Justinian Capital SPC, Appellant,v.WestLB AG,, et al., Respondents.BriefN.Y.September 14, 2016To Be Argued By: JAMES J. SABELLA Time Requested: 20 Minutes APL-2015-00231 New York County Clerk’s Index No. 600975/10 Court of Appeals STATE OF NEW YORK JUSTINIAN CAPITAL SPC for and on behalf of BLUE HERON SEGREGATED PORTFOLIO, Plaintiff-Appellant, -against- WESTLB AG, NEW YORK BRANCH, WESTLB ASSET MANAGEMENT (US) LLC, and BRIGHTWATER CAPITAL MANAGEMENT LLC, Defendants-Respondents. BRIEF FOR PLAINTIFF-APPELLANT d JAY W. EISENHOFER JAMES J. SABELLA DEBORAH A. ELMAN ROBERT D. GERSON GRANT & EISENHOFER P.A. 485 Lexington Avenue, 29th Floor New York, New York 10017 Telephone: (646) 722-8500 Facsimile: (646) 722-8501 Attorneys for Plaintiff-Appellant October 26, 2015 CORPORATE DISCLOSURE STATEMENT Pursuant to Rule 500.1 of the Rules of the Court of Appeals, Plaintiff- Appellant Justinian Capital SPC states that its voting shares are owned by Justinian Capital Management Ltd., and that the sole shareholder of Justinian Capital Management Ltd. is International Corporation Services Ltd. i TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... iv QUESTIONS PRESENTED ...................................................................................... 1 JURISDICTIONAL STATEMENT .......................................................................... 2 PRELIMINARY STATEMENT ............................................................................... 2 NATURE OF THE CASE ......................................................................................... 6 A. WESTLB’S EGREGIOUS WRONGDOING................................................... 6 B. DPAG’S SALE OF THE NOTES TO JUSTINIAN .......................................... 9 PROCEDURAL HISTORY ..................................................................................... 12 A. THE DECISION OF THE IAS COURT ....................................................... 13 B. THE APPELLATE DIVISION’S DECISION ................................................. 14 ARGUMENT ........................................................................................................... 15 I. DEFENDANTS BEAR THE BURDEN OF PROVING CHAMPERTY .... 16 II. THE APPELLATE DIVISION ERRED IN HOLDING THAT A BINDING OBLIGATION TO TRANSFER $500,000 TO THE SELLER IS INSUFFICIENT TO SATISFY THE SAFE HARBOR OF JUD. LAW § 489(2), AND THAT, INSTEAD, THE $500,000 MUST ACTUALLY HAVE CHANGED HANDS ............. 17 A. THE SAFE HARBOR OF § 489(2) WAS CREATED TO PROTECT AND FACILITATE THE MARKET FOR DISTRESSED DEBT INSTRUMENTS ......................................................... 17 ii B. THE COURT BELOW ERRED IN HOLDING THAT A BINDING OBLIGATION TO TRANSFER $500,000 TO THE SELLER IS INSUFFICIENT TO SATISFY THE SAFE HARBOR ..................... 20 C. THE OBLIGATION TO PAY THE $500,000 WAS A BONA FIDE, BINDING OBLIGATION .......................................................................... 23 1. Payment of the $1 Million Is Not Contingent on the Result in This Litigation.............................. 24 2. There Are Economic Consequences From Non-Payment of the $1 million ....................................... 25 3. The Fact That the $1 Million Has Not Yet Been Paid Does Not Demonstrate That the Obligation to Pay It Is Not Real ................................................................................ 25 4. Justinian’s Efforts to Raise the Money to Pay the $1 Million Further Demonstrates That the Obligation to Pay It Is a Bona Fide, Binding Commitment ........................ 27 III. THE APPELLATE DIVISION ERRED IN UPHOLDING SUMMARY JUDGMENT THAT THE ASSIGNMENT WAS CHAMPERTOUS GIVEN THAT THERE IS SUBSTANTIAL EVIDENCE THAT THE ASSIGNMENT DID NOT STIR UP LITIGATION AND THAT THE PURPOSE OF THE ASSIGNMENT WAS TO ENFORCE A LEGITIMATE CLAIM ............... 28 A. SECTION 489 IS THE EXCLUSIVE BASIS FOR A CHAMPERTY DEFENSE ............................................................................................... 28 B. THE TRANSACTION HERE DOES NOT VIOLATE SECTION 489(1) .......... 29 1. The Assignment Did Not Stir Up Litigation ............................. 30 2. The Purpose of the Assignment Was the Collection of a Legitimate Claim, Not Merely to Pursue Litigation .......... 33 iii a. The SPA Does Not Require Justinian to Bring Litigation ......................................................................... 36 b. Justinian’s Purpose Was to Enforce the Notes and Realize Value, Not Just to Bring a Lawsuit ............. 37 c. The Fact That Justinian’s Intent Was to Enforce the Notes and Not Simply Bring Litigation Is Reinforced by the Fact That Justinian Attempted to Pursue Discussions With WestLB to Obtain Payment on the Notes ......................................................................... 38 d. DPAG’s Rights Under the SPA Do Not Support the Appellate Division’s Conclusions .............. 39 e. The Fact That DPAG Is Entitled to a Substantial Portion of any Recovery on the Notes Does Not Support the Appellate Division’s Conclusions .............. 41 CONCLUSION ........................................................................................................ 44 iv TABLE OF AUTHORITIES Page(s) CASES Am. Optical Co. v. Curtiss, 56 F.R.D. 26 (S.D.N.Y. 1971) ....................................................................... 37 Atl. Int’l Movers, LLC v. Ocean World Lines, Inc., 914 F. Supp. 2d 267 (E.D.N.Y. 2012) ........................................................... 30 Bennett v. Supreme Enforcement Corp., 275 N.Y. 502 (1937) ..................................................................................... 41 Bluebird Partners, L.P. v. First Fid. Bank, N.A., 94 N.Y.2d 726 (2000) .............................................................................. 16, 41 Bunton v. Houze, No. 651362/10, 40 Misc. 3d 1212(A), 2013 WL 3722678 (Sup. Ct. N.Y. Co. July 3, 2013) ................................................................... 26 Centurion Capital Corp. v. Guarino, No. 11117/05, 38 Misc. 3d 1216(A), 2012 N.Y. Misc. LEXIS 6001 (Civ. Ct. Richmond Co. Dec. 31, 2012) .................................................. 16, 17 Chartis Specialty Ins. Co. v. Queen Anne HS, LLC, 867 F. Supp. 2d 1111 (W.D. Wash. 2012) .............................................. 22, 23 Coopers & Lybrand v. Levitt, 52 A.D.2d 493 (1st Dep’t 1976) .................................................................... 28 Cortlandt Street Recovery Corp. v. Hellas Telecommc’ns, S.à.r.l., 47 Misc. 3d 544 (Sup. Ct. N.Y. Co. 2014) .................................................... 42 Del Webb Communities, Inc. v. Partington, 652 F.3d 1145 (9th Cir. 2011) ....................................................................... 44 Ehrlich v. Rebco Ins. Exchange, Ltd., 225 A.D.2d 75 (1st Dep’t 1996) .................................................................... 36 Elliott Assocs., L.P. v. Banco de la Nacion, 194 F.3d 363 (2d Cir. 1999) .......................................................................... 36 v Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 325 (1971) .................................................................................... 44 Faris v. Longtop Fin. Techs. Ltd., No. 11-cv-3658, 2011 WL 4597553 (S.D.N.Y. Oct. 4, 2011) ......................... 34 Frank H. Zindle v. Friedman’s Express, Inc., 258 A.D. 636 (1st Dep’t 1940) ...................................................................... 41 FTBK Investor II v. Joshua Management LLC, No. 810164/2011, 2014 WL 2451490 (Sup. Ct. N.Y. Co. May 15, 2014) ................................................................................................ 30 Gallery Seomi v. Sotheby’s, Inc., No. 602573/2009, 27 Misc. 3d 1231(A), 2010 N.Y. Misc. LEXIS 1536 (Sup. Ct. N.Y. Co. Aug. 27, 2010) ................................................................ 30 Glick & Dolleck v Tri-Pac Export Corp., 22 N.Y.2d 439 (1968) .................................................................................... 15 Holmes v. Gravenhorst, 263 N.Y. 148 (1933) ...................................................................................... 40 IRB-Brasil Resseguros S.A. v. Inepar Investments S.A., No. 604448/2006, 2009 N.Y. Misc. LEXIS 4355 (Sup. Ct. N.Y. Co. Aug. 3, 2009) ................................................................................................. 45 Justinian Capital SPC v. WestLB AG, N.Y. Branch, 37 Misc. 3d 518 (Sup. Ct. N.Y. Co. 2012) .............................................. 12, 16 Justinian Capital SPC v. WestLB AG, 43 Misc. 3d 598 (Sup. Ct. N.Y. Co. 2014) .............................................passim Justinian Capital SPC v. WestLB AG, 128 A.D.3d 553 (1st Dep’t 2015) ...........................................................passim Knobel v. Estate of Hoffman, 105 Misc. 2d 333 (Sup. Ct. N.Y. Co. 1980) .................................................. 28 LBUBS 2005-C2 N.Y. Retail LLC v. AC I Sw. Broadway LLC, No. 850074/2012, 2013 WL 1796712 (Sup. Ct. N.Y. Co. Apr. 22, 2013) ........................................................... 30, 33 vi Lightwater Corp. v. Republic of Argentina, No. 02-cv-3804, 2003 U.S. Dist. LEXIS 6156 (S.D.N.Y. Apr. 14, 2003) .............................................................................. 33 LNC Invs., Inc. v. First Fid. Bank, N.A., No. 92-cv-7584, 2000 U.S. Dist. LEXIS 4617 (S.D.N.Y. Apr. 11, 2000) .... 16 Lost Lots Assocs., Ltd. v. Bruyn, 68 A.D.2d 1006 (3d Dep’t 1979) ................................................................... 28 M.V.B. Collision, Inc. v. Allstate Ins. Co., 40 Misc. 3d 37 (2d Dep’t App. Term 2012) .................................................. 33 Matter of Auerbach v. Bd. of Educ. of City School Dist. of City of N.Y., 86 N.Y.2d 198 (1995) .................................................................................... 22 Miller UK Ltd. v. Caterpillar, Inc., No. 10-cv-3770, 2014 WL 67340 (N.D. Ill. Jan. 6, 2014) ............................ 