Justinian Capital SPC v. WestLB AG , 28 N.Y.3d 160 ( 2016 )

This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 155
Justinian Capital SPC &c.,
Appellant,
v.
WestLB AG, &c., et al.,
Respondents.
James J. Sabella, for appellant.
Christopher M. Paparella, for respondents.
Burford Capital LLC, amicus curiae.
DiFIORE, Chief Judge:
The concept of champerty dates back to French feudal
times (Bluebird Partners v First Fid. Bank, 94 NY2d 726, 733-734
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[2000]). In the English legal system, the word "champart" was
used "as a metaphor to indicate a disapproval of lawsuits brought
'for part of the profits' of the action" (id. at 734 [internal
citations omitted]). As we have explained, the champerty
doctrine was developed "to prevent or curtail the
commercialization of or trading in litigation" (id. at 729). New
York's champerty doctrine is codified at Judiciary Law § 489 (1).
As pertinent here, the statute prohibits the purchase of notes,
securities, or other instruments or claims with the intent and
for the primary purpose of bringing a lawsuit (see id. at 735-
736).
Justinian Capital SPC, a Cayman Islands company, brings
this action against WestLB AG, New York Branch and WestLB Asset
Management (US) LLC (collectively, WestLB), alleging that
WestLB's fraud (among other malfeasance) in managing two
investment vehicles caused a steep decline in the value of notes
purchased by nonparty Deutsche Pfandbriefbank AG (DPAG).
Justinian acquired the notes from DPAG days before it commenced
this action.
In this appeal, we must first decide whether
Justinian's acquisition of the notes from DPAG is champertous as
a matter of law. If the answer is "yes," we must then decide
whether the acquisition falls within the champerty statute's safe
harbor provision codified at Judiciary Law § 489 (2). The safe
harbor provides that the champerty doctrine of section 489 (1) is
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inapplicable when the notes or other securities are acquired for
"an aggregate purchase price of at least five hundred thousand
dollars" (Judiciary Law § 489 [2]).
As set forth below, we hold that Justinian's
acquisition of the notes was champertous and, further, that
Justinian is not entitled to the protection of the safe harbor
provision. Therefore, the order of the Appellate Division should
be affirmed.
I.
In 2003, nonparty DPAG invested close to 180 million
euros (approximately $209 million) in notes (the Notes) issued by
two special purpose companies, Blue Heron VI Ltd. and Blue Heron
VII Ltd. (collectively, the Blue Heron Portfolios). The Blue
Heron Portfolios were sponsored and managed by defendants WestLB.
By January 2008, the Notes had lost much (if not all) of their
value.
After the value of the Notes declined, DPAG considered
its options. In the summer of 2009, DPAG's board of directors
approved filing a direct lawsuit against WestLB. Both DPAG and
WestLB are German banks and, at the time, DPAG was receiving
substantial support from the German government and WestLB was
partly owned by the government. Because of these relationships
the DPAG board expressed concerns about pursuing a direct action
to vindicate its rights for fear that the government would
withdraw support from DPAG if it sued WestLB. This fear of
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repercussions from bringing a direct lawsuit led DPAG to consider
another option in which a third party would bring the lawsuit and
remit a portion of any proceeds to DPAG. In February 2010, DPAG
discussed this option with plaintiff Justinian, a Cayman Islands
shell company with little or no assets. A presentation submitted
by Justinian in this action described Justinian's business plan
as:
(1) purchase an investment that has suffered
a major loss from a company so that the
company does not need to report such loss on
its balance sheet; (2) commence litigation to
recover the loss on the investment; (3) remit
the recovery from such litigation to the
company, minus a cut taken by Justinian; and
(4) partner with specific law firms . . . to
conduct litigation.
Ultimately, the DPAG board approved the option of having
Justinian bring suit because it presented the "best risk return
profile" for DPAG.
In April 2010, DPAG and Justinian entered into a sale
and purchase agreement (the Agreement). Pursuant to the
Agreement, DPAG would assign the Notes to Justinian and Justinian
would agree to pay DPAG a base purchase price of $1,000,000
(representing $500,000 for the Blue Heron VI notes and $500,000
for the Blue Heron VII notes). The Notes were assigned to
Justinian shortly after execution of the Agreement. The
assignment, however, was not contingent on Justinian's payment of
the $1,000,000. Nor did Justinian's failure to pay the
$1,000,000 constitute an Event of Default under section 9 of the
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Agreement. According to Justinian's principal and chief
negotiator of the Agreement, Thomas Lowe, Justinian's failure to
pay the $1,000,000 did not constitute a breach of the Agreement.
