THE PARTIES IN THIS DIVORCE PROCEEDING ENTERED A LITIGATION FUNDING AGREEMENT IN WHICH DEFENDANT ADVANCED FUNDS TO PLAINTIFF IN RETURN FOR THE ASSIGNMENT OF PROCEEDS FROM THE DIVORCE CLAIM; DESPITE THE INCLUSION OF THE TERM “THIS IS NOT A LOAN” IN THE AGREEMENT, THE FIRST DEPARTMENT HELD THE AGREEMENT WAS IN FACT AN INVALID LOAN AT A USURIOUS 18.96% ANNUAL INTEREST RATE (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Michael, reversing (modifying) Supreme Court, determined the parties’ divorce-litigation funding agreement was a usurious loan, not an investment, and was therefore void and unenforceable:

The parties entered into a Purchase and Sale Agreement, dated May 23, 2018 (the PSA), wherein defendant agreed to advance approximately$200,000 to plaintiff to fund the legal costs of plaintiff’s pending divorce action. In return, plaintiff agreed to assign to defendant his right to receive any proceeds from the divorce claim up to the amount owed to defendant under the PSA. The “Proceeds” consisted of “the total recovery from the Claim” and the “Claim” was defined as plaintiff’s right, title, and interest in and to any amount granted to plaintiff in connection with his pending divorce action, any appeal or settlement with respect thereto, and any related action. * * *

The PSA clarified that “THIS IS NOT A LOAN” and was expressly contingent on plaintiff’s “successful” recovery on the Claim. It proclaimed that “[i]f there is no recovery on the Claim, nothing will be owed to [defendant].” Yet, several provisions of the PSA together with the Sweetheart Guaranty … , entitled defendant to recoup the money it advanced plus interest even if “there is no recovery on the Claim,” such as in the event of plaintiff’s death or reconciliation with his wife. * * *

Considering the totality of the circumstances … , we find that the parties’ PSA was in fact a loan. The only remaining question is whether the loan was usurious. A loan is usurious if the interest exceeds the maximum legal rate of 16% (see General Obligations Law § 5-501[1], [2]; Banking Law § 14-a[1]). It is undisputed that under the PSA, interest accrued at 18.96% annually, which exceeds the legal limit. Denemark v New Ch. Capital, Inc., 2026 NY Slip Op 04553, First Dept 7-23-26

Practice Point: Consult this opinion for insight into when an agreement constitutes a “loan” subject to the usury law rather than an “investment.”