07-1050-cv
Trust v. Love Funding Corp.


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


                                        August Term, 2008

(Argued: September 26, 2008                                        Decided: January 11, 2010)

                                      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.


Before:
                B.D. P ARKER,1 R AGGI, Circuit Judges, and K EENAN, District Judge.2

                                      ___________________

          Appeal from a judgment in favor of Love Funding entered in the United States District

Court for the Southern District of New York (Shira A. Scheindlin, Judge), based on a


          1
         Judge Barrington D. Parker was designated as the third member of the panel
pursuant to then-Local Rule § 0.14(b), revised as Internal Operating Procedure E(b),
replacing Judge Guido Calabresi, who recused himself earlier in these proceedings.
          2
         District Judge John F. Keenan, of the United States District Court for the Southern
District of New York, sitting by designation.
determination that the assignment of rights supporting plaintiff’s suit was void as

champertous. Having previously certified questions regarding the scope of New York’s

statutory proscription of champerty, see N.Y. Judiciary Law § 489(1), to the New York Court

of Appeals, and having now received its response, this court concludes as a matter of law that

the trial record cannot support a finding of champerty.

       R EVERSED AND R EMANDED.




              IRA M. F EINBERG, Hogan & Hartson LLP, New York, New York (Andowah
                    Newton, Hogan & Hartson LLP, New York, New York, Lorane F.
                    Hebert, Hogan & Hartson LLP, Washington, D.C., on the brief), for
                    Plaintiff-Appellant.

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




R EENA R AGGI, Circuit Judge:

       Plaintiff, the Trust for the Certificate Holders of the Merrill Lynch Mortgage

Investors, Inc., Mortgage Pass-Through Certificates, Series 1999-C1 (the “Trust”) sued

defendant Love Funding Corporation (“Love Funding”), the originator of a defaulted

mortgage held by the Trust, for breach of various representations and warranties made in a

mortgage loan purchase agreement. Love Funding asserted the defense of champerty based

on the fact that the Trust was assigned the right to sue Love Funding as part of a settlement



                                              2
of claims against UBS Real Estate Securities, Inc. (“UBS”), the successor in interest to Paine

Webber Real Estate Securities, Inc. (“Paine Webber”),3 which funded the defaulted mortgage

loan. After a bench trial in the United States District Court for the Southern District of New

York, Judge Shira A. Scheindlin voided the assignment as champertous and entered

judgment in favor of Love Funding. See Trust for Certificate Holders of Merrill Lynch

Mortgage Investors, Inc., Mortgage Pass-Through Certificates, Series 1999-C1 v. Love

Funding Corp. (“Trust v. Love Funding” 4 ), 499 F. Supp. 2d 314 (S.D.N.Y. 2007).

       On appeal, the Trust argued that the assignment could not be champertous because it

had a preexisting interest in the loan giving rise to its claim. Because of ambiguities in the

scope of New York’s statutory proscription of champerty, see N.Y. Judiciary Law § 489, we

certified certain questions to the New York Court of Appeals, see Trust v. Love Funding, 556

F.3d 100, 114 (2d Cir. 2009). Having received the Court of Appeals’ response, see Trust v.

Love Funding, 13 N.Y.3d 190, --- N.Y.S.2d --- (2009), we now conclude, as a matter of law,

that the trial record does not permit a finding of champerty. Accordingly, we reverse the

challenged judgment and remand the case to the district court for entry of judgment in favor

of plaintiff and for a determination of damages.



       3
         Pursuant to a merger of their parent companies in 2000, UBS succeeded in interest
to Paine Webber’s rights and obligations under the agreements relevant here.
       4
         Because, aside from the parties’ titles, this case bore the same full caption in the
district court, this court, and the New York Court of Appeals, we henceforth use the
shortened caption form in referencing the opinions of each of these courts.

                                              3
I.     Background

       A.     Securitization of the Arlington Loan

       Although we assume familiarity with our prior opinion in this case, see Trust v. Love

Funding, 556 F.3d 100, we briefly recite certain facts relevant to the decision reached today.