44 Osprey, Inc. v. Cabana Ltd. P’ship, 340 S.C. 367, 532 S.E.2d 269 (2000) ............................................................ 44 Pearson v. Component Tech. Corp., 247 F.3d 471 (3d Cir. 2001) .......................................................................... 40 Phillips v Kantor & Co., 31 N.Y.2d 307 (1972) .................................................................................... 15 Puckett v. United States, 556 U.S. 129 (2009)................................................................................. 25, 26 Red Tulip, LLC v. Neiva, 44 A.D.3d 204 (1st Dep’t 2007) .............................................................. 44, 45 Refac Int’l, Ltd. v. Lotus Dev. Corp., 131 F.R.D. 56 (S.D.N.Y. 1990) .................................................................... 36 Richbell Info. Servs., Inc. v. Jupiter Partners L.P., 280 A.D.2d 208 (1st Dep’t 2001) ................................................................. 45 Saladini v. Righellis, 426 Mass. 231, 687 N.E.2d 1224 (1997) ....................................................... 44 vii Sprint Commc’ns Co. L.P. v. APCC Services, Inc., 554 U.S. 269 (2008) ................................................................................. 42, 43 Toste Farm Corp. v. Hadbury, Inc., 798 A.2d 901 (R.I. 2002) ............................................................................... 44 Trimm v. Marsh, 54 N.Y. 599 (1874) ........................................................................................ 40 Trust for Certificate Holders of Merrill Lynch Mortg. Investors, Inc. Mortg. Pass-Through Certificates, Series 1999-C1 v. Love Funding Corp., 13 N.Y.3d 190 (2009) .............................................................................passim Trust for Certificate Holders of Merrill Lynch Mortg. Investors, Inc. Mortg. Investors, Inc. v. Love Funding Corp., 591 F.3d 116 (2d Cir. 2010) .......................................................................... 34 Vollmer v. Auto. Fire Ins. Co., 207 A.D. 67 (3d Dep’t 1923) ..................................................................... 4, 22 Weitzel v. N. Golf, Inc., No. 2007/01858, 18 Misc. 3d 1134(A), 2008 N.Y. Misc. LEXIS 583 (Sup. Ct. Livingston Co. Feb. 20, 2008) ....................................................... 40 STATUTES AND RULES N.Y. C.P.L.R. § 5601 ................................................................................................. 2 N.Y. C.P.L.R. § 5602 ................................................................................................. 2 N.Y. JUD. LAW § 489 ........................................................................................passim OTHER AUTHORITIES 14 Am. Jur. 2d Champerty & Maintenance § 1 (2014) ........................................... 44 A.B. 7244-C, 227th Leg., Reg. Sess. (N.Y. 2004) ............................................ 18, 19 Jeffrey Gross & Nathaniel J. Palmer, The Champerty Doctrine Under New York Law, THE BANKRUPTCY STRATEGIST (Feb. 2013) ....................... 19 viii Anthony J. Sebok, Should the Law Preserve Party Control? Litigation Investment, Insurance Law, and Double Standards, 56 WM. & MARY L. REV. 833 (2015) ................................................................................................ 35 George Bundy Smith & Thomas J. Hall, The Narrow Application of the Champerty Doctrine, N.Y.L.J. (Oct. 19, 2012) ............................................. 30 RESTATEMENT (SECOND) OF CONTRACTS § 72 (1981) ............................................. 25 1 QUESTIONS PRESENTED 1. In order to satisfy the “safe harbor” of Judiciary Law § 489(2), which provides that the assignment of a claim is not champertous if accompanied by a sale of notes with a purchase price of at least $500,000, is it necessary for the money actually to change hands before a lawsuit is filed, or is it sufficient that the note purchaser entered into a binding obligation to pay $500,000? The Appellate Division held that it is necessary for the money actually to change hands. 2. Is it appropriate to grant summary judgment holding that an assignment of a claim violates Judiciary Law § 489(1) where a. There are hotly-contested disputed issues of fact concerning whether the assignment stirred up a lawsuit that would not otherwise have been prosecuted, and b. There is substantial evidence that the purpose of the assignment was to enforce an otherwise legitimate claim. The Appellate Division did not address the question of whether the assignment stirred up litigation or whether the claim was legitimate but nevertheless upheld summary judgment. 2 JURISDICTIONAL STATEMENT This Court has jurisdiction over the instant appeal pursuant to CPLR § 5602(a)(1)(i) because the action originated in the Supreme Court of the State of New York, and because the order of the Appellate Division appealed from finally determined the action and is not appealable as of right under CPLR § 5601. PRELIMINARY STATEMENT Plaintiff-Appellant Justinian Capital SPC (“Justinian” or “Plaintiff”) respectfully requests that this Court reverse the May 21, 2015 decision and order of the Appellate Division, First Department, which affirmed the February 25, 2014 decision and order of the Supreme Court, New York County dismissing with prejudice Justinian’s Complaint against Defendants-Respondents WestLB AG, New York Branch, and WestLB Asset Management (US) LLC (“Defendants” or “WestLB”).1 WestLB was a major player in the financial meltdown in the last decade, and its wrongdoing cost investors hundreds of millions of dollars. Indeed, the IAS Court recognized that Plaintiff Justinian could “be viewed as an important enforcer of the securities laws” that seeks to “hold those who caused the financial crisis 1 The Appellate Division’s decision is reported at 128 A.D.3d 553 (1st Dep’t 2015) and is in the Appendix at A6-11. The decision of the IAS Court is reported at 43 Misc. 3d 598 (Sup. Ct. N.Y. Co. 2014) and is in the Appendix at A14-24. 3 accountable.” 43 Misc. 3d at 604 (A20). However, through an unprecedented and unwarranted interpretation of JUD. LAW § 489, breathing new life into the long- dormant champerty doctrine, the decisions below have allowed WestLB to escape being held responsible for its egregious conduct, and in so doing the decisions threaten to disrupt the market for distressed debt in New York, which the Legislature had sought to protect through the 2004 amendments to § 489. Those amendments created JUD. LAW § 489(2), a “safe harbor” whereby a purchaser of distressed debt can acquire and sue on associated claims without fear of being accused of champerty as long as the notes or securities have “an aggregate purchase price of at least five hundred thousand dollars.” In adopting this amendment, the Legislature stressed that “[m]arkets have developed for the purchase and sale of claims including claims that are in default” (A411), and that “[t]he ability to collect on these claims without fear of champerty litigation is essential to the fluidity of commerce in New York.” Id. Relying on this provision, Justinian purchased from Deutsche Pfandbriefbank AG2 two series of Notes for $1 million plus a share of any recovery on the Notes, thereby satisfying the requirements of JUD. LAW § 489(2). The Court 2 Deutsche Pfandbriefbank AG and Depfa Bank plc were wholly-owned subsidiaries of Hypo Real Estate Holdings (“HRE”). A501. Unless the context otherwise requires, these three entities shall be referred to herein collectively as “DPAG.” 4 below, however, in an unprecedented ruling totally at odds with the language of the statute and the Legislature’s expressed intent, held that the safe harbor was not satisfied because, while Justinian has a binding obligation to pay DPAG the $1 million, that money has not yet changed hands. JUD. LAW § 489(2) does not state that the money must have changed hands in order for the safe harbor to apply; it merely requires a purchase price of $500,000 per note or series of notes. Furthermore, even if the statute had said that the purchaser must “pay” $500,000, or that $500,000 must be “paid,” which it does not, that still would not support the ruling below. In this State, it has long been the law that “[t]he word ‘pay’ means to satisfy by other means than cash as well as by cash,” Vollmer v. Auto. Fire Ins. Co., 207 A.D. 67, 69 (3d Dep’t 1923), including, for example, by promissory note. Id. Therefore, Justinian’s promise to pay is sufficient to satisfy any requirement that it “pay” $500,000 per series of notes. Through its unprecedented narrowing of the safe harbor that the Legislature created, the decision below has seriously undermined the Legislature’s intent to facilitate New York’s role in the trading of distressed debt. In addition, the decision below is hopelessly irreconcilable with well- established and long-standing law that the essential inquiry concerning alleged champerty is whether the assignment of a claim stirred up litigation that otherwise would not have been prosecuted. Trust for Certificate Holders of Merrill Lynch 5 Mortg. Investors, Inc. Mortg. Pass-Through Certificates, Series 1999-C1 v. Love Funding Corp., 13 N.Y.3d 190, 201 (2009). At bar, DPAG’s board authorized DPAG to file suit on its own (A351), so that, at a minimum, there is a triable issue - rendering summary judgment inappropriate - that the assignment to Justinian did not stir up litigation because DPAG would have sued on its own if the assignment had never been made. The IAS Court resolved this hotly contested factual issue against Justinian, concluding that the chances of DPAG suing in its own name were “remote.” 