No. 07-1050-cv
Trust for the Certificate Holders of the Merrill Lynch Mortgage
Investors, Inc. Mortgage Pass-Through Certificates, Series 1999-C1
v. Love Funding Corporation

                                    UNITED STATES COURT OF APPEALS
                                          F OR THE S ECOND C IRCUIT


                                                      August Term, 2008

(Argued: September 26, 2008                                                 Decided: February 13, 2009)

                                                   Docket No. 07-1050-cv


 T RUST FOR THE C ERTIFICATE H OLDERS OF THE M ERRILL L YNCH M ORTGAGE INVESTORS,
  INC. M ORTGAGE P ASS-T HROUGH C ERTIFICATES, S ERIES 1999-C1, by and through Orix
             Capital Markets, LLC, as Master Servicer and Special Servicer,

                                                                                     Plaintiff-Appellant,
                                                               —v.—

                                             L OVE F UNDING C ORPORATION,

                                                                                   Defendant-Appellee.1




          1
         By order dated October 31, 2007, the court granted Love Funding Corporation’s
motion to withdraw its cross-appeal. See Order, Trust for the Certificate Holders of the
Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates, Series 1999 C-1
v. Love Funding Corp., No. 07-1285-cv (2d Cir. Oct. 31, 2007). The Clerk of Court is
therefore directed to amend the caption to conform to our titling of the parties as,
respectively, “plaintiff-appellant” and “defendant-appellee.”

                                                                     1
Before:
                  R AGGI, Circuit Judge, K EENAN, Senior District Judge.2

                                 ___________________

       Appeal from a judgment of the United States District Court for the Southern District

of New York (Shira A. Scheindlin, Judge), entered after a bench trial, voiding as

champertous an assignment of rights to plaintiff, a trust representing the holders of

commercial mortgage-backed securities, which assignment enabled plaintiff to sue Love

Funding Corporation, the originator of a securitized loan held by plaintiff. On this appeal,

plaintiff contends that, as a matter of law, the assignment at issue does not constitute

champerty under New York Judiciary Law § 489(1). Because we conclude that resolution

of this issue depends on significant and unsettled questions of New York law, we certify to

the New York Court of Appeals the questions stated at the end of this opinion.

       Decision reserved pending the response of the New York Court of Appeals to certified

questions of state law.




       2
         The Honorable John F. Keenan, of the United States District Court for the Southern
District of New York, sitting by designation.

      Because the Honorable Guido Calabresi, originally assigned to this panel, recused
himself from consideration of this appeal, the decision announced in this opinion has been
reached by the panel’s remaining two judges pursuant to Local Rule § 0.14(b).

                                             2
              IRA M. F EINBERG (Lorane F. Hebert, Jake M. Shields, on the brief), Hogan &
              Hartson LLP, New York, New York, for Plaintiff-Appellant.

              A LEC W. F ARR (Michael G. Biggers, Anna C. Ursano, on the brief), Bryan
              Cave LLP, Washington, D.C., for Defendant-Appellee.




R EENA R AGGI, Circuit Judge:

       This appeal arises out of the sale of commercial mortgage-backed securities, complex

financial products held by Wall Street banks in an approximate amount of $100 billion. See

Louise Story, Fears Over Commercial Property Loans, N.Y. Times, Aug. 22, 2008, at C1;

see also LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp., 424 F.3d 195, 199 (2d Cir.

2005) (noting that commercial mortgage-backed securities comprise a “multi-billion dollar

market”). Plaintiff, the Trust for the Certificate Holders of the Merrill Lynch Mortgage

Investors, Inc. Mortgage Pass-Through Certificates, Series 1999-C1, by and through Orix

Capital Markets, LLC, as Master Servicer and Special Servicer (“the Trust”), as assignee of

certain rights of UBS Real Estate Securities, Inc. (“UBS”), sued Love Funding Corporation

(“Love Funding”) for breach of certain representations and warranties that Love Funding

made in a mortgage-loan-purchase agreement governing the origination of certain

commercial mortgage loans held by the Trust. Among other defenses, Love Funding argued

that the Trust’s suit was barred by New York’s statutory prohibition against champerty, see

N.Y. Jud. Law § 489(1), because the Trust’s primary purpose in obtaining the assignment of



                                            3
UBS’s rights was to sue Love Funding. After a bench trial in the United States District Court

for the Southern District of New York, Judge Shira A. Scheindlin held the assignment void

as champertous and entered judgment in favor of Love Funding. See Trust for the Certificate

Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates

Series 1999-C1 v. Love Funding Corp. (“Trust v. Love Funding”), 499 F. Supp. 2d 314, 325

(S.D.N.Y. 2007).

       On appeal from that judgment, the Trust argues that the district court misconstrued

New York champerty law, which, it asserts, was “never intended to prohibit assignments in

complex commercial transactions where the assignee has a substantial interest at stake.”

Appellant’s Br. at 26. We conclude that resolution of this appeal depends on significant and

unsettled questions of New York law that are properly answered, in the first instance, by the

New York Court of Appeals. Accordingly, we certify the questions stated at the conclusion

of this opinion to the Court of Appeals. We retain jurisdiction so that, upon receipt of that

court’s responses, we may rule on this appeal.

