Maybe still in NY, or maybe only barely and not enough to sting. The survival and scope of champerty is important today because it is the darling of the opponents of litigation funding, which has become pervasive in recent years. A couple of NY champerty cases this week prompt this post.
Champerty traces to French feudal law, whereby a tenant in land (a tenant by champart) paid the owner of the land out of the crop if any; no crop, not payment. Just so, a litigation funder takes its chances that the claim in which it invests will not produce a crop -- um, I mean money. The doctrine migrated from France to the UK, then to the US (or parts of it). How? Who knows? (By boat probably.)
Scholarship has revealed that about half of US jurisdictions have rejected the champerty defense. In NY, what is left of it is preserved in Judiciary Law 489. But the NY Court of Appeals has consistently defined that section quite narrowly. It wrote in one case:
“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”
It would seem fairly easy, then, to steer around this impediment and indeed nearly always the champerty defense fails. For one thing, an expansive view of champerty would have doleful consequences in the market for commercial paper. (But see the final paragraph.) The buyer might be foreclosed from suing on the note.
Anyway, on Feb. 24 a state trial judge in Manhattan dismissed a claim on champerty grounds. (2014 WL 702105.) The next day the appellate court in Manhattan in a separate case, reversed a dismissal on champerty grounds, with the quote that appears above. (2014 WL 700435.)
Now the cases differ. The plaintiff in the trial court had a harder argument. But strictly applying the narrow definition quoted above might have led to a different result. It may yet be different if the case is appealed.
The problem for the opponents of litigation funding, despite the lower court decision and even if it stands, is that litigation funding's dominant model does not involve buying a claim and suing on it, but rather investing in the claim of the borrower, who brings the claim in its own name. It would be difficult, if not impossible, for that model to fall within the definition of champerty as the NY courts have narrowed it.
One other oddity here: The NY statutory language has an exception if the buyer pays $500,000 or more for the claim on which it sues.Then, there is no champerty defense. So sellers with big claims to sell will find a liquid market but anyone whose claim falls beneath this floor may have to discount the purchase price to account for the risk of a successful champerty defense.(For reasons I omit here, the NY trial judge found this safe harbor unavailing despite the $1 million purchase price for the claims.)
I don't know that anyone has challenged this exception as irrational. Perhaps its rationality relies on the need to have a vibrant market for commercial paper. But it is not so limited and may be vulnerable.