Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certficates, Series 1999-C1, by and through Orix Capital Markets, LLC as Master Servicer and Special Servicer v. Love Funding Corporation
This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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,
Love Funding Corporation,
Ira M. Feinberg, for appellant.
Alec W. Farr, for respondent.
Loan Syndications & Trading Association Inc.; Northern
Manhattan Improvement Corporation et al., amici curiae.
The United States Court of Appeals for the Second
Circuit has certified to us questions relating to Judiciary Law
§ 489, New York's champerty statute.
We hold that a corporation
or association that takes an assignment of a claim does not
violate Judiciary Law § 489 (1) if its purpose is to collect
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damages, by means of a lawsuit, for losses on a debt instrument
in which it holds a pre-existing proprietary interest.
Love Funding Corporation ("Love Funding"), a commercial
mortgage-banking corporation, entered into a Mortgage Loan
Purchase Agreement ("the Love MLPA") with Paine Webber Real
Estate Securities Inc. ("Paine Webber") on April 23, 1999.
the Love MLPA, Love Funding originated mortgage loans, evaluating
the borrowers and performing due diligence, while Paine Webber
provided financing and was ultimately assigned the loans for
Love Funding received a fee of 1% of the
principal amount of each loan.
In the Love MLPA, Love Funding represented that the
loans were not in default.
Love Funding further promised that in
the event it breached any representation or warranty, and upon
prompt written notice, it would cure the breach or, at Paine
Webber's option, repurchase the affected mortgage loan.
Significantly, in section 9.14 (a) of the Love MLPA, Love Funding
agreed to indemnify Paine Webber "from and against all demands,
claims or asserted claims, liabilities or asserted liabilities,
costs and expenses, including reasonable attorneys' fees,
incurred . . . in any way arising from or related to any breach."
In July 1999, Love Funding made a $6.4 million loan to
Cyrus II Partnership, secured by a mortgage on an apartment
complex, the Arlington Apartments, in Harvey, Louisiana.
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- 3 loan was assigned to Paine Webber under the Love MLPA.
consideration, Love Funding received its 1% fee.
Paine Webber sold the Arlington Loan to Merrill Lynch
Mortgage Investors, Inc. on November 1, 1999, as part of a larger
securities transaction involving numerous mortgage loans.
the governing Mortgage Loan Purchase Agreement ("the Merrill
Lynch MLPA"), Paine Webber made representations and warranties
concerning the loans, including ones substantively similar to
those made by Love Funding in the Love MLPA.
The loans were then securitized, under a pooling and
servicing agreement in which certificates secured by the
underlying mortgages were issued, and a trust created for the
holders of those certificates, who would receive interest
payments generated by the loans.
The trust was denominated the
Trust for the Certificate Holders of the Merrill Lynch Mortgage
Investors, Inc. Mortgage Pass-Through Certificates, Series 1999C1 ("the Trust").
Orix Real Estate Capital Markets, LLC ("Orix")
was named Master Servicer and Special Servicer.
The Trust declared the Arlington Loan to be in default
in March 2002, for reasons not directly pertinent to this case,
and it commenced a mortgage foreclosure action in Louisiana state
It was discovered that Cyrus's principals had committed
In October 2004, the Arlington Apartments complex was sold
for some $6.5 million, from which the Trust received about $5.9
million. That December, the Trust was awarded approximately
$10.9 million in damages against Cyrus and its principals, though
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- 4 fraud in obtaining the Arlington Loan.
Webber's successor in interest, UBS.2
The Trust informed Paine
In the fall of 2002, the
Trust commenced litigation against UBS in federal court and in
state courts in Texas and New York, related to over thirty loans
that Paine Webber had sold.
With respect to the Arlington Loan,
the Trust's theory was that Cyrus's fraud had put the loan in
default from the outset, so that Paine Webber (and, hence, UBS)
had necessarily breached its representation in the Merrill Lynch
By all accounts, the litigation was intense and expensive,
with the Trust and UBS purportedly spending some $7 million and
over $30 million respectively.
On September 13, 2004, the Trust and UBS settled, with
UBS agreeing to pay the Trust $19.375 million with regard to
various loans deposited in the Trust.
With respect to the
Arlington Loan, however, UBS assigned to the Trust, as
consideration for its release, all its rights under the Love
MLPA: "each and every of the representations and warranties, and
related remedies for breach thereof . . . including but not
limited to the remedies set out in section 9.14" of the Love
it is not clear how much of that amount is collectible.
In November 2000, following a merger of their parent
companies, UBS succeeded in interest to Paine Webber's rights and
obligations under the Love MLPA.
