Understanding Justinian Capital and What It Means for Litigation Finance in New York
The basic principle behind the common-law doctrine of champerty is that it is wrongful for a party to “intermeddle” in a lawsuit between two other parties by providing financial assistance ot one or the other. But, in practice, the application of the doctrine can involve some subtle distinctions that are easily overlooked and that could give rise to misleading conclusions. A recent New York case illustrates this point.
In that case, Justinian Capital SPC v. WestLB AG, the defendant had issued securities that declined dramatically in value. The owner of some of those securities sold them to Justinian Capital for a nominal price of $1 million, with the idea that Justinian would sue the issuer. But Justinian would only pay that price if it prevailed in the lawsuit.
WestLB sought summary judgment, invoking a New York anti-champerty statute that restricts individuals and companies from purchasing or taking an assignment of notes or other securities “with the intent and for the purpose of bringing an action or proceeding thereon.” The statute also provides a safe harbor, which exempts the purchase or assignment of notes or other securities from this restriction when the notes or other securities “have an aggregate purchase price of at least five hundred thousand dollars.” WestLB argued that, because Justinian’s purchase price was contingent on the outcome of the litigation, Justinian was not entitled to the safe harbor and could not assert the securities action.
By a 5-2 majority, the Court of Appeals, New York’s highest court, held that Justinian’s purchase of the securities violated New York’s statutory prohibition on champerty. Specifically, the court held that the transaction did not come within the statute’s safe harbor provisions because there was no evidence that Justinian’s acquisition of the securities was for any purpose other than the lawsuit it commenced shortly after acquiring the securities. The lawsuit, the court said, “was not merely an incidental or secondary purpose of the assignment, but its very essence.” Because Justinian’s sole purpose in acquiring the notes was to bring the lawsuit, “its acquisition was champertous.”
Even though the decision undermined an attempt to invest in a legal claim, it would be wrong to read this decision as a generalized condemnation of litigation finance, however. Most importantly, the nature of Justinian’s investment was far different from the investment made in the ordinary litigation finance transaction. Justinian did not advance funds to a litigant; it made what amounted to a contingent purchase of securities. The decision against Justinian was, in a sense, a ruling that pertained more to standing than champerty. That is, Justinian’s contingent interest in the securities meant that it was not really the true owner and therefore was unable to exercise the rights belonging to a true owner, including the right to sue. In the final analysis, the Justinian case does not mean that investors cannot purchase a contingent interest in the recovery from a litigation matter. It just means that an investor cannot bring a lawsuit on the basis of a sham purchase of securities.
Topics: litigation finance, legal reform, third-party funding, litigation costs, securities law, New York, standing
Works Cited: Kevin LaCroix, N.Y. Top Court Rules Litigation Finance Transaction Violates Champerty Doctrine, The D&O Diary (Oct. 30, 2016) available at http://www.dandodiary.com/2016/10/articles/litigation-financing-2/n-y-top-court-rules-litigation-finance-transaction-violates-champerty-doctrine/
