New York Court of Appeals Holds that State Champerty Statute Cannot Curb Rights of Distressed Debt Buyers to Sue to Enforce Contracts
Hedge Fund Law Report
On October 15, 2009, the New York Court of Appeals decided that purchasers of distressed debt instruments, who buy them for the purpose of collecting damages by means of a lawsuit against the debtor, may do so without violating the New York champerty statute if they possess a pre-existing proprietary interest in the instrument. The court issued its ruling in response to a request from the United States Court of Appeals for the Second Circuit for clarification as to the proper interpretation of the New York champerty statute, New York Judiciary Law Section 489. We discuss the facts and the holding of the case, which has important implications for hedge funds that trade distressed debt. In particular, the case enhances the certainty of property rights for distressed debt traders, and has the potential to expand liquidity in the distressed debt trading market. It also may incentivize entry into that market, thereby undermining, at the margin, one of the competitive advantages of existing players, namely, the relative scarcity of specialized investors. On the other hand, new entrants without the experience of existing players may offer interesting opportunities for incumbents with presumptive advantages in terms of experience, contacts and infrastructure.