debtors, including the debts involved in this lawsuit.
On June 4, 1996, Peru and the BAC issued a term sheet setting forth the specific elements of Peru's proposed "Brady" debt restructuring agreement (the "Brady Agreement"). Roughly 180 creditors, collectively holding 99% of Peru's commercial debt, have indicated that they will participate in the Brady Agreement. Peru and all of the creditors represented on the BAC have signed the agreement, and Defendants expect the remaining creditors to sign in the coming weeks. According to Defendants, only Elliott and Pravin Banker Associates, the plaintiff-creditor in the Pravin cases previously before this Court, have openly opted out of the Brady Agreement and determined to enforce their debts by other means. The Brady Agreement is scheduled to close on December 20, 1996, at which time funds for the closing, including escrow and collateral arrangements, will be within the jurisdiction of this Court, and thus subject to attachment.
II. The Debts Held by Elliott
On February 1, 1996, this Court entered judgment for Pravin Banker Associates, Ltd. in the amount of $ 2,083,234.71. Peru's motion before this Court for an emergency stay was denied on February 8, 1996. After soliciting and receiving comments from the Executive Branch, the Second Circuit also denied a motion for an emergency stay on April 12, 1996. The appeal in Pravin Banker is sub judice, having been argued on September 11, 1996.
On March 29, 1996 and April 19, 1996, Elliott purchased $ 20,682,699.04 (face value) of debt arising from certain of the May 31, 1983 Letter Agreements. The first purchase of debt took place after the denial of the stay by this Court in Pravin Banker. The second purchase of debt took place seven days following the denial of the emergency stay in the Court of Appeals. Although not part of the record here, it is presumed that these purchases were made in the so-called secondary market at an undisclosed discount from the face value sought to be enforced in this proceeding. Plaintiffs have attached to the complaint against Banco (the "Banco Complaint") one such assigned Letter Agreement, the original parties to which were Banco, Wells Fargo Bank, and Peru. Pursuant to these Letter Agreements among Banco and Banco Popular del Peru (another Peruvian state-owned bank) as obligors, and Peru as guarantor, and the banks and financial institutions parties thereto (together with their successors and assigns, collectively, the "Creditors"), the Creditors agreed to extend the time for repayment of certain loans. Elliott purchased and was assigned all of the right, title and interest of the Creditors.
Pursuant to the 1983 Agreements, Banco agreed to repay loans in the amount of $ 7,000,000 (in principal) on extended maturity dates and to make quarterly interest payments with respect to the loans at a variable interest rate calculated in accordance with the terms of the 1983 Agreements.
The 1983 Agreements further provide that an "Event of Default" occurs if, among other reasons, any principal or any interest on the Loans or any other sum payable by Banco thereunder shall not be paid in full within ten days of when due.
The 1983 Agreements further provide that Banco shall pay, on demand, all of the Creditor's costs and expenses to enforce the 1983 Agreements, including reasonable attorneys' fees and disbursements.
Pursuant to a guaranty, also dated May 31, 1983, Peru agreed to guarantee the repayment of certain debts owed by Banco and Banco Popular under the Letter agreements. Under Section 3 of the guaranty, Peru agreed that its liability with respect to the guaranty would be absolute and unconditional irrespective of any circumstance which might constitute a defense available to Peru.
Elliott purchased and was assigned all of the right, title and interest of certain Creditors with respect to an aggregate total $ 20,682,699.04 (face value), together with all accrued interest thereon. The total consists of the $ 7,000,000.00 borrowed by Banco and $ 13,682,699.04 borrowed by Banco Popular, all of which was guaranteed by Peru.
Pursuant to the 1983 Agreements and the Guaranty, Peru agreed to repay the Loans on the terms described above.
All of the letter agreements at issue also provide that a creditor "may assign all or any part of [its] interest in this letter to any financial institution."
On May 17, 1996 Elliott representatives discussed the possibility of settlement with Peru's counsel. Elliott rejected the terms of the Brady Agreement and raised the possibility of attaching Peruvian assets in New York. Peschiera Decl. P 9. By letter dated June, 25, 1996, Elliott demanded that Peru pay Elliott the outstanding principal and interest on or before June 27, 1996. Affidavit of Jay Newman in Support of Writ of Attachment (Peru) ("Newman Aff.") P 12. On September 27, 1996, Elliott representatives met with Peru's debt negotiator in an effort to negotiate a resolution. Newman Reply Aff. at P 5. Elliott threatened to bring suit if payment in full was not forthcoming. See Peschiera Decl. at PP 9, 11. Banco has failed to pay any of the outstanding amounts due on the debts held by Elliott under the 1983 Agreements. Banco has not asserted any counterclaims. Counsel for Defendants represented that Elliott may still enter the Brady Agreement.
