Sax v. Fast Track Investments – Legal Financing Regulation, Consumer Loan Interest Rate Regulation


On July 19, 2021, the parties Sax v. Accelerated investments filed a movement to the Ninth Circuit Court of Appeals to dismiss the pending appeal and withdraw the issues that the Ninth Circuit had referred to the New York Court of Appeals. The legal finance contracts stipulated that New York law applied and the Ninth Circuit ruled that certain New York issues, relating to whether the contracts were loans, were not resolved and that the Court New York’s appeal should decide these issues. The questions submitted included whether the financing arrangements in the litigation at issue were “usury loans or cover” subject to New York interest rate law and, if so, whether the financial charges on the agreements exceeded the New York usury limits and penalties for such violations.

In an alert issued last summer, we reported that the New York Court of Appeals had accepted certified questions from the Ninth Circuit regarding whether litigation financing agreements qualified as “loans” under New York law last June. Inv. Co., LLC v. Sax, 962 F.3d 455, 458 (9th Cir.), Certified question accepted sub nom. Inv. Co., LLC v. Sax, 35 NY3d 997, 149 NE3d 432 (June 23, 2020). Sax and Fast Track Investments had already informed the case before the New York Court of Appeals before filing their joint motion to dismiss the appeal.

Judicial Disclosure Rule, Other Matters and Litigation

Sax / Fast Track’s motion to dismiss comes at a time when other rules, laws and court decisions involving litigation financing and other small loan agreements are being considered by state courts and legislatures. A recent federal judicial rule requiring certain disclosures to the court, certain cases and the legislation passed are discussed below:

New New Jersey District Disclosure Rule

On June 21, 2021, the United States District Court for the District of New Jersey passed a rule amendment requiring attorneys to disclose details of litigation funding agreements. Chief Justice Freda Wolfson signed orders to put the proposal into effect after it was approved by the District Judicial Council.

The Court adopted the new local rule 7.1.1 (a) (L.Civ. R. 7.1.1 (a)), which requires all parties to disclose certain information relating to “any person or entity that is not a party and who finances some or all of the attorney’s fees and expenses for the litigation without recourse in exchange for (1) a contingent financial interest based on the outcome of the litigation or (2) a non-monetary outcome that is not in the nature of a personal or bank loan, or insurance. L.Civ. R. 7.1.1 (a)

Rule 7.1.1 comes into force immediately and applies to all cases pending before the Court. Parties currently before the Court must make the required disclosure by August 5, 2021 (45 days from the date the rule comes into force).

Lawyers who receive third-party financial assistance for legal fees and expenses must now disclose the name and address of the funder, if the funder’s approval is required for litigation or settlement decisions, and any other terms and conditions that apply to such approvals.

New Jersey is not the first jurisdiction to impose some form of disclosure. The Northern District of California imposed a permanent rule in 2017 to require disclosure of third-party funding in class, mass, and collective actions throughout the district. Wisconsin and West Virginia each passed laws requiring disclosure of funding agreements with third parties in 2018 and 2019, respectively.

Select cases

A commercial legal finance contract with a law firm does not constitute debt under the Fair Debt Collection Practices Act (FDCPA)

Breen v. Callagy L. CP, n ° 20-1445, 2021 WL 1250425 (3d Cir. April 5, 2021). In Breen, the Third Circuit rejected allegations that obligations under a legal finance contract constituted “debt” under the Fair Debt Collection Practices Act. The FDCPA defines debt as “an obligation of a consumer to pay money resulting from a transaction in which the money, goods, insurance or services that are the subject of the transaction are primarily intended for for personal, family or household purposes ”. The district court relied on the continued Pollice v. National tax financing, LP., 225 F.3d 379, to explain that while the obligations of Bolings (i.e. Breen’s customers) could be classified as indebtedness under the FDCPA, Breen’s own obligations did not constitute not debts under the FDCPA because they were “strictly related to his practice of commercial law.” Identifier.

Alleged Rent-A-Bank challenge rejected

Sims v. Opportunity Financial, LLC, 2021 WL 1391565 (ND Cal. April 13, 2021). The Northern California District has dismissed claims that a loan violated California and Utah consumer and banking laws. The loan was made by a Utah chartered bank marketed through a lending platform operated by OppLoans, a Delaware limited liability company headquartered in Illinois. OppLoans also provided management and collection activities for the loan. The district court dismissed the borrower’s claims that the arrangement constituted an illegal “rent-a-bank” program that violated California Financial Lender Law as well as claims under California codes and of Utah for fraudulent conduct and usury. In particular, the court found that the California code exempts a foreign bank that uses this structure from the scope of the California restrictions.

The district court ruling reflects that simply alleging a rental tenancy without specific allegations will not necessarily support a challenge to a usury or consumer fraud claim. Here, the claims were brought by a sympathetic plaintiff – a retired veteran living on a fixed income – but were unsuccessful nonetheless.

The applicant borrower filed an appeal in this case on May 12, 2021.

Rent-A-Tribe Challenge authorized

Brice c. Haynes Investments, LLC, 2021 WL 29367330; ___ F.Supp.3d ___ (ND Cal. July 13, 2021). The Northern District of California has refused to grant summary judgment against usury claims brought against shareholders of a company, who allegedly operated a “tribal loan program” through three Native American tribes, where the rate interest exceeded California’s wear cap. The district court left to the jury whether the defendants, who were alleged to be the founders, backers or owners of the entity that allegedly ran the Tribal Lending Scheme, were responsible for the usury violations. .


Lawmakers, including several in “red” states, have introduced legislation refining their laws on interest rates or usury in general, and / or laws authorizing and regulating legal finance and small loans. While some measures languish before the adjournment of current lawmakers, some measures have been enacted. Illinois and North Dakota have passed legislation regulating the interest that can be charged by certain small lenders.

Illinois. In Illinois, legal finance companies, especially those that provide consumer finance, are generally licensed as lenders and are governed by the Consumer Installment Loans Act (CILA). On March 23, 2021, Illinois enacted Public Act 101-658 (SB 1792), which amends the CILA and the Illinois Interest Act. CILA previously set the interest rate at 36%, but SB 1792 requires the rate to be calculated using the “Military Annual Percentage Rate System under Section 232.4 of Title 32 of the Code of Federal Regulations ”, ie the regulations for calculating the APR under the Servicemember’s Civil Relief Act.

North Dakota. On April 14, 2021, North Dakota enacted North Dakota Laws 2021 SB 2103 (West’s No. 319), amending North Dakota laws governing “money broker” fees and exemptions. The legislation includes changes to exemptions for silver brokers and collection agencies and limits on fees that can be assessed by licensed silver brokers at 36% – with additional contract fees capped at 5%. The new law places additional restrictions on loans under $ 2,000.


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