from litigating it [champertous] and . . .acquir[ing] a right in order to enforce it [not champertous]" (id.). Here, Plaintiffs have provided evidence that they are still entitled to 80% of the future cash flows under the 2008 loan agreement with Rio because the loan was not paid off entirely—even though it was paid down almost in its entirety (Kluge Deposition, p. 124). Therefore, regardless of whether or not the 2012 Assignment's primary purpose was litigation, Defendants have not provided sufficient evidence to establish that the sole purpose, to the exclusion of all other purposes, was to profit off of litigation. As such, Defendants have failed to establish that the 2012 Assignment is void as champertous.

The attorneys at Schlam Stone & Dolan litigate issues concerning champerty and assignment. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.