43 Misc. 3d at 607 (A23). But, perhaps recognizing the inappropriateness of making such a factual determination on summary judgment, the Court then brushed aside the question of whether the assignment stirred up litigation that would not otherwise have been prosecuted, calling that question a “red herring.” Id. The Appellate Division did not address Justinian’s showing that the assignment did not stir up litigation but affirmed summary judgment for defendants anyway, which is entirely at odds with established law. For the reasons set forth herein, it is respectfully submitted that this Court should give effect to the language of the statute and the Legislature’s intent to facilitate the New York distressed debt markets and should reverse the decision below. 6 NATURE OF THE CASE A. WESTLB’S EGREGIOUS WRONGDOING As alleged in the Complaint (A31-106), this action arises from the collapse of special purpose companies Blue Heron Funding VI, Ltd. (“Blue Heron VI”) and Blue Heron Funding VII, Ltd. (“Blue Heron VII,” and collectively with Blue Heron VI, “Blue Heron” or the “Blue Heron Entities”), that were sponsored and managed by WestLB. DPAG invested nearly €180 million in the Class B Notes of the Blue Heron Entities, based on Defendants’ representations that the assets in the Blue Heron portfolios were low-risk, and exclusively high-quality. A42 ¶ 27. WestLB represented that these assets were managed to stringent guidelines, which were designed to maintain their quality, as set forth in their Offering Memoranda, Asset Management Agreements, and Trust Indentures (the “Governing Documents”). A40 ¶ 23. By January 2008, however, these investments had lost all or most of their value. A32 ¶ 2. This was no accident. The Governing Documents precluded inclusion in the Blue Heron portfolios of certain assets that were of very poor quality and were likely to cause the Class B Notes to deteriorate in value, as they did. A47-48 ¶¶ 43-44. The Governing Documents further provided performance tests and triggers designed to prevent under-collateralization and to alert the Class B Noteholders if such a situation occurred. A52-56 ¶¶ 55-64. These safeguards were included to provide protection 7 over the Class B Noteholders’ investments and were inserted into the Governing Documents at the insistence of the Class B Noteholders for their benefit. A48 ¶ 45; A56-57 ¶ 65; A92 ¶ 159. Motivated by self-preservation, and in contravention of its many duties to the Class B Noteholders, as the global economy began to falter, WestLB knowingly purchased ineligible, high-risk assets for the Blue Heron portfolios, which it masked as safe investments. A33-34 ¶ 5; A65 ¶ 89; A66-67 ¶ 94. For example, Defendants purchased facially attractive assets that were actually tied to low-quality subprime residential mortgage-backed securities (“RMBS”) destined to suffer massive losses and significant downgrades in credit rating. A65 ¶ 89; A69- 70 ¶ 101. Defendants, all the way up to the Board of Directors of WestLB AG, knew that these were ineligible assets that would decline in value and suffer large losses. A69 ¶ 100. WestLB thus deliberately violated its obligations to the Class B Noteholders by, inter alia, (1) ignoring the restrictions on what assets it was permitted to purchase for the Blue Heron portfolios; (2) misrepresenting the purchase price for those assets; and (3) falsely reporting the nature of those assets to the Class B Noteholders. A35 ¶ 10. The motive for WestLB’s improper actions is clear. First, WestLB and certain of its board members were the subject of a criminal investigation for improper trading. In addition, WestLB was suffering massive losses from failed 8 acquisitions. A61-63 ¶¶ 80-81, 83. Moreover, WestLB was trying to position Brightwater Capital Management - its subsidiary responsible for managing both Blue Heron Entities - for sale, and desired to keep Brightwater’s assets under management at a high number. A62 ¶ 82. If the Blue Heron Entities failed any of the performance tests set forth in the Governing Documents, that failure would not only be publicly reported by the credit ratings agencies, it would result in significant political, financial and reputational fallout that would exacerbate the problems WestLB was already facing. A34 ¶ 6; A61-62 ¶¶ 79, 81. It was therefore vital to WestLB that the Class B Noteholders remain invested in Blue Heron, and that its SPCs not fail a performance test in the Spring of 2007. A63 ¶ 84. In order to increase the Blue Heron entities’ collateralization levels as required to satisfy relevant performance tests, WestLB purchased ineligible assets so far under par that the price was a sign to WestLB of the ineligibility and unsuitability of those assets, while manipulating data and information to claim the full par value of the collateral and therefore avoid triggering the safeguards in place for the protection of the Class B Noteholders, or raising the suspicions of the Class B Noteholders. A65-66 ¶¶ 90, 93; A77 ¶¶ 119- 20; A78-80 ¶¶ 124-28. WestLB even attempted to solicit the Class B Noteholders’ consent to retroactive modifications of the Governing Documents in 9 order to avoid failing the overcollateralization triggers for ineligible assets that WestLB had already purchased. A82-85 ¶¶ 133-38; A86 ¶ 141. The Class B Noteholders rejected the substantive changes, but, by presenting misleading information, WestLB induced the Class B Noteholders to extend the dates on which certain triggers would arise. A86-88 ¶¶ 143-48; A94-96 ¶¶ 176-85. In fear of having its credit rating downgraded, which would almost certainly result in a loss of business, WestLB took these measures to protect its institutional interests with complete disregard for the inevitable consequences they had upon the Class B Noteholders. A61-63 ¶¶ 79-83. B. DPAG’S SALE OF THE NOTES TO JUSTINIAN Upon the collapse of the Blue Heron entities, DPAG resolved to take steps to salvage what it could from its investment in the Notes. Thus, in the summer of 2009, the DPAG board authorized DPAG to commence litigation in its own name against WestLB. A351. There was concern, however, that litigating directly against another German bank would have negative commercial repercussions, id., so DPAG considered some alternatives as well. Among the alternatives considered was selling the Notes to Justinian for a purchase price that would include a portion of whatever Justinian might recover on the Notes. See A329. In November 2009, Depfa’s CEO, Thomas Glynn, told board members that he was “working on a transaction 10 which would allow us to sell our CDOs … to a third party Cayman SPV managed by Justinian Capital Management.” A556 (emphasis added). He later explained to another DPAG executive that he was negotiating “to sell these bonds on to a buyer named Justinian.” A305 (emphasis added). As Glynn testified, he recognized that under the SPA DPAG “wouldn’t retain control of the asset.” A505. While initially Glynn thought that this approach would permit DPAG to remain anonymous, id., the board discounted that factor as unrealistic. A511; see also A508. Glynn asked for authorization to proceed with Justinian, and the board decided to pursue the Justinian sale because it felt this would be less expensive and impose less of a burden on DPAG than managing and monitoring the litigation itself, not because it expected anonymity. A525. The negotiation process with Justinian dragged on for many months, and a Sale and Purchase Agreement (the “SPA”) (A192-219) was finally entered into in April 2010. Under the SPA, full title to the Notes was transferred to Justinian. See SPA § 3.1.1 (A199). The contemporaneous documentation shows that all of the relevant parties recognized that pursuant to the SPA, Justinian became the owner of the Notes. DPAG’s records after the SPA was signed reflect that the Notes were sold to Justinian and delivered to CIBC Bank and Trust Company (Cayman) Ltd. (“CIBC”) to act as custodian “in favour of Justinian Capital SPC Blue Heron 11 Portfolio.” A577-78. Justinian wrote to CIBC that the Notes were being delivered to CIBC “to hold in custody on our behalf for the Blue Heron Segregated Portfolio.” A552. CIBC’s records establish that Justinian’s Blue Heron Portfolio was now the owner of the Notes. CIBC’s Client Holdings Report indicates that upon receipt of the Notes, CIBC placed them in an account owned by the Blue Heron Portfolio. A554. After execution of the SPA, DPAG wanted to obtain some information concerning the Notes from the website run by Wells Fargo, the trustee for the Notes. When DPAG was unable to do so, it contacted Wells Fargo and was told: “Before we can release any information we will need to confirm ownership.” A549. Wells Fargo asked DPAG to complete and return to it a beneficial holder form, but DPAG recognized that it was no longer the owner of the Notes and therefore needed to ask Justinian to sign the form. Id. Thus, as a DPAG employee wrote to DPAG’s CEO, Glynn: We are no longer owners of the Blue Heron VI and Blue Heron VII bonds …. Because we are not the owners we do not have rights to the Trustee website. Therefore, if you want any more reports or to check for anything more, we do not have the right to access. In order to get that right, we need the owners to give us permission to access. A547. Because Justinian was the owner of the Notes, it was Justinian which then completed and returned to Wells Fargo the Beneficial Holder Information Form, 12 which states that the beneficial owner is Justinian Capital SPC for the Account of Blue Heron Segregated Portfolio. A555. PROCEDURAL HISTORY The case was commenced by the filing of a summons with notice on April 16, 2010. After service of the Complaint, Defendants moved to dismiss on the ground, inter alia, that Justinian “does not have standing to sue on the Class B notes because the notes are owned and controlled by non-parties.”3 Defendants’ moving brief made no mention of champerty or JUD. LAW § 489. After Justinian submitted its opposing brief, Defendants submitted a reply brief that asserted, for the first time, that Justinian’s acquisition of the Notes and claims violated the prohibition against champerty as embodied in JUD. LAW § 489.4 By Decision and Order dated August 15, 2012, the Court denied Defendants’ motion to dismiss on grounds of standing. See Justinian Capital SPC v. WestLB AG, N.Y. Branch, 37 Misc. 3d 518, 523 (Sup. Ct. N.Y. Co. 2012). The Court reserved judgment on other aspects of the motion and directed that the parties conduct “limited discovery on the issue of champerty.” Id. at 528. Upon 3 Memorandum of Law in Support of Defendants’ Motion to Dismiss the Complaint, dated Jan. 10, 2011 (Dkt. No. 24), at 10. 