The Volokh Conspiracy

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Court Rejects Motion to Seal Litigation Finance Agreements

"The public may well have an interest in how litigation is funded by third parties," the judge concludes. A law firm and two litigation finance companies are disputing (among other things) whether the litigation finance agreements are illegally usurious.


From List Interactive, Ltd. v. Knights of Columbus (D. Colo.), decided last Tuesday by Judge R. Brooke Jackson:

ORDER denying 268 Motion for Leave to Restrict. The moving party filed the documents without restriction. Even assuming that was the result of inadvertent attorney error, the Court is not convinced that the public access should be restricted. The public may well have an interest in how litigation is funded by third parties. While it is possible that specific dollar or percentage numbers might be actual trade secrets, the request to restrict access to exhibits B and C in their entirety [the litigation finance agreements] is grossly overbroad. No authorities were provided showing that courts have denied public access to such documents.

The agreements had been attached to a brief related to a fee dispute, which claims that the agreements violate Colorado usury laws; here is the heart of the argument, though note, of course, that this is just the law firm's argument, and the litigation finance companies will presumably respond to it in the coming weeks:

On September 24, 2019, the Law Firm filed its Motion to Enforce its first position statutory attorneys' charging lien …. The Law Firm has a first position priority lien against all claims to the funds deposited with the Court in an amount totaling $190,134.75….

Two Interested Parties/Intervenors, Theano Ventures, LLC and Themistius Ventures, LLC … have taken the position that they are entitled to receive some or all of the funds deposited with the Court, and plan to challenge the Law Firm's first position lien under Colorado law. The Litigation Lenders are litigation funding companies that loaned funds to Plaintiff—on a non-recourse basis—to fund certain portions of this litigation. Nearly all of those funds were used and/or loaned long after the Law Firm's withdrawal from the case.

On October 9, 2019, several days before entering appearances through counsel in this litigation, the Litigation Lenders purported to file an arbitration proceeding against the Law Firm and its three owners1 through the AAA, hoping to force the Law Firm and its owners to litigate the attorney charging lien issue in an arbitration proceeding in New York City. The Litigation Lenders claim—incorrectly—that the Law Firm subordinated its first position statutory lien to their interests in accordance with a letter that the Law Firm was required to submit to begin its representation of UKnight. The contracts between the Litigation Lenders and Plaintiff are attached as Exhibit B, and aforementioned letter is attached as Exhibit C.

The Law Firm now supplements its Motion to Enforce its Attorneys' Lien to address the Litigation Lenders' position and request that the Court enforce its attorney lien, interpret the rights and obligations of the parties under the contracts, and stay the arbitration proceeding pending in New York City. Specifically, it is well-settled Colorado law that the contracts by which the Litigation Lenders loaned money to UKnight are invalid because they violate Colorado's criminal usury statute, Colo. Rev. Stat. § 18-15-104.

Colorado's criminal usury statute prohibits the lending of money at more than 45 percent interest. As evidenced by the contracts attached as Exhibit B, the Litigation Lenders charged an interest rate in excess of 90 percent. The contracts, because they violate the criminal usury statute, are unenforceable. Moreover, in accordance with Amadeus Corp. v. McAllister, 232 P.3d 107, 109 (Colo. App. 2009) the purported arbitration clauses in those contracts (to which the Law Firm is not a party) are also unenforceable as a matter of law….

On or about August 29, 2017 and April 2, 2018, prior to representation by the Law Firm, UKnight entered into two loan contracts with the Litigation Lenders. (Exhibit B) The loan contracts identify a "target fundraising goal," identify the commission to be paid from that fundraising goal to WealthForge Securities, LLC, and state the date and amount of repayment of the fundraising goal. (Exhibit B at ¶¶ 1(b), 2 and 5) The loan agreements further state that they are non-recourse if no "Recovery" is made in the litigation, and state that any disputes between

the Litigation Lenders and UKnight (the "Parties" to the contracts) shall be through AAA arbitration in New York. The loan agreements further require that all new attorneys of record (in this case, the Law Firm) "acknowledge this Agreement…and distribute the Recovery", "keep the Purchaser updated" and "comply with all obligations…of the Agreement."

