In Kelly, Grossman & Flanagan LLP v. Quick Cash, Inc., No, 04283-2011, 2012 WL 1087341 (Suffolk Co. 2012), the plaintiff law firms and their partners sought a declaration that their agreements with the defendant Quick Cash entities were void as violative of New York Penal Law Section 190.40 for being criminally usurious. After defendants advanced the law firms money with expected legal fees from the plaintiffs’ contingency fee lawsuits pledged as collateral, the plaintiffs brought suit asserting that, in addition to being required to repay the principal amount of the advances, their contracts called for over 40% in annualized interest payments, which exceeds the criminally usurious rate of 25%. After converting the defendants’ motion to dismiss the complaint to a motion for summary judgment, the court found that the relevant financial transactions were not loans, and thus New York’s prohibition against usury was not triggered.
Background
From May 2005 through August 2009, the plaintiff law firms and their partners entered into various agreements with the Quick Cash entities through which the firms were provided with financing secured by the expected legal fee recoveries in specific lawsuits. Plaintiffs were required to pay interest on the funds provided, and frequently individual partners personally guaranteed repayment in the event that, in any of the lawsuits serving as collateral, a judgment was entered in plaintiff’s favor but the judgment debtor was unable to pay.
Kenneth Bradt, President and CEO of certain defendant entities, asserted that, in addition to earlier agreements, in December 2007 the law firms entered into three contracts with Quick Cash entities for cash advances, paid a processing fee, and agreed that the financing was in the form of non-recourse advances with an obligation that would increase at a rate of 40% per annum compounded quarterly. These advances were secured by the law firms’ expected fee recoveries in certain lawsuits, and the firm’s partners were required to provide status updates regarding those cases. In addition, the law firm partners personally guaranteed the firms’ performance of these contracts.
In May 2009, a newly formed partnership consisting of the previous law firms engaged in transactions with Quick Cash to fund advertising. Defendants advanced funds for advertising in exchange for an agreement that the law firm continue to prosecute the cases previously handled by the two former firms that were used as collateral under prior agreements. To memorialize the terms of this agreement, in August 2009 the partners executed an Addendum and the fees from sixteen pending lawsuits were added as collateral. Additionally, a liquidated damages clause was added for double the payment obligation in the event of a breach.
The Law Firms Argue Criminal Usury
The plaintiffs asserted that the defendants extended numerous loans to them for which defendants charged an interest rate in excess of 40%, on which the firms had already paid over $1 million. In asserting that the financial transactions at issue were in fact loans, the plaintiffs pointed to the agreements themselves which name them as “Borrower” and defendants as “Lender.” They alleged that it was not until August 2009, when various agreements were consolidated into the Addendum, that one defendant began to use the term “advance” instead of “loan.” Plaintiffs also alleged that, despite non-recourse language in the agreements, the transactions were in fact recourse because defendants were never truly at risk, thereby making them loans. To support this argument, the plaintiffs pointed to the contractual requirement that, if they were discharged as counsel on a case pledged as security, plaintiffs were obligated to find a new case to serve as collateral or to pay liquidated damages.
Defendants Argue They Provided Advances, Not Loans
The defendants explained that their business was to provide financing to attorneys, or plaintiffs involved in litigation, as either recourse loans or as non-recourse advances. In a recourse loan, the attorney grants a lien to Quick Cash against the attorney’s expected contingency fee for the recovery in a case, and attorney makes monthly payments, pays when each case settles, or pays at the end of the loan term. In a non-recourse advance, on the other hand, the attorney assigns to Quick Cash a portion of the expected fee from a case and pays only if and when each case settles or there is an alternative recovery; if there is no recovery in the case, then no payment is made to Quick Cash on that case. Defendants asserted that the transactions at issue here fell into the latter category of non-recourse advances.
The Court’s Analysis
The court made a threshold finding that, to be subject to the criminal usury prohibition in Penal Law Section 190.40, a transaction must be a loan. The court further stated that “[w]here a transaction involves interest to be paid based upon a contingency which is in the control of the debtor, usury will not apply.” To determine if a financial transaction is a loan subject to criminal usury laws, courts will look to the character of the transaction rather than its title.
Here, several of the contracts at issue specifically stated: “Attorney represents and warrants that Attorney fully understands that the Advance made hereunder is not a recourse loan, but a non-recourse financial transaction pursuant to which Investor’s funds are at full risk.” Additionally, the August 2009 Addendum provided that “Recourse Agreement(s) shall be deemed null and void and the amounts due pursuant to those recourse agreement(s) are now incorporated in full herein as non-recourse.”
The court found that defendants had demonstrated that the agreements were non-recourse advances, not loans, and that there was no material issue of fact to be tried in that regard. The court gave little weight to plaintiffs’ argument that the transactions were loans because at times the relevant contracts referred to the parties as “borrower” and “lender.” Additionally, the court found persuasive that the defendants were always at risk of the collateral cases going to trial and resulting in defense verdicts. Given this possibly, the court found that the transaction could not be considered a loan. Finally, the court found that the language of the contracts was unambiguous in stating that the transactions were non-recourse advances.
The court relied on the case of Matter of Strategies, LLC v. Ferreira, 28 Misc. 3d 1204[A], 2010 N.Y. Slip Op. 51159 [U] (N.Y. Co. 2010), which dealt with an arbitration to enforce payment of a non-recourse advance with a pending legal matter as collateral. The court in Strategies, LLC wrote: “The instant transaction, by contrast [to a loan], is an ownership in proceeds for a claim, contingent on the actual existence of any proceeds. Had respondents been unsuccessful in negotiating a settlement or winning a judgment, petitioner would have no contractual right to payment.” The court in Strategies, LLC found that, based on this reasoning, the usury laws did not apply. Likewise, in the instant case, the court found that the transactions created ownership interests in proceeds of claims, contingent on there being a recovery, and that the New York usury law simply did not apply to such transactions.
