The New York Court of Appeals has decided (pdf) that under New York law, buyers of debt in the secondary market can also assert claims related to the loans they purchase. As you might imagine, it’s important that lenders who acquire loans know that they will not just be passive holders of the loans, but that they also will be able to take steps to enforce those loans if necessary. In keeping with this concept, the Loan Syndications and Trading Association‘s standard form for assignment has long provided that both the debt and the related claims are assigned to the buyer.
At issue in this case was application of the centuries-old doctrine of champerty. Not to be confused with “champignon” (a mushroom), “champing” (as in, “at the bit”), or “championship” (as in, “Will the Phillies beat the Yankees?”), this rather arcane legal doctrine was intended to prohibit attorneys from purchasing claims for the purpose of collecting the costs of litigating the claims. Of course, that situation seems to bear little resemblance to a lender buying a loan and then asserting its right to collect the loan.
If you’d like to know more about this case, Jordan Siev and David Kochman, both litigators in Reed Smith’s New York office, have prepared a write-up of the details, including a brief but interesting history of the doctrine of champerty.