I.     Background

       A.     The Mortgage-Loan-Purchase Agreement Between Love Funding and Paine
              Webber Real Estate Securities, Inc.

       Love Funding is a commercial-mortgage-banking company that originates mortgage

loans on income-producing real estate. In 1998 and 1999, Love Funding was involved in

“conduit lending,” a practice in which large investment firms partner with smaller mortgage-


                                             4
banking companies in making loan arrangements. As part of that practice, Love Funding

sought loan prospects for an investment bank to fund, typically receiving a fee of 1% of the

loan amount for its services.

       In April 1999, Love Funding entered into a conduit-lending arrangement with Paine

Webber Real Estate Securities, Inc. (“PaineWebber”).         That arrangement, which was

governed by New York law, was memorialized in an April 23, 1999 mortgage-loan-purchase

agreement (“the Love MLPA”). In the Love MLPA, Love Funding represented, inter alia,

that none of the underlying mortgage loans were in default.3

       In the event Love Funding breached that or other representations, the Love MLPA

provided PaineWebber with certain remedies, notably:

       Within sixty (60) days of the earlier of either discovery by or notice to the
       Seller [i.e., Love Funding] of any Breach of a representation or warranty,
       [Love Funding] shall cure such Breach in all material respects and, if such
       breach cannot be cured, [Love Funding] shall, at the Purchaser’s [i.e.,
       PaineWebber’s] option, repurchase such Mortgage Loan at the Repurchase
       Price.

Love MLPA § 5.03(b).          The Love MLPA also afforded PaineWebber the right to


       3
           Specifically, Love Funding represented that

       [t]here is no default, breach, violation or event of acceleration existing under
       the related Mortgage or the related Mortgage Note and no event (other than
       payments due but not yet delinquent) which, with the passage of time or with
       notice and the expiration of any grace or cure period, would constitute a
       default, breach, violation or event of acceleration.

Love MLPA § 5.02(cc).

                                              5
indemnification “from and against all demands, claims or asserted claims, liabilities or

asserted liabilities, costs and expenses, including reasonable attorneys’ fees, incurred . . . in

any way arising from or related to any breach of any representation, warranty, covenant or

agreement of [Love Funding] hereunder.” Id. § 9.14(a).

       In November 2000, pursuant to a merger of their parent companies, UBS succeeded

in interest to PaineWebber’s rights and obligations under the Love MLPA.4 Thus, in this

opinion, references to post-merger events will be to UBS; references to pre-merger events

will be to PaineWebber.

       B.       The Arlington Loan

       In July 1999, pursuant to the Love MLPA, Love Funding arranged a $6.4 million

mortgage loan to an entity called the Cyrus II Partnership (“Cyrus”), which was secured by

a mortgage on Louisiana property known as the Arlington Apartments.5 This “Arlington

Loan” was further secured by a personal guarantee executed by Mondona Rafizadeh,

president of Bahar Development, Inc. (“Bahar”), a corporate entity that served as Cyrus’s

general partner.




       4
       UBS also succeeded in interest to PaineWebber’s rights and obligations in a separate
mortgage-loan-purchase agreement with Merrill Lynch Investors, Inc., discussed infra at [7-
9].
       5
           Love Funding was the nominal lender; PaineWebber provided the actual financing.

                                               6
       C.      The Mortgage-Loan-Purchase Agreement Between PaineWebber and Merrill
               Lynch Investors, Inc.

               1.      The Securitization Process

       As part of a larger commercial-mortgage-backed securities transaction, on November

1, 1999, PaineWebber entered into a separate mortgage-loan-purchase agreement with

Merrill Lynch Investors, Inc. (“Merrill Lynch”). Pursuant to that agreement (“the Merrill

Lynch MLPA”), PaineWebber sold and assigned 36 loans to Merrill Lynch, three of which

— including the Arlington Loan — had been originated by Love Funding.

       In a series of related transactions, these 36 loans were then securitized, i.e., pooled and

packaged in a manner that allowed for sale to investors. See generally Gariety v. Grant

Thornton, LLP, 368 F.3d 356, 359 (4th Cir. 2004) (describing similar securitization process

for sub-prime mortgage loans). Central to that securitization process was the execution of

a separate agreement, dated November 1, 1999, called a “pooling and servicing agreement.”

Pursuant to this agreement, the plaintiff Trust was created, with Merrill Lynch acting as

depositor; Orix Real Estate Capital Markets, LLC (“Orix”), serving as master and special

servicer of the loans6 ; and Norwest Bank Minnesota, National Association, acting as trustee.

Additionally, Merrill Lynch assigned to the Trust all of its “right[s], title and interest . . . in,


       6
         As master and special servicer, Orix was required to perform various administrative
functions, including collecting mortgage-loan payments and depositing those payments for
the benefit of the certificate holders. Orix was also required to monitor the mortgage loans
held by the Trust, a task that enabled it, if appropriate, to foreclose upon property securing
these loans.

                                                 7
to and under (i) the Mortgage Loans [including the loans sold by PaineWebber], (ii) each

Mortgage Loan Purchase Agreement and (iii) all other assets included or to be included” in

the Trust. Pooling and Services Agreement § 2.01(a).

