NY Court of Appeals Affirms Narrow Definition of Champerty
At one time or another, almost every lawyer presented with a claim says: “I think that might be champerty!” Then, research shows, it isn’t. Champerty is elusive, to say the least.
Last week, the NY Court of Appeals affirmed the narrow definition of champerty. In answering certified questions from the Second Circuit, the court ruled that indemnity claims – obtained in a settlement where there was a pre-existing interest -- were not barred by champerty. 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 v. Love Funding Corporation.
The facts – which involve the sale, transfer and litigation related to mortgages – cover several years and parties. However, the holding is clear.
• First, the court defined champerty very narrowly as: the purchase of claims for the purpose of bringing an action in order to involve parties in costs and annoyance, where such claims would not be prosecuted absent that purpose.
• Second, it is not champerty to acquire the right to bring a claim as part of a settlement. The court was not aware of any New York case holding that it is champerty to acquire -- as part of a settlement -- indemnification rights for reasonable costs and fees incurred in past legal actions.
• Third, the rights transferred may be for an amount greater than the amount demanded in the underlying action. The court noted that it was not aware of any New York case standing for the proposition that it is champerty to settle a dispute by accepting a transfer of rights having the potential for a recovery that is larger than one demanded as a cash settlement.
This should reassure anyone who has ever taken a claim as part of a settlement.
