Why Consumer Legal Funding is NOT a Loan

Cartiga provides consumer legal funding to individuals pursuing legal claims so they can pay personal and medical bills while waiting for recovery. In exchange, Cartiga receives an ownership interest in any proceeds recovered on those claims.

This funding transaction is a simple purchase and sale.  Legal claimants sell to Cartiga an ownership interest in the assets they hold (i.e. their potential to recover money on their claim). Cartiga purchases that ownership interest by providing legal funding dollars to the claimants.¹ The return on the ownership interest that Cartiga purchases is not certain: there may never be any recovery on the legal claim, and Cartiga cannot separately seek to recover funds from the claimants (i.e., the transaction is “non-recourse”). Moreover, the ownership interest that Cartiga purchases is not fixed: it increases over time at a disclosed rate, which reflects the cost to Cartiga of its investment and the risk of loss on that investment.

Despite the plain structure of this transaction as a purchase and sale, consumer legal funding is often mischaracterized as a “loan” by commentators and by case law, and a small number of states include funding in statutes governing loans. This article explains definitively why consumer legal funding fundamentally differs from a loan, both legally and practically.

Not a Loan as a Legal Matter

Cartiga’s consumer funding is not a loan as a legal matter in most states, based on considerable case law.

Specifically, financial transactions are normally defined as loans under the law if, and only if, there is an absolute obligation of repayment. Unless the “principal sum provided is repayable absolutely, the transaction is not a loan.”²   Therefore, to determine whether a transaction constitutes a loan, courts typically examine whether the person or entity providing the money “is absolutely entitled to repayment under all circumstances.”³

Stated another way, recipients of money in a loan transaction are not permitted to retain that money without any obligation of repayment or consequence of non-payment. By contrast, if recipients of money in a transaction have no obligation of payment (or consequence of non-payment) unless some contingency occurs in the future, the transaction is typically not considered to be a loan. ⁴

Applying this legal definition of a loan, courts have regularly decided that consumer legal funding agreements like Cartiga’s are not loans.⁵  There are two basic features of Cartiga’s legal funding agreements that require this result.  Specifically, Cartiga’s funding agreement provides that: (1) the consumer has no obligation to pay Cartiga unless the claimant recovers money as a result of the resolution of his or her underlying legal claim, and (2) the claimant keeps all the money received from Cartiga, without any further obligation or consequence, in the event that the claimant does not achieve a recovery on his or her claim. For both those reasons, the obligation is not “absolute” under all circumstances. Rather, the obligation to pay Cartiga is clearly based on a contingency occurring (i.e. there is a recovery on the claim), and thus is not a loan.   

This conclusion applies even if it is very likely that claimants will recover some money on their claims, which in turn makes it very likely the claimants will be obligated to pay some amount to Cartiga in return for the funding. The fact that payment is very likely does not make the payment obligation “absolute” and convert the funding into a “loan.” ⁶

Not a Loan as a Practical Matter

Regardless of the legal definition, Cartiga’s consumer legal funding should not be characterized as a loan as a practical matter.

A loan requires the recipient of money (the “borrower”) to repay to the lender the principal sum borrowed plus the interest accrued on that principal. Those repayments normally must be made in regular intervals. By contrast, Cartiga’s consumer funding, there are no repayments of any principal and interest on the funded amounts at regular intervals. Instead, any payment to Cartiga in return for that funding is only made if and when there is a recovery on the recipient’s legal claim, and then is made only from the proceeds of any recovery; no repayments are made out of the recipient’s pocket, and there is no recourse to any other collateral. ⁷

Similarly, in a loan, there is normally a definite term when all the principal and interest have to be paid back to the lender. By contrast, Cartiga’s legal funding is for an indefinite term; there is no obligation to obtain a recovery or make payments by a certain time. Cartiga understands that a recovery may occur in less than a year, or after five years, or somewhere in between.      

Finally, the failure to make regular principal and interest repayments on a loan has serious consequences for the borrower, which include:

An acceleration of the total amount due

Credit Bureau reporting,

Penalties for delinquent payments, and

Individual Collection proceedings, including wage garnishment.

