NEW YORK, April 4 (Reuters) - A litigation funding company
that advanced plaintiffs' lawyers more than $1.2 million at an
alleged 40 percent interest rate is not liable for criminal
usury, a New York state court judge has ruled.
Suffolk Supreme Court Justice Emily Pines held in a March 29
ruling that advances made by entities affiliated with New
York-based Quick Cash Inc to lawyers at Long Island-based Kelly
Grossman & Flanagan were non-recourse advances, not loans, and
therefore not subject to usury prohibitions.
Non-recourse advances are not legally considered loans
because there is no guaranteed repayment.
"The Court finds that the language in the contracts was not
ambiguous, and the intent of the parties is clear, as
demonstrated by the plaintiffs' express acknowledgment, as
sophisticated attorneys, in each contract that a non-recourse
agreement for a cash advance was entered into and not a loan,"
Quick Cash advances funds to plaintiffs or lawyers to pay
for litigation costs in exchange for a cut of any award or
settlement. When the advances are structured as non-recourse
agreements, the financier only gets repaid when and if there is
a recovery in the underlying lawsuit.
This form of funding has stirred considerable controversy
among legal experts.
In a 2011 ethics opinion, the New York City Bar Association
cautioned lawyers against entering into "unlawful" funding
arrangements, but stopped short of weighing in on whether
non-recourse agreements were usurious per se.
The opinion cited a 2005 Nassau County ruling, Echeverria v.
Estate of Lindner, in which a judge found a non-recourse
agreement with a plaintiff constituted a loan, and was therefore
'ALWAYS AT RISK'
In the case at hand, Kelly Grossman & Flanagan sued Quick
Cash and several related entities in 2011, alleging they
committed usury when they made advances to the firm's
principals . Under Pen al Law 190.42, usury occurs when a lender
charges more than 25 percent annual interest on a loan
Quick Cash advanced money to the principals at Kelly
Grossman & Flanagan in 13 separate agreements, according to
court filings submitted by the defendants. Quick Cash said the
contracts, which were valued at more than $1.2 million, were
structured as non-recourse contingent investments -- meaning
Quick Cash only got paid when and if the lawyers received
attorneys' fees in the underlying cases.
Kelly Grossman countered that the payments were loans. In
its complaint, the firm noted that earlier versions of some of
the contracts referred to a "lender" and a "borrower," and
argued that it would be at least partially on the hook
regardless of the outcome of the underlying cases.
The attorneys claimed that they had paid more than $1
million to the Quick Cash entities over the years -- a sum that
Quick Cash disputed -- and were being charged more than 40
percent annualized interest on the principal, w ell above the
cut-off for criminal usury.
In her ruling, Pines said it was clear the "defendants were
always at risk of no recourse whenever one of the underlying
cases went to trial and resulted in no recovery."
"Such circumstances simply cannot be stated to constitute a
'loan,'" Pines wrote.
Raul Sloezen, who represented the defendants, said if the
payments had been legally considered loans, as plaintiffs
argued, then usury laws may have applied.
"Luckily, the judge saw through that and saw that it was a
purely contingent agreement," Sloezen said.
Calls to Kelly Grossman were not returned.
Anthony Sebok, a professor at Cardozo School of Law, said
that a key difference between the Echeverria case and Pines'
ruling is that the financing arrangement was made with a
"sophisticated" party -- the lawyers -- and not a consumer.
Quick Cash was one of nine litigation-funding companies to
enter into a 2005 agreement with then-Attorney General Eliot
Spitzer. Under the agreement, advances only have to be repaid if
the consumer receives a recovery through settlement or other
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.
For Kelly Grossman & Flanagan: Isaac Zucker
For Quick Cash: Raul Sloezen
(Reporting by Jessica Dye)
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