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Volume XI, Number 341


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New York Court Finds Champerty Defense Waived if not Timely Raised

For many, the term “champerty” might be more readily associated with Monty Python whimsy than sophisticated legal argument. And while champerty is in fact an “ancient legal doctrine” that finds its genesis in medieval England, it still remains relevant today. In short, the doctrine forbids “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.” Justinian Capital SPC v. WestLB AG, 28 N.Y.3d 160, 166 (2016) (describing New York’s Judiciary Law § 489). In other words, champerty prohibits litigation finance — at least the form of it whereby the financier purchases or takes an interest in a note or security for the purpose of suing on that instrument.

Recently, in Phoenix Light SF Ltd. et al. v. Bank of New York Mellon, the Southern District of New York considered whether a party can waive the doctrine of champerty by failing to raise it in a responsive pleading. No. 14–cv–10104 (VEC), 2020 WL 2950799 (S.D.N.Y. June 3, 2020). The Court answered with a clear “yes.” It found that champerty is an affirmative defense distinct from Article III standing and can therefore be waived if not timely raised.

This case arises from Bank of New York Mellon’s service as trustee of 20 residential mortgage-backed securities trusts (and master servicer of one such trust). The Plaintiffs hold trust certificates with an original face value of $448 million. They filed suit against Bank of New York Mellon in the Southern District of New York in December 2014. Plaintiffs allege that Bank of New York Mellon breached its contractual, fiduciary, and statutory duties in its role as trustee by, among other things, failing to account for and remedy defaults and servicing failures on the loans in the trust.

Five years after the case was filed, and long after the parties had completed fact discovery, Bank of New York Mellon expressed its intent to move for summary judgment on the ground that Plaintiffs lacked standing to bring suit, having received their interests in the trust certificates through a champertous assignment. The Court ordered Bank of New York Mellon to show why it had “not waived ‘the issue of champerty’ by not asserting [it] as an affirmative defense.” The parties filed competing letter briefs on the question in mid-April 2020.

On June 3, 2020, the Court issued an order barring Bank of New York Mellon from arguing that champerty precludes Plaintiffs’ suit. The Court began its analysis by noting that “standing and champerty are conceptually and doctrinally distinct[.]” The Court then described how the doctrine of standing derives from Article III and “is ‘at heart a jurisdictional prerequisite to a federal court’s deliberations.’” As such, standing “enforces institutional limitations” and therefore can’t be waived.

Champerty, by contrast, “was developed ‘to prevent or curtail the commercialization of or trading in litigation.’” Champerty thus represents a set of policy choices distinct from those represented by the doctrine of standing. The Court wrote that “[c]hamperty . . . concerns a party’s motivations behind entering a transaction, and, unlike standing, is an affirmative defense that the party asserting has the burden to prove.” Stated differently, the Court declined to “extend standing’s no-waiver rule to the affirmative defense of champerty” or to find that, by pleading a simple lack of standing, Bank of New York Mellon preserved its champerty argument. The bottom line is that a party must raise a champerty defense in its responsive pleading or risk waiving it.

© 2021 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 168

About this Author

Julie R. Landy Litigation & Business Disputes Attorney Faegre Drinker Biddle & Reath Minneapolis, MN

Julie Landy represents members of the financial services industry in litigation and complex business disputes nationwide. Julie focuses on financial, corporate trust and structured products litigation. She collaborates with finance, restructuring and bankruptcy colleagues to represent many leading participants in the financial services industry.

Pro Bono

Julie maintains an active pro bono practice, focusing on immigration. She successfully assisted an uncle in obtaining custody over his nephew who escaped gang violence in Central America. More recently, she wrote an...

Kyle R. Hosmer Trial & Appellate Litigation Attorney Faegre Drinker Biddle & Reath Denver, CO

Kyle Hosmer is a trial and appellate litigator. He has considerable experience representing companies and their executives in commercial disputes and bankruptcy matters, and he maintains an active pro bono practice.

Kyle has argued before the U.S. Court of Appeals for the Fourth Circuit and briefed appeals in five federal circuits. Kyle has litigated commercial and bankruptcy matters in federal courts across the country.

Before joining the firm, Kyle was an associate at McGuireWoods LLP, where he represented clients in appeals, class actions, business disputes,...