Fast Trak Investment Co. v. Richard Sax ( 2020 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FAST TRAK INVESTMENT No. 18-17270
COMPANY, LLC, a Delaware
limited liability company, D.C. No.
Plaintiff-Appellee, 4:17-cv-00257-
KAW
v.
RICHARD PHILIP SAX, CERTIFICATION
individually and as principal for ORDER TO THE
The Law Offices of Richard Sax; NEW YORK
LAW OFFICES OF RICHARD SAX, a COURT OF
sole proprietorship, APPEALS
Defendants-Appellants.
Filed June 11, 2020
Before: Richard A. Paez and Carlos T. Bea, Circuit Judges,
and Janis Graham Jack, * District Judge.
Order
*
The Honorable Janis Graham Jack, United States District Judge for
the Southern District of Texas, sitting by designation.
2 FAST TRAK INVESTMENT V. SAX
SUMMARY **
Certification to New York Court of Appeals
The panel certified to the New York Court of Appeals the
following questions:
1) Whether a litigation financing agreement may
qualify as a “loan” or a “cover for usury” where the
obligation of repayment arises not only upon and
from the client’s recovery of proceeds from such
litigation but also upon and from the attorney’s fees
the client’s lawyer may recover in unrelated
litigation?
2) If so, what are the appropriate consequences, if any,
for the obligor to the party who financed the
litigation, under agreements that are so qualified?
COUNSEL
Richard Sax, Law Office of Richard Sax, Santa Rosa,
California, for Defendants-Appellants.
Kira A. Schlesinger, Schlesinger Conrad PLLC, Phoenix,
Arizona, for Plaintiff-Appellee.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
FAST TRAK INVESTMENT V. SAX 3
ORDER
This case asks us to determine whether a litigation
funding agreement violates New York’s usury laws.
Richard Sax 1 and Fast Trak Investment Co., LLC (“Fast
Trak”) entered a series of contracts in which Fast Trak
agreed to fund lawsuits Sax brought as the attorney of
record, in exchange for his and his clients’ pledges of
proceeds from those cases, as well as Sax’s pledges of his
attorney fees in unrelated cases. After Sax obtained
proceeds or attorney fees in some of those cases but did not
pay them to Fast Trak as purportedly required by the
agreements, Fast Trak sued Sax for, among other things,
breach of contract and breach of fiduciary duty.
Below and on appeal, Sax argued that the contracts are
unenforceable because they are usurious loans. 2 The district
court rejected both arguments and granted Fast Trak’s
summary judgment motion, holding that the agreements
were enforceable under New York law (which the parties
had contractually selected). The court subsequently awarded
Fast Trak $323,611.11 in damages, which Sax does not
appeal.
To resolve Sax’s purported usury defense, however,
would require us to address what appears to be an
unanswered question of New York usury law. In New York,
1
Sax’s law firm, The Law Offices of Richard Sax, is also a
defendant in this case. Unless otherwise noted, we refer to Sax and his
law firm collectively as “Sax.”
2
Sax also argued that the that the contracts are unenforceable
because they violate laws against champerty. We do not certify this
question to the New York Court of Appeals because we are able to
resolve it by applying New York law.
4 FAST TRAK INVESTMENT V. SAX
usury laws typically apply only to agreements that constitute
a “loan.” See Seidel v. 18 E. 17th St. Owners, Inc.,
79 N.Y.2d 735, 744 (1992) (“If the transaction is not a loan,
‘there can be no usury, however unconscionable the contract
may be.’”) (quoting Orvis v Curtiss, 157 N.Y. 657, 661
(1899)). On the other hand, the New York Court of Appeals
has long held that a device to cover a usurious loan, even if
not technically a loan, will permit a defense of usury to
claims of breach. See, e.g., Orvis, 157 N.Y. at 660–61. And
at least one lower court in New York has found a non-
recourse litigation financing agreement to qualify as a “loan”
that violates usury laws. Echeverria v. Estate of Lindner,
801 N.Y.S.2d 233, 2005 WL 1083704, at *8 (Sup. Ct.),
judgment entered sub nom. Echeverria v. Lindner (N.Y. Sup.
Ct. 2005). Given the novelty of the issue and the impact its
resolution may have in a rapidly growing industry, 3 we
certify to the New York Court of Appeals the following
question:
Whether a litigation financing agreement
may qualify as a “loan” or a “cover for usury”
where the obligation of repayment arises not
only upon and from the client’s recovery of
proceeds from such litigation but also upon
and from the attorney’s fees the client’s
lawyer may recover in unrelated litigation?
