In accordance with the weight of authority, the Georgia Supreme Court ruled that certain litigation financing agreements structured as asset sales were not disguised “loans” and therefore were not subject to the Industrial Loan. State Act (ILA) or Payday Lending Act (PLA). The decision is important because it sets a useful precedent not only for litigation finance providers facing similar challenges, but also for providers of cash advances to merchants and businesses involved in other structured transactions like sales. rather than loans.
In Ruth v. Cherokee Funding, LLC, the two plaintiffs were injured in separate car crashes but have retained the same lawyer to sue on their behalf. The applicants have entered into funding agreements with Cherokee Funding in which the company has agreed to provide funds for their personal expenses. The agreements provided that the plaintiffs had no obligation to repay the funds if they did not recover anything in their lawsuits, but, if they did recover damages, they would be required to repay the amounts provided by Cherokee Funding, as well as monthly user fees (which the Supreme Court qualified as interest) and certain other fees, up to the amount of their recoveries. The dismissal of the lawsuits by the plaintiffs and withholding of funds received from Cherokee Funding would not put them in default under the funding agreements.
After settling their lawsuits for unspecified amounts, the plaintiffs filed a putative class action lawsuit against Cherokee Funding, alleging that the funding agreements violated the ILA and the PLA. The trial court partially granted and partially dismissed Cherokee Funding’s motion to dismiss, finding that the PLA applied but not the ILA. After allowing Cherokee Funding’s interlocutory appeal, the Court of Appeal concluded that no law applied because the transaction was not a loan but rather an “investment contract”. The plaintiffs then filed a petition for certiorari with the Supreme Court of Georgia, which agreed to “examine whether the Court of Appeal correctly understood the scope of the [ILA] and the [PLA]. “
The court considered the ILA’s definition of a “loan” as “any advance of money in the amount of $ 3,000 or less under a contract requiring repayment and any renewal of refinancing thereof. this or part of it. He also reviewed the wording of the PLA, which does not expressly define the term “loan” but provides that the PLA “shall apply to all transactions in which funds are advanced for repayment at a later date.” The Georgia Supreme Court concluded that the Cherokee Funding agreement was neither a “contract requiring repayment” for the purposes of the ILA nor a transaction “in which funds are advanced for repayment” for the purposes of the PLA because the agreement involved “an obligation to repay.”
The court also responded to the plaintiffs’ argument that “the conditional repayment requirement in their funding agreements is illusory because Cherokee Funding only grants loans … when the risk that the contingency will not occur is almost zero “. He commented that “it is easy to imagine an agreement with a fictitious conditional repayment provision that reflects an attempt to evade usury laws” and that when faced with an allegation that such a provision is a sham , a court “should look beyond the text of the [review the substance] and perhaps find an illegal loan, notwithstanding the eventuality. the eventualities were illusory or that there was no chance that the plaintiffs would fail in their lawsuits.
Litigation finance providers continue to face the risk of future private lawsuits and regulatory attacks. In July 2018, the New York Department of Financial Services raised concerns about litigation financing and suggested that legislation containing guarantees for consumers was needed. Such risks underscore the need for parties involved in financing litigation and other structured finance transactions like sales rather than loans to consult with legal counsel to ensure their transactions are properly structured to make them less vulnerable. wear and tear and similar challenges.
Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 310