Bluebird Partners, L.P.,
Appellant,
v.
First Fidelity Bank, N.A.,
et al.,
Defendants,
and United Jersey Bank,
Respondent.
(And another action.)
(And a third-party action.)
2000 NY Int. 52
Champerty is a venerable doctrine developed hundreds of years ago to prevent or curtail the commercialization of or trading in litigation. It is currently codified in New York as Judiciary Law § 489. In this case, the statute's evocation as an affirmative defense attempts to squeeze the ancient prohibition into a modern financial transaction and its resulting dispute.
Bluebird Partners, L.P. brings this action, essentially
alleging a breach of fiduciary duty against various trustees
involved in the bankruptcy of Continental Airlines, Inc. The
question before us, initially raised by United Jersey Bank (UJB)
We reverse the order of the Appellate Division and reinstate the champerty-contested aspect of Bluebird's complaint. Neither the history of the doctrine nor the case law of this Court support a matter of law application of the champerty doctrine to the acquisition of rights to claims that are integrated within the sophisticated market transactions like these.
I.
This action, Bluebird's fifth overall, was commenced in March 1997. All defendants moved jointly to dismiss the complaint. UJB filed an additional motion to dismiss the complaint as against it on champerty grounds and requested that this separate motion be treated as one for summary judgment. After considerable procedural meanderings, Supreme Court eventually denied UJB's separate champerty motion.
The Appellate Division unanimously reversed Supreme Court's denial of UJB's champerty motion, granted that motion, and dismissed the complaint as against UJB, stating:
"even were we to accept plaintiff's assertion that it began purchasing the second series certificates in order to gain leverage for the settlement of an unrelated lawsuit, it
admittedly continued to purchase more such certificates in large quantities for nearly two years after that litigation was settled. The record leaves no doubt that plaintiff's "primary purpose" * * * in purchasing those certificates was the maintenance of this litigation against the second series trustee, and, accordingly, the complaint should have been dismissed as against it on the ground of champerty (Judiciary Law § 489) as a matter of law (Bluebird Partners, L.P. v First Fidelity Bank, N.A., et al, ____ AD2d _____ [citations omitted])."
This Court granted Bluebird leave to appeal only with respect to UJB's motion premised on champerty.
This suit arises as a result of events related to Continental Airlines' bankruptcy, a Chapter 11 reorganization. The bankruptcy was filed on December 3, 1990, and Continental's Plan of Reorganization was confirmed on April 16, 1993. The certificate purchases by Bluebird at issue occurred after this period, but it is impossible to understand the import of the parties' assertions without some appreciation of the events that occurred prior to and during Continental's bankruptcy.
On March 15, 1987, Continental Airlines and four trustees entered into a Secured Equipment Indenture and Lease Agreement, pursuant to which Continental issued a $350 million debt offering, secured by collateral. The offering consisted of three series of certificates, with first series certificate holders having priority for payment over second series holders, who in turn had priority over Indenture third series holders.
Pursuant to the Agreement, the four trustees protected the interests of the certificate holders. A collateral trustee monitored the overall interest in the collateral, and separate trustees represented the holders of each of the three series. UJB was the original trustee for the second series certificates.
Continental filed its Chapter 11 petition in December 1990. At that time, there existed a total outstanding obligation pursuant to the three certificate offerings of over $180 million, the collateral was worth approximately that same amount.
Shortly before confirmation of Continental's Reorganization Plan, the successor to UJB as second series trustee filed a lawsuit challenging the priority rules of the Indenture Agreement. This priority action sought a declaration that all certificate holders would share equally in all consideration received by the collateral trustee, rather than in declining order of priority pursuant to the Indenture Agreement.