And, if so, what are the appropriate
consequences, if any, for the obligor to the
3
The New York City Bar Association estimated the amount of
litigation financing outstanding to exceed $1 billion in 2011. Ass’n of
the Bar of the City of N.Y. Comm’n on Prof’l and Judicial Ethics, Formal
Op. 2011-2, 2011 WL 6958790 at *1 (“N.Y. Bar Opinion”).
FAST TRAK INVESTMENT V. SAX 5
party who financed the litigation, under
agreements that are so qualified?
I.
Fast Trak, a Delaware LLC with its principal place of
business currently in New Jersey, is in the litigation finance
business. Sax is a personal injury lawyer whose residence
and principal place of business is in California. Fast Trak
entered a series of agreements with Sax and Sax’s clients in
the spring of 2013, each of which contained a New York
choice-of-law clause. These agreements can be divided into
two categories, “Primary Contracts” and “Secondary
Contracts.”
Primary Contracts are those between Fast Trak and one
of Sax’s clients, in which Fast Trak agreed to provide funds
directly to the client, who in turn pledged to Fast Trak a
portion of the future proceeds, if any, from his or her
litigation (in which Sax acted as the client’s attorney). Most
payments by Fast Trak to Sax’s clients ranged from $3,000
to $15,000. One client received a total of $96,000 from Fast
Trak as memorialized in four agreements. Even though the
Primary Contracts state that Fast Trak provides the funds
directly to the client (the “Seller” under each agreement), the
funds appear to have been wired directly from Fast Trak to
Sax in most cases. The exact amount that Fast Trak
transferred to Sax and/or his clients is disputed, with Sax
arguing that it is $125,000 and Fast Trak claiming it was “at
least” $132,000.
Rather than entitling Fast Trak to receive a percentage
of any damages award, the Primary Contracts each contain a
“Payment Schedule.” Each Payment Schedule outlines the
minimum amount that the client counterparty must pay to
Fast Trak, at a given time, from any received proceeds from
6 FAST TRAK INVESTMENT V. SAX
the client’s litigation. The minimum payment amounts
increase in six-month increments from the date of executing
the agreement. The Payment Schedule functions such that
the longer it takes the client to receive proceeds from his or
her litigation, the more the client will pay to Fast Trak (if the
client receives any such proceeds at all). For example, Fast
Trak’s Primary Contract to transfer $3,000 to Sax’s client,
Roger Gadow, contains the following payment schedule:
A. Property to be purchased from the
Seller under the agreement: $3,000.00
B. Payment Schedule:
Total Pay-Off Amount to be paid by the
Seller to FAST TRAK:
Minimum amount due on or before the
first six (6) month Anniversary: $4,716.51
After Six (6) month Anniversary, but
on or before One Year Anniversary: $5,631.76
After One Year Anniversary, but on or
before 18 month Anniversary: $6,724.61
After 18 month Anniversary, but on or
before Two Year Anniversary: $8,029.54
After Two Year Anniversary, but on or
before 30 month Anniversary: $9,587.69
After 30 month Anniversary, but on or
before Three Year Anniversary: $11,448.20
After the Three-Year Anniversary, the total pay-
off amount shall continue to increase in a Similar
fashion by $450.00 for each additional six-month
period.
In other words, if Gadow receives sufficient proceeds from
his litigation the day after executing the Primary Contract,
he must pay Fast Trak $4,716.51 (providing Fast Trak a
FAST TRAK INVESTMENT V. SAX 7
57.2% return on investment or “ROI”). Or if Gadow
receives sufficient proceeds from his litigation, say, twenty
months after executing the Primary Contract, Gadow must
pay Fast Trak $8,029.54 (a 167.7% ROI for Fast Trak). As
we explain below, if we were to hold that the increase in
payments over time constitutes “interest” on a “loan,” the
effective interest rates in all of the agreements between Fast
Trak and Sax would exceed the maximum statutory interest
rate for both civil and criminal usury.
However, the agreements are clear that if the client does
not obtain proceeds from his or her litigation sufficient to
make the scheduled payments, the client has no personal
obligation to pay Fast Trak out of his or her own pocket or
estate: most Primary Contracts state in bold that “[t]his is a
nonrecourse purchase agreement. There is no obligation for
seller to make payment except from the proceeds of the
matter/litigation.” The limited nature of this obligation,
though, appears to be why Fast Trak and Sax entered the
Secondary Contracts: to “induce” Fast Trak to invest in Sax.
