NY Court Finds Public Policy Supports Litigation Finance Agreement at Issue
While criticism from opponents of the alternative litigation finance industry against the use of litigation funding as being unethical or improper continue, a recent decision by New York Supreme Court Justice Shirley Werner Kornreich signifies that such arguments may very well be falling on deaf ears. In Hamilton Capital VII, LLC (Hamilton) v. Khorrami, LLP (Khorrami)[i] , Defendant Khorrami, a California mass torts plaintiffs’ firm, brought a motion to dismiss the complaint lodged against them by Plaintiff Hamilton, a New York hedge fund that provided litigation financing to Khorrami to enable it to continue to handle cases on contingency. At the outset, Justice Kornreich recognized “public policy favors this type of financing because it ‘allows lawsuits to be decided on their merits, and not based on which party has deeper pockets.”[ii]
At the heart of the complaint is a 2009 credit agreement entered into between Hamilton and Khorrami where the parties agreed to a $6M revolving credit facility collateralized by the law firm’s accounts receivable. Throughout the years, the credit facility was increased and the maturity date extended until Khorrami’s eventual default in August 2012. Although the parties entered into additional agreements to cure the default via payment plans in 2013, Khorrami failed to make payment. In August 2014, Shawn Khorrami (managing partner) signed a notarized Affidavit of Confession of Judgment, conceding his firm's outstanding debt to Hamilton in the amount of $8.5M, including $2M in interest. Ensuing settlement negotiations were unsuccessful. In March 2015, Hamilton filed suit against Khorrami for breach of the credit agreement and unjust enrichment.
Khorrami then moved to dismiss the suit on two grounds – improper fee sharing with a non-lawyer and usury under California law. The second argument did not garner much traction as the court noted that because Khorrami contractually agreed to have the credit agreement governed by New York law, it was precluded from questioning a validly agreed-to choice of law clause. As for Khorrami’s improper fee sharing defense, Khorrami argued the credit agreement with Hamilton was illegal since the loan was collateralized in part by contingent fees earned from client settlements and verdicts.
The court disagreed and did not find the case law cited by Khorrami supported its argument that the credit agreement constituted impermissible fee-sharing with a non-lawyer. In fact, Justice Kornreich recognized courts have expressly allowed law firms to fund themselves in precisely this manner. She explained that:
“Providing law firms access to investment capital where the investors are effectively betting on the success of the firm promotes the sound public policy of making justice accessible to all regardless of wealth. Modern litigation is expensive, and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case. Permitting investors to fund firms by lending money secured by the firm’s accounts receivable helps provide victims their day in court.”
In denying Khorrami’s motion to dismiss, Justice Kornreich recognized the important role that litigation finance plays in balancing the scales of justice.
[i]Hamilton Capital VII, LLC, I v. Khorrami, LLP, et al. 2015 WL 4920281 (Aug. 17, 2015).