The future of litigation funding in Georgia and elsewhere may depend on whether the state Supreme Court decides funding agreements meet the definition of “loans.”
Earlier this year, the Georgia Supreme Court was asked to decide whether litigation funding agreements equate to illegally high-interest loans. The case under review, Cherokee Funding, LLC v. Ruth, started with a problem plaintiffs who need money during litigation face all too frequently.
A group of people who were injured in car crashes needed money during the course of litigation. When they initially hired a lawyer for their personal injury lawsuits, that lawyer had them sign powers of attorney and then entered into agreements with Cherokee Funding. Two of those people, Ronald Ruth and Kimberly Oglesby, never saw the funding agreements or discussed them with their personal injury lawyer. They’re named plaintiffs in the lawsuit against Cherokee.
According to a law.com article, the lawsuit states that Ruth received $5,300 for living expenses during litigation. Once his claim settled, Cherokee demanded $84,000. Oglesby received a $400 advance from Cherokee. After her claim was paid, the company deducted $1,000. Both plaintiffs said Cherokee charged a “monthly use fee” of 4.99% and compounded its and other add-ons for an annual rate of 80%.
Because Cherokee made funding agreements with Ruth and Oglesby and provided funds with a principal amount of less than $3,000, Cherokee might be on the hook for violating the Payday Lending Act (PLA), which states that:
“A payday loan has been defined as “a loan of short duration, typically two weeks, at an astronomical annual interest rate. Payday loans are the current version of salary buying or wage buying. The fees, charges, and interest on a payday loan are between 15 percent and 30 percent of the principal for a two-week loan, constituting a pretext for usury. Because the maturity date of these loans is usually set to coincide with the borrower’s next payday, the loans are often called payday loans.”
Cherokee’s attorney, Laurie Webb Daniel of Holland & Knight, argues that the plaintiffs were not subject to the PLA because the agreements were not “loans,” but rather investments in the plaintiffs’ litigation with no guaranteed repayment. If the recipients lost their lawsuits, the funding company would not have gotten paid.
The Georgia State judges must decide whether Cherokee’s funding agreements are considered loans or not. They’ll either reverse or affirm a decision by the Georgia Court of Appeals saying the litigation advances are investment contracts, not loans, the law.com article explains. If the Supreme Court decides the company’s advances do meet the definition of “loan,” then the plaintiffs’ contracts with Cherokee were illegal because of its high interest rate.
The result of this lawsuit could have implications for plaintiff-funding companies across the country. Because the question at hand is specifically about lawyer-funding, not direct plaintiff funding, the decision won’t impact the work we do at the Bairs Foundation.
Our purpose isn’t the only feature of the foundation that contrasts the majority of the non-recourse funding industry. Our 501(c)(3) nonprofit organization provides capital at 7% simple interest — a huge difference from the staggering interest many for-profit companies charge plaintiffs in need.
If you or someone you know is struggling to make ends meet during litigation, check out the Bairs Foundation at www.bairsfoundation.org.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).