The Secondary Contracts were signed only by Fast Trak
and Sax (and not Sax’s clients). After referencing a specific
underlying Primary Contract, each Secondary Contract
states that it was executed “[i]n order to induce Fast Trak to
enter” such corresponding Primary Contract. For example,
for the $3,000 Gadow contract, Sax signed a Secondary
Contract with Fast Trak to induce Fast Trak to enter that
Primary Contract with Gadow. Sax gets no additional funds
for signing the Secondary Contract. Instead, Sax provides a
list of his cases (deemed the “Secondary” cases) that are
unrelated to Gadow’s case (the “Primary” case), and
promises that:
If there has not been a monetary recovery in
the “Primary” case great enough to pay the
8 FAST TRAK INVESTMENT V. SAX
entire balance due pursuant to [the Payment
Schedule of this Agreement] at the time when
the first (first means “earliest to occur”)
“Secondary” case yields any monetary
recovery by settlement, judgment or
otherwise; SAX shall than pay to FAST
TRAK an amount equal to the entire
remaining balance then due as per [the
Payment Schedule] of this agreement.
In other words, if Gadow’s case loses (or wins but does not
obtain sufficient proceeds to satisfy the Payment Schedule),
the corresponding Secondary Contract functions as Sax’s
agreement to cover the difference by paying Fast Trak from
his receipts of attorney fees in unrelated cases.
For each Secondary Contract, Sax pledged his attorney’s
fee in about five to ten unrelated cases. In other words, each
Primary and Secondary Contract pair is self-described as a
non-recourse “purchase” of future proceeds, which does not
obligate repayment to Fast Trak from a client or from Sax’s
personal credit or estates. But because Sax pledged his
attorney fees in so many other unrelated cases (such that he
states it would be enough to bankrupt his firm), the result of
this arrangement is, according to Sax, that payment to Fast
Trak by Sax is all but guaranteed.
Additionally, the Primary Contracts each include an
exhibit containing “Irrevocable Instructions to Counsel” in
which the client directs Sax (or any successor attorney) to
pay any received proceeds from the litigation to Fast Trak
before paying them to the client. Sax also signed an
“Acknowledgement by Counsel” exhibit for each Primary
Contract, in which he promised to:
FAST TRAK INVESTMENT V. SAX 9
“honor the assignment by [his client] to [Fast
Trak] . . . including without limitation:
(a) holding, as fiduciary for [Fast Trak], any
Proceeds (as defined in the Agreement),
together with any permitted fees and costs as
set forth in the Agreement; (b) promptly
notifying [Fast Trak] that I [Sax] have
become possessed of any Proceeds and
(c) providing information to [Fast Trak]
about the Claims and any related litigation.”
In the Primary Contracts, each client represents that he
or she “intends this transaction to be and agrees that this
transaction is a purchase and sale and is not a loan,” and
acknowledges that Fast Trak has “no influence, power or
control over any matter relating to the Litigation.” Further,
both the Primary and Secondary Contracts contain clauses
by which Sax and his clients agreed to “waive[] any and all
defenses to the enforcement of this Agreement . . . and
specifically and unconditionally waive[] any claims that . . .
any . . . provision of this Agreement . . . is invalid or
unenforceable in any respect.”
Fast Trak ultimately sued Sax for breach of contract and
breach of fiduciary duty. 4 In response to Fast Trak’s motion
for summary judgment, Sax’s primary arguments were that
the contracts are not enforceable because they are usurious
4
Fast Trak also sued to compel arbitration and for a writ of
attachment, neither of which are at issue on appeal. After filing a motion
for summary judgment, Fast Trak acknowledged that the arbitration
claim was moot.
10 FAST TRAK INVESTMENT V. SAX
and because they violate laws against champerty. 5 The
district court rejected both arguments and entered summary
judgment on both claims for Fast Trak. The district court
requested supplemental briefing on the amount of damages,
and, in response to Fast Trak’s briefing, Sax stated he took
“no position regarding the damages claimed by Plaintiff.”
The district court reviewed Fast Trak’s calculations and
awarded it $323,611.21 in damages.
II.
A.
The district court granted summary judgment to Fast
Trak on the grounds that “[u]nder New York law, ‘if the
transaction is not a loan, there can be no usury, however
unconscionable the contract may be.’” Fast Trak Inv. Co. v.
Sax, No. 4:17-CV-00257-KAW, 2018 WL 2183237, at *6
(N.D. Cal. 2018) (citing NY Capital Asset Corp. v. F & B
Fuel Oil Co., 98 N.Y.S.3d 501, 2018 WL 1310218, at *6
(N.Y. Sup. Ct. 2018)). On appeal, Sax argued that his
agreements with Fast Trak “were illegal, usurious, and
champertous recourse loans,” but provided little detail that
would directly or obviously support this argument. Instead,
he simply argued that “[t]he subject transactions were
usurious” and “[t]he parties intended the subject transactions
to be recourse loans.” He also described the terms of the
agreements, and stated that “Fast Track [sic] would thus
recover unless Sax lost each and every case that was pledged
in its entirety,” and that Fast Trak’s assertions to the contrary
were “misleading” and “illusory.” Finally, he stated that
5
The district court held that the New York choice-of-law provisions
in the contracts was enforceable. On appeal, Sax agrees that New York
law applies.
