Alternative Litigation Finance and the Usury Challenge: A Multi-Factor Approach
28 Pages Posted: 27 Feb 2012 Last revised: 25 Oct 2012
Date Written: February 26, 2012
Consumer Alternative Litigation Finance (ALF) is an industry comprised of for-profit companies that provide non-recourse funding to litigants to cover living expenses or medical fees while their lawsuits are pending. The financing fees charged by ALF companies to litigants are largely unregulated, giving rise to a vociferous outcry among critics who contend that high financing fees violate state usury statutes. The validity of the critique depends upon the proper classification of ALF advances; if the ALF advances are to be considered loans, they should be subject to usury restrictions, whereas if they are more accurately described as investments, they ought to fall outside of the reach of usury law.
This Note questions the efficacy of the framework currently utilized by courts to assess whether ALF transactions are properly governed by usury law, and proposes that a new framework be adopted. Part I presents an overview of ALF and describes several legal challenges that have plagued the industry, focusing primarily on case law examining the usury charge. Part II argues that the utility of the current framework to determine whether transactions should be subject to usury law is diminishing, as courts chip away at the centrality of recourse as a defining characteristic of a loan. It assesses, in its stead, the usefulness of a multi-factor test borrowed from tax law, suggesting that under the multi-factor test ALF advances are better classified as investments than loans. Part III proposes that courts adopt a tailored version of tax law’s multi-factor test to engage in a more meaningful examination of the usury claim against ALF. It further suggests that, because ALF advances are more accurately characterized as investments, legislatures regulate them outside of usury law.
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