Under the terms of the Agreement, the only consequences of
Justinian's failure to pay by the selected due date appear to be
that interest would accrue on the $1,000,000 and that Justinian's
share of any proceeds recovered from the lawsuit would be reduced
from 20% to 15%. Justinian has not paid any portion of the
$1,000,000 base purchase price, and DPAG has not demanded
payment.
Within days after the Agreement was executed and
shortly before the statute of limitations was to expire,
Justinian filed a summons with notice in Supreme Court commencing
this action against WestLB.1 The subsequent complaint alleged
causes of action in breach of contract, fraud, breach of
fiduciary duty, negligence, negligent misrepresentation, and
breach of the covenants of good faith and fair dealing, all in
connection with WestLB's alleged purchase of ineligible assets
for the Blue Heron Portfolios that caused the value of the Notes
to deteriorate.
WestLB moved to dismiss, alleging that Justinian lacked
standing to bring this action. Justinian opposed the motion. In
reply, WestLB raised the affirmative defense of champerty,
1
Brightwater Capital Management LLC was also named as a
defendant, but was dismissed from the case by Supreme Court.
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arguing that Justinian's acquisition of the Notes was champertous
under Judiciary Law § 489. After oral argument, Supreme Court
issued a written decision concluding that there were "questions
of fact surrounding Justinian's actual purpose and intent in
purchasing [the Notes] that require further discovery to resolve"
(37 Misc. 3d 518, 528 [Sup Ct, NY County 2012]). The court
ordered discovery limited to the issues related to champerty and
reserved judgment on the motion to dismiss.
After champerty-related discovery was complete, WestLB
renewed its motion to dismiss, which Supreme Court treated as a
motion for summary judgment. Supreme Court dismissed the
complaint, concluding that the Agreement was champertous because
Justinian had not made a bona fide purchase of the Notes and was,
therefore, suing on a debt it did not own. Supreme Court also
concluded that Justinian was not entitled to the protection of
the champerty safe harbor of Judiciary Law § 489 (2) because
Justinian had not made an actual payment of $500,000 or more (43
Misc. 3d 598 [Sup Ct, NY County 2014]). On appeal, the Appellate
Division affirmed, largely adopting the rationale of Supreme
Court (128 AD3d 553 [1st Dept 2015]). This Court granted leave
to appeal (25 NY3d 914 [2015]). We affirm, although our
reasoning is somewhat different.
II.
Judiciary Law § 489 is New York's champerty statute.
Section 489 (1) restricts individuals and companies from
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purchasing or taking an assignment of notes or other securities
"with the intent and for the purpose of bringing an action or
proceeding thereon" (Judiciary Law § 489 [1]).
In a prominent early champerty case, Moses v McDivitt
(88 NY 62, 65 [1882]), we concluded that the language "with the
intent and for the purpose" contained in a predecessor champerty
statute2 -- language which Judiciary Law § 489 (1) has retained --
was significant. We determined that simply intending to bring a
lawsuit on a purchased security is not champerty, but when the
purchase of a security was "made for the very purpose of bringing
such suit" that is champerty because "this implies an exclusion
of any other purpose" (88 NY at 65). Therefore, we held that
"[t]o constitute the offense [of champerty] the primary purpose
of the purchase must be to enable [one] to bring a suit, and the
intent to bring a suit must not be merely incidental and
contingent" (id. [emphasis added]). The primary purpose test
articulated in Moses has been echoed in our courts for well over
a century. In Trust for Certificate Holders of Merrill Lynch
Mtge. Invs., Inc. Mtge. Pass-Through Certificates, Series 1999-C1
v Love Funding Corp. (13 NY3d 190, 198-199 [2009]), we endorsed
the distinction in Moses "between acquiring a thing in action in
order to obtain costs and acquiring it in order to protect an
independent right of the assignee" and opined that "the purpose
2
Section 71 of art. 3, title 2, chap. 3, part III of the
Revised Statutes.
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behind [the plaintiff's] acquisition of rights" is the critical
issue in assessing whether such acquisition is champertous.