       The beneficial ownership of the Trust was evidenced by the issuance of the “Mortgage

Pass-Through Certificates, Series 1999-C1,” which were sold to investors via private

placement or public offering. Those certificates, referred to as “commercial mortgage-

backed securities” or “CMBS,” see LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp.,

424 F.3d at 200, were secured by the underlying commercial mortgages and entitled their

holders to interest payments generated by the underlying mortgage loans.

                2.     The Merrill Lynch MLPA Representations

       In the Merrill Lynch MLPA, PaineWebber made a representation, akin to that in the

Love MLPA, that none of the mortgage loans conveyed were in default.7 PaineWebber

expressly acknowledged that this representation, as with others, was made for the benefit of

the Trust’s certificate holders and could be enforced by the trustee or its designee. See


       7
           Specifically, PaineWebber represented that

       [t]here is no material default, breach, violation or event of acceleration existing
       under the related Mortgage or Mortgage Note, and to the Mortgage Loan
       Seller’s [i.e., PaineWebber’s] knowledge, there is no event (other than payments
       due but not yet delinquent) which, with the passage of time or with notice and
       the expiration of any grace or cure period, would constitute such a default,
       breach, violation or event of acceleration.

Merrill Lynch MLPA, Schedule I ¶ (vii).

                                              8
Merrill Lynch MLPA §§ 3.3(d), 5.3.         In the event that PaineWebber breached its

representations, the Merrill Lynch MLPA afforded the following remedy, among others:

       Within 90 days of the earlier of its discovery or its receipt of notice of any
       . . . Defective Mortgage Loan . . . , the Mortgage Loan Seller [i.e.,
       PaineWebber] shall cure such Document Defect or Breach in all material
       respects, which shall include payment of losses and any expenses associated
       therewith, or, if such Document Defect or Breach cannot be cured within such
       90-day period, either (i) repurchase the affected Mortgage Loan at the
       applicable Repurchase Price not later than the end of such 90-day period, or
       (ii) substitute a Qualified Substitute Mortgage Loan for such affected
       Mortgage Loan.

Id. § 3.3(b).

       D.       The Arlington Loan Foreclosure Proceedings

       In March 2002, although Cyrus was current on principal and interest payments on the

Arlington Loan, it failed to pay into escrow the amount required for replacement and repairs

on the Arlington Apartments. As a result, on March 8, the Trust declared the Arlington Loan

to be in default and accelerated payment on the full amount of the indebtedness. When Cyrus

failed to comply, on March 13, the Trust commenced a mortgage-foreclosure action in

Louisiana state court.

       Pursuant to these foreclosure proceedings, the Arlington Apartments were sold on

October 21, 2004, realizing approximately $6.5 million in net proceeds, from which the Trust

subsequently received $5.9 million. Thereafter, on December 23, 2004, the Trust obtained

a monetary judgment against Cyrus, Bahar, and Rafizadeh in the amount of $10,893,350.96.



                                             9
Among other findings, the Louisiana state court ruled that Cyrus had committed fraud to

obtain the Arlington Loan, which fraud constituted an event of default. The Trust represents

that, to date, it has recovered less than $5,000 from Cyrus and its principals on the Louisiana

judgment.

       E.     The Trust’s Suit Against UBS

       Within months of instituting the Louisiana foreclosure action, the Trust pressed its

remedies against UBS. The Trust theorized that, because fraud by Cyrus had put the

Arlington Loan in default from the outset, PaineWebber (and, hence, its successor UBS) had

necessarily breached its representation in the Merrill Lynch MLPA that the Arlington Loan

contained no material default.8 The Trust demanded that UBS repurchase the Arlington Loan

as well as other loans purportedly infected by defaults. UBS refused, triggering what the

district court aptly described as approximately two years of “scorched earth litigation”

between the Trust and UBS. Trust v. Love Funding, 499 F. Supp. 2d at 318.

       On September 13, 2004, the Trust and UBS settled their litigation pursuant to an

agreement whereby they exchanged mutual releases as to future claims relating to 33 loans

assigned by UBS and deposited in the Trust. As consideration for the releases on 32 of the



       8
         As the district court noted, it is undisputed that Love Funding was unaware of
Cyrus’s fraud at the time it assigned the Arlington Loan pursuant to the Love MLPA.
Indeed, the parties stipulated that Love Funding only learned of Cyrus’s fraud in the fall of
2002, some months after the Trust itself learned this fact. See Trust v. Love Funding, 499
F. Supp. 2d at 317.

                                              10
loans, UBS paid the Trust $19.375 million. With respect to the Arlington Loan, however,

the sole consideration for the Trust’s release was UBS’s assignment to the Trust of all of

UBS’s rights embodied in the Love MLPA. See id. at 319. That assignment is the subject

of the parties’ champerty dispute.

         F.     The Trust’s Suit Against Love Funding

         On November 1, 2004, the Trust sued Love Funding in the Supreme Court of the State

of New York. In a letter sent two days later, the Trust “demand[ed] that Love Funding cure

[its] breaches or, if (but only if) cure is not possible, repurchase the Arlington Loan at the

Repurchase Price as required by Section 5.03 of the MLPA.” Letter from Michael F. Wurst,

Director, Distressed & Proprietary Assets, Orix Capital Markets, LLC, to Karen Ford, Senior

Vice President, Love Funding Corp. (Nov. 3, 2004), at 2. Love Funding rejected the demand

and subsequently removed the Trust’s lawsuit — the subject of this appeal — to federal

court.

