By Thomas G. Wolfe, J.D.
Recently, the Supreme Court of Colorado was called upon to review the essential nature of litigation finance transactions in the state. The litigation finance companies in the case argued that the transactions were “asset purchases” or “investments” and were named and structured that way. In contrast, the Colorado Attorney General and the Colorado Uniform Consumer Credit Code Administrator argued that, despite their labels, these transactions were really “loans” that were subject to Colorado’s Uniform Consumer Credit Code (Colo. UCCC). In addition, many friend-of-the-court briefs were presented on the issue by groups representing the respective interests of consumer advocates, trial attorneys, defense attorneys, chambers of commerce, and property casualty insurers, among others.
Ultimately, in the case of Oasis Legal Finance Group, LLC v. Coffman, the Colorado Supreme Court decided that these litigation finance transactions constitute “loans” that are subject to the Colo. UCCC. More particularly, Colorado’s high court ruled that litigation finance companies that agree to advance money to tort plaintiffs in exchange for future litigation proceeds are making loans under Colorado law, even if the plaintiffs do not have an obligation to repay any deficiency should the litigation proceeds prove to be less than the amount due.
The court sketched the business model for litigation finance companies, relating that the companies typically buy interests in the potential proceeds of various personal injury cases—auto accidents, slip and falls, construction site injuries, and medical malpractice incidents, for example—by executing agreements with the tort plaintiffs. The litigation finance companies provide money, usually less than $1,500, to those tort plaintiffs while their cases are pending. In keeping with the agreement, the money is to be used by the tort plaintiffs to pay their personal expenses while they wait for their lawsuits to settle or go to trial. However, the money cannot be used to prosecute their legal claims.
To provide some background, several national litigation finance companies were involved in the case. Oasis Legal Finance Group, LLC, Oasis Legal Finance, LLC, Oasis Legal Finance Operating Company, LLC (collectively, Oasis), and Plaintiff Funding Holding, Inc. (doing business as LawCash) structured the core features of their litigation finance agreements similarly despite some minor differences.
Under the “Oasis Agreement,” the tort plaintiff was characterized as the “Seller” and the litigation finance company was labeled as the “Purchaser.” The Oasis Agreement specified that the seller-plaintiff would not receive any proceeds until the purchaser-company received the “Oasis ownership amount.” At the same time, the Oasis Agreement prominently stated that if the seller-plaintiff ultimately did not recover anything in the lawsuit, then the purchaser-company would receive nothing as well. Notably, the agreement called for the seller-plaintiff to refer to the litigation finance transaction as a “sale,” not a loan, for all purposes—including tax treatment. In addition, the seller-plaintiff was required to describe the purchased interest as an “asset,” not a debt obligation, in any bankruptcy proceedings.
The LawCash Agreement was first titled as a “Lawsuit Investment Agreement” and then later as a “Funding Agreement.” The underlying transaction was depicted as a “grant of a security interest” and as a “lien” in the proceeds. Further, the LawCash Agreement characterized the litigation finance transaction as “an investment and not a loan.”
After the Colo. UCCC Administrator determined that Oasis and LawCash had made loans in violation of the Colo. UCCC and the Colorado Consumer Protection Act, Oasis and Law Cash declined the Administrator’s offer to settle the matter through an “Assurance of Discontinuance and Final Agency Order.” Instead, the litigation finance companies filed a lawsuit against the Colo. UCCC Administrator and the Colo. Attorney General, “seeking a declaratory judgment that funding agreements of this type are not loans.”
Oasis and LawCash contended that they were involved in “asset purchases” and “investments” because, among other things, they took on the “risk of complete loss.” Oasis and LawCash maintained they had purposely structured their agreements “as sales and assignments of assets” and the agreements explicitly stated that the litigation finance transactions were not to be considered loans. Ultimately, however, the companies’ arguments did not prevail.
The Colorado Supreme Court emphasized that whether litigation finance transactions are or are not “good for consumers” was a question “better suited to the legislature.” Turning its attention to the definition of a “loan” under the Colo. UCCC, the court determined that the statutory provision made it clear that the presence of a “debt is a necessary, if not completely sufficient characteristic of the consumer transaction the Code seeks to regulate.” However, the court decided that an “unconditional” obligation to repay is not required.
From the court’s perspective, litigation finance agreements create debt because “they create repayment obligations, notwithstanding the finance companies’ “embrace of risks that, from time to time, require them to adjust or cancel some plaintiffs’ obligations. Most of the time, plaintiffs repay the full amount borrowed—and more.” Moreover, the court found it “significant that the obligation increases with the passage of time, another characteristic of a loan.”
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