The Colorado Supreme Court recently upheld consumers’ rights and dealt a blow to predatory lending practices of plaintiff-side litigation finance companies in Oasis Legal Finance Group v. Coffman, 2015 CO 63 No. 13SC497.
The petitioners were litigation finance companies engaged in the business of purchasing interests in the “potential proceeds” of lawsuits of personal injury plaintiffs. These companies typically only paid about $1,500, which funds plaintiffs could use while they awaited a judgment or settlement. In exchange, the lenders received the right to receive a sum of money from the plaintiffs’ future litigation proceeds, consisting of the amount advanced, a further amount based on a “multiplier” that increased over time, and various fees. Plaintiffs recovering less than this amount were not required to repay. The Administrator of the Colorado Uniform Commercial Credit Code (UCCC) issued an opinion letter reasoning that litigation finance companies made “consumer loans” subject to the UCCC and thus were required to be licensed and otherwise comply with the UCCC. Following the opinion letter, the Administrator investigated litigation finance companies’ business practices. The litigation finance companies, rather than settling with the administrator, sued for a declaratory judgment and alleged that the funds they advanced were not loans.
The Colorado Supreme Court held the funds advanced by litigation finance companies were consumer loans subject to the full regulatory reach of the UCCC, affirming the reasoning of both the district court and Court of Appeals. The Court considered the following factors significant. First, the UCCC was intended to ensure consumers broad protection from unfair lending practices. Second, the transactions litigation finance companies entered into with personal injury plaintiffs satisfied the classic elements of “consumer loans” under the UCCC in that: (a) the transactions created debt (defined as “an obligation to repay”) whereby personal injury plaintiffs commit to compensate litigation finance companies from future litigation proceeds, (b) the transactions possessed other characteristics of loans, such as the advance of money and expectation of full repayment at a later date, even though the repayment obligation might be conditional and the “debt” nonrecourse in some circumstances, and (c) under the “multipliers” of the financing agreements, the obligation of the plaintiffs to repay the funds advanced increased over the life of their litigation, which essentially acted as a “finance charge.” Third, the transactions could not be considered “sales” or “assignments” because the agreements did not transfer ownership rights in identifiable property and litigation finance companies only possessed the limited rights of any other creditor.
Throughout the Oasis Legal opinion, the Court highlighted facts casting litigation finance companies in the light of predatory lenders, such as lending “at usurious rates” and “loans hobbled with interest rates sometimes approaching triple digits.” The practical effect of the opinion is that litigation finance companies must now register with the State of Colorado and be licensed lenders subject to the strictures of the Colorado UCCC or else be prohibited from doing business in Colorado. While the full impact of Oasis Legal on the course and cost of civil litigation in Colorado is as yet unknown, it appears likely the effect of the ruling may discourage these businesses. For now, defendants and their counsel desiring to settle cases need not worry about at least one entity that previously sought a piece of the settlement pie.