         G.     The District Court Proceedings

                1.     October 11, 2005 Decision

         On cross-motions for summary judgment, the district court ruled in favor of the Trust

on the issue of Love Funding’s breach of § 5.02(cc) of the Love MLPA, the provision in

which Love Funding had represented that the conveyed mortgage notes contained no default,

breach, violation, or event of acceleration. See Trust for the Certificate Holders of the



                                              11
Merrill Lynch Mortgage Pass-Through Certificates Series 1999-C1 v. Love Funding Corp.,

No. 04 Civ. 9890, 2005 WL 2582177, at *7 (S.D.N.Y. Oct. 11, 2005). At the same time,

however, the district court authorized Love Funding to amend its answer to assert the

affirmative defense of champerty. Id. at *4.

              2.      February 27, 2007 Decision

       On February 27, 2007, after a bench trial, the district court ruled that, with respect to

the Arlington Loan assignment, Love Funding had proved its champerty defense by a

preponderance of the evidence. See Trust v. Love Funding, 499 F. Supp. 2d at 324-25. The

district court observed that to demonstrate that the transaction was champertous under New

York Judiciary Law § 489(1), Love Funding had to show that the Trust’s “‘primary purpose

[for], if not the sole motivation behind, entering into the transaction’” at issue was to sue on

the assigned claim. Id. at 315 (quoting Bluebird Partners, L.P. v. First Fidelity Bank, N.A.,

94 N.Y.2d 726, 736, 709 N.Y.S.2d 865, 871 (2000)). Although the Trust argued that its

November 3, 2004 letter to Love Funding demonstrated that its purpose was, in fact, “to

resolve its claims without litigation,” the district court rejected this argument as

“disingenuous” given that the Trust had already initiated a lawsuit two days earlier. Id. at

321-22.

       In any event, the district court found that the circumstances leading up to the

Arlington Loan assignment and the terms of the assignment convincingly demonstrated that

“the Trust’s primary purpose in accepting the Assignment was to buy a lawsuit against Love

                                               12
Funding.” Id. at 322. Notably, the court stated that,

       [d]uring settlement negotiations, UBS and the Trust discussed various ways of
       settling the Arlington Loan dispute. One option was that UBS would repay the
       Trust for its overpayment to UBS for this now-defaulted loan. At one point,
       the Trust had requested that UBS pay it an additional “$4 or $5 million” as
       compensation for Arlington.

       An alternative option, the one ultimately chosen, was the Assignment.
       Initially, however, the Trust was reluctant to accept the Assignment. [Orix
       representative John] Dinan testified that:

              I recall there being a discussion about, you know . . . if we [i.e.,
              the Trust] take the assignment, then we’re basically — which we
              did not want to do, you know, then we’re just — we’re continuing
              a microcosm of the litigation that has already been going on for
              the last three years with UBS.

       James Thompson, President and CEO of Orix USA, characterized the
       Assignment similarly in an email he sent to Brian Harris of UBS a week before
       the Settlement was finalized. Thompson wrote: “. . . our [the Trust’s] guys .
       . . do like the Love Funding claim, but that’s a whole new lawsuit, which
       doesn’t turn a lot of folks on.”

Id. at 319-20 (emphases and final alteration in original) (footnotes omitted).

       From these facts, the district court determined that

       UBS and the Trust treated the Arlington Loan separately from all of the other
       [Merrill Lynch] Litigation loans. Not a cent of UBS’s $19.375 million
       Settlement payment to the Trust was allocated to the Arlington Loan. The
       Trust took, as its sole consideration from UBS for losses related to Arlington,
       all of UBS’s rights and claims against Love Funding under the Love MLPA.

Id. at 320. The district court concluded that this “carve out of a single loan from a group of

loans that were settled for significant payments” distinguished the case from others relied on

by the Trust in which claim assignments were not deemed champertous. Id. at 324 & n.76

                                             13
(collecting cases).

       The district court deemed it “[c]ritical” to its identification of champerty that

       after two years of angry and expensive litigation, the only compensation the
       Trust took in exchange for releasing UBS from the Arlington Loan — a
       “poster child” of the [Merrill Lynch] Litigation — was the Assignment. The
       record is devoid of evidence suggesting why the Trust would consider the
       Assignment adequate consideration if its primary purpose was not to sue Love
       Funding thereunder. Quite literally, the Trust had negotiated for itself “a
       whole new lawsuit,” with the intent to “basically . . . continu[e] a microcosm
       of the litigation that ha[d] already been going on for the last three years with
       UBS.”

Id. at 322-23 (emphasis and last two alterations in original) (footnotes omitted). The district

court also found that the champertous nature of the assignment was evidenced by the Trust’s

perception that it could recover “millions of dollars more” on the Arlington Loan by suing

Love Funding than by pursuing a cash settlement from UBS:

       Under the Love MLPA, the Trust could sue (and is suing) Love Funding for
       the principal balance of the loan, as well as for millions of dollars in simple
       and default interest that have been accruing on the loan for years. Because
       simple interest began accruing shortly after the Trust notified Cyrus that the
       loan was in default, in January 2002, it now totals over $2.5 million. And
       given a Louisiana court’s finding that default interest began accruing on the
       loan as of July 7, 1999, the Trust is now claiming additional damages of
       approximately $2.4 million.

