Denemark v New Chapter Capital, Inc.
Judges
Attorneys and Parties
Brief Summary
Litigation funding in a matrimonial case, specifically whether a purported purchase of divorce proceeds was a true contingent investment or a disguised loan subject to New York usury law.
The trial court denied both sides' summary judgment motions, finding factual issues as to whether the Purchase and Sale Agreement (PSA) was truly contingent, whether usury law applied, and whether defendant improperly interfered in the divorce matter.
The Appellate Division reversed the denial of plaintiff's motion on the usury claim and granted summary judgment declaring the litigation funding agreement void and unenforceable; it otherwise affirmed the order, including denial of defendant's cross-motion.
Looking to substance over form, the court held the agreement functioned as a loan, not a contingent investment, because defendant had multiple repayment protections, including a Uniform Commercial Code (UCC) lien, an escrow arrangement, a personal guaranty, and repayment triggers upon reconciliation, death, and bankruptcy. The stated annual charge of 18.96% exceeded the 16% civil usury cap under General Obligations Law § 5-501[1], [2] [sets the maximum legal rate of interest] and Banking Law § 14-a[1] [sets the civil usury ceiling at 16%], making the agreement unenforceable.
Background
In May 2018, plaintiff entered into a Purchase and Sale Agreement (PSA) with defendant, a litigation funder, under which defendant advanced about $200,000 to finance plaintiff's pending divorce action. In exchange, plaintiff assigned his rights to proceeds from the divorce claim up to the amount owed under the PSA. The agreement stated that it was not a loan and that defendant would be repaid only from a successful recovery, but it imposed charges equivalent to 1.58% per month, or 18.96% per year, with a six-month minimum. While the divorce case was pending, defendant filed a Uniform Commercial Code (UCC) financing statement against plaintiff's Wallkill property. When the property was to be sold, the parties entered into an escrow agreement under which sale proceeds were to be held and then paid to defendant up to the amount due under the PSA. The escrow agreement stated that $318,309.52 was presently owed through June 11, 2021. The divorce settled in October 2022, allegedly yielding plaintiff enough to cover defendant's claim, but plaintiff made no payment and instead sued for a declaration that the agreement was void for usury, duress, and undue influence.
Lower Court Decision
Supreme Court, New York County, denied plaintiff's summary judgment motion and denied defendant's cross-motion for summary judgment dismissing the complaint and on its counterclaims. The court found triable issues about whether repayment under the PSA was genuinely contingent, whether usury law applied, whether defendant improperly took an active role in the divorce by filing the UCC statement, and whether plaintiff's duress claim had merit.
Appellate Division Reversal
The Appellate Division modified the order by granting plaintiff summary judgment on his usury claim and declaring the litigation funding agreement void and unenforceable as a matter of law. The court held that the PSA was in substance a loan because defendant's right to repayment was protected even if there were no divorce recovery, including through reconciliation and death triggers in the Sweetheart Guaranty, bankruptcy recourse, the UCC filing, and the escrow arrangement. Because the agreement charged 18.96% annually, above the lawful 16% rate, it was usurious. A contractual savings clause purporting to reduce the rate to the highest lawful rate if a court found the transaction to be a loan did not cure the usury defect.
Legal Significance
The decision reinforces that New York courts will examine litigation funding agreements by their real economic substance rather than labels. Even when an agreement says it is not a loan and claims repayment depends on litigation success, it may still be treated as a loan if the funder has effective repayment assurances outside the lawsuit proceeds. The ruling also signals particular concern where litigation funding is tied to divorce proceedings, given the public policy limits reflected in the Rules of Professional Conduct (22 NYCRR 1200.0) [rules governing attorney conduct], which bar lawyers from charging contingent fees to secure a divorce.
A litigation funding contract tied to divorce proceeds can be void for usury if the funder's repayment is practically assured and the charge exceeds New York's 16% civil usury limit; calling the deal a purchase instead of a loan will not control.