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Financial Services Law Insights and Observations

Second Circuit Holds New York Champerty Statute Not a Bar to Trust’s Lawsuit Against Loan Originator

State Issues

On January 11, the U.S. Court of Appeals for the Second Circuit held that a trust’s acquisition of rights to sue a loan originator for breach of a loan purchase agreement did not violate the New York Champerty Statute, and therefore was not barred by the affirmative defense of champerty. Trust for the Certificate Holders of the Merrill Lynch Mortg. Investors, Inc., v. Love Funding Corp., No. 07-1050-cv, 2010 WL 59276 (2nd Cir. Jan. 11, 2010). In this case, a trust sued the originator of a defaulted mortgage for breach of the representations and warranties made in the loan purchase agreement. The lawsuit came after the trust reached a settlement with the entity that purchased the loan from the originator and assigned it to the trust. As part of the settlement, the trust acquired the rights of the assignor as against the originator. In the instant case, despite having granted summary judgment in favor of the trust on its claims of breach of contract, the district court found that the trust’s claims were barred by the New York champerty statute because “the Trust’s primary purpose in accepting the Assignment was to buy a lawsuit against [the originator].” The trust appealed and the Second Circuit certified questions about the New York champerty statute to the New York Court of Appeals. In response, the New York Court of Appeals clarified that the champerty statute “does not apply when the purpose of an assignment is the collection of a legitimate claim,” and therefore “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.” According to the New York Court of Appeals, “if, as a matter of fact, the Trust’s purpose in taking assignment of [the assignor’s] rights under the [originator’s loan purchase agreement] 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 [the New York champerty statute].” Accepting the New York Court of Appeals’ answer, and noting that, even before the prior settlement, “the Trust had a significant interest in the repayment of the [defaulted loan],” the Second Circuit held that the evidence on the record did not allow, as a matter of law, for a finding that the assignment was champertous. Accordingly, the Second Circuit reversed the judgment of the district court and remanded the case for entry of judgment in favor of the trust.