Georgia Appeals Court Rules That Litigation Finance Is Investment, Not Lending
Several jurisdictions have ruled that consumer lending statutes apply to litigation finance agreements, even though such agreements universally provide that they are not loans because the litigant does not have any obligation to repay if he or she does not obtain a recovery. A Georgia case recently considered whether litigation finance agreements were regulated by either of two different consumer lending statutes, and the Georgia Court of Appeals correctly concluded that they were not. In reaching this conclusion, the court recognized that litigation finance agreements were investment contracts, not loans.
In Cherokee Funding LLC v. Ruth, a litigant who had received litigation funding challenged the legality of the litigation funding agreement. The litigant contended that the agreement created an unlawful and unenforceable under two consumer lending statutes: the Payday Loans Act (PLA) and the Georgia Industrial Loan Act (GILA).
The PLA is a criminal statute that prohibits “making, offering, arranging, or acting as an agent in the making of loans of $3,000.00 or less” unless permitted under certain other federal and state laws, which are delineated in the PLA. Although the PLA does not define the term “loan,” the statute provides that it applies to “all transactions in which funds are advanced to be repaid at a later date, notwithstanding the fact that the transaction contains one or more other elements.”
The GILA similarly regulates loans, which are defined as “any advance of money in an amount of $3,000.00 or less under a contract requiring repayment and any and all renewals or refinancing thereof or any part thereof.” GILA also notes that “[t]he purpose of this chapter is to authorize and provide regulation of the business of making loans of $3,000.00 or less and to bring within the regulation of this chapter and within its provisions all loans of $3,000.00 or less.”
Given these statutory terms, the Georgia Court of Appeals pointed out that the crucial question was whether a litigation finance agreement was a loan. The court ruled conclusively that it was not because it provided that that the funder would receive nothing if the litigant did not obtain a recovery. As the court explained:
A plain reading of the quoted portion of the funding agreements demonstrates that the use of the phrase “shall receive nothing” in conjunction with “no associated obligation to pay” means that the requirement of repayment is completely contingent upon the recovery of proceeds from the related legal claims. Stated another way, if the Plaintiffs had not prevailed in their personal injury litigation, the Defendants would have received nothing.
Thus, we conclude that . . . the funding agreements do not fall under the auspices of “loans” . . . . Instead of being loans . . . , the funding agreements appear to be investment contracts.
Topics: litigation finance, legal reform, third-party funding, litigation costs, Georgia, consumer lending, payday loans
Works Cited: Cherokee Funding LLC v. Ruth, Nos. A17A0132, A17A0208, 2017 Ga. App. LEXIS 313 (Ct. App. June 27, 2017)