Court Rules Litigation Funding to Law Firm not Usury

04/05/12

In a judgment that came as a palpable relief to consumers the U.S. Supreme Court of the State of New York has held that litigation funding to lawyers of a plaintiff at 40 percent interest is not usury. While under the circumstances of normal loans, the interest rate may be too high, in the instant case, the funding was not in the nature of loans, but contingent funding for litigation to consumers. The advances need to be repaid only if the consumer receives a recovery through settlement or other award.

The case is Kelly Grossman & Flanagan et al. v. Quick Cash Inc et al., in the Supreme Court of the State of New York, Suffolk County-Commercial Division, No. 04283-2011.

Quick Cash is one of nine litigation-funding companies that entered into an agreement in 2005 with the office of the New York Attorney General, which enabled them to fund consumer litigation under contingent contracts that allowed recovery only if the consumer received recovery or award from the funded litigation.

In the instant case, the law firm, Kelly Grossman & Flanagan alleged that Quick Cash and related entities committed usury by making advanced to the firm's principals by charging more than 25 percent interest, as according to usury law charging more than 25 percent on a loan was illegal. The unpaid amount of recoverable money was more than $1.2 million.

However, the court saw through the ruse and found the claims of the plaintiffs did not meet the definition of usury as the alleged funding was only contingent and non-recoverable upon failure of litigation, and hence not at par with the standard definition of a ‘loan.' The funding was in the nature of non-recourse contingent investments, and nothing more than that, and usury law could not be applied.

However, this form of funding has been subject to considerable controversy in recent times. The New York City Bar Association, in 2011, warned lawyers against ‘unlawful' funding arrangements, though it did not declare whether non-recourse agreements were usurious per se.

The plaintiffs depended upon a 2005 Nassau County ruling in Echeverria v. Estate of Lindner, where a non-recourse agreement with a plaintiff was deemed as a loan and declared usurious.

However, the Supreme Court distinguished from the cited matter and held that in the Echeverria case, the plaintiff was a layman, and the financial arrangement was with a simple consumer. The plaintiffs in the present case were lawyers who were ‘sophisticated' enough to be aware of their rights and duties.

Suffolk Supreme Court Justice, Emily Pines ruled that the funding cannot be held as loans as there is no guaranteed repayment. She wrote, “The Court finds that the language in the contracts was not ambiguous, and the intent of the parties is clear, as demonstrated by the plaintiff's express acknowledgement, as sophisticated attorneys, in each contract that a non-recourse agreement for a cash advance was entered into and not a loan.”