Bankruptcy Trustee Seeks to Recharacterize Litigation Financing Contract as Loan, Survives Motion to Dismiss

A litigation finance firm advanced funds to an attorney working a personal injury case on contingency. The attorney ultimately settled the case and was awarded a portion of the settlement as his fee. Following the settlement award, the attorney’s creditors, including the litigation finance firm, filed a petition to place the attorney in an involuntary bankruptcy to recover amounts due.

Rather than distributing funds to the finance firm, however, the bankruptcy trustee commenced an adversarial proceeding against the firm to recover any settlement funds that the firm had received or sought to recover from the attorney. The trustee argued that even though the transaction was couched as a purchase and sale of future income, it was in fact a loan that carried a usurious interest rate.

The trustee focused on portions of the agreement that it claimed exposed the transaction as a loan rather than a purchase and sale. Specifically, the trustee highlighted the agreement’s disclosure tables that referred to certain monetary transfers as “Amount of [finance firm]’s Interest/Amount Due to [finance firm].” The trustee claimed that the use of the term “interest” indicated that transaction was in fact a loan.

The finance firm filed a motion to dismiss the trustee’s claims arguing that the clear and unambiguous terms of the agreement controlled  and that the transaction was a true sale. The firm challenged the trustee’s interpretation and argued that the term “interest” was being taken out of context as it actually referred to the firm’s right to a portion of any future contingency fees the attorney ultimately received.

After reviewing the trustee’s allegations and the language of the agreement, the bankruptcy court denied the firm’s motion. The court stated that the use of the term “interest” was enough to introduce sufficient ambiguity into the agreement so that parol evidence could be considered to interpret the nature of the transaction.

Standish v. P. Rodney Jackson & LAC, LLC (In re Albertson), 548 B.R. 715, 2016 Bankr. LEXIS 1060 (Bankr. S.D. W. Va. 2016)

About Patrick Siegfried

Patrick Siegfried is the author of the Usury Law Blog. Patrick is a practicing attorney in Bethesda, Maryland. Patrick’s work focuses on issues regarding alternative small business financing. He can be reached at psiegfried@usurylawblog.com

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