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

Webber, which was memorialized in an April 23, 1999 mortgage loan purchase agreement

(the “Love MLPA”). Under the Love MLPA, Love Funding represented to Paine Webber

that no underlying mortgage loan was in default. In the event that Love Funding breached

this, or any other, representation, the Love MLPA provided for certain remedies, including

the “repurchase [of the] Mortgage Loan at the Repurchase Price,” Love MLPA § 5.03(b), and

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

asserted liabilities, costs and expenses, including reasonable attorneys’ fees, incurred by an

Indemnified Party, in any way arising from or related to any breach of any representation,

warranty, covenant or agreement . . . hereunder,” id. § 9.14(a).

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

mortgage loan (the “Arlington Loan”) to Cyrus II Partnership (“Cyrus”), which was secured

by a mortgage on Louisiana property known as the Arlington Apartments. On November 1,

1999, Paine Webber sold and assigned 36 loans, including the Arlington Loan, to Merrill

Lynch Mortgage Investors, Inc. (“Merrill Lynch”), pursuant to the Merrill Lynch mortgage

loan purchase agreement (the “Merrill Lynch MLPA”). In the Merrill Lynch MLPA, Paine

                                              4
Webber represented, as Love Funding had in the Love MLPA, that none of the mortgage

loans was in default.

       The loans were then securitized through a process that involved the creation of the

plaintiff Trust. On November 1, 1999, Merrill Lynch assigned to the Trust all of its “right[s],

title and interest . . . in, to and under (i) the Mortgage Loans [including the loans sold by

Paine Webber], (ii) each Mortgage Loan Purchase Agreement and (iii) all other assets

included or to be included” in the Trust. Pooling and Servicing Agreement § 2.01(a).

Commercial mortgage-backed securities, entitling their holders to interest payments

generated on the underlying mortgages including the Arlington Loan, were then issued and

sold to investors.

       B.     Arlington Loan Default and Resulting Litigation

       On March 8, 2002, the Trust declared the Arlington Loan to be in default and

accelerated payment on the full amount of the loan. The Trust then commenced a mortgage

foreclosure action in Louisiana state court, securing a ruling that Cyrus had committed fraud

to obtain the Arlington Loan and that such fraud constituted an event of default. As a

consequence, the Arlington Apartments were sold for approximately $6.5 million in net

proceeds, of which the Trust received $5.9 million. The Trust also obtained a judgment of

more than $10 million against Cyrus and its principals.

       In September and October 2002, the Trust brought several actions against UBS related

to the sale of loans by Paine Webber to the Trust. With respect to the Arlington Loan, the

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Trust’s theory was that, because Cyrus’s fraud put the Arlington Loan in default from the

outset, Paine Webber (and, therefore, its successor UBS) necessarily breached its

representation in the Merrill Lynch MLPA that “there is no material default.” Merrill Lynch

MLPA, Schedule I ¶ 7. On September 13, 2004, after two years of vigorous litigation, the

Trust and UBS reached a settlement releasing the Trust’s claims as to 33 loans. While UBS

paid the Trust $19.375 million in consideration for releases on 32 loans, the sole

consideration for the Trust’s release on the Arlington Loan was UBS’s assignment of its

rights under the Love MLPA.

       C.      District Court Proceedings

       In November 2004, the Trust commenced this action against Love Funding for breach

of the Love MLPA. On October 11, 2005, the district court granted summary judgment in

favor of the Trust on its claim that Love Funding had breached its representation that the

Arlington Loan was not in default; nevertheless, it allowed Love Funding to amend its

answer to assert the affirmative defense of champerty.

       On February 27, 2007, after a bench trial, the district court ruled that Love Funding

had proved champerty because “the Trust’s primary purpose in accepting the Assignment

was to buy a lawsuit against Love Funding.” Trust v. Love Funding, 499 F. Supp. 2d at 322.

The district court relied on the fact that the Trust “carve[d] out . . . a single loan from a group

of loans that were settled,” id. at 324, and thereby “negotiated for itself ‘a whole new

lawsuit,’ with the intent to ‘basically . . . continu[e] a microcosm of the litigation that ha[d]

                                                6
already been going on for the last three years with UBS,’” id. at 322-23 (alterations in

original). In reaching this conclusion, the district court further found that the Trust was

motivated by a perception that it could recover more on the Arlington Loan by suing Love

Funding than by pursuing a cash settlement because it would be able to recoup “millions of

dollars in simple and default interest that have been accruing on the loan for years” and

because it “could also potentially recover indemnification damages.” Id. at 323.