4 Defendants’ Reply Memorandum in Support of Motion to Dismiss the Complaint, dated Mar. 23, 2011 (Dkt. No. 34), at 3-4. 13 completion of the discovery, Defendants renewed their motion to dismiss on grounds of champerty. Oral argument was heard on January 16, 2014. A. THE DECISION OF THE IAS COURT By Decision and Order dated February 24, 2014 and entered February 25, 2014, the IAS Court granted summary judgment in favor of WestLB, dismissing the Complaint with prejudice. The Court held that JUD. LAW § 489(2) should be read to require “actual payment” of $500,000, “to avoid the safe harbor effectively doing away with champerty.” 43 Misc. 3d at 602 (A18). With respect to whether the assignment violated JUD. LAW § 489(1), the Court held the assignment was champertous, because it viewed the SPA as a pretext for “litigation by proxy.” Id. at 606-07 (A23-24).5 The Court stressed that DPAG would receive 85% of the proceeds of the litigation, that there are restrictions on Justinian’s ability to sell the notes or settle the lawsuit, and that the “notes are in a lockbox.” Id. at 607 (A23).6 Rejecting the evidence that the assignment did not stir up litigation because DPAG would have sued on its own absent the assignment, the Court resolved this disputed factual issue in West LB’s 5 This is a phrase that the IAS Court adopted from WestLB’s briefs. Prior to this case, it had never been used by any court in this State in connection with a champerty defense. 6 There is no “lockbox.” This is another phrase that the Court merely adopted from WestLB’s briefs. 14 favor, stating that DPAG would not have sued WestLB in its own name because such a suit “might have imperiled its very existence if the German government took offense and decided to withhold funding.” Id. at 600 (A15). There was no evidence supporting this conclusion, and resolving this question on a motion for summary judgment was plainly improper. Perhaps cognizant that this issue could not properly be resolved on a motion for summary judgment, the Court then stated that the issue was a “red herring” that did not need to be resolved. Id. at 607 (A24). Justinian timely appealed. Oral argument in the Appellate Division took place on February 13, 2015. B. THE APPELLATE DIVISION’S DECISION By decision and order entered May 21, 2015, the Appellate Division unanimously affirmed the order of the IAS Court, dismissing the Complaint with prejudice. First, the Court rejected Justinian’s reliance on the safe harbor of JUD. LAW § 489(2). The Court stated that a “promise to pay” $500,000 for notes does not satisfy the statute because if it did, this “would effectively do away with champerty in New York.” 128 A.D.3d at 554 (A8). The Court therefore held that “actual payment of at least $500,000” is required, not by the language of the statute but by the “intent” underlying it. Id. at 555 (A9). 15 After rejecting applicability of the safe harbor, the Court then held that the assignment was champertous because, inter alia, “DPAG maintained significant rights in the notes and expected the lion’s share of any recovery from defendants.” Id. The Court did not address Justinian’s contention that there is a factual issue, precluding summary judgment, that the assignment did not stir up litigation because DPAG would have sued on its own if the assignment had not been made. Justinian timely moved for leave to appeal to this Court, which this Court granted by Order entered August 27, 2015. A4-5. ARGUMENT Because discovery was authorized in connection with WestLB’s champerty motion, the motion became one for summary judgment. 43 Misc. 3d at 599 (A14). Summary judgment is a “drastic remedy,” depriving the parties of a trial, and as such, should only be granted where there is no doubt as to the existence of a triable issue of fact. Glick & Dolleck v Tri-Pac Export Corp., 22 N.Y.2d 439, 441 (1968). It is familiar law that the function of a court in reviewing such a motion is issue finding, not issue determination, and if any genuine issue of material fact is found to exist, summary judgment must be denied. Phillips v. Kantor & Co., 31 N.Y.2d 307, 311 (1972). These principles are of particular relevance on a motion alleging champerty. As this Court has noted, when a defense of champerty is raised, “the question of 16 intent and purpose of the purchaser or assignee of a claim is usually a factual one to be decided by the trier of facts.” Bluebird Partners, L.P. v. First Fid. Bank, N.A., 94 N.Y.2d 726, 738 (2000) (internal quotation marks omitted) (emphasis added); see also id. at 734-35 (“while this Court has been willing to find that an action is not champertous as a matter of law, it has been hesitant to find that an action is champertous as a matter of law”) (citations omitted) (emphasis in original). As set forth below, the evidence demonstrates that WestLB’s champerty defense is meritless. But, at a minimum, there is sufficient evidence raising factual issues rebutting the defense that it was inappropriate to grant summary judgment in WestLB’s favor and the issue should be “decided by the trier of facts” at trial. Bluebird, 94 N.Y.2d at 738. I. DEFENDANTS BEAR THE BURDEN OF PROVING CHAMPERTY Champerty is an affirmative defense. Bluebird, 94 N.Y.2d at 735-36. Therefore, “[s]ince defendants raise champerty as an affirmative defense, they bear the burden of proof in regard to it.” Justinian Capital SPC v. WestLB AG, 37 Misc. 3d at 527; accord LNC Invs., Inc. v. First Fid. Bank, N.A., No. 92-cv-7584, 2000 U.S. Dist. LEXIS 4617, at *8 (S.D.N.Y. Apr. 11, 2000) (champerty is an “affirmative defense” and it is defendants’ “burden to prove the defense”); Centurion Capital Corp. v. Guarino, No. 11117/05, 38 Misc. 3d 1216(A), 2012 17 N.Y. Misc. LEXIS 6001, at *19 (Civ. Ct. Richmond Co. Dec. 31, 2012) (“champerty is a defense with the burden of proof being on the defendant”). II. THE APPELLATE DIVISION ERRED IN HOLDING THAT A BINDING OBLIGATION TO TRANSFER $500,000 TO THE SELLER IS INSUFFICIENT TO SATISFY THE SAFE HARBOR OF JUD. LAW § 489(2), AND THAT, INSTEAD, THE $500,000 MUST ACTUALLY HAVE CHANGED HANDS In rejecting Justinian’s reliance on the safe harbor of JUD. LAW § 489(2), the Court below held that even though the SPA created a binding obligation for Justinian to pay DPAG $500,000 for each series of notes, the safe harbor was inapplicable because the cash had not yet changed hands. This is an issue which no court previously has addressed, and the Appellate Division’s holding is erroneous. A. THE SAFE HARBOR OF § 489(2) WAS CREATED TO PROTECT AND FACILITATE THE MARKET FOR DISTRESSED DEBT INSTRUMENTS In 2004, the Legislature amended JUD. LAW § 489 to adopt a safe harbor, whereby assignments of claims would be exempt from § 489 as long as accompanied by transfers of financial instruments with a purchase price of at least $500,000. Under the amended statute, regardless of the intent underlying the transfer, if a transfer includes financial instruments and the purchase price is at least $500,000, no defense of champerty can be sustained. Section 489(2) provides: 18 [T]he provisions of subdivision one of this section shall not apply to any assignment, purchase or transfer hereafter made of one or more bonds, promissory notes, … or other things in action, or any claims or demands, if such assignment, purchase or transfer included bonds, promissory notes, … issued by or enforceable against the same obligor … having an aggregate purchase price of at least five hundred thousand dollars …. (Emphasis added.) Therefore, as long as the assignment includes a transfer of notes with “an aggregate purchase price of at least five hundred thousand dollars,” claims can be transferred regardless of intent and still be immune from a champerty defense.7 In creating this safe harbor, the Legislature noted that champerty “has been almost universally repealed” and that “[c]hamperty defenses have routinely been rejected by the courts including the Court of Appeals.” A.B. 7244-C, 227th Leg., Reg. Sess. (N.Y. 2004). A411. The Legislature established the safe harbor in recognition of the fact that “in the past twenty years a market had developed in the United States, and particularly in New York, for the purchase and sale of claims, particularly claims that were in default.” A405-06 ¶ 7. The Legislature “wanted to provide assurance to investors that New York would remain a market for such claims” (A406 ¶ 9) and “provide meaningful and immediate relief from New 7 Because intent does not matter as long as the requirements of the safe harbor are met, whether or not the SPA set the purchase price at $1,000,000 solely to qualify for the safe harbor is irrelevant. The fact that a structure is chosen specifically to come within § 489(2) does not matter; all that matters is whether the terms of that provision are met, as they are in this case. 19 York’s archaic ‘champerty’ provision.” A410. The State Assembly Memorandum supporting the amendment confirms this legislative intent: Markets have developed for the purchase and sale of claims including claims that are in default. The ability to collect on these claims without fear of champerty litigation is essential to the fluidity of commerce in New York. It is thus necessary to amend this section of law to achieve clarity and certainty in certain transactions and to avoid driving markets for such claims out of New York. A411. In addition, as the IAS Court recognized, permitting purchasers of distressed debt to bring lawsuits on assigned claims furthers the public policy of “hold[ing] those who caused the financial crisis accountable.” 