The agreement memorializing the "Assignment of claims and
causes of action" was signed by the parties on November 18, 2004,
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In November 2004, a representative of the Trust
approached Love Funding's principals, by telephone and in
writing, demanding that Love Funding either cure its breaches of
representations and warranties affecting the Arlington Loan or
repurchase the loan.
According to Love Funding, the Trust
representative demanded $10 million to settle.
At the same time,
the Trust commenced an action against Love Funding in Supreme
Court, New York County, alleging that it had breached its
representations and warranties that the Arlington Loan was not in
default at the time of closing.
The Trust's action was removed to federal court.
the Trust and Love Funding moved for summary judgment.
October 11, 2005, the United States District Court for the
Southern District of New York granted the Trust's motion for
summary judgment to the extent of holding that Love Funding
breached the Love MLPA.
Although denying Love Funding's cross-
motion for summary judgment, the District Court allowed Love
Funding to amend its Answer to assert a champerty defense.
In a February 27, 2007 decision, the District Court
held that the Trust had "accepted the assignment of the Love MLPA
with the primary purpose of bringing a lawsuit against Love
Because the assignment is void for champerty, the Trust
is not entitled to any award of damages."
The District Court
noted that the assignment was the only consideration the Trust
but by its terms had become effective on September 13, 2004.
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took in exchange for releasing UBS with respect to the Arlington
Loan, and observed that the Trust had urged the court to find
that Love Funding must indemnify the Trust for some of the legal
fees UBS incurred defending itself against the Trust.
the Trust's efforts at settlement as a sham, the District Court
concluded that the Trust's primary purpose was to secure a means
of suing Love Funding, and dismissed its action.
On appeal, the Trust argued principally that a finding
that it had accepted the assignment with the intention of suing
Love Funding is insufficient as a matter of law for champerty.
The United States Court of Appeals for the Second Circuit decided
that resolution of the Trust's appeal depended on significant and
unsettled questions of New York law.
The Second Circuit
certified to us, and we accepted, the following questions:
1. Is it sufficient as a matter of law to
find that a party accepted a challenged
assignment with the "primary" intent
proscribed by New York Judiciary Law
§ 489 (1), or must there be a finding of "sole"
2. As a matter of law, does a party commit
champerty when it "buys a lawsuit" that it
could not otherwise have pursued if its
purpose is thereby to collect damages for
losses on a debt instrument in which it holds
a pre-existing proprietary interest?
3. (a) As a matter of law, does a party
commit champerty when, as the holder of a
defaulted debt obligation, it acquires the
right to pursue a lawsuit against a third
party in order to collect more damages
through that litigation than it had demanded
in settlement from the assignor?
(b) Is the answer to question 3(a) affected
by the fact that the challenged assignment
enabled the assignee to exercise the
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assignor's indemnification rights for
reasonable costs and attorneys' fees?
(556 F3d 100, 114 [2d Cir 2009].)
We answer the second certified question, and both parts
of the third certified question, in the negative.
Because -- as
the Second Circuit itself hinted -- "the critical issue to
assessing the sufficiency of the champerty finding is not the
denomination of the Trust's intent as 'primary' or 'sole,' but
the purpose behind its acquisition of rights that allowed it to
sue Love Funding" (556 F3d at 111), we find it unnecessary to
answer the first certified question.
The doctrine of champerty developed "to prevent or
curtail the commercialization of or trading in litigation"
(Bluebird Partners, L.P. v First Fid. Bank, N.A., 94 NY2d 726,
The doctrine, which has ancient and medieval roots
(see Bluebird Partners, 94 NY2d at 733-734; Martin, Syndicated
Lawsuits: Illegal Champerty or New Business Opportunity?, 30 Am
Bus L J 485 ; Radin, Maintenance by Champerty, 24 Cal L Rev
48 ), is currently codified in Judiciary Law §§ 488-489,
which derive from sections 274 and 275 of the former Penal Law.
The latter section applied to all corporations and associations a
proscription that had long governed legal practitioners (see Act
of June 9, 1939, ch 822, § 13, 1939 NY Laws 2055, at 2058).
Under Judiciary Law § 489 (1), a corporation or association may
not "solicit, buy or take an assignment of, or be in any manner
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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."4
champerty statutes are directed at preventing the "strife,
discord and harassment" that would be likely to ensue "from
permitting attorneys and corporations to purchase claims for the
purpose of bringing actions thereon" (Fairchild Hiller Corp. v
McDonnell Douglas Corp., 28 NY2d 325, 329 ).