       D.     Certification of Questions to the New York Court of Appeals

       On appeal, the Trust argued that New York’s champerty law did not apply to this

lawsuit because the relevant statute “was never intended to prohibit assignments in complex

commercial transactions where the assignee has a substantial interest at stake.” Appellant’s

Br. at 26. Recognizing ambiguities in New York law, we certified 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 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?



                                             7
              (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?

Trust v. Love Funding, 556 F.3d at 114.

       E.     New York Court of Appeals’ Response

       The New York Court of Appeals accepted our certification and answered the second

question and both parts of the third question in the negative, rendering it unnecessary to

answer our first inquiry. Trust v. Love Funding, 13 N.Y.3d at 198, --- N.Y.S.2d at ---.

       In responding to our second question, the Court of Appeals emphasized that New

York’s prohibition of champerty “has always been ‘limited in scope and largely directed

toward preventing attorneys from filing suit merely as a vehicle for obtaining costs.’” Id. at

199 (quoting Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d 726, 734, 709

N.Y.S.2d 865, 870 (2000)). The Court of Appeals distinguished between “acquiring a thing

in action in order to obtain costs,” which constitutes champerty, “and acquiring it in order to

protect an independent right of the assignee,” which does not. Trust v. Love Funding, 13

N.Y.3d at 199, --- N.Y.S.2d at ---. “[I]f a party acquires a debt instrument for the purpose

of enforcing it, that is not champerty simply because the party intends to do so by litigation.”

Id. at 200, --- N.Y.S.2d at ---. Noting our observation that the Trust had a preexisting

proprietary interest in the Arlington Loan, the Court of Appeals concluded that, “[i]f, as a

matter of fact, the Trust’s purpose in taking assignment of UBS’s rights under the Love

MLPA was to enforce its rights, then, as a matter of law, given that the Trust had a

                                               8
preexisting proprietary interest in the loan, it did not violate Judiciary Law § 489(1).” Id. at

202, --- N.Y.S.2d at ---.

       Our third question asked whether the Trust’s intent either to recover more in damages

from a lawsuit than from a potential settlement or to be indemnified for reasonable costs and

attorneys’ fees evidenced champerty. The New York Court of Appeals concluded that it did

not.

       To acquire indemnification rights to the costs of past litigation is not to acquire
       a thing in action in order to obtain costs from prosecution thereon. Similarly,
       no New York case has been brought to our attention that stands for the
       proposition that it is champerty to settle a dispute by accepting a transfer of
       rights that has the potential for a larger recovery than one had demanded as a
       cash settlement.

Id. at 202-03, --- N.Y.S.2d at --- (footnote omitted).

II.    Discussion

       Upon receipt of the New York Court of Appeals’ response, the parties filed

supplemental papers with this court in which they effectively agree that the district court –

operating without the benefit of the Court of Appeals’ recent explication of New York

champerty law – applied a more expansive definition of champerty than was warranted.

Love Funding urges us to remand the case to allow the district court to determine whether

it nevertheless still finds champerty proved under the standard set forth in the Court of

Appeals’ response decision. The Trust on the other hand argues for reversal, submitting that,

as a matter of law, the record will not permit a finding of champerty. We agree with the



                                               9
latter argument and accordingly reverse the challenged judgment in favor of Love Funding.

       A.      The New York Court of Appeals’ Decision Effectively Rejects the District
               Court’s Finding of Champerty

       New York’s statutory prohibition against champerty states, in pertinent 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 . . . .

N.Y. Judiciary Law § 489(1). The district court found that the challenged assignment

violated this statute because “the Trust’s primary purpose in accepting the Assignment was

to buy a lawsuit against Love Funding.” Trust v. Love Funding, 499 F. Supp. 2d at 322.