Id. at 322-23 (footnotes omitted). Finally, the district court found that, by accepting the

assignment, the Trust

       believed it could also potentially recover indemnification damages from Love
       Funding under section 9.14 of the Love MLPA. The Trust’s particular
       attraction to this provision is clear from the fact that section 9.14 is the only
       provision of the Love MLPA specifically identified in the language of the

                                          14
       Assignment. Under section 9.14, Love Funding could be required to
       indemnify the Trust not only for attorneys’ fees and costs expended pursuing
       Love Funding, but also for all attorneys’ fees and costs expended foreclosing
       on the property and pursuing Cyrus and Rafizadeh. Moreover, the Trust urges
       this Court to find that section 9.14 also obligates Love Funding to indemnify
       the Trust for a portion of the legal fees UBS incurred during the [Merrill
       Lynch] Litigation [i.e., the fees UBS incurred in its litigation with the Trust].

Id. at 323 (emphasis in original) (footnotes omitted).9 Thus, the district court concluded,

“the Trust had a strong incentive to sue Love Funding from the time it accepted the

Assignment.” Id.10

       This appeal followed.

II.    Discussion

       A.      Certification Standards

       Under our local rules, when authorized by state law, “‘this Court may certify to the




       9
        In its brief to this court, the Trust asserts that it “does seek indemnification from
Love Funding under the indemnification provision of the Love Funding MLPA, and seeks
to recover the attorneys’ fees and costs to which it is entitled under that contract.”
Appellant’s Br. at 45. Similarly, the Trust confirmed at oral argument that it construed the
assignment to allow it to pursue fully UBS’s rights of indemnification against Love Funding.
       10
          In a final footnote to its February 27, 2007 opinion, the district court stated that, if
the Arlington Loan assignment were not voided by champerty, it would award the Trust
$1,736,668.35 in damages, consisting of the loan repurchase price as of September 30, 2002,
offset by the Trust’s modest recovery to date from Cyrus, Bahar, and Rafizadeh, and the
proceeds from the sale of the Arlington Apartments. See id. at 325 n.79. This hypothetical
award, which limited the Trust’s claims for default-interest payments and declined to award
disputed indemnification damages, was considerably less than the roughly $10,000,000 that
the district court found the Trust unrealistically to have demanded from Love Funding to
avoid litigation. See id. at 320-21.

                                               15
highest court of a state an unsettled and significant question of state law that will control the

outcome of a case pending before this Court.’” Israel v. Chabra, 537 F.3d 86, 100 (2d Cir.

2008) (quoting Second Cir. R. § 0.27). Section 500.27 of the New York Rules of Court

authorizes certification “[w]henever it appears to . . . any United States Court of Appeals

. . . that determinative questions of New York law are involved in a case pending before that

court for which no controlling precedent of the [New York] Court of Appeals exists.” N.Y.

Comp. Codes R. & Regs. tit. 22, § 500.27(a). Although we have described certification as

an “exceptional procedure,” it is appropriately invoked where a “statute’s plain language

does not indicate the answer to the question pending before the court, and there is an absence

of authoritative state court interpretations of the state statute.” McGrath v. Toys “R” Us,

Inc., 356 F.3d 246, 250 (2d Cir. 2004) (internal citation and quotation marks omitted). Such

is our case.

       B.      The Unsettled Questions of New York Law

       New York’s prohibition against champerty is codified in New York Judiciary Law

§ 489(1). That provision states, in relevant part:

       [N]o corporation or association, directly or indirectly, itself or by or through
       its officers, agents or employees, shall solicit, buy or take an assignment of, or
       be in any manner interested in buying or taking an assignment of a bond,
       promissory note, bill of exchange, book debt, or other thing in action, or any
       claim or demand, with the intent and for the purpose of bringing an action or
       proceeding thereon.




                                           16
Id.11

        While New York courts have had several occasions to construe this statutory text,

those interpretations have, as we noted in Elliott Associates, L.P. v. Banco de la Nacion, 194

F.3d 363, 377 (2d Cir. 1999), not always been clear or consistent. In Elliott Associates,

however, there was consistency on what mattered: New York cases had consistently refused

to characterize as champertous a transacting party’s acquisition of a debt instrument for the

primary purpose of enforcing it. See id. at 378. Thus, because the district court in Elliott

Associates had determined that the plaintiff’s “‘primary goal in purchasing the debt was to

be paid in full,’” id., we were able to apply the established state principle on appeal without

any need for certification, see id. at 370.

        In this case, the district court did not find that the Trust’s primary intent when

purchasing the debt instruments was to be paid in full. Rather, it found that the Trust’s

“primary purpose” in accepting the challenged assignment was “to buy a lawsuit against

Love Funding.” Trust v. Love Funding, 499 F. Supp. 2d at 322; see also id. at 324 n.75

(distinguishing Elliott Associates). The Trust challenges this assessment of its intent, in

essence asserting that the facts cited by the district court to support its conclusion are


        11
         The statute was amended in 2004 to add sections (2) and (3), which reference a safe
harbor for certain transactions. See 2004 N.Y. Sess. Laws Ch. 394 (McKinney). Because
the Trust did not seek the shelter of the safe harbor, we have no cause to consider these
sections. We note the statute’s amendment simply to explain that our reference to the historic
champerty provision now codified at § 489(1) is intended to correlate with pre-amendment
references to § 489.