By the time Continental emerged from bankruptcy in
April 1993, the value of the collateral had declined to an
approximate value of less than $50 million. This amount was not
enough to compensate fully even the first series certificate
holders. The Bankruptcy Court found that the trustees had failed
to take available measures to preserve the interests of the
"secured" creditors and denied the trustees' motion for
compensation for lost value of $119 million. This purported
The trustees appealed that Bankruptcy Court decision. Various Federal appeals ensued between April 1993 and January 6, 1997, when, finally, the United States Supreme Court denied certiorari (Bank of New York v Continental Airlines, Inc., 519 US 1057). This result ended any hopes or expectations of recovering the full value of the collateral.
In the interim, the priority action remained pending. The collateral trustee would only distribute to the first series certificate holders the pro rata share they would receive if the priority action succeeded, rather than the larger recovery to which they were entitled pursuant to the Indenture Agreement. The withholding of funds made it apparent that any possible further recovery on the first series certificates would not occur until the priority action was resolved.
Also in the interim, on January 14, 1994, Gabriel
Capital, L.P. and its affiliates, a variety of investment-related
limited partnerships, formed Bluebird, with Gabriel Capital as
its general partner. From 1991 to early 1993, Gabriel and its
affiliates had purchased approximately $70 million worth of
Continental's outstanding first series certificates. The cost,
though, was approximately $26 million -- a massive discount from
face value due to the pending bankruptcy. In January 1994,
Beyond acquiring the first series certificates, Bluebird also made several purchases of second series certificates from January 28, 1994 through June 26, 1996, at significantly reduced prices: between January 28 and February 24, 1994, Bluebird purchased a total of $28,995,000 worth of the outstanding second series certificates for a cost of approximately $577,000 (an average cost of two cents on the dollar); on November 9, 1994, Bluebird purchased $1.5 million worth of second series certificates for $13,125 (.875 cents on the dollar); on December 20, 1995, Bluebird purchased $8 million worth of second series certificates for $50,000 (.625 cents on the dollar); and, in June 1996, Bluebird purchased $1.8 million worth of second series certificates at a cost of only $4,500 (approximately .25 cents on the dollar).
Jack Mayer, a research analyst with one of the Gabriel
affiliates, testified at a deposition that he requested that the
broker make the January 1994 purchases "with all legal right or
rights" because he didn't want any question as to whether
Bluebird had acquired such rights when it purchased the
certificates. The trade ticket for the February 1994 purchase of
second series certificates bore a similar notation. When asked
whether he purchased these second series certificates with the
idea of suing the second series trustee because of its conduct
Mayer also specifically testified that he bought the second series certificates for two reasons:
"Basically, there was this priority action. And I did think that as a practical matter in order to settle it that one would have to give the Second Series bonds something. * * * Number two, if I were to embark on a course of buying more of these at some point, I would be in a position to direct the Second Series trustee if I thought that that was desirable and/or I would come to a point where it was economically indifferent to me that the priority action was settled."
Next, Bluebird filed its first complaint against UJB in Federal court, asserting breaches of fiduciary duty. Subsequently, in June 1994, Bluebird consented to a priority action settlement in the range of three to four cents on the dollar. The settlement was not finalized immediately, and by the time the settlement agreement was approved by the Bankruptcy Court on December 28, 1995, approximately .68 cents on the dollar was paid to second series certificate holders.
Eventually, Bluebird's Federal breach of duty complaint
was dismissed. Bluebird then filed a complaint, including claims
against UJB, in state court in January 1996. The complaint in
When UJB made its champerty move in this last action at Supreme Court, Bluebird did not cross-move. Relying on the evidence provided by UJB, such as the deposition testimony of Mr. Mayer, Bluebird asserted that the only relevant evidence shows that Bluebird had valid business reasons for making the second series purchases, that the primary purpose of purchase was not to sue on the certificates, and that, at a minimum, disputed issues of fact concerning the champerty contention are involved here.
Supreme Court agreed that questions of material fact existed when it addressed UJB's champerty defensive shield. The Appellate Division, however, found no issues of fact and dismissed the complaint against UJB on the champerty ground as a matter of law. We disagree with the Appellate Division for the reasons next set forth.
II.