Similarly, in Bluebird Partners v First Fid. Bank (94 NY2d 726,
736 [2000]), we held that "in order to constitute champertous
conduct in the acquisition of rights . . . the foundational
intent to sue on that claim must at least have been the primary
purpose for, if not the sole motivation behind, entering into the
transaction."3
Here, the impetus for the assignment of the Notes to
Justinian was DPAG's desire to sue WestLB for causing the Notes'
decline in value and not be named as the plaintiff in the
lawsuit. Justinian's business plan, in turn, was acquiring
investments that suffered major losses in order to sue on them,
3
We reject Justinian's contention that Judiciary Law § 489
has no application unless the underlying claim is frivolous or
was brought by Justinian to secure "costs." Justinian's
contention is based on certain language in Love Funding.
However, nothing in Love Funding or any of our previous cases
stands for the proposition that champerty turns on whether the
underlying claim is frivolous, nor does Judiciary Law § 489
require the claim to be frivolous for the prohibition against
champerty to apply. Indeed, we make no such finding as to the
merits of this lawsuit. The reference in Love Funding to
litigation being "'stirred up . . . in [an] effort to secure
costs,'" (Love Funding, 13 NY3d at 201, quoting Wightman v
Catlin, 113 App Div 24, 28 [2d Dept 1906]), harks back to earlier
cases, from before 1907, when "the prohibition of champerty was
limited in scope and largely directed toward preventing attorneys
from filing suit merely as a vehicle for obtaining costs, which,
at the time, included attorneys' fees" (Bluebird Partners, 94
NY2d at 734 [emphasis added]). Thus, the reference to champerty
as a vehicle to obtain costs has no application to a company such
as Justinian, which is not a law firm and would not obtain
attorneys' fees by virtue of bringing the lawsuit.
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and it did so here within days after it was assigned the Notes.
Contrary to the suggestion by the dissent, there was no evidence,
even following completion of champerty-related discovery, that
Justinian's acquisition of the Notes was for any purpose other
than the lawsuit it commenced almost immediately after acquiring
the Notes (dissenting op. at 3-4). Justinian's principal
speculated at his deposition as to other possible sources of
recovery on the Notes -- for example, that there "might have
been" an insolvency or that there "might have been" a
restructuring or distribution between the time of acquisition and
2047 when the Notes were due. Such speculation does not suffice
to defeat summary judgment. We have long held that "'[m]ere
conclusions, expressions of hope or unsubstantiated allegations
or assertions are insufficient'" to defeat summary judgment
(Gilbert Frank Corp. v Federal Ins. Co., 70 NY2d 966, 967 [1988],
quoting Zuckerman v City of New York, 49 NY2d 557, 562 [1980]).
Indeed, "[t]he moving party need not specifically disprove every
remotely possible state of facts on which its opponent might win"
to defeat summary judgment, particularly when the opponent's
"theorizing" is "farfetched" (Ferluckaj v Goldman Sachs & Co., 12
NY3d 316, 320 [2009]). Here, the lawsuit was not merely an
incidental or secondary purpose of the assignment, but its very
essence. Justinian's sole purpose in acquiring the Notes was to
bring this action and hence, its acquisition was champertous.
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III.
Conduct that is champertous under Judiciary Law § 489
(1) is nonetheless permissible if it falls within the safe harbor
provision of Judiciary Law § 489 (2). Section 489 (2) exempts
the purchase or assignment of notes or other securities from the
restrictions of section 489 (1) when the notes or other
securities "hav[e] an aggregate purchase price of at least five
hundred thousand dollars" (Judiciary Law § 489 [2]). Here,
although the price listed in the Agreement, $1,000,000, satisfies
the threshold dollar amount for the safe harbor, Justinian has
not actually paid any portion of that price. Justinian argues
that a binding obligation to pay is sufficient to receive the
protection of the safe harbor. WestLB argues that in order to
come within the safe harbor an actual payment of at least
$500,000 must have been made. The courts below endorsed WestLB's
position. We do not agree. Actual payment of the purchase price
need not have occurred to receive the protection of the safe
harbor. Nonetheless, for the reasons set forth below, under the
circumstances presented here, Justinian is not entitled to the
protection of the safe harbor.
The parties disagree about whether the phrase "purchase
price" in section 489 (2) is ambiguous. Justinian argues that it
is unambiguous and means whatever amount is denominated the
"purchase price" in a purchase agreement. WestLB argues that
reading "purchase price" with "'absolute literalness'" would
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violate the safe harbor's "'purpose and intent'" (respondents'
brief at 14, quoting Matter of Long v Adirondack Park Agency, 76
NY2d 416, 420 [1990]). We agree with that statement.