There are no such consequences if the recipient of consumer funding fails to recover any amount on the legal claim. In that case, the recipient keeps the entire amount funded by Cartiga, and Cartiga receives nothing. In short, instead of the consumer taking on the risk of repayment of the money received, as would be the case in a loan, Cartiga takes on that risk in a consumer funding transaction.

Conclusion

Cartiga’s consumer funding has many compelling benefits;  benefits that outweigh the costs. Those benefits can significantly increase a legal claimant’s recovery on their claim, ensure that the claimant receives the full medical treatment they deserve,  and “monetize” some of their claim early on by transferring risk of loss on a claim to Cartiga. These benefits are all delivered in a purchase and sale transaction that should not be considered a loan and should avoid the financial burdens and potentially negative consequences of a loan. More reasons why consumer funding is a good investment that maximizes legal outcomes for clients!

This article is for marketing purposes only, does not constitute legal advice, and should not be relied upon as legal advice.

1. See generally, Victoria Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 862, 894 (2015).

2. K9 Bytes, Inc. v. Arch Capital Funding, LLC, 56 Misc. 3d 807, 816 (Sup. Ct. Westchester County 2017); LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664, 666 (2d Dept. 2020). See also Shannon, supra, at 892; Susan Lorde Martin, The Litigation Financing Industry: The Wild West of Finance Should be Tamed not Outlawed, 10 Fordham J. Corp. & Fin. 55, 58-59 (2004)(for a transfer of money to qualify as a “debt,” the “repayment of the purported debt cannot be contingent upon a future event,” such as a recovery in a lawsuit);  LEND, Black’s Law Dictionary (11th ed. 2019) (“To provide (money) temporarily on condition of repayment.”).

3. K9 Bytes, Inc. v. Arch Capital Funding, LLC, 56 Misc. 3d 807, 816 (Sup. Ct. Westchester County 2017); Abir v. Malky, Inc., 59 A.D.3d 646, 649 (2d Dept. 2009); Rubenstein v Small, 273 A.D. 1024 (2d Dept. 1947).
4. See Maslowski v. Prospect Funding Partners LLC, A21-1338 (Minn. August 23, 2023); Ordway v. Price, 194 N.W. 321, 322 (Minn. 1923); Shannon, supra, at 892; Sahani, Reshaping Third-Party Funding, 91 TUL. L. REV. 405, 422 (2017), https://scholarlycommons.law.wlu.edu/wlufac/513/ (“[T]hird-party funding carries the risks inherent in the dispute resolution system’s rules, procedures, inefficiencies).
5. See, e.g., Obermayer v. West, 725 F. App’x 153, 155-56 (3d Cir. 2018) (because legal funding agreement was contingent on outcome of case and not secured, agreement was not a loan and was not subject to state usury laws); Anglo-Dutch Petroleum Int’l, Inc. v. Haskell, 193 S.W.3d 87, 96-97 (Tex. App. 2006) (agreement not usurious loan as a matter of law because litigant had no obligation to repay funded amount if litigant “recovered nothing or an insufficient amount of damages”); Ruth v. Cherokee Funding, LLC, 820 S.E. 2d 704, 710 (Ga. 2018) (internal quotation marks omitted) (“[W]hen the obligation to repay is only contingent and limited [to the amount of recovery in lawsuit], there generally is no loan….”); Cash4Cases, Inc. v. Brunetti, 167 A.D.3d 448, 449 (1st Dep’t 2018) (usury laws did not apply to legal finance company “because the repayment of principal is entirely contingent on the success of the underlying lawsuit”); MoneyforLawsuits LP v. Rowe, No. 4:10-CV-11537, 2012 WL1068171, at *10 (ED. Mich. Jan. 23, 2012); see also Truby v. Mosgrove, 11 A. 806, 807 (Pa. 1888) (“It is settled law that when the promise to pay a sum above legal interest depends upon a contingency” it is not a usurious loan); see also Maslowski v. Prospect Funding Partners LLC, A21-1338 (Minn. August 23, 2023); Shannon, supra, at 892.
6. See Maslowski v. Prospect Funding Partners LLC, No. A21-1338 at pp. 10-11 (Minn. August 23, 2023)
7. Shannon, supra, at 892-894.