FAST TRAK INVESTMENT V. SAX 11
“even if the ‘Primary Cases’ did not deliver adequate returns,
Fast Track [sic] would not lose its investment, because it had
demanded the right to collect the ‘entirety’ of Sax’s attorney
fees from a string of secondary cases in his law firm, by way
of an ambiguous, even incomprehensible, contract of
adhesion.”
Thus, Sax has made out the following argument: his
agreements with Fast Trak predictably and effectively
guaranteed repayment to Fast Trak from clients’ and Sax’s
assets, at interest rates that are usurious. As such, they
constitute usurious loans under New York law, or are at least
a device by Fast Trak to cover a usurious loan, and are thus
unenforceable. Therefore, the district court erred in granting
Fast Trak’s motion for summary judgment. For the reasons
discussed below, we certify the above question to the New
York Court of Appeals.
B.
New York’s usury statute provides, in relevant part:
1. The rate of interest, as computed pursuant
to this title, upon the loan or forbearance of
any money, goods, or things in action, . . .
shall be six per centum per annum unless a
different rate is prescribed in section
fourteen-a of the banking law.
2. No person or corporation shall, directly or
indirectly, charge, take or receive any money,
goods or things in action as interest on the
loan or forbearance of any money, goods or
things in action at a rate exceeding the rate
above prescribed. The amount charged,
taken or received as interest shall include any
12 FAST TRAK INVESTMENT V. SAX
and all amounts paid or payable, directly or
indirectly, by any person, to or for the
account of the lender in consideration for
making the loan or forbearance . . . .
N.Y. Gen. Oblig. Law § 5-501 (McKinney) (emphases
added). In turn, section 14-a of the banking law provides
that the maximum rate of interest provided for in section 5-
501 is a 16% simple interest rate per year. N.Y. Banking
Law § 14-a(1) (McKinney). New York courts have
interpreted section 5-501(2) literally, and included in the
calculation of interest all payments or amounts owed to the
lender “in consideration of the making of a loan or
forbearance of money.” Feldman v. Kings Highway Sav.
Bank, 102 N.Y.S.2d 306, 307 (App. Div.), aff’d, 303 N.Y.
675 (1951); see also Band Realty Co. v. N. Brewster, Inc.,
37 N.Y.2d 460, 464–66 (1975). Finally, section 5-511 of
that chapter states that any contract under which a “greater
value, for the loan or forbearance of any money . . . than is
prescribed in section 5-501, shall be void. . . .” N.Y. Gen.
Oblig. Law § 5-511 (McKinney) (emphasis added).
New York also has a criminal usury statute, which was
“designed to prohibit ‘loansharking.’” Practice
Commentary to N.Y. Penal Law § 190.40 (McKinney). The
criminal usury statute provides for a higher statutory rate of
25% simple interest annually. N.Y. Penal Law § 190.40
(McKinney). Further, the same 25% annual rate constitutes
“[c]riminal usury in the first degree” if “the actor’s conduct
was part of a scheme or business of making or collecting
usurious loans.” 6 Id. § 190.42.
6
In New York, although corporations cannot bring a usury defense
in civil actions, N.Y. Gen. Oblig. Law § 5-521(1), (3) (McKinney), this
FAST TRAK INVESTMENT V. SAX 13
Put simply, sections 5-501 and 5-511 make any contract
“void” that provides for (1) a “loan” (2) that charges an
effective annual interest that exceeds 16% (i.e., that includes
any and all amounts payable under the contract). As
explained below, element (2) is easily satisfied in this case.
Accordingly, because the case depends on whether the
financial agreement qualifies as a loan, the answer to the
certified question would resolve this issue.
C.
All of the Primary and Secondary Contracts charge
effective annual interest rates that—if the Contracts
constitute loans—far exceed the statutory maximum of 16%
annually. By way of example, the Gadow Primary Contract,
described above, as well as the Secondary Contract between
Sax and Fast Trak, contain the below Payment Schedule (the
interest calculations in the far right column do not appear in
the contracts themselves).
prohibition does not apply to Richard Sax, a natural person, and his law
firm, a sole proprietorship.
