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LawCrossing Legal Daily News Feature
Court Rules Litigation Funding to Law Firm not Usury 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. 04/05/12
However, this form of funding has been subject to considerable controversy in recent times. The New
The case is Kelly Grossman & Flanagan et al. v. Quick
York City Bar Association, in 2011, warned lawyers
Cash Inc et al., in the Supreme Court of the State of
against ‘unlawful’ funding arrangements, though it did
New York, Suffolk County-Commercial Division, No.
not declare whether non-recourse agreements were
04283-2011.
usurious per se.
Quick Cash is one of nine litigation-funding companies
The plaintiffs depended upon a 2005 Nassau County
that entered into an agreement in 2005 with the office
ruling in Echeverria v. Estate of Lindner, where a non-
of the New York Attorney General, which enabled them
recourse agreement with a plaintiff was deemed as a
to fund consumer litigation under contingent contracts
loan and declared usurious.
that allowed recovery only if the consumer received However, the Supreme Court distinguished from the
recovery or award from the funded litigation.
cited matter and held that in the Echeverria case, the In the instant case, the law firm, Kelly Grossman &
plaintiff was a layman, and the financial arrangement
Flanagan alleged that Quick Cash and related entities
was with a simple consumer. The plaintiffs in the
committed usury by making advanced to the firm’s
present case were lawyers who were ‘sophisticated’
principals by charging more than 25 percent interest,
enough to be aware of their rights and duties.
as according to usury law charging more than 25 percent on a loan was illegal. The unpaid amount of
Suffolk Supreme Court Justice, Emily Pines ruled that
recoverable money was more than $1.2 million.
the funding cannot be held as loans as there is no guaranteed repayment. She wrote, “The Court finds
However, the court saw through the ruse and found the
that the language in the contracts was not ambiguous,
claims of the plaintiffs did not meet the definition of
and the intent of the parties is clear, as demonstrated
usury as the alleged funding was only contingent and
by the plaintiff’s express acknowledgement, as
non-recoverable upon failure of litigation, and hence
sophisticated attorneys, in each contract that a non-
not at par with the standard definition of a ‘loan.’ The
recourse agreement for a cash advance was entered
funding was in the nature of non-recourse contingent
into and not a loan.”
investments, and nothing more than that, and usury law could not be applied.
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