                                              17
insufficient as a matter of New York law to prove champerty. This argument forces us to

confront several questions of New York law not clearly answered by established precedent.

Mindful that these questions arise in the context of “sophisticated business transactions,” and

of the importance of New York law to the State’s preeminent role in world financial affairs,

Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d at 739, 709 N.Y.S.2d at 873,

we conclude that certification of these questions to the New York Court of Appeals is

warranted.

               1.     The Level of Intent Necessary to Demonstrate Champerty

       The first issue raised by this appeal is whether the district court’s finding that the

Trust’s “primary” intent was “to buy a lawsuit against Love Funding,” Trust v. Love

Funding, 499 F. Supp. 2d at 322, is legally sufficient to demonstrate champerty under New

York Judiciary Law § 489(1). Before addressing whether an intent “to buy a lawsuit” is, on

the facts of this case, legally sufficient to demonstrate champerty, we note some ambiguity

in New York jurisprudence as to whether the level of champertous intent proscribed by

§ 489(1) can be “primary” or whether it must, in fact, be “sole.”

       The ambiguity originates with the seminal New York champerty case, Moses v.

McDivitt, 88 N.Y. 62 (1882), which seems to allude to both primary and sole intent. At one

point, Moses explains that, to violate § 489, “the primary purpose of the purchase must be

to enable [a transacting party] to bring a suit, and the intent to bring a suit must not be merely

incidental and contingent.” Id. at 65 (emphasis added). At the same time, however, Moses

                                               18
states that “a mere intent to bring a suit on a claim purchased does not constitute the offense;

the purchase must be made for the very purpose of bringing such suit, and this implies an

exclusion of any other purpose.” Id. (emphases added). The highlighted language suggests

that the proscribed intent must be singular.

       Subsequent cases did little to clarify the statute’s intent requirement. Compare Sprung

v. Jaffe, 3 N.Y.2d 539, 544, 169 N.Y.S.2d 456, 460 (1957) (holding that statute is violated

“only if the primary purpose of the purchase or taking by assignment of the thing in action

is to enable the attorney to commence a suit thereon” (emphasis added)), with Fairchild

Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 325, 330, 321 N.Y.S.2d 857, 860

(1971) (referencing “exclusion of any other purpose” and “primary purpose” phrases used

in Moses and Sprung v. Jaffe in holding that challenged assignment was not champertous

because assignee did not receive it “for the sole and primary purpose of bringing an action”

(emphasis added)).

       In Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d at 735-36, 709

N.Y.S.2d at 871, the New York Court of Appeals recognized the interpretive tension in these

precedents. Moreover, it acknowledged that “a purpose that is primary is not necessarily the

sole purpose.” Id. at 736, 709 N.Y.S.2d at 871. In Bluebird Partners, however, the Court of

Appeals did not have to choose between these two degrees of intent because the record in the

case did not permit a finding of a primary champertous motivation, a conclusion that

necessarily foreclosed any finding as to a sole champertous intent. See id. This factual

                                               19
context is critical to understanding the Court of Appeals’ ruling that “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.” Id. (emphasis added). The term “at least”

generally indicates that a certain showing is “necessary” but not always “sufficient” to

establish a particular fact. K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d

123, 129 (2d Cir. 1995) (interpreting term in other context). Thus, by using “at least” to

discuss a primary champertous intent in Bluebird Partners, the Court of Appeals appears to

have reserved for another day the question of whether the proof of intent ultimately required

is “primary” or “sole.” 12

       Thus, we now ask the Court of Appeals to clarify whether a finding of a “primary”

champertous intent is legally sufficient to void an assignment under § 489(1), or whether a

further finding is required that the proscribed intent was “sole.”

                      2.     The Scope of the § 489(1) Proscription

       As always in certifying questions to the New York Court of Appeals, we do not bind

the court to the particular questions stated. In this case, the Court of Appeals may well


       12
          Embedded in Bluebird Partners’ discussion of champertous intent is the statement
that the primary/sole distinction “is one without a legal difference when the ‘primary’
element is present.” 94 N.Y.2d at 736, 709 N.Y.S.2d at 871. Standing alone, this statement
might be construed to signal that a finding of primary intent is, by itself, sufficient to void
a transaction as champertous. In the factual context of the case, however, the Court of
Appeals may have meant to communicate that the primary/sole distinction is without legal
significance when, as in Bluebird Partners, primary intent is not present. In responding to
the certified questions, the Court of Appeals may wish to clarify this point.

                                              20
conclude that the critical issue to assessing the sufficiency of the champerty finding is not the

denomination of the Trust’s intent as “primary” or “sole,” but the purpose behind its

acquisition of rights that allowed it to sue Love Funding.

       As this court recognized in Elliot Associates, L.P. v. Banco de la Nacion, the language

of § 489 appears to “forbid[] essentially all ‘secondary’ transactions in debt instruments where

the purchaser had an intent to enforce the debt obligation through litigation.” 194 F.3d at 372.

