On November 17, the Colorado Supreme Court issued its ruling in Oasis Legal Financing v. Coffman. The Supreme Court unanimously held that agreements in which companies advance money to tort plaintiffs in exchange for future litigation proceeds are “loans”, which loans are subject to the Uniform Consumer Credit Code [UCCC] as adopted in Colorado.
Litigation financing has grown nationwide in recent years as a way to assist people and companies in covering personal expenses incurred during the pendency of a lawsuit and in managing litigation costs. There has been a perceived need for some governmental regulation to protect those who, under financial pressure, may agree to terms which may be commercially unfair or even unconscionable.
The Colorado Attorney General issued an opinion in 2010 which concluded that entities which engaged in lawsuit financing had to comply with the UCCC. [§5-1-101 et seq.]. A declaratory action challenging this conclusion was filed and the matter progressed through the court system, ultimately ending up in the Colorado Supreme Court.
The litigation financing companies had sought to structure their funding agreements as sales and assignments of assets, explicitly noting within the agreements that the transactions are not loans. The companies emphasized that their clients [the tort plaintiffs] do not have an obligation to repay borrowed funds if the litigation proceeds recovered are less than the amount paid, i.e. they emphasized that the finance companies take on the risk of complete loss. This, they argued, meant they were not ‘loans’ as defined in the UCCC.
The State and various Amici argued that the UCCC does not require a transaction to have an unconditional obligation to repay for to it be a loan, and that the litigation financing transactions fell within the concept of a loan that the Legislature intended to regulate in adopting the UCCC.
In agreeing with the State, the Court found that the agreements were loans, in part because they create debt as contemplated by the Code. In so holding, it rejected the argument that an unconditional repayment obligation was a necessary requirement of a transaction for it to fall within the definition of a loan. The Supreme Court also noted that the financing agreements contained a provision which allows for growth in the repayment obligation over time, and held that this was a finance charge, a hallmark of a consumer loan under the UCCC.
As noted above, in order to avoid the agreements being depicted as loans, the companies argued that the agreements were, instead, sales or assignments. However, since the companies do not step into the tort plaintiffs’ shoes, but instead the agreements only provide the litigation financing companies with the rights that any creditor would have to receive payment of the amount due, they could not be considered sales or assignments.
Ruebel & Quillen drafted an amicus brief on behalf of several interested entities in the Oasis Legal Financing case urging the adoption of the position of the State.