In an article for Bloomberg Law, Glenn Agre partners Reid Skibell and Joseph Gallagher and associate Colleen Piasentin examine how a recent appellate ruling and new state legislation could leave litigation funders unable to recover even their principal.
In Denemark v. New Chapter Capital, Inc., decided in July 2026, the Appellate Division, First Department, held that a funding arrangement was a loan, not an investment, and void for usury. The agreement said the funder would recover nothing if the underlying claim failed. Even so, a “sweetheart guaranty,” a UCC-1 lien on marital property, and an escrow agreement left the funder repaid in virtually every scenario. The funder’s nearly 19% annual interest rate exceeded the 16% cap.
Why This Matters to Litigation Funders
If an arrangement gives the financier recourse beyond the client’s recovery, New York treats it as a loan subject to usury limits, and the remedy can void repayment entirely. New York’s Consumer Litigation Funding Act, effective June 17, codifies the same principle by defining consumer funding as non-recourse. The authors describe this as a critical question that funders cannot afford to get wrong. In their view, the exposure is greatest for newer entrants in consumer funding, whose arrangements draw closer scrutiny.
How Funders Can Protect Themselves
The authors caution that layering risk-minimizing clauses into a funding agreement can backfire. New York courts evaluate holistically whether an arrangement is a loan, asking whether the funder’s risks are real or a disguised effort to evade the usury laws.
They also note that precautionary drafting won’t rescue a riskless deal. In Denemark, a clause reducing the interest rate to the legal maximum did not save the agreement. Courts are reluctant to rewrite usurious terms, because doing so would let funders overcharge with no downside.
For funders whose portfolio size or risk profile calls for added protections, the authors suggest pricing below the usury threshold. That way principal is not at risk even if the deal is recharacterized as a loan.
Read the full article published in Bloomberg Law.