43 Misc. 3d at 604 (A20). The Court further observed that “Justinian may be viewed as an important enforcer of the securities laws.” Id. Because of the importance of the market for distressed debt, an earlier decision in this case by the IAS Court, foreshadowing dismissal on grounds of champerty, was heavily criticized in the financial press because it introduced great uncertainty in the distressed debt markets. See Jeffrey Gross & Nathaniel J. Palmer, The Champerty Doctrine Under New York Law, THE BANKRUPTCY STRATEGIST (Feb. 2013), http://www.lawjournalnewsletters.com/issues/ljn_ bankruptcy/30_4/news/157679-1.html?zkPrintable=true. A416-18. 20 B. THE COURT BELOW ERRED IN HOLDING THAT A BINDING OBLIGATION TO TRANSFER $500,000 TO THE SELLER IS INSUFFICIENT TO SATISFY THE SAFE HARBOR As stated above, JUD. LAW § 489(2) provides a safe harbor if claims are transferred along with notes “having an aggregate purchase price of at least five hundred thousand dollars.” The SPA provides a purchase price of at least $500,000 for each series of notes purchased by Justinian - precisely what the safe harbor requires. The SPA provides: In consideration for the Seller’s transfer of the Assets, the Purchaser shall pay to the Seller in immediately available funds on the Base Price Due Date $1,000,000 comprised of (a) $500,000 in respect of the Assets comprised of the Blue Heron VI Notes and their respective Related Rights; and (b) $500,000 in respect of the Assets comprised of the Blue Heron VII Notes and their respective Related Rights (together, the “Base Purchase Price”). SPA § 3.1.2 (A199). Notwithstanding this provision, the Court below erroneously held that the safe harbor was inapplicable because Justinian had not yet transferred the $500,000 per series of notes to DPAG. To reach this result, the Court read into the statute words that do not appear within it. Thus, the Court held that Justinian’s promise to pay $500,000 was insufficient to satisfy the statute, and that, instead, there must be “actual payment,” i.e., money must actually change hands. There is no basis for this unprecedented interpretation of the statute. 21 As the IAS Court acknowledged, “[t]he statute does not indicate whether such money must actually be paid.” 43 Misc. 3d at 601 (A16). Indeed, the statute does not use words such as “pay” or “paid” at all. All the statute requires is “an aggregate purchase price” of at least $500,000, which is precisely what SPA § 3.1.2 provides. Nevertheless, in order to reject Justinian’s reliance on the safe harbor, the Appellate Division focused on an affidavit by a sponsor of the safe harbor legislation, where she referred to the statute providing protection “where a purchaser pays at least $500,000.” 128 A.D.3d at 555 (A8). There is nothing in the affidavit (A404-07) suggesting that the author was attempting to draw any distinction between transferring funds as opposed to a contractual obligation to do so. Similarly misplaced is the Court’s reliance on the bill jacket’s reference to “the payment of more than $500,000,” 128 A.D.3d at 555 (A9), as there is no indication that the authors thereof were drawing the distinction on which the Court’s decision rests. These materials, neither of which purport to focus on the distinction between a “purchase price” of $500,000 (which is what the statute requires) and the actual transfer of funds (which is what the decision below requires), cannot support the interpretation adopted by the Court below.8 8 In any event, the statute does not include the word “paid,” and there is no reason to resort to (Cont’d) 22 Indeed, even if the statute used the word “pay,” that would not be enough to sustain the interpretation that the Appellate Division adopted. The Court cited no caselaw supporting its holding that the word “pay” requires cash to change hands, as opposed to a promise to deliver cash in the future. Such failure is not surprising, as that holding is inconsistent with settled law. The question of whether an obligation to “pay” can be satisfied by a promise to pay was presented in Vollmer, 207 A.D. 67. Answering in the affirmative, the Third Department held unequivocally that “[t]he word ‘pay’ means to satisfy by other means than cash as well as by cash.” Id. at 69. The decision below is wholly incompatible with this longstanding rule. The meaning of the word “pay” as articulated in Vollmer also prevails in other states. For example, in Chartis Specialty Ins. Co. v. Queen Anne HS, LLC, 867 F. Supp. 2d 1111 (W.D. Wash. 2012), the issue was whether providing a promissory note constituted “actual payment” of an obligation. Id. at 1118. In holding that it did, the court explained: When people speak of paying for something, they sometimes mean giving cash equal to the price of the good or service for which they are paying. But sometimes, they mean providing a promise that they (or someone else) will give cash equal to the asking price. For example, legislative history when the statute is clear on its face. See, e.g., Matter of Auerbach v. Bd. of Educ. of City School Dist. of City of N.Y., 86 N.Y.2d 198, 204 (1995). 23 it is common to “pay by check,” even though a check is not cash or currency, but rather a promise that the payor’s bank will transfer cash or currency to the payee …. Similarly, when one is asked how she “paid for her house,” she might respond “I put $10,000 down and took out a mortgage for the rest.” Again, the only cash with which she parted was her down payment; her mortgage issuer paid the remainder, subject to her secured promise to repay a promissory note. In common usage, “actual payment” can mean payment in cash or payment by a promise to pay. Id. The Chartis court further pointed out that “[s]tandard English dictionaries confirm that the ordinary meaning of ‘pay’ encompasses payment by promissory note”: To “pay” means “to satisfy (someone) for services rendered or property delivered,” to “discharge an obligation to,” “to give in return for goods or service,” or “to discharge indebtedness for.” Webster’s 3d New Int’l Dictionary 1659 (2002). None of these definitions prohibits payment with a promissory note. Id. at 1119. It is respectfully submitted that this Court should reject the lower Courts’ re- writing of § 489(2) and should hold that an obligation to pay $500,000 is sufficient to satisfy the statute. C. THE OBLIGATION TO PAY THE $500,000 WAS A BONA FIDE, BINDING OBLIGATION While the Appellate Division nowhere held that Justinian’s obligation to pay DPAG the $500,000 was not a bona fide, binding obligation, its opinion was 24 clearly influenced by its view that Justinian was a “shell company with virtually no assets.” 128 A.D.3d at 555 (A9). Justinian, however, produced substantial evidence demonstrating that its obligation to pay the $500,000 per series of Notes is a bona fide, binding obligation. Therefore, to the extent that the Court was suggesting that the SPA did not create a bona fide, binding obligation to pay the $500,000, the evidence is to the contrary. At a minimum, the Court resolved against Justinian disputed issues of fact, which is inappropriate on a motion for summary judgment. 1. Payment of the $1 Million Is Not Contingent on the Result in This Litigation Under the SPA, payment of the Base Purchase Price is not contingent on any settlement or judgment in this litigation. The SPA specifically provides that the $1 million is due immediately upon the execution of the SPA. SPA § 3.1.2 (A199); see A446-47. Notes by Thomas Lowe, Justinian’s principal, on a draft of the SPA reflect his understanding that “[t]he Base Purchase Price is payable irrespective of a Value-Realisation Event.” A586. DPAG also understood that the $1 million was a non-contingent obligation. Thus, DPAG booked the $1 million as a receivable (A529-31) and has made periodic inquiries to Justinian concerning when DPAG will receive payment of the $1 million. A522. 25 2. There Are Economic Consequences From Non-Payment of the $1 million First, the SPA provides that interest on the purchase price begins to accrue on the Base Price Due Date, SPA § 3.2 (A199), which was September 1, 2010. SPA § 1.1 (A194).9 Second, if Justinian fails to pay the $1 million by the Base Price Due Date, Justinian’s share of any recovery drops from 20% to 15%. SPA § 5.2(b) (A200). Furthermore, if the $1 million is not paid by the time of a Value Realization Event, then DPAG is entitled to 85% of the recovery plus $1 million, whereas if the $1 million is paid before a Value Realization Event, Justinian is able to credit the $1 million against the 85% that DPAG receives. Id.; see A463. 3. The Fact That the $1 Million Has Not Yet Been Paid Does Not Demonstrate That the Obligation to Pay It Is Not Real While the $1 million has not yet been paid, that does not mean that the obligation to pay it is not real. It is black letter law that a promise to pay constitutes valid consideration to create an enforceable bargain. RESTATEMENT (SECOND) OF CONTRACTS § 72 (1981). The fact that “one of the exchanged promises is not kept” does not mean that “the contract was never validly 9 A principal reason why the Base Price Due Date was five months after execution of the SPA was to provide a grace period for Justinian to raise money in order to pay the Base Purchase Price. A522. As set forth below, Justinian made significant efforts to do that. 26 concluded.” Puckett v. United States, 556 U.S. 129, 137 (2009); see also Bunton v. Houze, No. 651362/10, 40 Misc. 3d 1212(A), 2013 WL 3722678, at *3 (Sup. Ct. N.Y. Co. July 3, 2013). The $1 million is a real debt, owed by Justinian to DPAG, and, as noted above, there are economic consequences by reason of the non- payment. In addition, the evidence in the record is that DPAG has normal creditor’s remedies if the $1 million remains unpaid. As Lowe testified, “if you are owed money, you are a creditor so you are entitled to enforce your rights as creditor.” A458. In particular, Lowe explained: [M]y belief of what this does is it creates a liability that they become a creditor to us - they become our creditor for a million dollars, and they would have the rights of a creditor which have in no way been excluded to enforce that liability. * * * * If a creditor of a portfolio has rights against that portfolio, there are ways in which, as a creditor in an insolvency, he can - well, not actually in an insolvency - where he can enforce that. And one is to appoint a receiver of the portfolio, and the receiver then has rights against the company itself. Because if it’s been mismanaged or the directors haven’t done something, it will run into a state of insolvency, then you can wind up in the SPC. A459-60. Lowe further explained that the receiver would have rights against Justinian SPC, which, in turn, could have rights against its officers, directors and agents. A460-61. 