Peru has yet to satisfy two outstanding judgments totaling over $ 10 Million entered by the United States District Court for the Southern District of New York. Elliott refers to Banco Cafeteria (Panama) S.A. v. The Republic of Peru, 94 Civ. 3569 (JSM), in which a judgment was entered against Peru in the amount of $ 8,037,812.50 on October 3, 1995. The Court's records do not indicate that the judgment has been satisfied. In addition, Elliott points to the fact that a judgment was entered against Peru in the amount of $ 2,083,234.71 plus interest on February 1, 1996, Pravin Banker Associates, Ltd. v. Banco Popular del Peru and the Republic of Peru, 96 Civ. 7183 (RWS), and that Peru has sought stays of enforcement of these judgments, and posted a bond to lift a post judgment attachment pending resolution of the appeal. Moreover, Elliott asserts that counsel for Defendants has stated that Pravin will be unable to enforce any judgments against Peru. In addition, Elliott alleges that Peru has sold and is in the process of selling certain government owned and controlled entities which "is bringing in billions of dollars to the government's coffers." Newman Aff. at P 17 and Ex. 2.
Defendants contend that Elliott has also sued the Republic of Panama, seeking and obtaining a writ of attachment, but only after Panama's Brady agreement had closed.
Attachment pursuant to Rule 64 is available as a prejudgment remedy "under the circumstances and in the manner provided by the law of the state in which the district court is held." Fed. R. Civ. P. 64. Article 62 of the New York Civil Practice Laws and Rules ("CPLR") governs attachment procedures in New York.
A party seeking a prejudgment attachment in New York must show, "by affidavit and such other written evidence as may be submitted, that there is a cause of action, that it is probable that plaintiff will succeed on the merits, that one or more grounds for attachment provided in section 6201 exist and that the amount demanded from the defendant exceeds all counterclaims known to the plaintiff." CPLR § 6212(a)(McKinney 1980 & Supp. 1996).
Elliott has alleged that Banco has failed to meet its obligations under letters of credit assigned to Elliott to repay $ 7,000,000.00 in principal presently due and owing and that Peru has failed to meet its absolute and unconditional guaranty of repayment of $ 20,682,699.04 in principal presently due and owing Elliott. Defendants do not dispute that these allegations state a cause of action.
Section 6201 of the CPLR provides, in relevant part, that "an order of attachment may be granted in any action, ... when ... the defendant is a nondomiciliary residing without the state, or is a foreign corporation not qualified to do business in the state." CPLR § 6201(1). Defendants do not dispute that they are non-domiciliaries or foreign corporations within the meaning of § 6201(1). Thus, Plaintiffs satisfy the requirement that "one ... of the grounds for attachment provided in section 6201 exist[s]."
Defendants have not asserted any counterclaims and do not dispute that Elliott's demand would exceed any counterclaims they might assert.
However, Defendants contend that Elliott has not sustained its burden of showing a probability of success on the merits. Specifically, Defendants contend that Elliott cannot recover because: (1) it purchased the debts at issue in violation of New York champerty laws and (2) Elliott is not a proper assignee of the debt under the terms of the letter agreements.
Defendants also argue that, even if Elliott has satisfied the technical requirements for issuance of a writ of attachment, this Court should exercise its discretion to deny attachment because of the risk that attachment will "unravel" Peru's Brady Agreement with its foreign creditors, with harsh results on the Peruvian economy and people.
I. Plaintiff Has Established a Probability of Success on the Merits
A. Defendant Has Failed to Make A Sufficient Showing of Champerty
Defendants contend that Elliott's claims are unenforceable under section 489 of the New York Judiciary Law because the Peruvian loans were allegedly purchased for the purpose of bringing suit. Section 489 provides, in pertinent part:
no corporation or association, directly or indirectly ... shall solicit, buy or take assignment ... of a bond promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon ....
