Champerty and Litigation Finance in New York
For general background on the analogy between venture capital and litigation funding please read this post. To review our assumptions please click here. This essay should be cited as Maya Steinitz and Abigail C. Field, “A Model Litigation Finance Contract,” Iowa Law Review, (forthcoming) available at www.litigationfinancecontract.com.
Litigation finance faces myriad obstacles to widespread acceptance and market development, but none are as comprehensive a threat as the champerty doctrine, in those jurisdictions that still enforce it. Broadly speaking, champerty is financing someone else’s litigation for profit. The prohibition against it arose in medieval England as a way to protect small property owners from the predations of feudal lords, based on the idiosyncratic political economy of the time. America inherited champerty when the colonies imported English common law, but each state developed the doctrine differently. In recent years some states have discarded the doctrine while others have reaffirmed it. New York does not have a common law prohibition on champerty, but it does have a statutory one. Nonetheless New York’s courts have interpreted the statute as imposing a very narrow prohibition.
In New York, it is champertous to acquire a claim to instigate, for a profit, litigation that would not otherwise have been filed. The key element is the instigation of the litigation; the profit element has been interpreted in the jurisprudence as incidental. In fact, in New York the prohibition is so narrow that even the purchase of a claim that the purchaser had no relationship to, before any litigation has been filed, and then filing suit to profit from it, is not necessarily champertous. For example, New York courts have held that purchasing a defaulted bond and trying to collect on it via litigation is not champerty, regardless of the profits derivable from the suit because it is merely enforcing a right via litigation when other methods of vindicating the right—e.g., demanding payment—have failed. Similarly courts have held that it is not champertous as a matter of New York law to have a business model based on funding plaintiffs in exchange for part of their eventual litigation recoveries, provided their suits were already in existence and control of the suit remained with the plaintiffs. This result happens because New York courts frequently distinguish between a claim and the proceeds of a claim. The assignment of proceeds rather than the underlying claim is closely analogous to the typical litigation finance scenario and underscores New York’s litigation finance-friendly doctrine.
Reflecting this state of New York law, the New York City Bar Association’s 2011 formal opinion on the ethics of third party litigation finance acknowledged “we are aware of no decision finding non-recourse funding arrangements champertous under New York law.”
FN1 Nonetheless, perhaps it is possible to have a champertous assignment of proceeds even if the underlying claim has not been transferred. Two cases are troubling on this point. One found the non-profit funding of a commercial claim by an insurer to be nonchampertous, and though it helpfully made the distinction between claim transfer and proceed transfer, the significance of the lack of profit to the judge’s non-champerty determination was not clear. The other case involved the outright assignment of the claim and then its funding; the judge ruled champerty rested on questions fact and remanded. The analysis focused on the claim assignment, but funding was effectuated by investing for proceeds. Certainly not all litigation finance business models are free from champerty concerns. A recent NY case involving a business model not related to the structure imagined by our contract was held champertous.