27 4. Justinian’s Efforts to Raise the Money to Pay the $1 Million Further Demonstrates That the Obligation to Pay It Is a Bona Fide, Binding Commitment The emphasis by the Appellate Division that Justinian lacked the means to pay the purchase price overlooks that Justinian could pursue borrowing the funds to pay the purchase price, just like prospective homeowners and businesses often take out mortgages or other loans to pay the purchase price of assets they are acquiring. The purchase price in a contract for the purchase of a house is not illusory just because the purchaser needs mortgage money in order to pay the price. Understanding that the $1 million was a real debt and cognizant of the economic consequences of non-payment of the debt, Justinian sought to finance the obligation so Justinian could pay the $1 million to DPAG. As Glynn testified, at the time the SPA was executed Justinian wanted “to get the money and pay us.” A519. Therefore, Justinian tried to put in place financing for the $1 million payment. A463. Justinian was “actively trying” to raise the $1 million (A514-15) and approached two different potential counterparties (A517), offering to surrender half of its interest in the Notes in exchange for the funds. A620. Justinian has been unsuccessful in raising the money, however, due in large part to the pendency of WestLB’s motion to dismiss (A463), which was filed in January 2011. The record established that Justinian plans to try again to raise the money. Id. 28 These efforts demonstrate that Justinian understood the obligation to pay the $1 million was real, because Justinian hardly would have offered to give up half of its interest in the Notes in order to raise $1 million to pay DPAG if the obligation to DPAG was not a bona fide obligation. III. THE APPELLATE DIVISION ERRED IN UPHOLDING SUMMARY JUDGMENT THAT THE ASSIGNMENT WAS CHAMPERTOUS, GIVEN THAT THERE IS SUBSTANTIAL EVIDENCE THAT THE ASSIGNMENT DID NOT STIR UP LITIGATION AND THAT THE PURPOSE OF THE ASSIGNMENT WAS TO ENFORCE A LEGITIMATE CLAIM Because the transaction satisfies the safe harbor of § 489(2), there is no need to decide whether, absent the safe harbor, it would be appropriate to grant summary judgment that the transaction is champertous. Nevertheless, in the event the Court does find it necessary to address that issue, it can be readily seen that the Court below erred in affirming summary judgment to WestLB on that ground. A. SECTION 489 IS THE EXCLUSIVE BASIS FOR A CHAMPERTY DEFENSE “The doctrine of champerty does not prevail in this State except as provided by statute.” Coopers & Lybrand v. Levitt, 52 A.D.2d 493, 497 (1st Dep’t 1976).10 Therefore, a transaction cannot be held to be champertous unless it violates the 10 Accord Lost Lots Assocs., Ltd. v. Bruyn, 68 A.D.2d 1006 (3d Dep’t 1979) (“In New York champerty and maintenance is not a viable defense except as provided by statute”); Knobel v. Estate of Hoffman, 105 Misc. 2d 333, 334 (Sup. Ct. N.Y. Co. 1980) (“It is well settled that champerty and maintenance prevails in New York only by statute”). 29 provisions of § 489. This is important because the Appellate Division and the IAS Court both based their decisions, in part, on the notion that DPAG was “subcontracting out its litigation” to Justinian, 128 A.D.3d at 556 (quoting 43 Misc. 3d at 607) (A11) - a phrase not found in the statute. Similarly, the IAS Court concluded that it is champertous to engage in “litigation by proxy,” 43 Misc. 3d at 606-07 (A23-24) - another phrase not found in the statute nor in any of the decisions in this State interpreting the statute, but which the Court appears to have adopted from WestLB’s briefs.11 B. THE TRANSACTION HERE DOES NOT VIOLATE SECTION 489(1) In Love Funding, this Court explained what § 489(1) does and does not cover: [T]he champerty statute does not apply when the purpose of an assignment is the collection of a legitimate claim. What the statute prohibits … 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. 13 N.Y.3d at 201 (citation omitted). Under Love Funding, the transaction here is not champertous because (1) it 11 See Defendant’ Memorandum of Law in Support of Their Renewed Motion to Dismiss the Complaint on the Ground of Champerty, dated Sept. 18, 2013 (Dkt. No. 138), at 1, 3, 4, 5, 11, 13; Defendants’ Reply Memorandum of Law in Further Support of Their Renewed Motion to Dismiss the Complaint on the Ground of Champerty, dated Nov. 1, 2013 (Dkt. No. 173), at 1. 30 did not stir up litigation that would not otherwise have been prosecuted, and (2) the purpose of the assignment was the collection of a legitimate claim. 1. The Assignment Did Not Stir Up Litigation As noted above, in Love Funding this Court focused on whether or not an assignment stirred up litigation that otherwise would not be prosecuted.12 Nevertheless, the IAS Court erroneously concluded that whether or not the assignment stirred up litigation “is a red herring,” 43 Misc. 3d at 607 (A24), and the Appellate Division completely ignored whether DPAG would have sued on its own if the transaction with Justinian had not occurred. The facts demonstrate that the assignment to Justinian did not stir up litigation that would otherwise not have occurred, and, therefore, the transaction is not one that § 489(1) prohibits. In the absence of the transfer to Justinian, the evidence shows that DPAG would have pursued litigation itself. In the summer of 2009, Depfa’s CEO, Glynn, “received board approval … to move forward with two Blue Heron transactions managed by West LB on a direct litigation basis.” A351. This authorization for 12 Accord LBUBS 2005-C2 N.Y. Retail LLC v. AC I Sw. Broadway LLC, No. 850074/2012, 2013 WL 1796712, at *3 (Sup. Ct. N.Y. Co. Apr. 22, 2013); Gallery Seomi v. Sotheby’s, Inc., No. 602573/2009, 27 Misc. 3d 1231(A), 2010 N.Y. Misc. LEXIS 1536, at *9 (Sup. Ct. N.Y. Co. Aug. 27, 2010); see George Bundy Smith & Thomas J. Hall, The Narrow Application of the Champerty Doctrine, N.Y.L.J. (Oct. 19, 2012) (“New York Commercial Division courts have made clear that they are unlikely to find a lawsuit champertous unless the claim would not have been brought if not for the assignment in question”). A415. 31 DPAG to bring its own case is, in itself, sufficient to create a triable issue as to whether the assignment to Justinian stirred up litigation that would not otherwise have been prosecuted. While the DPAG board granted approval for DPAG to bring a direct case against WestLB, the board wanted to consider other litigation options as well. Thereafter, a presentation to the DPAG board set forth three alternatives for DPAG to pursue: OPTION 1: Hire aggressive litigation firm on an hourly basis to pursue initial claims OPTION 2: Hire aggressive litigation firm on contingency to pursue claims OPTION 3: Sell claim to a third party Cayman trust and recover on a contingency basis…. A564. As Depfa’s CEO, Glynn, testified, this presentation captured all of the viable options, and they all involved a component of litigation. A505-07; A508. Ultimately, DPAG viewed selling the Notes to Justinian as the preferable course. But if that had not occurred, DPAG was not going to simply walk away after losing hundreds of millions of dollars due to WestLB’s wrongdoing. Indeed, the board presentation states that “[t]he bank has a responsibility to pursue such claims if they believe they exist and that significant damages would be awarded.” A563 (emphasis added). As DPAG’s other two options also involved litigation, 32 litigation would almost certainly have resulted. The sale of the Notes to Justinian did not stir up litigation that would otherwise not have occurred, and the purpose behind § 489(1) is not implicated. The Appellate Division stated that DPAG would not have sued WestLB in its own name because such a suit risked “‘imperil[ing] [DPAG’s] very existence.’” 128 A.D.3d at 554 (A7). The Court did not cite any record evidence to support this assertion, and that fact is that the only place where this phrase appears is in the opinion by the IAS Court, see 43 Misc. 3d at 600 (A15), which also did not cite any evidence using that phrase. The evidence in the record does not come close to supporting such assertion. The documents merely indicate that DPAG saw possible “repercussions from any direct suit we would bring against West LB,”13 “issues” in light of the support it received from the German government,14 difficulties getting loans from other banks15 and potential “damage to relationships with those institutions being sued.”16 The Court had no basis for elevating these concerns - which are hardly unusual when one bank sues another - into a flat refusal to file suit for fear of “imperil[ing]” DPAG’s “very existence,” and it was 13 A351. 14 A327. 15 Id. 16 A329. 