Litigation finance is not risk-free loans

There are two theories to this phenomenon, one says that litigation finance is not loans, as it does not come with the interest or with the liability to repay. Another theory says that this is a loan, which borrowers have to repay/payback once they successfully won the case. Litigation funding, also known as legal financing and third-party litigation funding enables a party to litigate or arbitrate without having to pay for it, whether because they are unable to pay for it or because they do not want to.

When it comes to any litigation, only certain thing is that the outcome is uncertain because nothing matters how good is the petition still the decision lies in the hands of judge, jury, and evidence. This is why claim holders and lawyers frequently share litigation risk with litigation funders, and it is why courts have held that usury laws do not prohibit litigation finance agreements. Usury laws apply only to loans, which have an absolute requirement that the borrower repay. Litigation funders are repaid only if the plaintiff wins.

In June 2020, In New York, USA federal appeal is filed to decide whether a unique type of litigation funding transaction violates New York’s usury laws. New York courts have the opportunity to recognize help cash-poor litigants access the courts and make litigation finance as risk-free for the petitioner because for financer this will always remain risky funding. This dispute comes in light in the recent cases of Fast Trak Investment Company v. Sax involves a dispute over whether Fast Trak’s funding agreement with attorney Richard Sax and his clients violates New York’s usury laws. Fast Trak provided funding backed by contingent case proceeds payable to both Sax and his clients, across a portfolio of at least 18 cases. When Sax failed to pay Fast Trak after obtaining recoveries in several cases, Fast Trak sued Sax.

In the year 2019, scholar J.B. Heaton wrote a law review article contending that litigation finance is unlikely to be profitable for most investors because litigation is simply too uncertain. “Litigation is far more complex and random than most investors understand,” Heaton argued. Courts should hesitate to declare nonrecourse litigation finance a risk-free endeavour.

In the end, the decision of the court would affect the claim holders. Claimholders and their lawyers should hope the New York Court of Appeals gets it right: litigation finance investments are not loans subject to usury laws.

Topics: Third-Party Litigation Funding, New York Court, Investment

Work Cited:

Wendie Childress and William C. Marra, Litigation finance is not risk-free loans, June 15, 2020