Litigation finance and usury

Litigation finance is not a loan

Litigation finance is a non-recourse investment, not a loan, and thus is exempt from usury laws in most states. Today, generally the elements of usury are: (1) a loan or forbearance of money; (2) an absolute obligation to repay the principal (not contingent on any event); and (3) greater compensation for the loan than is allowed under statute.

Usury is generally irrelevant to litigation funding, provided the contracts put in place are structured correctly. Litigation funding agreements usually share five common requirements: (i) a cash advance; (ii) made by a non-party; (iii) in exchange for a share of the litigation or arbitration proceeds; (iv) whether in settlement or judgment or award; and (v) payable at the time of recovery if, and only if, such recovery takes place. Given that recovery for a funder is contingent on a successful recovery, litigation funding agreements are generally exempt from usury provisions.

Instead, litigation finance agreements are more similar to contingent fee arrangements between a lawyer or third party and a litigant, which are considered to be investments and not loans since there is no unconditional obligation to repay. Legalists funding agreements include provisions acknowledging the level of risk involved in the transaction and explicitly recognize that the deal is to be considered an investment and not a loan of any nature.

Legalist provides this information as legal information for its potential applicants. The information provided here does not constitute legal advice and should not be relied upon by any reader without first consulting an attorney. Specific circumstances may vary from individual to individual and from jurisdiction to jurisdiction, and Legalist does not take responsibility for decisions made as a result of reading this information.