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Litigation finance deals aren’t “loans” under New Jersey law, saving the industry from claims that 33% interest on plaintiff cash infusions violate lending regulations.
The big issue sprang from a small case—a traffic accident in which a plaintiff received $9,600 over three contracts from Covered Bridge Capital as she pursued crash damages. After paying back roughly $7,000 to Covered Bridge and discharging the rest in bankruptcy, the plaintiff sued the company claiming the deals she entered violated state lending and consumer protection laws.
The New Jersey Superior Court Appellate Division leaned on federal precedent to reject her arguments in a Friday decision boosting the state’s litigation finance industry. With no precedent at the state high court, the appeals panel looked to federal law and blessed the finance deals as contracts for an interest in recovery, rather than loans regulated by state banking officials.
“She lacks standing to call herself an ‘aggrieved consumer,’ both as a matter of law, a matter of equity, and common sense,” the court said in an unauthored opinion.
Counsel on both sides called the decision important, for both the finance companies and the consumer protection bar.
“It has a huge impact, it just clarifies what the law is,” said Raul. J. Sloezen of Emerson, NJ, representing Covered Bridge.
“I’m still pissed off,” said the plaintiff’s lawyer, Edward George Hanratty of Freehold, NJ. “There’s language in the case that’s concerning for the court’s interpretation of the consumer fraud statute.”
‘Gone Both Ways’
Whether and how to regulate litigation finance is an open question in New Jersey, where the state Senate is weighing legislation that would make the deals discoverable in litigation and cap the deals at 40% annual interest.
“There’s been some controversy over the years as to whether it was legal, and this decision clearly supports the position that litigation funding is legal in New Jersey,” said Sloezen, who said that he’s work on litigation funding matters since 2001 and has dealt with many attorneys who have relied on older precedent to argue a plaintiff can’t assign proceeds in personal injury cases.
“There have been cases that have gone both ways,” he said. “If this decision had gone the other way it would have created a big issue for funding companies getting paid.”
The appeals court ruled plaintiffs must show they’re “aggrieved customers” to bring consumer protection claims. But the facts didn’t fit the theory, the court said.
After bankruptcy, the plaintiff came out more than $2,000 ahead on litigation finance deals—she received more money than she gave back. So she can’t claim she was “aggrieved,” despite those deals including eye-watering interest rates of 24%, 32%, and 33%.
“Plaintiff argues that we should ignore the gain she made from the third funding agreement and focus instead on the nearly $3000.00 she paid in combined interest and fees under the first and second agreements,” the court said. “Even if we viewed her claim in that myopic fashion, plaintiff still has not set forth an ascertainable loss caused by” a consumer protection violation.
‘Not A Loan’
Beyond that, the deals themselves shouldn’t be considered a traditional loan, said the appeals court, agreeing with the trial judge. Both courts leaned on US Court of Appeals for the Third Circuit and US District Court for the District of New Jersey precedent going back to the 1990s reasoning that litigation finance deals are “joint undertakings” and not loans.
The judges also relied on state ethics guidance, which allows plaintiffs lawyers to refer clients to litigation finance institutions.
“We agree with defendants that it would be ‘absurd and illogical’ to have an ‘arm of the Court’ permit an attorney to assist a client in an ‘illegal’ act, i.e., ‘refer a client to a funding company, review the documents and sign them, and then have the [c]ourt permit a plaintiff to sue the funding company, while exonerating the attorney.’”
Hanratty said the court missed the mark. Existing consumer protection laws that apply to unlicensed pawn shops should govern here, and there’s precedent in New Jersey that distinguishes between normal and equitable creditors.
An equitable creditor—like a doctor who has an interest in a lawsuit because they provided treatment for a patient injured in a car crash—can be assigned an interest in recovery, he said. Litigation finance companies don’t have that equitable relationship, he reasoned, so he’s considering appealing to the New Jersey Supreme Court.
“Since the 1900s these transactions have been illegal in New Jersey,” he said.
The case is Ivaliotis v. Covered Bridge Cap., LLC, N.J. Super. Ct. App. Div., No. A-1744-22, 10/11/24.
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