14 FAST TRAK INVESTMENT V. SAX
Annually
Compounded
Interest 7
A. Property to be purchased
from the Seller under the
agreement: $3,000.00
B. Payment Schedule:
Total Pay-Off Amount to
be paid by the Seller to
FAST TRAK:
Minimum amount due on
or before the first six (6)
month Anniversary: 4,716.51
After Six (6) month
Anniversary, but on or
before One Year
Anniversary: 5,631.76 87.7%
After One Year
Anniversary, but on or
before 18 month
Anniversary: 6,724.61
After 18 month
Anniversary, but on or
before Two Year
Anniversary: 8,029.54 42.6%
After Two Year
Anniversary, but on or
before 30 month
Anniversary: 9,587.69
7
These interest rates were not calculated by Sax or included in the
record. We calculated them by “the traditional method of computing
interest” endorsed by the New York Court of Appeals. Band Realty Co.,
37 N.Y.2d at 466.
FAST TRAK INVESTMENT V. SAX 15
After 30 month
Anniversary, but on or
before Three Year
Anniversary: 11,448.20 42.6%
As shown in the table, the conditional payment obligations
that the Contracts impose upon Gadow and/or Sax would, if
they constitute loans, well exceed the civil statutory
maximum interest rate of 16% per annum (compounded
annually), as well as the criminal statutory maximum of 25%
per annum (compounded annually). The same is true for all
the Primary and Secondary Contracts under which Fast Trak
is suing Sax: the amounts of payment which they
conditionally obligate Sax and his clients to pay exceed the
statutory rate for criminal usury. In other words, if the
contracts do in fact constitute “loans” under section 5-501,
they are usurious and, under the terms of section 5-501, void.
D.
When the highest court of a state has not directly spoken
on a matter of state law, a federal court sitting in diversity
must generally use its “own best judgment in predicting how
the state’s highest court would decide the case.” Fiorito
Bros., Inc. v. Fruehauf Corp., 747 F.2d 1309, 1314 (9th Cir.
1984) (internal quotation marks omitted). In making this
prediction, the federal court “must ascertain from all
available data what the state law is and apply it.” Estrella v.
Brandt, 682 F.2d 814, 817 (9th Cir. 1982). “An intermediate
state appellate court decision is a ‘datum for ascertaining
state law which is not to be disregarded by a federal court
unless it is convinced by other persuasive data that the
highest court of the state would decide otherwise.’” Id.
(quoting West v. Am. Tel. & Tel. Co., 311 U.S. 223, 237
(1940)).
16 FAST TRAK INVESTMENT V. SAX
To begin with, New York law is clear that “[w]hen
determining whether a transaction constitutes a usurious
loan it must be ‘considered in its totality and judged by its
real character, rather than by the name, color, or form which
the parties have seen fit to give it.’” Ujueta v. Euro-Quest
Corp., 814 N.Y.S.2d 551, 552 (App. Div. 2006) (quoting
Lester v. Levick, 376 N.Y.S.2d 619 (App. Div. 1975) (Christ,
J., dissenting), rev’d. on dissenting opn. 41 N.Y.2d 940
(N.Y. 1977)). Thus, that the agreements are described by
their language as “Purchase Agreement[s]” and not as loans
is not dispositive; it is their “real character,” when they are
“considered in [their] totality,” that matters here. Id.
Nonetheless, according to the New York Court of
Appeals, “[i]f the transaction is not a loan, ‘there can be no
usury, however unconscionable the contract may be.’
Seidel, 79 N.Y.2d at 744 (quoting Orvis, 157 N.Y. at 661).
New York appellate courts have held that “[i]n order for a
transaction to constitute a loan, there must be a borrower and
a lender; and it must appear that the real purpose of the
transaction was, on the one side, to lend money at usurious
interest reserved in some form by the contract and, on the
other side, to borrow upon the usurious terms dictated by the
lender.” Donatelli v. Siskind, 565 N.Y.S.2d 224, 226 (App.
Div. 1991). Further, “[f]or a true loan it is essential to
provide for repayment absolutely and at all events or that the
principal in some way be secured as distinguished from
being put in hazard.” Rubenstein v. Small, 273 A.D. 102,
104 (N.Y. App. Div. 1947); see also Cash4Cases, Inc. v.
Brunetti, 167 A.D.3d 448 (N.Y. App. Div. 2018). Put
simply, to constitute a “loan” under the usury statute, the
purported lender must have the right to collect from the
purported borrower in absolute terms—that is, a right not
dependent on the occurrence of any condition precedent.
Because Fast Trak has the right to collect from Sax only if
FAST TRAK INVESTMENT V. SAX 17
he or his clients obtain sufficient proceeds, Fast Trak argues,
the transactions cannot constitute a “loan.”
