Champerty Bill Passes Senate
Albany – Today the New York State Senate passed S.1477, carried by Senator Liz Krueger, which would strengthen New York's champerty laws to protect sovereign nations from predatory investors buying up their debt for the purpose of initiating litigation. The bill is carried in the Assembly by Assemblymember Jessica González-Rojas.
“When we help destroy other countries’ economies, preventing them from providing education, infrastructure, clean water, electricity and healthcare to their people, not only do the people of that country suffer, but we suffer the ripple effects of that destabilization," said Senator Krueger. "We can’t continue to destroy countries, wreaking international havoc, so that a few hedge funds can game our system to build their personal wealth. We need to shut them down."
For years, vulture hedge funds have built their wealth off struggling nations by using the same playbook - they bet on a nation's economic failure and engage in predatory practices that increase poverty and get in the way of economic recovery. These hedge funds have made billions in profits while leaving nations with insurmountable debts and a destabilized economy. Approximately half of sovereign debt contracts are governed by New York law, meaning that by changing the law, New York can change the rules by which these hedge funds play.
The Champerty Doctrine prohibits the purchase of securities or other financial instruments for the sole purpose of litigation. Champerty is currently a feature of New York judiciary law and has been for many years. However, in 2004, the State enacted a safe harbor provision to allow the purchase of claims “with the intent and purpose to sue” for claims exceeding $500,000—which was followed by a rapid increase in sovereign debt litigation in the state. S.1477 will remove this safe harbor for champertous investment behavior with respect to sovereign debt claims, with the aim of reducing such litigation and to support orderly sovereign debt restructurings.
The scope of the bill is carefully tailored. It would only apply to debtors like foreign states, who are vulnerable to disruptive litigation even while they are working in good faith with representatives of a majority of creditors to carry a voluntary adjustment of their debt using Collective Action Clauses. In addition, the bill is narrowly focused on blocking litigation brought by institutions whose history implies that they buy debt instruments of financially distressed borrowers with the express intention of pursuing a preferential recovery vis-a-vis other similarly situated creditors. No such implication would be drawn in the case of conventional investors even if circumstances in a particular case result in the investor pursuing its legal remedies. In further support of good faith negotiations to resolve sovereign debt crises, the bill also incorporates a positive obligation of creditors to cooperate with sovereign debtors while they restructure their debt.
“When we help destroy other countries’ economies, preventing them from providing education, infrastructure, clean water, electricity and healthcare to their people, not only do the people of that country suffer, but we suffer the ripple effects of that destabilization," said Senator Krueger. "We can’t continue to destroy countries, wreaking international havoc, so that a few hedge funds can game our system to build their personal wealth. We need to shut them down."
For years, vulture hedge funds have built their wealth off struggling nations by using the same playbook - they bet on a nation's economic failure and engage in predatory practices that increase poverty and get in the way of economic recovery. These hedge funds have made billions in profits while leaving nations with insurmountable debts and a destabilized economy. Approximately half of sovereign debt contracts are governed by New York law, meaning that by changing the law, New York can change the rules by which these hedge funds play.
The Champerty Doctrine prohibits the purchase of securities or other financial instruments for the sole purpose of litigation. Champerty is currently a feature of New York judiciary law and has been for many years. However, in 2004, the State enacted a safe harbor provision to allow the purchase of claims “with the intent and purpose to sue” for claims exceeding $500,000—which was followed by a rapid increase in sovereign debt litigation in the state. S.1477 will remove this safe harbor for champertous investment behavior with respect to sovereign debt claims, with the aim of reducing such litigation and to support orderly sovereign debt restructurings.
The scope of the bill is carefully tailored. It would only apply to debtors like foreign states, who are vulnerable to disruptive litigation even while they are working in good faith with representatives of a majority of creditors to carry a voluntary adjustment of their debt using Collective Action Clauses. In addition, the bill is narrowly focused on blocking litigation brought by institutions whose history implies that they buy debt instruments of financially distressed borrowers with the express intention of pursuing a preferential recovery vis-a-vis other similarly situated creditors. No such implication would be drawn in the case of conventional investors even if circumstances in a particular case result in the investor pursuing its legal remedies. In further support of good faith negotiations to resolve sovereign debt crises, the bill also incorporates a positive obligation of creditors to cooperate with sovereign debtors while they restructure their debt.
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