(Save the date: RealShare New York  comes to the Grand Hyatt, New York, NY, October 9.)

[A slightly different version of this story appeared in the New York Law Journal]

NEW YORK CITY-An investment firm that agreed to buy distressed notes and hand over to the sellers most of the proceeds from litigation over the notes while keeping a share for itself may be engaged in champerty, a Manhattan commercial division judge has ruled, though she has ordered more discovery into the issue.

In an Aug. 15 ruling in Justinian Capital v. WestLB, Supreme Court Justice Shirley Kornreich ruled that if the plaintiff, Justinian Capital SPC, had bought distressed debt with the sole purpose of making mon-ey from litigation, the arrangement would be cham-perty under New York law. However, she said that there are "clearly questions of fact surrounding Justinian's actual purpose and intent…that require further discovery to resolve. 

Justinian, according to the complaint, is the holder of two series of Class B notes issued by two special purpose vehicles sponsored by WestLB AG, a German bank. The special purpose vehicles have collapsed and the notes lost value. Justinian sued WestLB in 2010 alleging breach of contract, fraud, breach of fiduciary duty, negligence and unjust enrichment, among other things. Justinian was originally represented by Reed Smith, but Kornreich disqualified that firm because of conflicts in May 2011. It is now represented by Grant & Eisenhofer.

WestLB moved to dismiss on various grounds, among them that Justinian's suit was champerty. 

Champerty, a concept that originated in English common law, refers to an arrangement in which a party buys an interest in litigation, bearing the costs of the litigation but sharing in any gains arising from it.

In New York, champerty is prohibited by Judiciary Law