Georgia regulates the small loan industry with usury laws like the Payday Lending Act and Industrial Loan Act. But, as the Georgia Supreme Court recently held, these Acts can reach only as far as their texts allow.

In Ruth v. Cherokee Funding, LLC, the Georgia Supreme Court held money advanced by a litigation finance company is not a “loan” under either the PLA or the ILA where the litigant’s obligation to repay depends on the success of her lawsuit. The opinion comes in a state class action suit against litigation finance companies that advanced money to the plaintiffs while their personal injury lawsuits were pending. Under the financing agreements their attorney executed, the plaintiffs were required to repay the funds (plus various fees and interest at an annualized rate of 59.88%) only if they recovered proceeds from their lawsuits. When the litigation finance companies sought to recover the amounts owed under the agreements, the plaintiffs sued alleging, among other things, the agreements violated the PLA and ILA.

On cross appeals, the Georgia Court of Appeals concluded neither Act applied to the challenged transactions, saying they were not “loans,” but merely “investment contracts” due to their uncertain and contingent repayment obligations.

The Georgia Supreme Court agreed. Both Acts apply to “loans,” which as defined must involve an unqualified obligation to repay. However, the Georgia Supreme Court found the financing agreements “involve[] . . . a contingent and limited obligation of repayment”—if the plaintiffs recovered nothing in their lawsuits, they were not obligated to repay. The agreements, therefore, constitute neither a “contract requiring repayment” nor an agreement by which “funds are advanced to be repaid” to meet the Acts’ definitions of a loan.

Depending on the language of their laws, other states may view—and have viewed—litigation financing agreements differently. Litigation finance companies should carefully review a state’s usury laws and relevant court decisions to ensure their business practices comply with them.

The Georgia Supreme Court’s opinion can be found here.