Court Rejects Champerty Defense Where Plaintiffs Had Purchased Defaulted Bonds with the Intention of Suing to Collect on Them

On August 28, 2023, Justice Crane of the New York County Commercial Division issued a decision in Fortelus Funds Invs. Trust v. Hellas Telecom. (Luxembourg) II SCA, 2023 NY Slip Op. 32978(U), rejecting a champerty defense where the plaintiffs had purchased defaulted bonds with the intention of suing to collect on them, explaining:

Plaintiffs bought their Sub Notes in the secondary market after Bellas II defaulted and was known to be unable to pay Sub Note holders. Nonparties claim this suggests the primary purpose of purchase and assignment was bringing suit and therefore there is a champerty defense. Nonparties believe champerty-related discovery is warranted.

The champerty doctrine is codified in Judiciary Law § 489(1), that states in relevant part:

No 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.

Thus, champerty is a limited doctrine. It does not apply when the purpose of an assignment is the collection of a legitimate claim. It merely prohibits the purchase of securities or claims with the primary purpose of bringing a lawsuit. Nothing the Nonparties have claimed points to anything more than the common situation in which an entity that purchased distressed debt is now seeking payment on that debt. It is not champertous to purchase distressed debt as an investment.

MLRN LLC v. US. Bank Nat’l Ass’n, 217 AD3d 576,579 (1st Dep’t 2023) does not compel a different result. In that case, MLRN had purchased some of these Certificates after the Court of Appeals held that the Trustee could not recover in putback litigation and purchased others after the filing of the lawsuit. Thus, given the timing, there was significant evidence that MLRN purchased primarily to sue. Here, we simply have investors attempting to recover notes purchased after a default, with an apparent plan to seek that recovery from other possibly responsible parties later. Further, evidence in the record indicates that at least plaintff Geilli Recovable Trust purchased its interest for a price of $848,000.00. This falls into the safe harbor provision of Judiciary law § 489(2). Any suggestion that Geilli did not actually pay this amount is pure speculation.

(Internal quotations and citations omitted).

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