In recent years, an industry has developed in which businesses advance monies to plaintiffs with pending lawsuits in exchange for a share of the recovery. The business only recovers money if the plaintiff makes a recovery. If the lawsuit fails, the business making the advance receives nothing. In the Cherokee Funding, LLC v. Ruth, Case No. A17A0132 (decided June 27, 2017), the Georgia Court of Appeals looked at how those businesses fit into Georgia’s statutory schemes regulating certain lending activities. The Georgia Court of Appeals concluded that this type of litigation funding did not fit within two sets of Georgia statutes regulating loans.
The plaintiffs had made separate arrangements with the defendants to receive several thousand dollars each in exchange for agreeing to share any recovery they might receive in their lawsuits. When the plaintiffs settled their lawsuits, they found themselves obligated to pay the defendants many multiples what they had been advanced. The plaintiffs claimed that the agreements violated the Georgia Industrial Loan Act and the Payday Lending Act. The Georgia Court of Appeals concluded that those Acts did not govern the agreements.
Both of the Acts applied to loan agreements. The Court concluded that a loan was an agreement to advance money that required repayment. However, the funding agreements at issue required repayment only if the plaintiff achieved a recovery. If the plaintiff received no recovery, no repayment was due. The Court concluded that because the defendants took the risk of receiving no recovery, the agreements were investment contracts that fell outside the scope of the Acts.
The Court said that it was in the hands of the Georgia Legislature to decide whether funding agreements of this type should be regulated. It would be interesting to see whether the Georgia Legislature accepts that invitation.
The Opinion is available the website of the Georgia Court of Appeals, www.gaappeals.us.