Litigation finance deals are “investments” under New Jersey law, not “loans,” saving the industry from claims that plaintiffs’ 33% interest on cash injections violated lending regulations.
This big problem arose from a small incident. In a traffic accident, plaintiff received $9,600 in three contracts from Covered Bridge Capital for collision damages. The plaintiffs repaid Covered about $7,000 and filed for bankruptcy for the rest, then sued the company, alleging that the deal they entered into violated state lending and consumer protection laws.
The New Jersey Superior Court, Appellate Division, relied on federal precedent to reject her claims in a decision Friday that boosted the state’s litigation finance industry. Because there was no precedent in the state high court, the appeals panel turned to federal law and recognized the loan transaction as a collection interest contract, rather than a loan regulated by state banking authorities.
“As a matter of law, equity, and common sense, she is not entitled to call herself an ‘distressed consumer,'” the court said in a non-commissioned opinion.
not a loan
In order for plaintiffs to seek consumer protection, they must prove that they are “aggrieved customers.” But the facts don’t match the theory, the court said.
After the bankruptcy, the plaintiff gained more than $2,000 in litigation finance deals and received more money than he returned. Therefore, she cannot claim to have been “distressed” despite the deal including eye-watering interest rates of 24%, 32% and 33%.
“Plaintiff should ignore the profits she made under the third financing agreement and instead focus on the nearly $3,000 in interest and fees she paid under the first and second financing agreements. “, the court said. “Even if we view her claims in such myopic light, Plaintiff has yet to disclose any verifiable harm caused by her consumer protection violations.”
Beyond that, the transaction itself should not be considered a conventional loan, the appellate court said, agreeing with the trial judge. The courts relied on precedent dating back to the 1990s from the U.S. Court of Appeals for the Third Circuit and the District Court for the District of New Jersey that holds that litigation finance transactions are “joint ventures” rather than loans.
The judges also relied on state ethics guidelines that allow plaintiff attorneys to refer clients to litigation finance institutions.
“We agree with the defendants that it is “irrational and illogical” for a “division of the court” to allow lawyers to assist their clients in their “illegal” conduct. That is, “introduce the client to the funding company, review the legal evidence,” and get the court to authorize the plaintiff to sue the funding company, while at the same time clearing the lawyer of charges. I’ll clear it up.”
Judges Jack M. Sabatino, Katie A. Gummer, and Maritza Beldote Byrne heard the case.
Freehold, New Jersey attorney Edward Hanratty represented the plaintiffs. Emerson, N.J., attorney Raul J. Slozen represented Covered.
The case is Ivaliotis v. Covered Bridge Capital, LLC, NJ Super. cent app. Department, No. A-1744-22, 10/11/24.
