Consumer Legal Funding Is Not A Loan

The common element to the definition of a “loan” or an “advance” transaction is the debtor’s obligation to repay the sum extended, or the “principal.”

  • Loan: delivery by one party to and receipt by another party of sum of money upon agreement, express or implied, to repay it with or without interest.[i]
  • Advance: to furnish money for a specific purpose understood between the parties, the money or sum equivalent to be returned. [ii]

If there is neither an understanding nor a guarantee that the principal will be returned, the transaction cannot be considered a loan or an advance of money. The majority of the states have adopted this definition of a “loan.”[iii]Applying these definitions, the funding provided by a CLF company is neither a “loan” nor an “advance” because the contract provides no guarantee that the purchase price (or “principal” as used in reference to loans and advances) will be returned to the CLF Company.

In fact, most companies that offer consumer legal funding in their agreements expressly acknowledges that the ownership amount purchased “may be worthless,” and the CLF Companies expressly accepts the risk of loss. This transfer of the risk of loss proves that there is no guarantee that the consumer will have to repay the purchase price or for that matter, any amount at all. Therefore, the purchase agreement is not a loan transaction.

According to CLF experts during a May 2, 2012 panel discussion at The George Washington University Law School, in 47% of CLF cases, the CLF Company gets less than the contracted amount; in 22% it gets back only principal or less; and in 10% it gets nothing back.[iv]

CLF companies purchase a contingent right to receive a portion of the proceeds of a consumer’s legal claim. Notably, courts across the country have distinguished CLF purchase transactions from loans which are subject to state lending laws.[v] By making the purchase, the CLF Company obtains title to a specific portion of the proceeds of the consumer’s legal claim.

[i] Black’s Law Dictionary 482 (5th ed. 2004).

[ii] Black’s Law Dictionary 25 (5th ed. 2004).

[iii] See Clark v. State, 52 So. 893, 894-95 (Ala. 1910); Berger v. State Dep’t of Revenue, 910 P.2d 581 (Alaska 1996); Ariz. Rev. Stat. § 20-1603(11) (2012); Cal. Civ. Code § 1912 (Deering 2012); Bridgeport L. A. W. Corp. v. Levy, 147 A. 841, 843-44 (Conn. 1929); Technicorp Int. II, Inc. v. Johnston, No. 5084, 1997 Del. Ch. LEXIS 126 (1997); Fireman’s Fund Ins. Co. v. Dollar Sys., 699 So. 2d 1028, 1030 (Fla. Dist. Ct. App. 1997); Parsons v. Fox, 176 S.E. 642, 644 (Ga. 1934); Union Sec., Inc. v. Merchants’ Trust & Sav. Co., 185 N.E. 150, 152 (Ind. 1933); Am. Furniture Co. v. Snell, 164 So. 478, 479-80 (La. Ct. App. 1935); B&S Mktg. Enters., LLC v. Consumer Prot. Div., 835 A.2d 215 (Md. 2003); Gilbert v. Comm’r of Internal Revenue, 248 F.2d 399, 402 (2d Cir. 1957); People v. Lee, 526 N.W.2d 882 (Mich. 1994); Firstar Eagan Bank v. Marquette Bank Minneapolis, N.A., 466 N.W.2d 8, 11 (Minn. Ct. App. 1991); Sunburst Bank v. Keith, 648 So. 2d 1147, 1150 (Miss. 1995); Pennington v. Solovic, 870 S.W.2d 440 (Mo. Ct. App. 1993); Nyquist v. Nyquist, 841 P.2d 515 (Mont. 1992); Morisch v. Morisch, 355 N.W.2d 784, 786 (Neb. 1984); Robinson v. Durston, 432 P.2d 75, 77 (Nev. 1967); Security Escrow Corp. v. State Taxation and Revenue Dep’t, 760 P.2d 1306, 1310 (N.M. Ct. App. 1988); Elwell v. Chamberlin, 31 N.Y. 611, 616 (1864); N.D. Cent. Code § 47-14-01 (2012); Cobb v. Baxter, 292 P.2d 389, 391 (Okla. 1956); Carey v. Lincoln Loan Co., 998 P.2d 724, 729 (Or. Ct. App. 2000); Lancia v. Grossman’s of R.I., Inc., 216 A.2d 517, 520 (R.I. 1966); S.D. Codified Laws § 54-1-2 (2012); Tenn. Code Ann. § 45-4-601(a) (2) (2012); Tex. Fin. Code §301.002(10) (2012); Rasmussen v. Western Cas. & Sur. Co., 393 P.2d 376, 378 (Utah 1964); Hafer v. Spaeth, 156 P.2d 408 (Wash. 1945); Carper v. Kanawha Banking & Trust Co., 207 S.E.2d 897, 908-09, (W. Va. 1974); Burnham v. City of Milwaukee, 73 N.W. 1018 (Wis. 1897); Witzenburger v. State ex rel. Wyo. Cmty. Dev. Auth., 575 P.2d 1100 (Wyo. 1978).

[iv] Conference Summary, George Washington Univ., Alternative Litigation Financing (May 17, 2012), Download

[v] See Clark, 52 So. 894-95; Carter v. Four Seasons Funding Corp., 97 S.W.3d 387 (Ark. 2003)citing Reade H. Ryan, Jr., Trade Receivables Purchases, DS71 ALI-ABA 305, 373 (1999); Cullen v. Bragg, 350 S.E.2d 798 (Ga. Ct. App. 1986); Goodtimes, Inc. v. IFG Leasing Co., 788 P.2d 853, 856 (Idaho Ct. App. 1990); General Motors Acceptance Corp. v. Kettelson, 580 N.E.2d 187, 189-90 (Ill. App. Ct. 1991); General Elec. Credit Corp. v. Oregon State Tax Comm’n, 373 P.2d 974, 983 (Or. 1962); Dennis v. Sears, Roebuck & Co., 446 S.W.2d 260, 264 (Tenn. 1969); Lowell & Austin, Inc. v. Truax, 507 A.2d 949, 951 (Vt. 1985); Stonebraker v. Zinn, 286 S.E.2d 911 (W. Va. 1982).