Judiciary Law § 489, provides in pertinent part:
"Purchase of claims by corporations or collection agencies
"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 * * *" (emphasis added).
The "champerty" concept is based on a type of French feudal tenure in land, a "champart," in which the fee for use of the land was neither in money nor ordinary service in kind. The tenant-by-champart was a partial owner of the land bound to share any rents and profits with the grantor, but the grantor took the risk that the crops might fail and that there would be no return. Anyone who then obtained a legal interest in that grant of land would also take a share of the profits in champart (see, Radin, Maintenance By Champerty, 24 Cal L Rev 48, 61-62 [1935]).
"Champerty," 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. The most important litigation of that era was over land, and a person who bought lawsuits could acquire a partial interest in landed estates -- an estimable power play. The taint on the process arose because the purchase price was usually far below the value of the potential land acquisition -- a transaction suffused with speculation related to the "sin" of usury and its concomitant legal prohibitions. The champerty transaction, however, evaded the strict prohibitive laws involving usury (see, id., at 60-61, 67).
Even as the feudal system faded, English law retained
the word "champart" as a metaphor to indicate a disapproval of
lawsuits brought "for part of the profits" of the action (see,
id., at 63; see also, Winfield, The History of Maintenance and
Champerty, 35 L.Q. Rev 50 [1919]). Because lawyers were usually
the instruments of such practices, "champertors [were] nearly
always lawyers" (see, Radin,
Indeed, early 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 (see, Elliott Associates, L.P. v Banco de la Nacion, 194 F3d 363, 372-373 [2nd Cir. 1999]). Consistent with this limited purpose, New York's early statutory prohibitions against champerty, found in the Revised Statutes and then in the Code of Civil Procedure, were specifically addressed to lawyers (see, Irwin v Curie, 171 NY 409, 411-412 [1902]). However, in 1907, the prohibitions were extended to non-lawyers and corporations (see, Code of Civil Procedure § 77 [1907]).
These provisions were consolidated into the Penal Law in 1909 and then moved to the Judiciary Law in 1965. It is with this history in mind that we resolve the summary judgment application of the conventional notion of champerty in the modern setting of sophisticated financial transactions and complicated investment strategies.
This Court's jurisprudence demonstrates that while this Court has been willing to find that an action is not champertous as a matter of law (see, Fairchild Hiller v McDonnell Douglas, , 28 NY2d 325; see also, Avalon LLC v Coronet Properties 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 63 [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.
This Court's seminal champerty case, Moses v McDivitt
(
"This language is significant and indicates that a mere intent to bring a suit on a claim purchased does not constitute the offense; the purchase must be made for the very purpose of bringing such suit, and this implies an exclusion of any other purpose. * * * To constitute the offense the primary purpose of the purchase must be to enable him to bring a suit, and the intent to bring a suit must not be merely incidental and contingent" (Moses v McDivitt, 88 NY 62, 65,
supra ).
In Sprung v Jaffe (, 3 NY2d 539 [1957],
"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" (Sprung v Jaffe,
supra , at 544, citing Moses v McDivitt, 88 NY 62).
In Fairchild Hiller v McDonnell Douglas (
Bluebird urges that the "sole" and "primary" tests are equivalent. However, UJB argues against a "sole purpose" test to determine champertous intent.
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 ["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,
III.
The question is whether Bluebird purchased the second series certificates for the sole or primary purpose of bringing a lawsuit against the second series trustee. UJB urges the courts to examine separately Bluebird's acquisition of the pre-existing "legal rights," as opposed to the general purchase of the certificates. UJB must make this distinction because it is not asserting that it would be improper for Bluebird to acquire a debt instrument with the intent of obtaining payment, even should litigation become necessary. However, we decline to parse the transactions in the fashion and with the legal effect proposed by UJB. That might cast the potentiality of a champerty cloud too easily over modern business practices and dispute resolutions involving the acquisition of securities and their concomitant rights (see, Elliot Associates, L.P. v Banco de la Nacion, 194 F3d 363, 379-381 [2d Cir 1999]).
