Back in October, all of the Philadelphia Reed Smith bloggers participated in an in-house CLE presentation attended by colleagues and clients. Our portion of the presentation dealt with third party litigation funding. There are several different funding models, but all are united by a common theme: funding companies, aided by plaintiffs’ lawyers, identify vulnerable litigants and prey on them, advancing money that must be paid back upon verdict or settlement. Some of these advances are “non-recourse” – if insufficient funds are recovered, the plaintiff’s obligation to reimburse the funder is limited to the amount of the recovery. Some are not – if the plaintiff doesn’t recover enough to pay back the advance, he or she is personally obligated for the balance. And some charge interest rates so exorbitant that only those in the most desperate financial straits are tempted. But such plaintiffs exist, and they agree to the funding companies’ usurious terms, and they are victimized.
But not, anymore, in Colorado. In November, in the case of Oasis Legal Finance Group, LLC v. Coffman, 361 P.3d 400 (Colo. 2015), the Colorado Supreme Court held that litigation funding agreements were “loans,” subject to the terms of the Colorado Uniform Consumer Credit Code (UCCC). This case was originally a preemptive strike by a couple of litigation finance companies against the State of Colorado, seeking a declaratory judgment that their funding agreements were not “loans” that could be regulated under the UCCC. As the court explained, these agreements were called something other than loan agreements. One plaintiff called its contracts with plaintiffs “Purchase Agreements,” labeling the tort plaintiff the “Seller” and the funding company the “Purchaser,” and defining the “Purchased Interest” as “the right to receive a portion of the Proceeds [of the litigation] equal to” the amount of cash advanced to the plaintiff (and some other charges). 316 P.3d at 402. Those agreements provided that the “Purchaser shall receive nothing” if the Plaintiff does not recover on the tort claim.
Another company called its contracts “Funding Agreements.” As the court explained, “The agreement characterizes the transaction as an assignment of an interest in the proceeds from the resolution of a pending case – but not, it makes plain, an assignment of the lawsuit . . . itself.” Id. “The amount assigned is equal to the funded amount, together with the accrued use fee, compounded monthly, and other fees or costs, from the proceeds of the Lawsuit.” Id. at 402-03 (internal punctuation and citation omitted). Similarly, these “Funding Agreements” “acknowledge the possibility that [the company] might receive nothing depending on the outcome of the litigation.” Id. at 403.
In the declaratory judgment action, the trial court held that the funding transactions created “debt,” and were thus “loans” governed by the UCCC, under the Code’s plain language, the court’s historical definition of debt, and the court’s decision in State ex rel Salazar v. CashNow Stores, Inc., 341 P.2d 161 (Colo. 2001), holding that agreements to advance tax refunds, at interest rates up to 50%, were UCCC “loans.” Id. at 405. The Court of Appeals affirmed, “emphasiz[ing] that courts liberally construe the UCCC to promote consumer protection . . . [and pointing] out that, in CashNow, the court rejected a ‘narrow interpretation’ of the term ‘debt’ in favor of a ‘broad reading’ of the UCCC’s definition of ‘loan,’ and made clear that a loan does not require an unconditional obligation to repay.” Id
On appeal, the Colorado Supreme Court explained the policies and purposes underlying the UCCC:
The UCCC regulates consumer credit transactions including consumer loans, leases and credit sales. . . . For example, the Code seeks to corral what it terms “supervised loans,” consumer loans with an annual finance charge exceeding twelve percent . . . , restrict[ing] authority to make supervised loans to “supervised lenders,” those licensed by the Administrator
or otherwise exempted from the UCCC. The UCCC also, [inter alia], regulates “payday loans,” . . . limits creditors’ collection remedies, . . . and restricts what parties can agree to . . . .
Id. at 406 (citations omitted). In this fashion, the UCCC seeks to protect consumers from unfair practices, foster competition among credit suppliers, and simplify consumer credit law. Id. (citations omitted)
The court explained that the UCCC “defines ‘loan’ to include ‘the creation of debt by the lender’s payment of or agreement to pay money to the consumer . . . “ Id. at 407 (internal punctuation and citations omitted). Moreover, “the word ‘debt’ also figures prominently in the Code’s definition of the more specific ‘consumer loan.’ Id. Thus, the court continued, because “debt is a necessary, if not completely sufficient, characteristic of the consumer transaction the Code seeks to regulate . . . we start there. Do the transactions at issue her create debt?” Id.
The court concluded that a “litigation finance transaction creates ‘debt’ because it creates an obligation to repay,” id., notwithstanding the finance companies’ arguments that there was no “debt” – and no “loan” – because plaintiffs’ repayment obligations were limited to the amount of their recoveries. The court noted,
[The Code’s language and our CashNow decision show that the repayment obligation need not be unconditional; the debt “created” by a UCCC loan need not be recourse. Litigation finance companies create debt because they create repayment obligations. This is so notwithstanding the litigation finance companies’ embrace of risks that, from time to time, require them to adjust or cancel some plaintiffs’ obligations. Most of the time, plaintiffs’ repay the full amount borrowed – and more.
Id. at 409. The court also found it “significant that the obligation increases with the passage of time, another characteristic of a loan,” id., noting that “one of the features of a ‘consumer loan’ under the UCCC is the presence of a ‘finance charge.’” Id. (citations omitted). Finally, “[b]ecause the agreements do not transfer ownership rights,” the court “rejec[ed] the companies’ theory that these transactions are ‘sales’ or ‘assignments.’” Id. at 410. Under the funding companies’ agreements, the funding companies do not “step into the tort plaintiffs’ shoes;” rather, the plaintiffs retain control of the litigation, and “the agreements provide [the funding companies] only with the rights that any creditor would have to receive payment of the amount due.” Id
And so, at least in Colorado, a litigation funding company is making a “loan” when it advances money to a plaintiff with the expectation that that the money will be repaid with interest, and those loans are subject to all of the state’s consumer protection mechanisms. Indeed, the Colorado Supreme Court pointed out that both after the plaintiff litigation funders lost in the lower courts, they ceased doing business in Colorado rather than accept possible UCCC regulation. As such, desperate people are protected from themselves. And if this is all a bit “Big Brother”-ish, we have no problem with that at all.