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Georgia Supreme Court: Personal Injury Lawsuit Financing Deals are Not “Loans”

Personal injury litigation often takes a long time to resolve. In many cases, the victims and their families need to wait years before seeing a dime from their claims. This can impose a substantial financial hardship, especially if you are an accident victim unable to return to work and earn a living due your injuries.

For this reason, there are many companies that now offer litigation financing. Basically, a third party advances funds to the plaintiff to help them pay personal expenses while the case is pending. If the plaintiff is successful, the plaintiff repays the funds to the third party, together with any previously agreed upon interest and fees. If the plaintiff recovers nothing from the case, they owe the financing company nothing.

Ruth v. Cherokee Funding, LLC

You will notice the above description did not refer to litigation financing as a “loan,” even though it has many of the same characteristics as a traditional loan. In fact, there is a great deal of debate in legal circles as to whether or not litigation financing qualifies as a loan. The Georgia Supreme Court recently stepped into this debate, when it issued its October 22 decision in Ruth v. Cherokee Funding, LLC.

This case actually involves two separate personal injury lawsuits involving car accidents. The victims in each case retained the same attorney to represent them. Both plaintiffs also obtained litigation financing from the defendant in this case. The defendant agreed to provide funds for personal expenses to both plaintiffs, with their obligation to repay contingent on the “success of their lawsuits.” Assuming they recovered damages, they would have to repay the funds advances, plus interest of 4.99% per month and additional fees. In no event would either plaintiff owe more than the total value of their recovery from in their personal injury claims.

Both plaintiffs ended up settling their lawsuits. The defendant then sought to deduct the money they were owed from the respective awards. The plaintiffs then turned around and filed a class action, alleging their litigation financing arrangements violated Georgia’s Industrial Loan Act and Payday Lending Act, two laws that regulate loans. The defendant moved to dismiss, arguing that the funds it provided did not qualify as “loans” under the statutes.

To make a long story short, the Georgia Supreme Court agreed with the defendant. The Industrial Loan Act defines a loan as a “contract requiring repayment.” But the defendant’s litigation financing only imposed a “contingent and limited” obligation repay based on the plaintiff’s ability to recover damages in their personal injury lawsuits. As for the Payday Lending Act, it refers to loans as “transactions in which funds are advanced to be repaid at a later date.” The Court said it failed to see “any meaningful distinction” between this definition of “loan” and the one contained in the Industrial Loan Act. Accordingly, the Court held the plaintiffs failed to state a valid claim for relief under either statute.