A litigation finance firm advanced funds to an individual that was pursuing a personal injury case against a gas can manufacturer. After receiving a series of cash advances, the individual filed suit against the financing firm in U.S. District Court alleging that the financing agreements were unenforceable under Kansas law. The individual argued that even though the transactions were couched as purchase and sales of future proceeds of the personal injury case, they were in fact loans that carried usurious interest rates. The individual filed a motion for summary judgment.
In its opposition to the motion, the finance firm argued that the agreements were not subject to Kansas’ usury statute because repayment was contingent on the success of the individual’s case. If the individual failed to receive proceeds from his personal injury claim he would owe nothing. In support of its position, the firm cited a Kentucky Court of Appeals case which held,
Where, under a contract for the payment or repayment of money, the payment of interest on the principal sum is subject to a contingency, so that the creditor’s entire profit or return is put in hazard, the interest so contingently payable need not be limited to the maximum fixed by the usury statutes, provided the contract is made in good faith and without intention to evade or avoid the usury laws.
Dublin v. Veal, 341 S.W.2d 776, 777-78 (Ky. 1960).
After reviewing the individual’s motion and the firm’s opposition, the court granted summary judgment for the individual. The court held that even if the agreements were not loans (which it believed they were) the transactions were still subject to Kansas’ usury statutes. It stated, “[t]he statute never uses the term ‘loan’ in that subsection; rather it applies to ‘any contract or other obligation in writing where the original principal amount is fifteen thousand dollars ($15,000) or less . . . .’ KRS 360.010(1)(a). The scope of KRS 360.010(1) certainly encompasses the subject Agreements, each of which evidence indebtedness under $15,000.”
The court refused to follow the holding in Dublin because that case involved the sale of future business profits between co-partners in a commercial enterprise. In contrast, the court found that the transactions between the individual and the financing firm were simply loans of money “to tide him over while he litigated his personal injury claim.” As such, the court held that the agreements did not fit the exception discussed in the Dublin case and were, therefore, subject to Kansas’ usury statute.
Boling v. Prospect Funding Holdings, LLC, 2017 U.S. Dist. LEXIS 48098 (W.D. Ky. Mar. 30, 2017)