Although the phrase "purchase price" may be unambiguous
in some contexts, here it is not, and we must look to the
legislative history to discern its meaning (see Matter of
Auerbach v Board of Educ. of City School Dist. of City of N.Y.,
86 NY2d 198, 204 [1995]). A review of draft versions of the safe
harbor legislation introduced during the legislative session
reveals that at least one version of the bill contemplated that
the safe harbor would protect a purchaser of notes or securities
if either the aggregate face amount of the notes or securities
sued upon totaled at least $1,000,000 or the purchaser had paid,
in the aggregate, at least $500,000 to acquire them (2003 NY
Senate Bill 2992-A). The statute as enacted contained different
language, requiring instead that the notes or securities have "an
aggregate purchase price" of at least $500,000 (Judiciary Law §
489 [2]). The "purchase price" language effectively falls
between the two earlier proposed safe harbor formulations --
strong indication that the Legislature did not intend either that
actual payment necessarily had to have been made or that face
value alone would suffice to obtain the protection of the safe
harbor.
The legislative explanation of the safe harbor's
purpose further supports our reading. New York has long been a
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leading commercial center, and our statutes and jurisprudence
have, over many years, greatly enhanced New York's leadership as
the center of commercial litigation. The safe harbor was enacted
to exempt large-scale commercial transactions in New York's debt-
trading markets from the champerty statute in order to facilitate
the fluidity of transactions in these markets (see Assembly Mem
in Support, Bill Jacket, L 2004, ch 394). The participants in
commercial transactions and the debt markets are sophisticated
investors who structure complex transactions. Requiring that an
actual payment of at least $500,000 have been made for these
transactions to fall within the safe harbor would be overly
restrictive and hinder the legislative goal of market fluidity.
The phrase "purchase price" in section 489 (2) is better
understood as requiring a binding and bona fide obligation to pay
$500,000 or more for notes or other securities, which is
satisfied by actual payment of at least $500,000 or the transfer
of financial value worth at least $500,000 in exchange for the
notes or other securities. Such understanding conforms with the
realities of these markets in which payment obligations may be
structured in various forms, whether by exchange of funds,
forgiveness of a debt, a promissory note, or transfer of other
collateral. We emphasize that we find no problem with parties
structuring their agreements to meet the safe harbor's
requirements, so long as the $500,000 threshold is met, as set
forth above.
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However, as the dissent concedes, "[u]nquestionably, if
the obligation to pay [at least $500,000] [i]s entirely
contingent on a successful outcome in [the] litigation, it [does]
not constitute a binding and bona fide debt" (dissenting op. at
8). The legislative history reveals that a purchase price of at
least $500,000 was selected because the Legislature took comfort
that buyers of claims would "not invest large sums of money" to
pursue litigation unless the buyers believed in the value of
their investments (see Assembly Mem in Support, Bill Jacket, L
2004, ch 394). This comfort is lost when a purchaser of notes or
other securities structures an agreement to make payment of the
purchase price contingent on a successful recovery in the
lawsuit; such an arrangement permits purchasers to receive the
protection of the safe harbor without bearing any risk or having
any "skin in the game," as the Legislature intended. The
Legislature intended that those who benefit from the protections
of the safe harbor have a binding and bona fide obligation to pay
a purchase price of at least $500,000, irrespective of the
outcome of the lawsuit.
That is precisely what is lacking here. The record
establishes, and we conclude as a matter of law, that the
$1,000,000 base purchase price listed in the Agreement was not a
binding and bona fide obligation to pay the purchase price other
than from the proceeds of the lawsuit. The Agreement was
structured so that Justinian did not have to pay the purchase
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price unless the lawsuit was successful, in litigation or in
settlement. The due date listed for the purchase price was
artificial because failure to pay the purchase price by this date
did not constitute a default or a breach of the Agreement. The
Agreement permitted Justinian to exercise the option to let the
due date pass without consequence and simply deduct the
$1,000,000 (plus interest) from its share of any proceeds from
the lawsuit.
