The Debate Over Legal Funding – Loans vs. Investments

The debate over the classification of legal funding rages on

As legal funding entered the spotlight, and regulation looms. One of the main issues is whether such funding qualifies as a loan. This is now a topic of state and federal discourse.

One of the key issues is whether legal funding violates state usury laws. Federally, and in most states, legal funding skirts the confines of loan classification due to its non-recourse and contingent nature. However, though repayment is contingent on settlement success, certain personal injury cases have an extremely high chance of payback.

Cherokee Funding v. Ruth

Cherokee Funding v Ruth examined this distinction. The plaintiffs got funding on their lawsuits and won, but refused to repay. The plaintiffs argued that legal funding is a loan and violates usury laws. The court ruled that the Georgia Industrial Loan Act, or GILA, didn’t apply to this case, but the Georgia Payday Lending Act, or PLA, could apply.

After this case went to appeal, the court had to decide whether legal funding qualified as a loan in Georgia. The judge ruled that PLA’s scope is limited to “transactions in which funds are advanced to be repaid at a later date.”

The judge ruled that based on existing law, legal funding “more closely resembles an investment” than a loan. “The funder’s ability to achieve a return depends entirely on the efforts of another party. The uncertain nature … as well as the time frame of the plaintiffs’ claims, leads to the conclusion that [repayment] is contingent.”

And indeed, in recent years, the time-frame for civil cases has increased. This has led to more uncertainty and longer time until payback.

As Professor Jeremy Kidd, a Mercer University law and economics scholar writes: “this is case is only one battle in what could become a long war in the legal system.”

Oasis Legal Finance Group, LLC v. Coffman

After Colorado classified litigation finance agreements as loans, Oasis Legal Finance and LawCash, two of the largest legal funding companies, alleged that Colorado was not allowed to categorize litigation financing agreements as loans based on the Colorado’s Uniform Consumer Credit Code.

Despite the fact that funding companies frequently lose money due to failed cases, the court noted that the distinction between legal funding and actual loans did not actually constitute a difference and ruled that legal funding qualified as a loan under Colorado UCCC.

Uplift Legal Funding

Uplift Legal Funding provides non-recourse legal funding to plaintiffs nationwide. We provide funding with interest rates right-sized to the strength of your case.

Apply online or give us a call at (800) 385-3660.