Two arguments push in the other direction. First is the
possibility that Sax’s obligation to make payments is
sufficiently “guaranteed” by the terms of the agreement,
such that what appears not to be a “loan” is nonetheless
treated like one for the purposes of New York usury law.
While the Court of Appeals has not addressed this possibility
in the realm of litigation finance, at least one New York state
trial court has held that a similar purported non-recourse
litigation financing arrangement was a “loan” (and thus
subject to usury laws) because the recovery of the underlying
plaintiff—and therefore the financier’s payment—was
“almost guaranteed.” Echeverria, 801 N.Y.S.2d 233, 2005
WL 1083704 at *8. In Echeverria, the plaintiff Echeverria
received a $25,000 “advance” from a company called
LawCash to pursue his personal injury case, which he agreed
to repay “at an interest rate of 3.85% compounded monthly
to LawCash from any judgment awarded,” id. at *4, which
the court noted was “an obviously usurious rate,” id. at *1.
In finding that the finance agreement constituted a loan, the
court concluded that:
[T]here was a very low probability that
judgment would not be in favor of the
plaintiff. It is a strict liability labor law case
where the plaintiff is almost guaranteed to
recover. There is low, if any risk. This is
troubling considering the enormous profits
that will be made from the rapidly accruing,
extremely high interest rates they are
charging.
18 FAST TRAK INVESTMENT V. SAX
Id. at *8. The court also noted that, just like a bank making
a loan, LawCash was able to demand its rate of return. Id.
at *5 n.1. The court then found that because the investment
was a “sure thing,” “it is a loan, not an investment with great
risk. If it is a loan, then the interest rate charged is usurious
and the court could vitiate the agreement.” Id. at *8. Instead,
because the law was uncertain, the court enforced the
agreement at maximum statutory rate of 16% annual interest.
Id.
Given that Fast Trak’s realization of payment depends
entirely on a condition—the receipts of either litigation
proceeds by the client or attorney fees by Sax—Sax’s
argument that these agreements strictly qualify as “loan[s]”
under New York law is questionable. Nonetheless, with the
Primary and Secondary contracts, the risk of non-payment
might be so low that the financial agreement qualifies as a
loan under New York law. However, even if the transactions
are not “loan[s]” under section 5-501, New York law still
seems to permit a defense of usury in certain circumstances.
The second and more colorable argument against Fast
Trak’s characterization of the agreements addresses the “real
character” of the agreements. See Ujueta, 814 N.Y.S.2d
at 552. The Court of Appeals has repeatedly endorsed the
principle that if an “agreement was not intended for the
purpose indicated upon its face, but as a mere device or
subterfuge to conceal a loan of money[,] . . . . it is quite
possible that the defense of usury could be sustained.”
Orvis, 157 N.Y. at 660–61 (emphasis added). This rule has
some appeal, especially to payors: “[I]f the form of the
contract were to be controlling, the statute against usury
would be substantially unenforcible [sic], and thus it was
made the duty of the court in each case presented to examine
into the substance of the transaction between the parties and
FAST TRAK INVESTMENT V. SAX 19
determine whether the intent which pervaded it was one
which violated the statute.” Hartley v. Eagle Ins. Co. of
London, Eng., 222 N.Y. 178, 185 (1918) (quoting Hall v.
Eagle Ins. Co., 151 A.D. 815, 826 (N.Y. App. Div. 1912)).
Thus, New York courts have affirmed this principle
numerous times, usually in the mortgage context. See, e.g.,
72 N.Y. Jur. 2d Interest and Usury § 87; Equity Serv. Corp.
v. Agull, 250 A.D. 96, 98 (N.Y. App. Div. 1937); Hartley,
222 N.Y. at 184–85; Meaker v. Fiero, 145 N.Y. 165, 169–
170 (1895). However, no New York appellate or high court
has addressed a defense of usury in cases involving litigation
financing agreements where, similar to those here, the
purported lender’s risk of non-payment is arguably
miniscule.
At oral argument before this court, Fast Trak argued that
Cash4Cases, an intermediate appellate decision, is “the
controlling law in New York.” Oral Argument at 16:57, Fast
Trak Invest. Co. v. Sax, No. 18-17270 (Feb. 3, 2020),
https://youtu.be/6C1qJ9Bt1ws. It is true that this decision
cannot be “disregarded” by this court. Estrella, 682 F.2d at
817. However, while Cash4Cases presents some facial
similarity to this one, given its evaluation of a litigation
finance agreement, it is easily distinguishable. In
Cash4Cases, the challenged agreement appears to have been
contingent upon “successful recovery of proceeds” from
“defendant’s [single] pending personal injury litigation.”
