The First Department Grants Summary Judgment on Defendant’s Champerty defense and Dismisses Plaintiff’s Complaint

• Posted on: Apr 23 2021

Most simply stated, champerty is the prohibited practice of purchasing claims for the purpose of commencing litigation and has been described as “a venerable doctrine 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, 729 (2000) (describing the historical antecedents to New York’s present champerty rules).  While an ages old doctrine dating back to medieval times, most present-day lawyers view champerty more as an annoying topic covered in bar review course rather than a legal theory that might actually be litigated these days.  Champerty, however, does rear its head from time to time.

New York’s prohibition against champertous transactions is codified in section 489 of the Judiciary Law, which provides in relevant part, and with some exceptions, that “[n]o person or co-partnership, engaged directly or indirectly in the business of collection and adjustment of claims, and no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, 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….”

As the Court in Bluebird explained, “‘[c]hamperty,’ as a term of art, grew out of this practice to describe the medieval situation where someone bought an interest in a claim under litigation, agreeing to bear the expenses but also to share the benefits if the suit succeeded.”  Bluebird, 94 N.Y.2d at 734.  The Court explained that because, during medieval times, important litigation involved land, the purchase of lawsuits could result in a “partial interest in landed estates.”  Acquiring real property in this manner was “taint[ed]” because “the purchase price was usually far below the value of the potential land acquisition” and, accordingly, such a transaction was “suffused with speculation related to the ‘sin’ of usury and its concomitant legal prohibitions [but which] evaded the strict prohibitive laws involving usury.”  Id.

“[E]arly New York cases indicate that the prohibition of champerty was limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs, which, at the time, included attorneys’ fees.”  Jurisprudence from the Court of Appeals:

demonstrates that while this Court has been willing to find that an action is not champertous as a matter of law (see, Fairchild Hiller Corp. v McDonnell Douglas Corp., 28 NY2d 325; see also, Avalon, L. L. C. v Coronet Props. Co., 248 AD2d 311), it has been hesitant to find that an action is champertous as a matter of law (see, Sprung v Jaffe, 3 NY2d 539 [1957]; see also, Moses v McDivitt, 88 NY 62 [1882]). This prudent approach is consistent with the limited scope of the champerty doctrine as it originally appeared and developed in the Anglo-American legal system.

The Bluebird Court noted that in Fairchild Hiller Corp. v McDonnell Douglas Corp., 28 N.Y.2d 325 (1971), the Court of Appeals “first examined the actions of a nonattorney, under the champerty statute….”  Bluebird, 94 N.Y.2d at 735 – 36.  Fairchild involved claims related to the design and manufacture of the Phantom F-4 fighter-bomber (the “Bomber”).  Republic Aviation was to manufacture for McDonnell Douglas certain components of the Bomber using tools and drawings supplied by McDonnell.  Republic asserted claims against McDonnell based on defects in the supplied tools and drawings that resulted in increased production costs for Republic.  Subsequently, Fairchild Hiller Corp. acquired all of Republic’s operating assets, including Republic’s claim against McDonnell, while Farmingdale Co. acquired Republic’s non-operating assets – mostly land.  “As to [the claim against McDonnell], Fairchild and Farmingdale entered into a separate agreement which provided that in the event of recovery by Fairchild against McDonnell, Fairchild would turn over to Farmingdale 75% of the net proceeds received by Fairchild.”  

After settlement negotiations proved unsuccessful, Fairchild commenced suit against McDonnell.  In turn, McDonnell moved for summary judgment dismissing, inter alia, the champerty claim arguing “that the assignment of the claim by Republic to Fairchild is champertous and, therefore, in violation of section 489 of the Judiciary Law.”  Supreme court dismissed the champerty claim but the Appellate Division reinstated the claim due to the existence of fact questions that required trial.  The Fairchild Court of Appeals reversed and dismissed the champerty claim and, in so doing, stated:

We have consistently held that in order to fall within the statutory prohibition, the assignment must be made for the very purpose of bringing suit and this implies an exclusion of any other purpose. (Moses v. McDivitt, 88 N.Y. 62, 65.) More recently, in Sprung v. Jaffe (3 N Y 2d 539, 544), we stated: “the statute is violated only if the primary purpose of the purchase or taking by assignment of the thing in action is to enable the attorney to commence a suit thereon. The statute does not embrace a case where some other purpose induced the purchase, and the intent to sue was merely incidental and contingent.”  