New York, however, has plainly declined to construe the statute so broadly. Mindful of the

traditionally narrow scope of champerty, which focused primarily on preventing persons

“from filing suit merely as a vehicle for obtaining costs [and] attorneys’ fees,” Bluebird

Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d at 734, 709 N.Y.S.2d at 870 (reviewing

history of champerty), the Court of Appeals has expressly held that an intent to sue “cannot

automatically become synonymous with champerty, for litigation can be an appropriate and

commonly used strategy,” id. at 738, 709 N.Y.S.2d at 872; see also Elliott Assocs., L.P. v.

Banco de la Nacion, 194 F.3d at 372-73 (discussing statute’s focus on preventing acquisition

of debts “as an expedient vehicle for obtaining costs” and holding that “acquisition of a debt

with intent to bring suit against the debtor is not a violation of the statute where, as here, the

primary purpose of the suit is the collection of the debt acquired”).

       Thus, a question arises as to whether the intent to “buy a lawsuit” identified by the

district court, Trust v. Love Funding, 499 F. Supp. 2d at 322, necessarily equates with the

intent proscribed by New York Judiciary Law § 489(1). Specifically, would it make a

                                               21
difference whether the new lawsuit was purchased (a) to allow the purchaser to profit from

the costs and fees that could be generated by that lawsuit, or, instead, (b) to provide a means

to enforce an otherwise legitimate obligation?

       The Trust was not, after all, a party with no interest in the loans that Love Funding had

transferred to PaineWebber pursuant to the Love MLPA. To the contrary, as the end holder

of the Arlington Loan, the Trust was the party that would directly suffer the damages of any

default on that instrument. To be sure, the default that the Trust declared against Cyrus for

failure to post required collateral was distinct from the default the district court found as a

result of Cyrus’s initial fraud in acquiring the loan. Notably, the former default would not,

by itself, have supported a claim that Love Funding had materially breached its representation

to PaineWebber (and, hence, to its successor UBS). The Trust could not, however, sue Love

Funding directly for damages linked to Cyrus’s initial fraud for the simple reason that no

privity existed between the Trust and Love Funding. Thus, the Trust first sued UBS and, then,

by accepting in settlement an assignment of UBS’s rights in the Love MLPA, the Trust

effectively acquired privity with Love Funding. It is in this sense that the Trust might be

viewed, as the district court found, to have bought a “‘whole new lawsuit,’” Trust v. Love

Funding, 499 F. Supp. 2d at 322, i.e., a lawsuit that it could not have filed on its own — but

hardly one involving a debt obligation that it had no interest in collecting.

       It is not clear whether New York law would view an intent to acquire a lawsuit in such

circumstances as champertous. In Bellarno International Ltd. v. Irving Trust Co., the First

                                              22
Department held that an assignment was not champertous where the “plaintiff was not a

stranger to the transaction, and the assignment was made for the purpose of facilitating a

recovery as compensation for an alleged wrong, in an action already commenced and

pending.” 165 A.D.2d 809, 809, 560 N.Y.S.2d 287, 288 (1st Dep’t 1990) (internal citations

omitted); see also Williams Paving Co. v. U.S. Fid. & Guar. Co., 67 A.D.2d 827, 828, 413

N.Y.S.2d 73, 74 (4th Dep’t 1979) (holding assignment not champertous where assignee’s

“primary purpose was to protect its own interest in attempting to collect its judgment”). To

be sure, at the time the Trust acquired the assignment, the Trust’s original action against UBS

on the Arlington Loan was no longer “pending.” Moreover, as the district court observed,

neither the Trust nor UBS had ever sought to implead Love Funding throughout the course

of their protracted litigation. See Trust v. Love Funding, 499 F. Supp. 2d at 325. These

circumstances, however, do not indicate that the Trust acquired UBS’s interests simply to

pursue the classic rewards of champerty, i.e., the costs and fees it could generate from new

litigation.

       Indeed, we are aware of no New York case addressing facts akin to those presented on

this appeal, i.e., where a party that holds a proprietary interest in a debt instrument accepts an

assignment of rights that allows it to sue a party that had purportedly misrepresented to the

assignor that the instrument was not in default. Thus, we ask the New York Court of Appeals

to indicate whether the intent to acquire such rights, even if properly characterized as the




                                               23
intent to “to buy a lawsuit,” id. at 322, is legally sufficient to constitute champerty.13

              3.      Whether an Intent to Realize More From a Lawsuit to Enforce Assigned
                      Rights Than One Might Have Recovered in Settlement from the
                      Assigning Party Makes the Assignment Champertous

       In voiding the challenged assignment as champertous, the district court found that the

Trust’s intent in suing Love Funding was to recover more in compensation for its losses on

the Arlington Loan than it had demanded in settlement from UBS on this debt obligation. See

Trust v. Love Funding, 499 F. Supp. 2d at 323 (“From the Trust’s perspective, a lawsuit

against Love Funding could potentially reap millions of dollars more than the Trust had been

prepared to accept from UBS on the Arlington Loan.”). Further, the district court noted that

the assignment enabled the Trust to pursue UBS’s rights to indemnification against Love

Funding, which, in the Trust’s view, allowed it to sue for the extensive attorneys’ fees and

costs incurred in foreclosing on the Arlington Apartments and in pursuing claims against