167 A.D.3d at 448–49. Here, in sharp contrast, Fast Trak
advanced money to Sax, the repayment of which was
secured in each instance with his future attorney fees in
about five to ten unrelated cases. Even the Cash4Cases
court recognized that an agreement can constitute a loan if
“the principal [is] in some way . . . secured as distinguished
from being put in hazard.” Id. at 449 (citing Rubenstein,
273 A.D. at 104).
20 FAST TRAK INVESTMENT V. SAX
To put it another way, if this case’s facts aligned with
those in Cash4Cases, such that Fast Trak was suing Sax for
proceeds he purportedly owed it related to a single case, we
might be inclined to agree that Cash4Cases would foreclose
Sax’s usury defense. As Fast Trak would have it, as long as
there is some possibility that the assets listed in the
agreements will not yield full payment to Fast Trak, the
transaction cannot qualify as a “loan” and Sax may not
sustain a usury defense. But unlike Cash4Cases, Sax has
made a colorable argument that repayment to Fast Trak is all
but guaranteed.
In summary, we are bound by New York law to analyze
the transaction and determine its “real character.” If the
transaction’s character is in fact the lending of money at a
usurious rate, a defense of usury may be sustained even if
the transaction fails to meet the legal requirements of a
“loan” under section 5-501. See Meaker, 145 N.Y. at 170
(stating that “no matter what the disguise, if the court can see
that the real transaction was the loan or forbearance of
money at usurious interest, its plain and imperative duty is
to so declare, and to hold the security void.”). As we see it,
there is a nonfrivolous argument that the “real purpose” of
these transactions is a loan rather than the purchase of
contingent assets: Fast Trak wired funds to Sax; Fast Trak
secured future payment by Sax with the potential proceeds
in a large number of Sax’s cases, thereby making Sax’s
obligation to pay Fast Trak arguably likely.
E.
Furthermore, the record of this case is sufficiently
established such that the outcome to the above legal question
will determine the case’s result. The New York Court of
Appeals has held that whether a transaction constitutes a
cover for usury “raise[s] a triable issue of fact” precluding
FAST TRAK INVESTMENT V. SAX 21
summary judgment. Hammelburger v. Foursome Inn Corp.,
54 N.Y.2d 580, 594 (1981); see also Ujueta, 814 N.Y.S.2d
at 552. These cases typically involved mortgages, and the
triable issue was whether a broker’s commission should be
included in the interest rate calculation. See, e.g., ids. Here,
there is no question that the Pay-Off Amounts in the
Secondary Contracts, if triggered, would exceed the
maximum statutory rate. However, the relevant factual issue
on remand would be whether the occurrence of the triggering
condition (i.e., Sax’s success in his cases) was sufficiently
certain so as to constitute a “loan” or a “cover for usury.”
Sax averred that “Plaintiff’s loan was secured by other
cases, so that unless I lost each and every case, Plaintiff still
had the right to collect from the ‘Secondary Cases.’ To lose
each and every case would be highly unlikely.” Sax’s
declaration also includes several statements to the effect that
the cases with which he secured Fast Trak’s advances make
up most or all of his firm’s resources. He stated that four of
the securing cases “that resulted in adverse defense verdicts
drained my law firm, which was still struggling as a result of
the ‘Great Recession,’” that paying Fast Trak the amount it
claims would put him “out of business” and “drive[] [him]
into bankruptcy.” Further, though, the record shows that
Fast Trak’s advances to Sax were secured by a total of at
least eighteen cases.
Accordingly, if the New York Court of Appeals holds
that the agreements can indeed constitute a “loan” or a
“cover for usury” such that Sax may assert a usury defense
under New York law, we will reverse the district court’s
grant of summary judgment to Fast Trak and remand for
further proceedings consistent with the answer to the
certified question. On the other hand, if the Court of Appeals
holds that such agreements do not constitute a “loan” or a
22 FAST TRAK INVESTMENT V. SAX
“cover for usury,” these facts are irrelevant (that is, not
“material” for the purposes of a summary judgment motion).
In this case, we will affirm the district court’s grant of
summary judgment for Fast Trak.
F.
Finally, there also exists some confusion regarding the
consequences of a successful usury defense under New York
law. The Court of Appeals has previously held that “[t]he
consequences to the lender of a usurious transaction can be
harsh: the borrower is relieved of all further payment—not
only interest but also outstanding principal, and any
mortgages securing payment are cancelled. In effect, the
borrower can simply keep the borrowed funds and walk
away from the agreement.” Seidel, 79 N.Y.2d at 740.
However, the Echeverria court enforced the agreement,
limiting interest to the maximum statutory rate.
801 N.Y.S.2d at *8. Given this uncertainty, we also certify
the question of the appropriate consequence to the Court of
Appeals, as proposed below.