In sum, we hold that because the Notes were acquired
for the sole purpose of bringing litigation, the acquisition was
champertous. Further, because Justinian did not pay the purchase
price or have a binding and bona fide obligation to pay the
purchase price of the Notes independent of the successful outcome
of the lawsuit, Justinian is not entitled to the protection of
the safe harbor. In essence, the Agreement at issue here was a
sham transaction between the owner of a claim which did not want
to bring it (DPAG) and an undercapitalized assignee which did not
want to assume the $500,000 risk required to qualify for the safe
harbor protection of section 489 (2) (Justinian).
Accordingly, the order of the Appellate Division should
be affirmed, with costs.
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Justinian Capital SPC v WestLB AG
No. 155
STEIN, J.(dissenting):
This case requires us to determine whether the transfer
of notes from nonparty Deutsche Pfandbriefbank AG (DPAG) to
plaintiff Justinian Capital SPC was champertous as a matter of
law and, if so, whether the statutory safe harbor provision
applies. Because the answer to each of these two questions
depends on the intent of one or both of the parties to that
transaction, and such intent is -- as in almost all cases -- a
factual issue, I cannot agree with the majority of this Court
that summary judgment is appropriate here. Therefore, I
respectfully dissent.
I. Champerty
We need not travel back to feudal France or merry old
England to discuss champerty. When the New York State
Legislature enacted statutes prohibiting champerty, it intended
to abolish the common-law version of that doctrine and, thus, our
primary focus must be on the relevant statutory provisions (see
Sedgwick v Stanton, 14 NY 289, 299 [1856]). Judiciary Law § 489
(1) provides that no person or corporation may buy or take an
assignment of notes or other security instruments "with the
intent and for the purpose of bringing an action or proceeding
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thereon."1 This Court has stated that "the critical issue to
assessing the sufficiency of [a] champerty finding is . . . the
purpose behind [the assignee's] acquisition of rights that
allowed it to sue" (Trust for Certificate Holders of Merrill
Lynch Mtge. Invs., Inc. Mtge. Pass-Through Certificates, Series
1999-C1 v Love Funding Corp., 13 NY3d 190, 198 [2009] [internal
quotation marks and citation omitted]). "The bottom line is that
Judiciary Law § 489 requires that the acquisition be made with
the intent and for the purpose (as contrasted to a purpose) of
bringing an action or proceeding" (Bluebird Partners v First Fid.
Bank, 94 NY2d 726, 736 [2000] [citations omitted]; see Sprung v
Jaffe, 3 NY2d 539, 544 [1957]; Moses v McDivitt, 88 NY 62, 65
[1882]).
"[W]hile 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" (Bluebird Partners, 94 NY2d at 734-735 [internal citations
omitted]). Indeed, until today, we have never found summary
judgment appropriate to hold a transaction champertous as a
matter of law. This hesitation is understandable because the
intent and purpose of the purchaser or assignee is usually a
factual question that cannot be decided on summary judgment (see
Love Funding Corp., 13 NY3d at 200; Bluebird Partners, 94 NY2d at
1
Judiciary Law § 488 is similar, but applies only to
attorneys.
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738; Fairchild Hiller Corp. v McDonnell Douglas Corp., 28 NY2d
325, 330 [1971]).
In deciding summary judgment motions, courts should
simply identify triable material issues of fact, and may not
invade the province of the jury by making credibility
determinations or weighing the probative force of the evidence
presented by each side (see Vega v Restani Constr. Corp., 18 NY3d
499, 505 [2012]). On such a motion, the facts must be viewed in
the light most favorable to the nonmoving party (here, plaintiff)
(see Jacobsen v New York City Health & Hosps. Corp., 22 NY3d 824,
833 [2014]). Because champerty is an affirmative defense (see
Bluebird Partners, 94 NY2d at 729; Fairchild Hiller Corp., 28
NY2d at 329), defendants bore the burden of demonstrating that
the assignment was champertous (see Kirschner v KPMG LLP, 15 NY3d
446, 478 [2010]). I believe that, in arriving at its definitive
conclusion regarding plaintiff's sole purpose in acquiring the
notes here, the majority has overlooked or disregarded these
basic principles.
To be sure, the majority points to evidence in the
record that would support a finding that plaintiff was a
champertor, merely acting as a proxy to bring suit for DPAG.