The term "champerty" referred in the Middle Ages to any
"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 Partners, 94 NY2d at
In New York, however, the prohibition of champerty has
always been "limited in scope and largely directed toward
preventing attorneys from filing suit merely as a vehicle for
obtaining costs" (id.).5
Our earliest cases and those of the
Court of Chancery clearly demonstrate this narrow scope.
In Baldwin v Latson (2 Barb Ch 306 ), the Court
of Chancery explained that the purpose of New York's champerty
Judiciary Law § 488 (1) applies a similar proscription to
attorneys and counselors.
Payment of attorneys by fees that are contingent upon
successful litigation and derived from its proceeds is expressly
permitted in the champerty statute (Judiciary Law § 488  [d]);
see also 22 NYCRR § 603.7).
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statute "was to prevent attorneys and solicitors from purchasing
debts, or other things in action, for the purpose of obtaining
costs from a prosecution thereof, and [it] was never intended to
prevent the purchase for the honest purpose of protecting some
other important right of the assignee" (2 Barb Ch at 308).
Moses v McDivitt (88 NY 62 ), we endorsed the Chancery
Court's analysis, repeating its distinction between acquiring a
thing in action in order to obtain costs and acquiring it in
order to protect an independent right of the assignee (see 88 NY
In Moses, plaintiff, an attorney, bought a bond and
mortgage from defendant in order to coerce the defendant, as a
condition of extending his time of payment, to assign to
plaintiff certain stock in a company.
"This purpose, whether
honest or reprehensible, was not within the prohibition of the
statute. . . .
The real question upon which the case turned was,
whether the main and primary purpose of the purchase was to bring
a suit and make costs, or whether the intention to sue was only
secondary and contingent, and the suit was to be resorted to only
for the protection of the rights of the plaintiff, in case the
primary purpose of the purchase should be frustrated."
(88 NY at
We have also held that the champerty statute is
violated by an attorney "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" (Sprung v Jaffe,
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- 10 3 NY2d 539, 544 ).
In describing champerty in terms of an
acquisition made with the purpose of bringing a lawsuit (see also
Bluebird Partners, 94 NY2d at 736), we intended to convey the
difference between one who acquires a right in order to make
money from litigating it and one who acquires a right in order to
New York cases agree that if a party acquires a debt
instrument for the purpose of enforcing it, that is not champerty
simply because the party intends to do so by litigation.
inquiry into purpose is a factual one.6
In Promenade v Schindler
El. Corp. (39 AD3d 221 [1st Dept 2007]), for example, The Glick
Organization, a general contractor, sued by The Promenade for
reasons not relevant here, commenced a third-party action for
contractual indemnification against some of its subcontractors,
including De-Con Mechanical Corp.
Promenade and Glick settled.
The settlement agreement provided not only that Glick pay
Promenade $1.8 million but also that Glick assign Promenade its
claim for contractual indemnification against De-Con.
Appellate Division rejected De-Con's argument that the assignment
was void for champerty.
De-Con's contention was belied by the
fact that Promenade had accepted the assigned claim for the
purpose of pursuing the full value of its settlement of
contractual claims, not for the purpose of "bringing a claim
That is not to say, however, that the issue may not be
amenable to summary judgment in an appropriate case.
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against De-Con either as an investment or to harass or injure it"
(39 AD3d at 223).
Similarly, in Williams Paving Co. v United States
Fidelity & Guaranty Co. (67 AD2d 827 [4th Dept 1979]), plaintiff,
a corporation that owned a machine damaged by the Joneses,
obtained judgment of $27,008.50.
to a maximum of $5,000.
Defendant insured the Joneses
It was alleged that plaintiff had
offered to settle the claim within the policy limits and
defendant, acting in bad faith, had refused to do so.
Plaintiff's insurer became subrogated to plaintiff's claim
against the Joneses, and plaintiff sued as nominee of its insurer
and assignee of the Joneses, asserting defendant's bad faith.
The Appellate Division held that plaintiff's "primary purpose was
to protect its own interest in attempting to collect its judgment
against the Joneses" and that, in taking the assignment from the
Joneses, plaintiff, rather than acting with litigious purpose,
had a relationship with the Joneses that gave it a substantial,
legitimate interest in the transactions involved in the suit (67
AD2d at 828).