N.Y. Judiciary Law § 489.
Elliott, as a limited partnership, is an "association" covered by § 489. See N.Y. Partnership Law § 10 (a "partnership is an association of two or more persons").
An assignment in violation of § 489 is void, and a claim acquired in this manner may not be enforced by the assignee. See CIBC Bank & Trust Co. v. Banco Central do Brasil, 886 F. Supp. 1105, 1110 (S.D.N.Y. 1995).
The champerty prohibition was designed to cure the malicious stirring-up of litigation that would not otherwise have occurred, often by means of lawyers or corporations that took assignments in order "to enforce claims other than their own." Pan-American Sec. Corp. v. Fried, Krupp A.G., 169 Misc. 445, 449, 6 N.Y.S.2d 993, 998 (Sup. Ct. Kings County 1938), aff'd, 256 A.D. 955, 10 N.Y.S.2d 205 (2d Dep't 1939).
The question of champertous intent is a fact-intensive inquiry. CIBC, 886 F. Supp. at 1110. Under New York law, a defendant asserting the affirmative defense of champerty must demonstrate that the plaintiff acquired the claim for the "sole" or "primary" purpose of bringing suit. Id. at n.6.
Defendants assert that the required champertous intent can be inferred from the following facts: (1) Elliott purchased the Peruvian debt, at a substantial discount, just one week after the Court of Appeals denied Peru's motion for an emergency stay in the Pravin case, with the knowledge that Peru would not settle debt agreements outside of the parameters of the Brady Agreement; (2) Elliott knew that Peru was in default when Elliott made its purchases; and (3) Elliott has also sued the Republic of Panama in similar circumstances.
The question here is whether Defendants' allegations supporting its champerty defense are sufficient at this point of the proceeding to defeat Elliott's showing that it is likely to succeed on the merits.
Defendants' allegations do provide a basis for an inference of opportunistic behavior, and possibly even anticipation that litigation would be the most lucrative strategy, if not of champertous intent. The timing of some of the assignments after the denial of an emergency stay in the Pravin case, along with the knowledge that Peru would not be able to negotiate settlements outside the terms of the Brady Agreement without undermining the Brady agreement, suggest that in order to make a profit on the debt, which was presumably purchased at a discount fully adjusted for the Brady Agreement and the litigation risks as clarified by the rulings of this Court and the Court of Appeals, Elliott would have to bring a lawsuit to secure a judgment higher than the Brady Agreement's discount would allow (as Pravin Banker had done). Cf. CIBC, 886 F. Supp. at 1110 (timing of lawsuit immediately after right to sue accrued supports inference of champertous purpose).
The fact that Elliott knew that the debts were already in default may also suggest that Elliott purchased the debt with the intent to sue, particularly given Peru's reasonable resistance to settling outside the terms of the Brady Agreement.
Finally, Elliott's prior lawsuit against Panama, which was also negotiating a Brady agreement and in which Elliott also sought a writ of attachment, may give rise to an inference that Elliott pursues a conscious strategy of purchasing commercial debt owed by foreign sovereigns and state-owned entities trying to renegotiate their debt with the intent of bringing lawsuits.
However, Defendants' assertions, set forth without benefit of discovery, do not establish at this stage a sufficient factual basis to defeat Elliott's showing that it has a probability of success on the merits. First, the champerty statute has been narrowly construed, with a presumption that a debt is purchased for legitimate purposes. In The President Arthur, 25 F.2d 999, 1001 (S.D.N.Y. 1928), the Court rejected a champerty defense, explaining:
It has been held that an attorney is not prohibited from discounting or purchasing bonds and mortgages and notes, or other choses in action, either for investment or for profit, or for the protection of other interests, and such purchase is not made illegal by the existence of the intent on his part at the time of the purchase, which must always exist in the case of such purchases, to bring suit upon them if necessary for their collection.
To constitute the offense, the primary purpose of the purchase must be to enable him to bring a suit, and the intent to bring a suit must not be merely incidental and contingent. Moses v. McDivitt, 88 N.Y. 62 at 65. An assignment taken ... not for mere speculation upon the outcome of intended litigation, is not champertous or in violation of the state statute. Sampliner v. Motion Picture Patents Co., 254 U.S. 233, 240, 41 S. Ct. 79, 65 L. Ed. 240.