33 unquestionably inappropriate to grant summary judgment given that the DPAG board had, in fact, authorized a direct suit by DPAG itself. A351. At best for WestLB, this is a question for the jury. 2. The Purpose of the Assignment Was the Collection of a Legitimate Claim, Not Merely to Pursue Litigation As noted above, in Love Funding this Court stated unequivocally that “the champerty statute does not apply when the purpose of an assignment is the collection of a legitimate claim.” 13 N.Y.3d at 201.17 The Court further explained 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.” Id. at 200.18 The Court thus drew a distinction between, on the one hand, an assignment made to enforce a “legitimate claim,” and, on the other hand, an assignment that is effected to bring a non- meritorious claim for nuisance value. In the first instance the 17 See also M.V.B. Collision, Inc. v. Allstate Ins. Co., 40 Misc. 3d 37, 40 (2d Dep’t 2012) (“since one of the purposes of the assignment was to enforce a legitimate claim, the transaction cannot be considered champertous”); FTBK Investor II v. Joshua Mgmt. LLC, No. 810164/2011, 2014 WL 2451490, at *5 (Sup. Ct. N.Y. Co. May 15, 2014) (dismissing champerty defense where plaintiff was seeking to enforce a legitimate claim); Atl. Int’l Movers, LLC v. Ocean World Lines, Inc., 914 F. Supp. 2d 267, 273 (E.D.N.Y. 2012) (assignment of claims was not champertous, since “[w]hether the underlying claim is based upon a debt instrument or some other transaction, the essential issue remains whether the purpose of the assignment is to obtain costs or to enforce a legitimate claim”). 18 See also Lightwater Corp. v. Republic of Argentina, No. 02-cv-3804, 2003 U.S. Dist. LEXIS 6156, at *12 (S.D.N.Y. Apr. 14, 2003) (“where a bond is purchased with the intent to collect on that bond, the statute is not violated even though there is also an intention to collect by a lawsuit if necessary”); LBUBS, 2013 WL 1796712, at *3 (“That LBUBS New York elected to enforce this legitimate debt by litigation is not champertous”). 34 champerty statute does not apply at all. In the second instance, the statute does apply, and it is obvious from the context of the Court’s language that “in [an] effort to secure costs” means an attempt to extract through a settlement the expenses the defendant would otherwise incur in litigating a case that may be meritless but which would be very expensive to defend. In other words, the statute is designed to keep parties from acquiring non-meritorious claims, suing defendants on those claims for purposes of harassment or nuisance value, and hoping that the defendants will pay something to avoid the expense of defending themselves against those claims. The Love Funding opinion clarified this point when it explained that, in an earlier champerty case, “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 enforce it.” 13 N.Y.3d at 200. See Trust for Certificate Holders of Merrill Lynch Mortg. Investors, Inc. v. Love Funding Corp., 591 F.3d 116, 120- 21 (2d Cir. 2010) (describing the New York Court of Appeals’ distinction between suits that are filed in order to obtain “costs” and suits that are filed in order to collect on legitimate claims); Faris v. Longtop Fin. Techs. Ltd., No. 11-cv-3658, 2011 WL 4597553, at *7 (S.D.N.Y. Oct. 4, 2011) (same); see also Love Funding, 13 N.Y.3d at 199 (“In New York, however, the prohibition of champerty has always been ‘limited in scope and largely directed toward preventing attorneys from filing 35 suit merely as a vehicle for obtaining costs.’ Our earliest cases and those of the Court of Chancery clearly demonstrate this narrow scope.”) (citation omitted); Anthony J. Sebok, Should the Law Preserve Party Control? Litigation Investment, Insurance Law, and Double Standards, 56 WM. & MARY L. REV. 833, 865 n.133 (2015) (“Courts have interpreted [N.Y. JUD. LAW § 489] to prohibit the taking of an assignment in order to profit the legal costs of enforcing the cause of action acquired, as opposed to profiting from enforcing the rights at issue in the suit”). The Appellate Division made no finding that the claim that Justinian seeks to pursue here is not “legitimate,” an issue which, in any event, would involve factual questions not susceptible to summary judgment. Indeed, contrary to any suggestion that the claim is not legitimate and is pursued for nuisance value and annoyance, the IAS Court stated: Justinian may be viewed as an important enforcer of the securities laws that seeks to hold those who caused the financial crisis accountable. If not for Justinian, many legitimate financial crisis lawsuits would simply not exist for reasons having nothing to do with their merits. 43 Misc. 3d at 604 (A20).19 Apparently cognizant that it could not base a finding of champerty on the position that the claim against WestLB is not legitimate, the Appellate Division 19 As noted above, in this case the lawsuit would have existed without Justinian, because DPAG was prepared to commence suit in its own name. 36 took a different tack. The Court stated that Justinian took the assignment “with the intent of pursuing litigation” and “not to enforce the notes on its own behalf.” 128 A.D.3d at 556 (A10). The Court stated that Justinian “could not enforce all of the rights under the notes,” id., and further held: “The purported sale of the notes is champertous since DPAG maintained significant rights in the notes and expected the lion’s share of any recovery from defendants.” Id. at 555 (A10). Contrary to the Appellate Division’s conclusion, the evidence showed that Justinian’s intent was to enforce the notes, not simply to pursue litigation. None of the reasons articulated by the Appellate Division for a contrary ruling are valid. a. The SPA Does Not Require Justinian to Bring Litigation The SPA does not require Justinian to bring a lawsuit; it merely requires Justinian to “make reasonable efforts (including, without limitation, litigation and/or settlement of the Claims) to maximize” the recovery on the Notes. SPA § 12.4 (A208). This key fact distinguishes cases where champerty has been found.20 20 For example, in Refac Int’l, Ltd. v. Lotus Dev. Corp., 131 F.R.D. 56 (S.D.N.Y. 1990), unlike the situation at bar, the failure promptly to commence litigation “would constitute ‘material breach’ of the agreement.” Id. at 57. Elliott Assocs., L.P. v. Banco de la Nacion, 194 F.3d 363, 376 (2d Cir. 1999), recognized that the “non-discretionary obligation to bring suit” was a principal reason why champerty was found in cases such as Refac and Ehrlich v. Rebco Ins. Exchange, Ltd., 225 A.D.2d 75 (1st Dep’t 1996). Such a requirement that the assignee file a (Cont’d) 37 b. Justinian’s Purpose Was to Enforce the Notes and Realize Value, Not Just to Bring a Lawsuit The record demonstrates that Justinian’s purpose in acquiring the Notes was to try to realize value on them, not simply to bring a lawsuit. While everyone recognized that litigation might well be necessary, that was not the sole mechanism that was contemplated or pursued. Lowe testified that Justinian contemplated numerous ways of realizing value on the Notes, “[n]ot necessarily just suing on the notes.” A443. He testified: Q. Well, how else would you recover? A. Well, there might have been an insolvency. There might have been a restructuring. Might have been a distribution. These notes aren’t due until 2047. Id. Glynn similarly testified that prior to execution of the SPA, Lowe indicated that Justinian would try to “maximize the value” of the Notes through a variety of mechanisms: Q. Did he describe what mechanisms he could use to maximize the value? A. Agitating the trustee to take action; to approach the person that did the harm, whether that was an underwriter or an asset manager; litigation; pretty much anything else. I’m sure he mentioned those three. lawsuit was also the decisive factor in Am. Optical Co. v. Curtiss, 56 F.R.D. 26, 30 (S.D.N.Y. 1971). 38 A498. In recognition that there were numerous ways in which Justinian might seek to enforce the Notes and obtain value for them, the SPA provided that Justinian would make payments to DPAG upon the occurrence of any number of “Value Realization Events,” including: (a) the Purchaser’s sale of any Asset(s); (b) the rendering of a legal judgment in the Purchaser’s favor with respect to the Assets (or any party thereof); (c) payment to the Purchaser for the purpose of compromising, settling or otherwise resolving any Claim; (d) an issuer’s payment of interest to the Purchaser under the terms of the Notes in lieu of or in the nature of the events described in the immediately preceding clauses (a) thorough (c); and (e) an issuer’s repayment of principal to the Purchaser under the terms of the Notes or otherwise in lieu of or in the nature of the events described in the immediately preceding clauses (a) through (c). SPA § 5.1 (A200). c. The Fact That Justinian’s Intent Was to Enforce the Notes and Not Simply Bring Litigation Is Reinforced by the Fact That Justinian Attempted to Pursue Discussions With WestLB to Obtain Payment on the Notes Further undermining the notion that Justinian’s sole purpose was to bring litigation is the undisputed fact that Justinian “did try and negotiate with WestLB” (A444): Q. When did you try to negotiate with WestLB? A. We had a name of the person who was responsible for the notes, and so I contacted him. I tried to call him, and he never returned my call. Tom Glynn gave me the name. 39 Q. Did you write to WestLB? A. No. I didn’t have the ability to write. We started with proceedings. I don’t know his e-mail address. I called up his office. I had the number to call and I left - I did that two or three times and I left a message. I assumed he knew who Justinian Capital would be. * * * * Q. And are you saying that you made phone calls to somebody at WestLB before filing this Complaint? A. Yes. Id. Glynn corroborated this testimony, stating that Justinian told him that they “would like to have a discussion with WestLB before bringing a suit.” A508. Glynn gave Lowe the name of the relevant person at the WestLB affiliate, and Lowe later reported back that he called that person but nothing happened. A523. d. DPAG’s Rights Under the SPA Do Not Support the Appellate Division’s Conclusions The Appellate Division erred in concluding that “[t]he purported sale of the notes is champertous since DPAG maintained significant rights in the notes ….” 