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," Pines wrote.

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 usurious.

'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 agreement.

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.

'CONTINGENT ARRANGEMENT'

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 award.

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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