Many other New York cases can be cited for the same
principle (see e.g. Red Tulip, LLC v Neiva, 44 AD3d 204, 213-214
[1st Dept 2007]); Hill Int'l, Inc. v. Town of Orangetown, 290
AD2d 416, 417 [2d Dept 2002]; G.G.F. Dev. Corp. v Andreadis, 251
AD2d 624 [2d Dept 1998]; Small Business Admin. v Mills, 203 AD2d
654, 655 [3d Dept 1994]; Am. Bag & Metal Co. v. Alcan Aluminum
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Corp., 115 AD2d 958, 959-960 [4th Dept 1985]; Limpar Realty Corp.
v Uswiss Realty Holding, Inc., 112 AD2d 834, 836-837 [1st Dept
1985]; 1015 Gerald Realty Corp. v A & S Improvements Corp., 91
AD2d 927, 928 [1st Dept 1983]; Prudential Oil Corp. v Phillips
Petroleum Co., 69 AD2d 763 [1st Dept 1979]; American Express Co.
v Control Data Corp., 50 AD2d 749, 750 [1st Dept 1975]; Concord
Landscapers, Inc. v Pincus, 41 AD2d 759 [2d Dept 1973]).
short, the champerty statute does not apply when the purpose of
an assignment is the collection of a legitimate claim.
statute prohibits, as the Appellate Division stated over a
century ago, "is the purchase of claims with the 'intent and for
the purpose of bringing an action' that [the purchaser] may
involve parties in costs and annoyance, where such claims would
not be prosecuted if not stirred up . . . in [an] effort to
secure costs" (Wightman v Catlin, 113 AD 24, 27, 28 [2d Dept
In the present case, as the Second Circuit explains,
the Trust, as the holder of the Arlington Loan and the party that
would directly suffer the damages of any default on that loan,
had a pre-existing proprietary interest in the loan (556 F3d at
If, as a matter of fact, the Trust's purpose in taking
assignment of UBS's rights under the Love MLPA was to enforce its
rights, then, as a matter of law, given that the Trust had a preexisting proprietary interest in the loan, it did not violate
Judiciary Law § 489 (1).
Accordingly, we answer the second
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certified question in the negative.
The Second Circuit also asks us to clarify the
application of the champerty doctrine to certain facts of the
The District Court found that the Trust's intent
in suing Love Funding was to recover more in compensation for its
losses on the Arlington Loan than it had demanded in settlement
from UBS on the Arlington Loan.
Moreover, the District Court
noted that, in accepting the assignment, the Trust believed that
Love Funding could be made to indemnify the Trust for a portion
of the legal fees UBS incurred defending itself against the
The District Court concluded that the Trust's intent in
suing Love Funding was not only to be made whole on losses
sustained from the Arlington Loan default, but also to profit
from the past litigation, a purpose the District Court found
consistent with champerty.
Love Funding does not identify, and we are 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 that were incurred in past legal actions.
indemnification rights to the costs of past litigation is not to
acquire a thing in action in order to obtain costs from
The Trust also seeks the attorneys' fees it paid and costs
it expended pursuing Love Funding, as well as its fees and costs
related to the Arlington Apartments foreclosure and its lawsuit
against Cyrus and its principals.
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- 14 prosecution thereon.8
Similarly, no New York case has been
brought to our attention that stands for the proposition that it
is champerty to settle a dispute by accepting a transfer of
rights that has the potential for a larger recovery than one had
demanded as a cash settlement.
Nor would it be possible in many
cases to assess whether rights are likely to yield a larger
recovery than earlier demanded.
Consequently we answer both
parts of the third certified question in the negative.
Accordingly, the first certified question should not be
answered as unnecessary, the second certified question should be
answered in the negative, the first part of the third certified
question should be answered in the negative, and the second part
of the third certified question should be answered in the
We express no view as to whether the Love MLPA obligates
Love Funding to indemnify the Trust for legal fees UBS incurred
defending itself against the Trust, prior to the assignment.
Although UBS purportedly spent over $30 million defending itself
against the Trust, counsel for the Trust stated at oral argument
before this Court that the UBS legal fees sought by the Trust
amount to some $300,000, for representation relating to the
Arlington Loan. We have not been asked whether these are
"reasonable attorneys' fees" arising from or related to Love
Funding's breach, within the meaning of the Love MLPA.
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Following certification of questions by the United States Court
of Appeals for the Second Circuit and acceptance of the questions
by this Court pursuant to section 500.27 of the Rules of Practice
of the New York State Court of Appeals, and after hearing
argument by counsel for the parties and consideration of the
briefs and the record submitted, certified questions answered in
accordance with the opinion herein. Opinion by Judge Pigott.
Chief Judge Lippman and Judges Ciparick, Graffeo, Read, Smith and
Decided October 15, 2009
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