However, the record also contains evidence supporting plaintiff's
argument that it procured the notes with an intent to enforce its
rights in them in whatever way possible, not necessarily by way
of litigation. In fact, plaintiff affirmatively alleges that it
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acquired the notes for the lawful purpose of enforcing rights
under them and that, while litigation on the notes was a real
possibility when it took the assignment, litigation was not the
only option under consideration when it was negotiating for their
acquisition. For example, plaintiff's principal testified that
one possible avenue to recover on the notes was through
bankruptcy proceedings. In addition, the funds at issue could
potentially have been restructured with some amount paid to note
holders. Alternatively, a distribution could still be
forthcoming on the notes because they are not due until 2047,
leaving some possibility that the notes will regain value over
time.
Contrary to the majority's assertion, discussion of
these options did not constitute mere after-the-fact speculation.
As relevant to the question of plaintiff's intent when acquiring
the notes, plaintiff's principal testified that such options were
among those considered as possibilities at the time plaintiff was
negotiating with DPAG regarding the purchase of the notes. The
principal's use of the words "might have been" in connection with
several of the options did not necessarily indicate that their
pursuit was speculative; instead, such words appropriately
reflected his recognition that, as a practical matter, the
outcome under any option was also dependent on defendants'
responses to plaintiff's efforts. Thus, the record contains non-
speculative evidence that options other than litigation were
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under consideration before plaintiff acquired the notes,
notwithstanding any uncertainty about whether plaintiff would
actually be successful in obtaining a recovery by pursuing them.
Such evidence was sufficient to create a question of fact
precluding summary judgment.
Furthermore, litigation is a legitimate consideration
when acquiring any distressed debt instrument. Plaintiff
commenced this litigation soon after acquiring the notes, but
explained that a hasty commencement was necessary because the
statute of limitations was about to run shortly after the
purchase agreement was executed; this did not mean that
litigation was necessarily plaintiff's sole purpose or option.
Indeed, due to the impending statute of limitations deadline,
commencement of this action was necessary to protect plaintiff's
rights while it explored its other options, in case its efforts
thereunder were not fruitful. The action was commenced by a
summons with notice, and there is evidence that plaintiff
unsuccessfully attempted to contact defendants, prior to filing
the complaint, to discuss options other than protracted
litigation. While defendants may dispute having received such
communications from plaintiff, the courts may not, for purposes
of defendants' summary judgment motion, make credibility
determinations and must view the evidence in plaintiff's favor.
Nor does an agreement to receive a percentage share in
the recovery make a transaction champertous per se (see Fairchild
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Hiller Corp., 28 NY2d at 328, 330 [no champerty despite 75%
sharing agreement]). Here, plaintiff explained that the
agreement's adjustment to the purchase price -- adding 80% or 85%
of the recovery in litigation or settlement, on top of the base
purchase price of $1 million -- was a commercially reasonable way
of structuring the sale of distressed debt instruments that are
difficult to value.
Thus, even if the majority is correct that the greater
weight of the evidence would support a finding of champerty,
because there is conflicting evidence regarding plaintiff's
purpose in purchasing the notes, and because intent is generally
a factual question, I believe it was error to grant summary
judgment to defendants, finding this transaction champertous as a
matter of law. I would, therefore, deny summary judgment on this
factual issue and permit the parties to proceed to trial to
resolve it.
II. Safe Harbor
Regardless of whether the transaction is champertous as
a matter of law (as the majority has determined), or there is a
question of fact regarding its allegedly champertous nature (as I
have concluded), we must decide whether the safe harbor provision
of Judiciary Law § 489 (2) is applicable. That provision exempts
the purchase or assignment of notes or other securities from
being champertous under subdivision (1) when they have "an
aggregate purchase price of at least [$500,000]." I agree with
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the majority that this statutory language is ambiguous, and that
the "purchase price" in subdivision (2) can include either actual
payment of, or a binding and bona fide legal obligation to pay,
at least $500,000. However, I disagree with the majority's
application of that provision to find, as a matter of law, that
the purchase price set forth in the agreement here did not
constitute a binding and bona fide obligation on plaintiff's
part.
It is generally inadvisable for courts to look beyond
the four corners of a contract to ferret out whether the parties
actually intended to pay the purchase price set forth therein
(see Morlee Sales Corp. v Manufacturers Trust Co., 9 NY2d 16, 19-
20 [1961]; Hutchison v Ross, 262 NY 381, 398 [1933]). Otherwise,
courts could regularly become mired down in an attempt to discern
the parties' intent when entering a contract, rather than simply
applying the language employed in the contract. However, in
those circumstances in which a contract is ambiguous on its face
and it becomes necessary to determine the parties' intent by
resorting to extrinsic evidence, the issue becomes one for the
jury and summary judgment is inappropriate (see Hartford Acc. &
Indem. Co. v Wesolowski, 33 NY2d 169, 172 [1973]). Such is the
case here.