Moreover, it is not realistic to try to make the
distinction that UJB urges. The fact is that Bluebird did
purchase the second series certificates in their entirety, and
not just the rights to a lawsuit encompassed within the expressed
terms of the instrument (cf., Platt Corporation v Platt, , 15 NY2d 705, affirming without opn 21 AD2d 116; compare, Bennett v
Supreme Enforcement Corp., 275 NY 502, affirming without opn, 250
This Court has previously stated that when the
"acquisition of the claim was simply an incidental part of a
substantial commercial transaction," there is no champerty
(Fairchild Hiller v McDonnell Douglas,
In his deposition testimony, Jack Mayer suggested
various reasons for Bluebird's purchases of the second series
certificates: (1) to gain leverage to settle the priority action,
which would permit final payment to first series certificate
holders; (2) to profit on the second series certificates,
purchased at a greatly reduced cost; and (3) to at least be
economically indifferent as to the result of the priority action.
Bluebird also argues that holding second series certificates
could have been beneficial in the event the appeal of the
bankruptcy court decision was successful and the value of the
By purchasing the certificates, Bluebird could have
simply been covering varying risks and potentialities. Bluebird
has offered an array of financial considerations justifying its
purchases, including an intent to be paid some amount on the
certificates. These reasons qualify as a sufficient business
motivation for the purchases (cf., Sprung v Jaffe,
Jack Mayer admitted, however, that a lawsuit against the second series trustee over matters related to the Continental bankruptcy was a consideration at the time Bluebird began to purchase the certificates in late January 1994. While he did not believe it actually changed the rights acquired, Mayer did request the early purchases with what he acknowledged was an atypical assurance that they were purchased "with all legal rights." Then, Bluebird brought its first lawsuit against UJB in April 1994.
Thus, Bluebird first sued UJB based on its conduct
during the Continental bankruptcy before payment on the second
series certificates was possible (pursuant to the settlement of
the priority action in December 1995). Neither the success of
the priority action nor a profit or loss on the second series
certificates was yet known. Bluebird then filed a state
Yet, the decision to sue cannot automatically become synonymous with champerty, for litigation can be an appropriate and commonly used strategy. Further, in the face of Mr. Mayer's testimony as to the business purposes at hand when the certificates were acquired, the timing of the lawsuits offers only competing inferential hindsight with which to challenge that testimony in a fact-resolution setting.
Essentially, this case boils down to a weighing of
evidence or a credibility determination, albeit within subsets of
uncontested facts, regarding Bluebird's proffered reasons for the
acquisitions. Indeed, "the question of intent and purpose of the
purchaser or assignee of a claim is usually a factual one to be
decided by the trier of facts" (Fairchild Hiller v McDonnell
Douglas,
In this regard, we note that the Appellate Division
found evidence of a litigation-oriented "primary purpose" on the
basis of a plainly mistaken fact. Bluebird's final purchases of
certificates were made within six months (not two years) of the
approval of the priority action settlement in December 1995,
The dismissal of the complaint as against UJB on the champerty ground, therefore, was improper, and the question remains whether it was Bluebird's asserted business purpose or the admitted consideration of the lawsuit that constituted the primary purpose for the purchases of the second series certificates. Considering the narrow purposes of champerty and the tangled context of this case, we would not make this determination lightly. To say the least, a finding of champerty as a matter of law might engender uncertainties in the free market system in connection with untold numbers of sophisticated business transactions -- a not insignificant potentiality in the State that harbors the financial capital of the world.
We have considered all of UJB's arguments, and are
satisfied that, especially considering all the facts and
practicalities, this matter cannot be summarily resolved at this
procedural juncture on this issue presented (see, Sprung v Jaffe,
Accordingly, with respect to UJB's champerty-predicated motion to dismiss the complaint, the order of the Appellate Division should be reversed, with costs, and the motion denied.