Litigation Financing Agreements Affirmed by NY Appellate Court

The New York Appellate Division of the Supreme Court, First Department recently confirmed the legality of properly structured litigation financing agreements. In Cash4Cases, Inc. v. Brunetti, 90 N.Y.S.3d 154, 155 (1st Dep’t 2018), the defendant, appealing from the grant of summary judgment in favor of plaintiff Cash4Cases, Inc., which was seeking to enforce the agreement pursuant to which it purchased an interest in the defendant’s personal injury litigation, argued that the agreement was usurious and unconscionable given the excessive interest rate. However, the appellate court unanimously affirmed the Supreme Court’s judgment in favor of the litigation funder, rejecting both arguments.

The plaintiff purchased an interest in the defendant’s claim by advancing a total of $76,930 at a “compounded monthly carrying charge” of 3.2 percent and an annual percentage rate of 45.93 percent. Repayment of the advance, the significant majority of which was used to pay off an advance previously made by a different funder, was contingent upon the defendant’s successful recovery in the personal injury litigation. 

The court followed several prior decisions in holding that the defendant could not claim the defense of usury, on the basis that the underlying transaction was not a loan, in which repayment is an absolute requirement or secured with collateral, but rather an assignment in which repayment was entirely contingent upon the outcome of the trial. Lynx Strategies, LLC v. Ferreira, 2010 WL 2674144, at *2, 957 N.Y.S.2d 636 (Sup. Ct. N.Y. Cnty. 2010); Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 2012 WL 1087341, at *3, 950 N.Y.S.2d 723 (Sup. Ct. N.Y. Cnty. 2012); and Lawsuit Funding, LLC v. Lessoff, No. 650757/2012, 2013 WL 640997, at *5 (Sup. Ct. N.Y. Cnty. 2013) (the court referred to the purchase of contingent interests in litigation proceeds as “investments” rather than as loans). 

The court also rejected the argument that the agreement was unconscionable, because the defendant failed to show he did not have a meaningful choice in entering into the agreement and that the terms were unreasonably favorable to the funder. First, the defendant was represented by an attorney and understood the terms of the agreement. Second, although the interest rate was high, the payment was contingent upon the receipt of proceeds from the underlying personal injury litigation. Accordingly, the agreement was not overly unfavorable to the defendant, the court noted, again citing Lawsuit Funding, LLC v. Lessoff.

Cash4Cases and the cases that precede it show that New York courts will respect litigation finance agreements, even with the economic equivalent of high “interest rates,” so long as the repayment obligation is entirely contingent upon receipt of proceeds, the recipient of the funding had a meaningful choice in entering into the agreement and the terms are within established bounds.