       In answering our second certified question, however, the New York Court of Appeals

clarified that such an intent to sue is insufficient, by itself, to violate the statute. As the Court

of Appeals explained, New York’s champerty statute “does not apply when the purpose of

an assignment is the collection of a legitimate claim.” Trust v. Love Funding, 13 N.Y.3d at

201, --- N.Y.S.2d at ---. Thus, “if a party acquires a debt instrument for the purpose of

enforcing it, that is not champerty simply because the party intends to do so by litigation.”

Id. at 200, --- N.Y.S.2d at ---. Applying these principles to this case, the Court of Appeals

concluded that “if, as a matter of fact, the Trust’s purpose in taking assignment of UBS’s

rights under the Love MLPA was to enforce its rights, then, as a matter of law, given that the

Trust had a preexisting proprietary interest in the loan, it did not violate Judiciary Law

                                                 10
§ 489(1).” Id. at 202, --- N.Y.S.2d at ---. This effectively rejects the district court’s finding

of champerty.

       B.       Because the Trial Evidence Will Not Permit a Finding of Champerty, No
                Remand Is Warranted in this Case

       Love Funding submits that the conditional language at the start of the last quoted

passage from the Court of Appeals’ decision signals a need to remand this case to permit the

district court to resolve a previously unconsidered fact question: whether the Trust’s intent

in taking the UBS assignment of rights was, in fact, to enforce its interest in the Arlington

Loan. Such a remand is warranted, however, only if the trial record presents sufficient

evidence on the point to allow a factfinder to resolve it in favor of Love Funding, i.e., to find

that the Trust intended to sue not to enforce rights under the Love MLPA, but rather to

generate and recover the costs of such litigation. See Sporty’s Farm LLC v. Sportsman’s

Mkt., Inc., 202 F.3d 489, 497 (2d Cir. 2000) (declining to remand when “the findings of the

district court, together with the rest of the record, enable us to apply the new law to the case

before us without difficulty”). That is not this case.

       At the outset, we note that undisputed evidence establishes that, even before the

challenged UBS assignment, the Trust had a significant interest in the repayment of the

Arlington Loan. As this court observed in our prior decision, “[t]he Trust was not . . . 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



                                               11
party that would directly suffer the damages of any default on that instrument.” Trust v.

Love Funding, 556 F.3d at 111. The district court recognized that, by accepting the

challenged UBS assignment of rights under the Love MLPA, the Trust acquired the right

directly to enforce the Arlington Loan. Nevertheless, the district court denominated the

assignment champertous because it determined that the Trust intended from the start to

pursue its rights through litigation in order to achieve the greatest possible recovery. See

Trust v. Love Funding, 499 F. Supp. 2d at 322-23. As already noted, the Court of Appeals

has now clarified that an assignment “is not champert[ous] simply because the party intends

to [enforce its rights] by litigation.” Trust v. Love Funding, 13 N.Y.3d at 200, --- N.Y.S.2d

at ---.

          Love Funding thus shifts its argument to contend that, on remand, the district court

might conclude that the Trust’s purpose in accepting the UBS assignment was “not to enforce

its interests in the Arlington Loan, but to engage in a speculative litigation venture against

Love Funding to generate and recover costs and damages far greater than its actual Arlington

losses.” Appellee’s Supp. Br. at 7. To be sure, litigation for the purpose of generating and

then recovering costs is the essence of champerty under New York law. See Trust v. Love

Funding, 13 N.Y.3d at 199, --- N.Y.S.2d at ---. But the record evidence will not support such

a characterization where, as here, the challenged assignment allowed the Trust directly to

enforce its pre-existing interest in the Arlington Loan.

          Love Funding asserts that an inference of champerty can be drawn from the fact that

                                               12
the Trust originally estimated its losses from the Arlington Loan at $3 million. After

assignment of UBS’s interests, however, the Trust demanded that Love Funding cure its

breaches or repurchase the loan for $10 million. The discrepancy is understandable. With

UBS’s rights under the Love MLPA, the Trust acquired claims to indemnification as well

as to actual loan losses. Even if the $10 million demand was excessive under the Love

MLPA, however, that fact cannot by itself demonstrate that the Trust’s intent was to employ

litigation to profit from the costs and fees generated therein rather than to recoup “the full

value of its . . . contractual claims.” Promenade v. Schindler Elevator Corp., 39 A.D.3d 221,

223, 834 N.Y.S.2d 97, 99 (1st Dep’t 2007). As the New York Court of Appeals explained

in response to our certified questions, it is not champerty “to settle a dispute by accepting a

transfer of rights that has the potential for a larger recovery than one had demanded as a cash

settlement.” Trust v. Love Funding, 13 N.Y.3d at 202-03, --- N.Y.S.2d at ---.