Cyrus, Rafizadeh, and Love Funding, as well as certain fees and costs that UBS had incurred

in defending its litigation with the Trust itself. See id.14 The Trust further sought to recover



        13
         We expect that any consideration of this question will be informed by the fact that
the challenged Arlington Loan assignment arose in the context of a broad settlement
agreement, see Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d at 330, 321
N.Y.S.2d at 861 (noting that challenged assignment was “an incidental part of a substantial
commercial transaction”), as well as by the district court’s finding that this assignment was
“carve[d] out” from “a group of loans that were settled for significant payments,” Trust v.
Love Funding, 499 F. Supp. 2d at 324.
        14
        We note that, on appeal, the Trust claims that the indemnification damages it seeks
from Love Funding “are almost identical to the damages that the Trust could previously have

                                               24
from Love Funding the interest that had been accruing on the loan over the years. See id.

As a result, the district court concluded that the Trust’s intent in suing Love Funding was not

only to be made whole on losses sustained from the Arlington Loan default, but also to profit

from the litigation itself, a motivation apparently consistent with champerty. See id.; see also

Promenade v. Schindler Elevator Corp., 39 A.D.3d 221, 223, 834 N.Y.S.2d 97, 99 (1st Dep’t

2007) (suggesting impropriety of obtaining assignment as “investment”).

       As we have already observed, a party’s acquisition of rights in order to profit from the

very act of maintaining a lawsuit by generating compensable costs and fees constitutes a

classic case of champerty. See Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d

at 734, 709 N.Y.S.2d at 870; Elliott Assocs., L.P. v. Banco de la Nacion, 194 F.3d at 373. But

we have identified no New York case holding that champerty is evidenced by the settlement

of one legitimate dispute (that between the Trust and UBS) through an assignment of

indemnification rights for reasonable costs and fees incurred in legal actions that have already

transpired. To the extent such rights might be viewed as akin to any other debt obligation held

by the assigning party, a question arises as to whether their acquisition could legally support

a claim of champerty, particularly if the acquiring party’s intent is simply to obtain payment

of that debt “even should litigation become necessary.” Bluebird Partners, L.P. v. First

Fidelity Bank, N.A., 94 N.Y.2d at 737, 709 N.Y.S.2d at 871. Thus, we ask the New York



sought from UBS.” Appellant’s Br. at 45. The district court, however, did not make such
a finding; thus, on this appeal, we treat that assertion as unresolved.

                                              25
Court of Appeals to indicate whether such an assignment of costs and fees in the

circumstances of this case constitutes champerty.

       Similarly, we have identified no New York case indicating whether, when a party

(here, the Trust) settles a dispute by accepting a transfer of rights (UBS’s rights under the

Love MLPA) that hold the potential for a greater recovery than the parties had explored as a

cash settlement, the acquisition of such rights can be deemed champertous if the acquiring

party is, in fact, using litigation to seek full payment of the purported debt obligation rather

than “merely as a vehicle for obtaining costs [and] attorneys’ fees.” Id. at 734, 709 N.Y.S.2d

at 870. Accordingly, mindful of the New York Court of Appeals’ concern that the “champerty

cloud” not cast a shadow “too easily over modern business practices and dispute resolutions

involving the acquisition of securities and their concomitant rights,” id. at 737, 709 N.Y.S.2d

at 871, we ask that court to clarify the application of the champerty doctrine to these facts.

III.   Conclusion

       For the reasons stated, the court hereby certifies the following questions to the New

York Court of Appeals:

       1.     Is it sufficient as a matter of law to find that a party accepted a challenged

              assignment with the “primary” intent proscribed by New York Judiciary Law

              § 489(1), or must there be a finding of “sole” intent?

       2.     As a matter of law, does a party commit champerty when it “buys a lawsuit”

              that it could not otherwise have pursued if its purpose is thereby to collect

                                              26
              damages for losses on a debt instrument in which it holds a pre-existing

              proprietary interest?

       3.     (a) As a matter of law, does a party commit champerty when, as the holder of

              a defaulted debt obligation, it acquires the right to pursue a lawsuit against a

              third party in order to collect more damages through that litigation than it had

              demanded in settlement from the assignor?

              (b) Is the answer to question 3(a) affected by the fact that the challenged

              assignment enabled the assignee to exercise the assignor’s indemnification

              rights for reasonable costs and attorneys’ fees?

The Court of Appeals may answer these questions in whatever order it deems best to assist

this court in determining whether the facts of this case demonstrate champerty. Similarly, the

Court of Appeals may expand these certified questions to address any other issues of New

York law pertinent to this appeal.

       This panel retains jurisdiction for purposes of resolving this appeal once the New York

Court of Appeals has responded to our certification.

       It is, therefore, O RDERED that the Clerk of this Court transmit to the Clerk of the New

York Court of Appeals a certificate, as set forth below, together with this opinion and a

complete set of briefs, appendices, and the record filed in this case by the parties.

IV.    Certificate

       The foregoing is hereby certified to the Court of Appeals of the State of New York

                                              27
pursuant to Second Cir. R. § 0.27 and N.Y. Comp. Codes R. & Regs. tit. 22, § 500.27, as

ordered by the United States Court of Appeals for the Second Circuit.




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