III.
Applying these state-law doctrines to a novel type of
contract—secured financing agreements like the ones in this
case—is a job most suitable for the highest court of the state
whose law is in question. This is particularly the case when,
as here, the result is likely to have wide-reaching
implications. Litigation financing is a rapidly growing
industry. N.Y. Bar Opinion, 2011 WL 6958790 at *1. Other
states that have addressed whether similar agreements
FAST TRAK INVESTMENT V. SAX 23
violate usury laws have reached conflicting results. 8 Given
the importance of the issue, it would be preferable for the
New York Court of Appeals to address this issue in the first
instance.
While the parties did not request the certification of this
question, we have the authority and obligation to certify a
question sua sponte. See Parents Involved in Cmty. Sch. v.
Seattle Sch. Dist., No. 1, 294 F.3d 1085, 1086 (9th Cir. 2002)
(“[W]e have an obligation to consider whether novel state-
law questions should be certified—and we have been
admonished in the past for failing to do so.”) (citing
Arizonans for Official English v. Ariz., 520 U.S. 43, 62, 76–
79 (1997)); see also Lehman Bros. v. Schein, 416 U.S. 386,
391 (1974) (noting that federal certification of state law
questions “helps build a cooperative judicial federalism,”
and is “particularly appropriate” for novel or unsettled
questions of state law).
Further, certification is permitted under New York law
when the New York Court of Appeals has not yet provided
controlling precedent. N.Y. Comp. Codes R. & Regs. tit. 22,
8
Compare Oasis Legal Fin. Grp., LLC v. Coffman, 361 P.3d 400,
410 (Col. 2015) (holding “that litigation finance companies that agree to
advance money to tort plaintiffs in exchange for future litigation
proceeds are making ‘loans’ subject to Colorado’s [Uniform Consumer
Credit Code] even if the plaintiffs do not have an obligation to repay any
deficiency if the litigation proceeds are ultimately less than the amount
due. These transactions create debt, or an obligation to repay, that grows
with the passage of time.”) with Anglo-Dutch Petroleum Int’l, Inc. v.
Smith, 243 S.W.3d 776, 782 (Tex. App. 2007) (holding that litigation
funding agreements entered into by investor and petroleum companies,
under which investor provided funds to finance companies’ lawsuit
against multinational corporation in return for portion of companies’
recovery in lawsuit, were not usurious transactions, as they did not meet
the definition of a “loan”).
24 FAST TRAK INVESTMENT V. SAX
§ 500.27(a). As explained above, whether New York law
permits a defense of usury in these circumstances is a
question for which no controlling precedent of the Court of
Appeals exists. Because the resolution of this question will
determine the result of this case, we believe certification is
proper.
Accordingly, as stated above, we respectfully certify the
following question to the New York Court of Appeals:
Whether a litigation financing agreement
may qualify as a “loan” or a “cover for usury”
where the obligation of repayment arises not
only upon and from the client’s recovery of
proceeds from such litigation but also upon
and from the attorney’s fees the client’s
lawyer may recover in unrelated litigation?
And, if so, what are the appropriate
consequences, if any, for the obligor to the
party who financed the litigation, under
agreements that are so qualified?
We do not intend our framing of this question to restrict the
New York Court of Appeals’ consideration of any issues that
it determines are relevant. The New York Court of Appeals
may, in its discretion, reformulate the question. See, e.g.,
Broad v. Mannesmann Anlagenbau AG, 196 F.3d 1075,
1076 (9th Cir. 1999).
The clerk of our court is hereby ordered to transmit
forthwith to the New York Court of Appeals, under official
seal of the United States Court of Appeals for the Ninth
Circuit, a copy of this order and all relevant briefs and
excerpts of record filed in this court. The record contains all
FAST TRAK INVESTMENT V. SAX 25
matters in the pending case deemed material for
consideration of the local law question certified for answer.
Further proceedings in our court are stayed pending the
New York Court of Appeals’ decision whether it will accept
review, and if so, receipt of the answer to the certified
question. This case is withdrawn from submission and the
clerk is directed to close this docket administratively,
pending further order from this court. When the New York
Court of Appeals decides whether to accept the certified
question (or orders briefing on the question), the parties shall
file a joint report informing us of the decision. The parties
shall also file a joint status report notifying us when briefing
has been completed, and when a date is set for oral argument
before the New York Court of Appeals. The parties shall
finally file a joint status report every six months after the
date that the New York Court of Appeals accepts the
certified question (or orders briefing thereon), or more
frequently if circumstances warrant.
QUESTION CERTIFIED; SUBMISSION
WITHDRAWN and PROCEEDINGS STAYED.