The agreement at issue contains arguably inconsistent
provisions, and it is unclear on its face as to whether the
parties ever intended that DPAG would be able to collect the $1
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million base purchase price from plaintiff absent recovery from
defendants in this action. Unquestionably, if the obligation to
pay was entirely contingent on a successful outcome in this
litigation, it would not constitute a binding and bona fide debt.
However, the agreement requires plaintiff to pay the $1 million
base purchase price by a date certain, without regard to the
success of this action. Although that date was five months after
the execution of the agreement, the delay was arguably designed
to provide plaintiff with an opportunity to raise that sizeable
amount. The majority's reference to plaintiff as a "shell
company" with virtually no assets (majority op at 3-4; see 128
AD3d 553, 555 [1st Dept 2015]), ignores the possibility that
plaintiff was capable of raising capital, which it had apparently
succeeded in doing for other similar transactions. Moreover,
under the contract, plaintiff's failure to timely pay the base
purchase price carried consequences, including the accrual of
interest until full payment, and an increase in the purchase
price adjustment from 80% to 85% of any recovery.
The majority correctly notes that the failure to timely
pay the base purchase price was not designated in the contract as
a default event. Contrary to the majority's conclusory
statement, however, neither this omission, nor any provision of
the contract -- nor even DPAG's failure to enforce plaintiff's
obligation to pay thus far -- necessarily means that the failure
to pay does not constitute a breach of the agreement. A failure
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to perform one's promise or contractual obligation -- such as the
payment of $1 million -- is the very definition of a breach of
contract (see Black's Law Dictionary [10th ed 2014], breach of
contract) and, therefore, need not be -- and rarely is --
explicitly identified as such in the contract, itself. The
deposition testimony cited by the majority, wherein one of DPAG's
principals indicated that he did not think plaintiff's failure to
timely pay would be a breach, is irrelevant unless the contract
language is ambiguous so as to require the courts to consider
extrinsic evidence to ascertain the parties' intent. If it is
necessary to review extrinsic evidence regarding intent, factual
questions exist that a jury must resolve. Even then, courts
interpreting the contract are not bound by that one individual's
personal opinion, but may consider it as merely some evidence of
DPAG's intent.
Here, the contract's provision concerning the base
purchase price is susceptible to an interpretation that would
create an unqualified, bona fide obligation to pay $1 million.
Nevertheless, as the majority points out, other provisions of the
contract, such as certain limitations on DPAG's remedies, raise
questions as to whether DPAG intended to enforce its rights in
the event of plaintiff's breach of the payment provision,
including whether DPAG is feasibly able to do so. In my view,
these factual questions, which stem from contractual provisions
that cannot fully be read in harmony, would permit the Court to
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look beyond the four corners of the agreement. However, I cannot
agree with the majority's conclusion that this was a "sham
transaction" as a matter of law (majority op at 12).
Finally, the majority correctly notes this state's
leadership role in promoting and supporting large scale, complex
commercial markets and transactions, and recognizes that
participants in such transactions are "sophisticated investors"
(majority op at 10). However, in my view, the majority's
decision discourages transactions aimed at fostering
accountability in commercial dealings, generally, and, in this
particular case, successfully forecloses litigation against
parties that are alleged to have committed fraud against all of
the investors in more than one portfolio.
In sum, resolution of the questions of whether the
transaction was champertous and, if so, whether the parties'
contract included a bona fide obligation for plaintiff to pay $1
million for the notes, such that the safe harbor provision would
apply, requires a factfinder to ascertain the parties' intent, a
determination that is inappropriate on a motion for summary
judgment (see Love Funding Corp., 13 NY3d at 200; Bluebird
Partners, 94 NY2d at 738; Fairchild Hiller Corp., 28 NY2d at
330). Accordingly, I would reverse the Appellate Division order
and deny summary judgment.
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* * * * * * * * * * * * * * * * *
Order affirmed, with costs. Opinion by Chief Judge DiFiore.
Judges Rivera, Abdus-Salaam, Fahey and Garcia concur. Judge
Stein dissents in an opinion in which Judge Pigott concurs.
Decided October 27, 2016
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