The loan contracts do not require any new attorneys of record to subject themselves to arbitration or subordinate any statutory liens. Thus, when the Law Firm began its representation of UKnight, it issued a letter required by the Litigation Lenders acknowledging the existence of the loan contracts. The letter also does not expressly subordinate any statutory attorneys' liens and does not submit any claims that the Law Firm may have to enforce its lien to arbitration through the AAA in New York. There are no such express terms in the letter. (Exhibit C)

The loan contracts between the Litigation Lenders and UKnight are both subject to, and violate, Colorado's lending laws. First, the loan contracts are subject to Colorado's lending statutes. In Oasis Legal Fin. Group v. Coffman, 361 P.3d 400 (Colo. 2015), the Colorado Supreme Court made clear that loans made by litigation finance companies are subject to Colorado's lending statutes. In Oasis, several national litigation finance companies brought an

action against the Colorado Attorney General and Uniform Consumer Credit Code (UCCC) Administrator for a declaratory judgment that funding agreements for personal injury litigation were not loans. The Court disagreed and ruled that "litigation finance companies that agree to advance money to tort plaintiffs in exchange for future litigation proceeds are making loans subjects to Colorado's UCC." Thus, the Litigation Lenders' loan contracts to UKnight are loans that are subject to Colorado's lending laws.

Second, the loan contracts between the Litigation Lenders and UKnight violate Colorado's criminal usury statute, Colo. Rev. Stat. § 18-15-104. In Colorado, the maximum amount that may be charged in a loan is 45 percent. The usury statute, in relevant part, provides: "Any person who knowingly charges, takes, or receives any money or other property as a loan finance charge where the charge exceeds an annual percentage rate of forty-five percent or the equivalent for a longer or shorter period commits the crime of criminal usury, which is a class 6 felony." See Colo. Rev. Stat. § 18-15-104(a) (emphasis added).

The loan contacts between the Litigation Lenders and UKnight, however, charge effective interest rates in excess of 90 percent per annum. Though the loan contracts (likely intentionally) do not state an interest rate, when the repayment amounts and repayment dates are compared to the "funding targets," the resulting interest rate is in excess of 90 percent per annum. Moreover, the Litigation Lenders cannot contract around Colorado's criminal laws by incorporating New York law into their loan contracts. Making a loan to a Colorado resident (UKnight) subjects the Litigation Lenders and their respective principals to Colorado's criminal usury laws. People v. Chase, 411 P.3d 740, 746 (Colo. App. 2013)….

I don't know who's right and who's wrong on this, but it seems to be an interesting and practically important issue. And here, by the way, is the judge's order urging the parties to mediate the case:

To counsel for the parties (past and present) and the interested parties: Please be advised that as of this date, the funds on deposit in the registry of the court, including interest, total $754,359.63. It appears that there may be multiple persons claiming entitlement to some or all of those funds, likely in amounts that collectively exceed the available funds. To date, to the Courts knowledge, the claimants are Condit Csajaghy (plaintiffs second counsel who were involved for a short period in 2018), and the Interested Parties (litigation funders). Others who potentially could assert a claim on the funds include plaintiffs initial counsel (who prosecuted the case for its first 15 months); plaintiffs third counsel (who prosecuted the case for the past year, including through trial and the motion for a new trial); and the plaintiffs themselves.

Without commenting on the interpretation or the validity of any of the contracts that exist among these various entities and individuals, the reasonableness of any fees or costs claimed, or the appropriateness of the pending arbitration proceeding initiated by the interested parties, the Court suggests that all of you consider mediating with a professional mediator to see if it might be possible to reach some type of equitable distribution of the available funds. Please confer and advise the Court if the parties are willing to give that a try before spending further time and expense litigating the issues.