       To the extent Love Funding insists that the Trust’s champertous purpose is evidenced

by its efforts to use this action to recover litigation costs and fees previously incurred by itself

and UBS in connection with the disputed loans, Love Funding conflates litigation instituted

for the purpose of generating costs therein, which constitutes champerty, and litigation to

enforce contract rights to previously incurred costs, which is effectively an action on a debt

instrument. See id. at 200, --- N.Y.S.2d at --- (observing that acquisition of “a debt

instrument for the purpose of enforcing it . . . is not champerty simply because the party

intends to do so by litigation”). The Court of Appeals recognized as much in specifically

                                                13
rejecting Love Funding’s argument that the Trust’s intent to sue Love Funding “not only to

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

the past litigation” evidenced champerty. Id. at 202, --- N.Y.S.2d at ---. It explained that it

is not champerty “to acquire . . . indemnification rights for reasonable costs and fees that

were incurred in past legal actions.” Id. (observing further that “[t]o acquire indemnification

rights to the cost of past litigation is not to acquire a thing in action in order to obtain costs

from prosecution thereon” (emphasis added)). In short, even if the Trust’s entitlement to

previously incurred costs and fees under the Love MLPA is sufficiently debatable to view

that part of its pending claim as a “speculative litigation venture,” Appellee’s Supp. Br. at

8, the Trust’s acquisition and pursuit of that claim cannot evidence champerty.5

       In expressing concern about the Trust’s litigation to recover “millions of dollars more

than the Trust had been prepared to accept from UBS on the Arlington Loan,” the district

court referenced only the “interest that [has] been accruing on the loan for years” and

“indemnification damages from Love Funding under . . . the Love MLPA,” Trust v. Love

Funding, 499 F. Supp. 2d at 323, neither of which can support a champerty finding in light

of the Court of Appeals’ responsive decision, see Trust v. Love Funding, 13 N.Y.3d at 202-

       5
        While we express no view on the district court’s calculation of damages on remand,
we note that to the extent it indicated a preliminary inclination to award $1,736,668.35 in
damages, an amount that excluded indemnification for costs the Trust incurred pursuing
Cyrus, see Trust v. Love Funding, 499 F. Supp. 2d at 325 n.79, the Trust’s recovery here
could actually be less than its initial estimated loss of $3 million on the Arlington Loan.
Accordingly, this lawsuit is unlikely to yield the hypothetical “profit” that Love Funding
challenges.

                                               14
03; --- N.Y.S.2d at ---. The district court made no finding that the Trust intended to generate

new costs in this litigation. Because such cost-generation was the essence of champerty even

at the time of the district court’s decision, see Bluebird Partners, L.P. v. First Fidelity Bank,

N.A., 94 N.Y.2d at 734, 709 N.Y.S.2d at 870, we can hardly conclude that the district court

inadvertently neglected to make such a critical finding while instead reaching for a broader

construction of champerty. Because the record does not support a finding of intent to

generate new costs, we conclude that remand for further factfinding is unnecessary in this

case. Love Funding’s champerty defense fails as a matter of law.

III.   Conclusion

       To summarize, in light of the New York Court of Appeals’ response to our certified

questions in this case, see Trust v. Love Funding, 13 N.Y.3d 190, --- N.Y.S.2d ---, we

conclude as a matter of law that the trial record does not permit the Trust’s acquisition of

UBS’s rights under the Love MLPA to be held champertous in violation of New York

Judiciary Law § 489(1). Accordingly, we REVERSE the judgment of the district court in

favor of Love Funding, and we REMAND the case for entry of judgment in favor of the

Trust and a calculation of damages.




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