Senate restores champerty protections for sovereign‑debt litigation, prompting warnings about business flight

The Senate on June 1 approved a Judiciary Law change that removes a roughly 20‑year‑old carveout exempting sovereign debt from champerty restrictions. Supporters said the move restores a long‑standing common‑law doctrine that prohibits buying debt solely for the purpose of litigation; they described recent cases in which purchasers of distressed sovereign obligations have obtained outsized litigation recoveries.

Sponsor Senator Liu framed the change as restoring a protective rule against predatory litigation practices. “The champerty doctrine was meant to stop people profiting from placing litigation bets on distressed debt,” he said, urging that the carveout be removed so capital markets can work without distortion from buyers who seek profit exclusively through lawsuits.

Opponents warned of economic consequences. Senator Borrello, and others including Senators Martins and Palumbo, said sovereign‑debt underwriting and placement is a large New York industry, involving banks, asset managers, pension funds and nonprofit investors. They argued the law may raise borrowing costs for debtor countries, discourage issuance under New York law, and move transaction and jobs to other jurisdictions such as Texas or the U.K. — costing New Yorkers employment and tax revenue.

The floor exchange was long and sharply worded. Sponsors cited past cases where distressed debt purchasers recovered multiples of their purchase price through litigation; opponents emphasized the role of New York’s financial markets and the risk to local investors and institutions.

After extended debate the Senate restored the bill to the calendar and passed it (AYES 39, NAYs 22). The bill’s supporters said it will reduce what they described as opportunistic litigation; opponents said the state should not add uncertainty to a global bond market that supports New York jobs and investor returns.

Why it matters: The measure affects how distressed sovereign debt is treated in New York courts and may affect where sovereign issuers and the parties that underwrite and place their bonds choose to do business. That has implications for New York’s financial sector and for investors who rely on predictable enforcement of debt contracts.

What’s next: If enacted, markets and legal practitioners will watch how lenders and issuers respond; regulators and institutional investors may reassess underwriting and jurisdiction decisions.