128 A.D.3d at 555 (A10). While the SPA required Justinian to obtain DPAG’s approval before selling or transferring the Notes, this is not inconsistent with the position that Justinian owns the Notes. DPAG’s right to prevent Justinian from selling the Notes without DPAG’s approval did not make DPAG the owner of the Notes but merely gave 40 DPAG rights similar to those of a secured lender or mortgagee. In situations where a person has a security interest in assets owned by another, provisions precluding transfer of the assets without the approval of the holder of the security interest are typical. “[O]ne of the defining rights of a secured lender [is] the right to prevent the transfer of its collateral.” Pearson v. Component Tech. Corp., 247 F.3d 471, 502 (3d Cir. 2001). As Lowe testified: Q. And Section 4 contains restrictions on Justinian’s ability to transfer assets out of the portfolio, right? A. I think you’d expect for a mortgagee or any other secured lender, he would have control over that. A462. Such restrictions do not mean, however, that the person with the approval right is the owner of the asset. Notwithstanding that a mortgagee can prevent the mortgagor from transferring the subject property, this Court long ago recognized that “[i]t is an affront to common sense to say the mortgagor is not the real owner” of the property. Trimm v. Marsh, 54 N.Y. 599, 608 (1874) (internal quotation marks omitted); see Holmes v. Gravenhorst, 263 N.Y. 148, 154 (1933) (until a mortgage is foreclosed, “[t]itle remains in the mortgagor”) (internal quotation marks omitted); Weitzel v. N. Golf, Inc., No. 2007/01858, 18 Misc. 3d 1134(A), 2008 N.Y. Misc. LEXIS 583, at *13 (Sup. Ct. Livingston Co. Feb. 20, 2008) (same). The same is true as to Justinian. While the SPA gives DPAG the right to object to a proposed settlement, the 41 SPA provides that Justinian has control over the litigation and can settle the litigation even if DPAG objects, as long as Justinian’s counsel provides an opinion that DPAG’s objections are not reasonable. See SPA § 8.4.2 (A204). e. The Fact That DPAG Is Entitled to a Substantial Portion of any Recovery on the Notes Does Not Support the Appellate Division’s Conclusions The Appellate Division also erred in concluding that a finding of champerty was justified because DPAG “expected the lion’s share of any recovery from defendants.” 128 A.D.3d at 555 (A10). As support, the Court cited Bennett v. Supreme Enforcement Corp., 275 N.Y. 502 (1937), and Frank H. Zindle v. Friedman’s Express, Inc., 258 A.D. 636 (1st Dep’t 1940), but neither case justifies the Appellate Division’s holding. In Bennett, there was no opinion by this Court, just a three sentence opinion from the Appellate Division, and the case was decided long before the adoption of the current statute and the judicial gloss of the last 75 years. In Bluebird, this Court distinguished Bennett as a case involving a naked assignment of a claim, rather than, as at bar, a sale of a security with litigation rights attached. 94 N.Y.2d at 737. Similarly, Frank H. Zindle was decided long before adoption of the current statute and the judicial decisions of the last 70 years. That case invalidated the activities of a collection agency and is no longer good law after Bluebird and Love Funding. 42 The fact that, pursuant to the SPA, DPAG will receive “the lion’s share” of any recovery on the Notes is not unusual for assignments of this nature and does not invalidate the transaction. Under New York law - which parallels federal law as articulated in Sprint Commc’ns Co. L.P. v. APCC Services, Inc., 554 U.S. 269 (2008) - an assignee of a claim has standing to sue even if it is obligated to pay part - or all - of the recovery to the assignor or some third party. Moreover, the ramifications of the obligation to pay over the proceeds are analyzed under the “real party-in-interest” doctrine and have nothing to do with champerty. As stated in Cortlandt Street Recovery Corp. v. Hellas Telecommc’ns, S.à.r.l., 47 Misc. 3d 544, 554 (Sup. Ct. N.Y. Co. 2014) (emphasis added): Under longstanding New York law, an assignee is the “real party in interest” where the “title to the specific claim” is passed to the assignee, even if the assignee may ultimately be liable to another for the amounts collected. (Allen v. Brown, 44 N.Y. 228, 231 [1870]; …; Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 325, 330 [1971] [assignee was real party in interest where “title to the cause of action ... reside[d] with” assignee, notwithstanding that assignee had agreement with third party to share proceeds of amount recovered]; Sardanis v. Sumitomo Corp., 282 A.D.2d 322, 323 [1st Dep’t 2001] [“To be a real party in interest, an assignee must have some title, legal or equitable, to the thing assigned”] [internal quotations marks and citation omitted].) This doctrine is fully consistent with federal law under which an assignee for purposes of collection - i.e., an assignee who has promised to remit proceeds of the litigation to its assignor - has standing to bring suit, provided that the assignment transferred to the assignee title to the claims. (Sprint Communications Co. L.P. v. APCC Services, Inc., 554 U.S. 269, 285 [2008].) 43 In Sprint, on which Cortlandt relied, the Supreme Court held that assignees of claims had standing to sue even though they were obligated to turn over everything they collected to the assignors and were paid a fee for providing this service to the assignors. The Supreme Court stated: Finally, we note that there is also considerable, more recent authority showing that an assignee for collection may properly sue on the assigned claim in federal court. See, e.g. 6A Wright & Miller §1545, at 346-348 (noting that an assignee with legal title is considered to be a real party in interest and that as a result “federal courts have held that an assignee for purposes of collection who holds legal title to the debt according to the governing substantive law is the real party in interest even though the assignee must account to the assignor for whatever is recovered in the action”); 6 Am. Jur. 2d, Assignments, § 184, pp. 262-263 (1999) (“An assignee for collection or security only is within the meaning of the real party in interest statutes and entitled to sue in his or her own name on an assigned account or chose in action, although he or she must account to the assignor for the proceeds of the action, even when the assignment is without consideration” (footnote omitted)). 554 U.S. at 284-85 (emphasis added). Thus, both New York and federal law recognize an assignee’s right to assert a claim even though the assignee may be obligated to turn over part or all of its recovery to the assignor. Yet it is precisely such a scenario that the Court below concluded was unlawful. The well-established body of law concerning the “real party-in-interest” demonstrates that the Appellate Division was wrong to equate these circumstances with champerty and further demonstrates that there is nothing improper - or even unusual - about an assignee asserting a claim on which it 44 intends to remit “the lion’s share” of the recovery to the assignor. See Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 325, 328, 330 (1971) (rejecting champerty defense notwithstanding that the plaintiff-assignee agreed to give 75% of any recovery to another entity and stating that “regardless of the use to be made of any proceeds collected, pursuant to the sharing agreement, Fairchild, the assignee, is the real party in interest”). Indeed, if the view by the Court below respecting such an assignment were correct, it would effectively eradicate the “real party-in-interest” body of law set forth above concerning assignees of claims. CONCLUSION The trend across the country is toward “limiting, not expanding, champerty’s reach.” Del Webb Communities, Inc. v. Partington, 652 F.3d 1145, 1156 (9th Cir. 2011).21 Although the New York Legislature has not yet totally abolished champerty, it has narrowed its reach considerably by means of the safe harbor codified in JUD. LAW § 489(2). And while this Court must, of course, apply the New York statute, it should give it an appropriately narrow reading (see, e.g., Red Tulip, LLC v. Neiva, 44 A.D.3d 204, 213 (1st Dep’t 2007) (“The champerty 21 See also Miller UK Ltd. v. Caterpillar, Inc., No. 10-cv-3770, 2014 WL 67340, at *9 (N.D. Ill. Jan. 6, 2014) (“over the centuries, maintenance and champerty have been narrowed to a filament.”); Saladini v. Righellis, 426 Mass. 231, 687 N.E.2d 1224, 1226-27 (1997); Osprey, Inc. v. Cabana Ltd. P’ship, 340 S.C. 367, 532 S.E.2d 269, 277 (2000); Toste Farm Corp. v. Hadbury, Inc., 798 A.2d 901, 905 (R.I. 2002); 14 Am. Jur. 2d Champerty & Maintenance § 1 (2014). defense ... is construed narrowly by the courts"),22 and not resolve factual disputes in favor of expanding the statute's reach. It is respectfully submitted that the decision below should be reversed, with costs. Dated: New York, New York October 26, 2015 Respectfully submitted, GRANT & EISENHOFER P .A. /' /,///~/ /.;/ -' - - /. -';i// ~-:?:%~;:>~/-- /P-~'-" By: ;/ ~- / / ,,:; Jay W. Eisenhofer James J. Sabella Deborah A. Elman Robert D. Gerson 485 Lexington Avenue New York, New York 10017 Telephone: (646) 722-8500 Facsimile: (646) 722-8501 Attorneys for Plaintiff-Appellant 22 Accord Richbell Info, Servs" Inc, v, Jupiter Partners L.P., 280 A.D.2d 208,215 (1st Dep't 2001) ("courts historically have interpreted the proscription of § 489 as a narrow one"); IRB- Brasil Resseguros SA, v, Inepar Investments SA., No. 604448/2006, 2009 N.Y. Misc. LEXIS 4355, at *31 (Sup. Ct. N.Y. Co. Aug. 3, 2009) (,,[tJhe defense of champerty ... is construed narrowly"). 45