Today, the North Carolina Court of Appeals allowed a plaintiff to proceed with her lawsuit that "litigation funding," the practice by which private firms make advances to plaintiffs involved in litigation in exchange for a substantial return in the event of a successful result, violates the law of North Carolina. Reversing the trial court, the Court of Appeals let stand claims for usury, unfair and deceptive practices, and a violation of the North Carolina Consumer Finance Act. The Court threw out, however, claims that this practice constitutes "unlawful gaming" and champerty. 

In the case of Odell v. Legal Bucks, LLC, the litigation funder had advanced Ms. Odell $3,000 for her motor vehicle accident claim.  Ms. Odell ultimately settled her claim for $18,000, but found that the terms of her agreement required her to pay Legal Bucks $9,582, or more than triple the advance that she had received. Ms. Odell, certainly unhappy at having to give up more than half of her recovery, then sued Legal Bucks, seeking class certification on her multiple claims.

The principal argument of Legal Bucks against the usury claim was that Ms. Odell was not under an absolute obligation to repay the money she had been advanced, and that the arrangement between them was therefore not usurious.  The Court recognized that the litigation funding was not a "loan," because a "loan" carries the requirement of an unconditional obligation to repay principal, but held that N.C. Gen. Stat. §24-1.1 also covers "advances," which do not have the same requirement. The Court found that the agreement between the parties demonstrated an understanding that the principal of the advance would be returned, meeting a key element of the test for usury. The Court further found that there was no dispute "that the rate of interest provided for in the Agreement substantially exceeds that permitted" by the statute, and that Legal Bucks had "intentionally entered into a contract to receive a greater amount of interest that that allowed" by law.

Since Legal Bucks wasn’t licensed under the Consumer Finance Act, that made out a violation of the Act, as did its violation of the usury statute. The unfair and deceptive practices claim also went forward, over Legal Bucks’ objection that the terms of the agreement had been fully disclosed to the plaintiff. The Court held that:

 "violations of statutes designed to protect the consuming public and violations of established public policy may constitute unfair and deceptive trade practices." In this regard, we note that it is a "paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws." N.C. Gen. Stat. § 24-2.1 (2003). [The] [d]efendants’ practice of offering usurious loans was a clear violation of this policy.


Turning to the points on which Legal Bucks met with success, the Court rejected the illegal gaming claim, holding that the relevant statute (N.C. Gen. Stat. §16-1) covers "wagers" and "bets," two terms not previously defined in North Carolina, and that the litigation funding agreement fit neither definition.  It held:

A "bet" . . . requires that the parties to the bet take opposite sides of an uncertain event. It follows that for an agreement to constitute a "bet," there must be both a winning party and a losing party. In the Agreement at issue in the current case, however, both Plaintiff and Defendants desired the same outcome of the uncertain event: that Plaintiff recover a large sum of money in her personal injury claim. All parties to the Agreement stood to gain if Plaintiff recovered an amount equal to or greater than the sum of the principal of the advance plus the accrued interest. Likewise, all parties to the Agreement stood to lose if Plaintiff recovered less than the amount she owed to Defendants. Such an agreement does not constitute a "bet" under N.C.G.S. § 16-1, notwithstanding that the parties’ respective positions under the Agreement were dependent upon a contingent event.

A "wager" . . . requires that neither party to the wager have any interest in the contingent event at issue. It is true that Defendants had no independent interest in the outcome of Plaintiff’s personal injury claim. However, it is equally clear that Plaintiff did have an independent interest in the outcome of her personal injury claim. The outcome of Plaintiff’s personal injury claim would not only define Plaintiff’s legal rights and obligations under the Agreement with Defendants, but would also define her legal rights with respect to the other parties to the automobile accident giving rise to her claim. Therefore, the Agreement does not constitute a "wager" under N.C.G.S. § 16-1, notwithstanding that the parties’ respective positions under the Agreement were dependent upon a contingent event.

The Court also rejected the claim of champerty, although it noted that "courts in other jurisdictions have held similar litigation financing agreements to be champertous and void." In adopting a different approach, the Court of Appeals observed that Ms. Odell’s agreement was a permissible assignment of proceeds rather than an impermissible assignment of the claim itself, and that the litigation funder did not have control over plaintiff’s claim. Furthermore, plaintiff could not show that Legal Bucks had "interfered in Plaintiff’s personal injury claim for the purpose of stirring up strife and continuing litigation," which it found to be North Carolina’s standard for champerty. That standard, to the Court, required "a higher level of intermeddling for a lender’s actions to be considered champertous" than the standard in other states. 

There were other cases worth noting from the Court of Appeals today, I’ve written about them separately.