962 F.3d 455
9th Cir.2020Background:
- Fast Trak (litigation funder) advanced funds to clients of California PI lawyer Richard Sax under New York‑choice contracts labeled as nonrecourse "purchase" agreements ("Primary Contracts").
- Each Primary Contract set an escalating Payment Schedule payable from any case proceeds; amounts yield very high effective returns if paid (well above NY statutory rates).
- Sax executed separate "Secondary Contracts" promising Fast Trak payment from his attorney fees in multiple unrelated cases if a given Primary Contract’s proceeds were insufficient, effectively backing repayment with many of his firm’s future fees.
- Fast Trak sued Sax for breach of contract and fiduciary duty after Sax did not turn over proceeds/fees; the district court granted summary judgment for Fast Trak and awarded damages, rejecting Sax’s usury and champerty defenses.
- On appeal, Sax argued the deals were really usurious recourse loans or a "cover for usury" because repayment was virtually guaranteed by Sax’s pledged attorney fees; the Ninth Circuit certified to the New York Court of Appeals whether such litigation‑finance agreements can be a “loan” or a “cover for usury,” and what remedies apply.
Issues:
| Issue | Plaintiff's Argument (Fast Trak) | Defendant's Argument (Sax) | Held |
|---|---|---|---|
| Whether litigation‑finance agreements that condition repayment on client recovery and on attorney fees in unrelated cases can qualify as a "loan" under NY usury law | Transactions are purchases/nonrecourse; thus not loans and not subject to usury | Substance over form: structure and Sax’s fee pledges effectively guarantee repayment, so the transactions are loans or covers for usury | Certified to NY Court of Appeals for authoritative answer (Ninth Circuit did not decide) |
| Whether an arrangement that effectively guarantees repayment (via many pledged attorney fees) can be treated as a "cover for usury" despite nonrecourse labeling | Labels control if some contingency exists; not a usury cover | If repayment is virtually certain, courts should treat it as a loan/cover for usury notwithstanding form | Certified to NY Court of Appeals; factual certainty of repayment raises triable issue |
| Whether the record creates a triable factual issue precluding summary judgment on a usury defense | Fast Trak: material facts do not defeat summary judgment under existing NY precedent | Sax: factual record (many pledged cases, firm at risk of bankruptcy) shows near‑certainty of repayment and thus raises a triable issue | Ninth Circuit found the factual issue dispositive depending on NY law; remand contingent on NY Court of Appeals’ answer; proceedings stayed and certification made |
| What are the appropriate remedies/consequences if the agreements are found usurious (voidness vs. reform/limitation to statutory rate) | Fast Trak urged enforcement (district court already awarded damages) | Sax sought full usury remedies (voidness, rescission) or other relief | Ninth Circuit certified the remedial question to the NY Court of Appeals (state law unsettled) |
Key Cases Cited
- Seidel v. 18 E. 17th St. Owners, Inc., 79 N.Y.2d 735 (New York Court of Appeals 1992) (if transaction is not a loan, there can be no usury)
- Orvis v. Curtiss, 157 N.Y. 657 (New York 1899) (courts must examine substance to detect devices to conceal usurious loans)
- Band Realty Co. v. N. Brewster, Inc., 37 N.Y.2d 460 (New York Court of Appeals 1975) (include all amounts paid in consideration of loan when computing interest)
- Rubenstein v. Small, 273 A.D. 102 (App. Div. 1947) (true loan requires absolute repayment or security distinguished from hazard)
- Meaker v. Fiero, 145 N.Y. 165 (New York 1895) (courts must declare the plain substance when transaction disguises a loan)
- Cash4Cases, Inc. v. Brunetti, 167 A.D.3d 448 (App. Div. 2018) (litigation‑finance agreement contingent on a single case held less likely to be a secured loan)
- Echeverria v. Estate of Lindner, 801 N.Y.S.2d 233 (Sup. Ct. 2005) (lower court treated a near‑certain, contingent litigation advance as a loan for usury purposes and limited enforcement to statutory rate)
- Feldman v. Kings Highway Sav. Bank, 303 N.Y. 675 (New York 1951) (include payments made in consideration of making a loan in the interest computation)
- Hartley v. Eagle Ins. Co. of London, 222 N.Y. 178 (New York 1918) (court duty to look beyond form to prevent evasion of usury statute)