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The Champerty Doctrine Under New York Law

By Jeffrey Gross and Nathaniel J. Palmer

A recent New York case demonstrates that the common law doctrine of champerty still poses a threat to the market for distressed debt. Historically, this doctrine barred litigation brought by assignees. In recent years, New York courts and the Legislature have restricted its ambit, thereby encouraging the development of secondary debt markets. This more limited application of the champerty doctrine has enabled buyers of distressed debt to pursue litigation, if necessary, as assignees.

But the champerty doctrine is not dead yet. In Justinian Capital, SPC v. WestLB AG, 952 N.Y.S.2d 725 (Sup. Ct. N.Y. Cty. Aug. 15, 2012), a New York trial court stayed a claims trader's causes of action pending further discovery about the merits of a champerty defense. On what it deemed to be an issue of first impression, the court characterized plaintiff's claims as a “scheme” to wage “litigation by proxy in exchange for a fee.” Id. at 733. Whatever the outcome of future discovery in this case, this decision is noteworthy for participants in the market for distressed debt.

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