Post by Anthony J. Sebok
Here is a simple question: why should it matter who brings a valid claim in private law? Standing, of course, is an important mechanism that insures that courts spend their time only on cases that matter to someone, especially in public law. But what if the party who was the victim of a genuine harm chooses to assign that claim to a stranger, in order (let’s assume) to let them bring it to the courts. Why not let that happen?
It is commonly assumed that almost all legal rights are freely assignable: contract rights, property rights, and even certain causes in action for damages. But the law in both the United States and England is grappling with how far to take the principle of fee assignability when it comes to “naked” assignments – that is, the assignment of causes of action for the redress of a wrong, not the collection of a debt or the performance of a contract.
A federal court recently applied New York’s statutory prohibition on naked assignments in a way which I think is wrong as a matter of policy and, arguably, wrong as an interpretation of the statute at issue, N.Y. Jud. Law § 489. The case, BSC Assocs. v. Leidos, Inc., [2015 U.S. Dist. LEXIS 18597, February 17, 2015] involved a small, family-owned computer software company that went bankrupt when its largest (perhaps only) client, a defense contractor (Leidos), did not pay for 16 of 18 “flight simulator modules” that Leidos delivered to the U.S. Government. (Leidos’ defense for this was that the U.S. Government took the position that the software in the modules belonged to the U.S. Government.)
For the sake of this discussion, let’s assume that a wrong was suffered by the family-owned business. They went bankrupt but still had some assets, including potential claims against Leidos and the damages that those claims would generate. They assigned those claims to the company that bought their assets in bankruptcy – a company owned by the family, formed to buy up their old company’s assets. That new holding company, in turn, sold all of the tangible assets of the old company to a technology company and assigned just the legal claims against Leidos to yet another holding company, again created by the family, whose only purpose was to hold the legal claims and to litigate them. The final resting place for the legal claims was a company called “BSC Associates”. It didn’t make anything; it had no physical offices; it existed – one can imagine – just so a family who once had a thriving software business could “go after” Leidos, the contractor who destroyed their company.
The federal court held that the suit against Leidos had to be dismissed because BSC Associates had taken the claims – which were for damages arising from a breach of contract and unjust enrichment – for no other reason than to sue to collect the damages caused to the software company. The court said that it is one thing for a stranger to sue in order to collect a debt assigned to her by the original lender, or for a stranger to sue to enforce the performance of a contract assigned to him by the original promisee, but taking an assignment “just” to collect damages for a wrong suffered in the past – especially when you didn’t even own the property or thing injured – is still not allowed in New York.
I think that the court arrived at the wrong outcome. I am happy to report that there is evidence that the UK is moving in the correct direction. Recently, in JEB Recoveries LLP v. Judah Eleazar Binstock [[2015] EWHC 1063 (April 21, 2015)], Judge Simon Barker of the English Chancery Division refused to dismiss a case with facts that paralleled BSC Assocs. England’s common law prohibition on champerty, upon which NY Jud. Law §489 is based, also prohibits ‘naked assignments’. In JEB Recoveries, a party who claimed that the defendant owed him a million pounds in fees assigned his claim to a holding company created as a special purpose vehicle to litigate it along with the claims of two other similarly wronged parties. Judge Barker recognized that the assignments were “bare” – but said that the claims’ nakedness only mattered if by allowing them to go forward, the “integrity of the legal process” was demonstrably impaired. This, I think, is the right approach.
A really interesting question. My sense is that there is a deep policy argument here in favor of naked transfers. In their absence, one could strategically drive the other party to bankruptcy by strategically breaching prior agreements and walk away without any threat of litigation. I wonder if the judge attempted to deal with this possibility.
My understanding is that it’s all based on “slaved democracy”. Even though they say public is always first, it’s all for people, in real life it will be always controlled by higher powers who nobody knows about…
Conspiracy and all 🙂
Despite being allowed to assign the partial fruits of claims to litigation funders, in Australia the position regarding the prohibition on the assignment of bare causes of action is the same as in New York, although Australian courts frequently side-step this issue by finding a ‘common legitimate interest’ between the assignor and assignee. The continued reference to maintenance and champerty doesn’t make sense when traders and others can walk away from their obligations with impunity and the harmed victim is left without a remedy precisely because the harm they have suffered has left them financially bereft and thus incapable of pursuing the wrongdoer themselves.
There is an elephant in the room, unless such assignments are at least presumptively invalid.
That parties must bear their own attorneys’ fees, regardless of the outcome, is called the ‘American Rule.’ As a matter of practice, however, a plethora of federal and state statutes provide for fee-shifting in various circumstances. For example, in my state, the prevailing party is entitled to their reasonable attorney’s fees on claims for breach of contract. The purpose is to deter frivolous claims.
Permitting assignments would seem to defeat this purpose. A party seeking to advance a risky claim could simply create, assign, and bring the claim through a ‘judgment-proof’ entity.
Even placing the burden on the Plaintiff, to show that “the integrity of the legal process” is not impaired, is arguably not enough. Where the Plaintiff would otherwise have been deterred from bringing the case at all, the Defendant is now in Court, with the burden of showing Plaintiffs haven’t met their burden.
I would suggest that if assignments are permitted, at minimum Plaintiff-assignees should be presumed to be the alter-ego of the assignor(s) for purposes of liability based on fee-shifting.