Fairchild, 28 N.Y.2d at 330.  Recognizing that the “intent and purpose of the purchaser or assignee of a claim” is typically to be determined by the trier of fact, the “undisputed facts…as developed by extensive pretrial discovery, established that Fairchild did not receive the assignment …for the sole and primary purpose of bringing an action….”  Id.  Indeed:

Fairchild’s primary purpose, as the record indicates, was to acquire Republic’s operating assets. The acquisition of the claim was simply an incidental part of a substantial commercial transaction, taken in order to induce Farmingdale to take part in the acquisition by purchasing Republic’s nonoperating assets. Under such circumstances, it can by no means be said to be champertous. Consequently, we conclude that the assignment was not within the reach of section 489 of the Judiciary Law.

Id.

In concluding that the transactions at issue in Bluebird were not champertous, the Court of Appeals stated:

We conclude that in order to constitute champertous conduct in the acquisition of rights that would then be nullified and to resolve the question at issue, the foundational intent to sue on that claim must at least have been the primary purpose for, if not the sole motivation behind, entering into the transaction. The words, “sole” and “primary,” are not synonymous generally or in law. A purpose that is the sole purpose is, by necessity, the primary purpose. However, a purpose that is primary is not necessarily the sole purpose (see, People v Lopez, 73 NY2d 214, 219 [“two primary purposes”]). Yet, the distinction is one without a legal difference when the “primary” element is present. The bottom line is that Judiciary Law § 489 requires that the acquisition be made with the intent and for the purpose (as contrasted to a purpose) of bringing an action or proceeding (compare, Moses v McDivitt, supra; Sprung v Jaffe, supra). Thus, we are satisfied that the record here does not support a finding of champerty as a matter of law for summary resolution. It cannot be determined on this record and in this procedural posture that champerty was the primary motivation, no less the sole basis, for all this strategic jockeying and financial positioning.

Bluebird, 94 N.Y.2d at 736 (emphasis in original).

On April 22, 2021, the Appellate Division, First Department, decided Leasing Control Inc., as Assignee of Firequench, Inc. v. 500 Fifth Avenue, Inc.  The facts of Leasing Control are simple and were obtained from the underlying record available on the e-court’s website.  Firequench, Inc. is a company that provided, inter alia, fire alarm installation and repair services to buildings in Manhattan, including a building (the “Building”) owned by defendant (“Owner”).  Firequench claimed that Owner owed it a significant sum of money for services allegedly rendered for which payment was never made.  Plaintiff was formed on November 30, 2012 and is owned by the sister of Firequench’s owner.  On March 5, 2013, Firequench delivered to plaintiff, a blanket assignment of all of Firequench’s claims against Owner.  On March 7, 2013, two days later, plaintiff commenced its collection action as the assignee of Firequench’s claims against Owner.  In seeing through the sham transaction between Firequench and Leasing Control and finding plaintiff’s claims against Owner champertous, the First Department stated:

As plaintiff’s president admitted during her deposition, the primary purpose of Firequench’s assignment of its claims against defendants to plaintiff was for plaintiff to pursue litigation against defendants on the claims in exchange for a portion of the proceeds from the litigation (Justinian Capital SPC [v WestLB AG, N.Y. Branch], 28 NY3d [160] at 164-165 [2016]). Plaintiff and Firequench had no pre-existing relationship and plaintiff had no pre-existing interest in the claim before the assignment (compare Trust for Certificate Holders of Merrill Lynch Mtge. Invs., Inc. Pass-Through Certificates, Series 1999-C1 v Love Funding Corp., 13 NY3d 190, 200-201 [2009]). Instead, plaintiff was a shell company with no real assets, corporate structure, or operations, and it commenced litigation two days after the assignment (see Justinian Capital SPC, 28 NY3d at 165).