Hamilton Capital VII, LLC v Khorrami, LLPAnnotate this Case
Decided on August 17, 2015
Supreme Court, New York County
Hamilton Capital VII, LLC, I, Plaintiff,
Khorrami, LLP (f/k/a KHORRAMI & BOUCHER, LLP; f/k/a KHORRAMI BOUCHER SUNER, SANGUINETTI, LLP; and f/k/a KHORRAMI, POLLARD, & ABIT, LLP) and SHAHIM KHORRAMI (a/k/a SHAWN KHORRAMI), Defendants.
Ganfer & Shore LLP, for plaintiff.
Morelli Alters Ratner, LLP, for defendants.
Shirley Werner Kornreich, J.
Defendants Khorrami, LLP (the Law Firm) and Shawn Khorrami (Khorrami) move by order to show cause, pursuant to CPLR 3211, to dismiss the complaint. Defendants' motion is denied for the reasons that follow.
I. Procedural History & Factual Background
As this is a motion to dismiss, the facts recited are taken from the complaint and the documentary evidence submitted by the parties.[FN1]
Plaintiff Hamilton Capital VII, LLC (Hamilton),[FN2] a Delaware LLC based in New York, provides "alternative litigation financing" to law firms that represent plaintiffs in tort cases on a [*2]contingency basis. As discussed further below, 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." Complaint ¶ 4. Hamilton essentially functions as a factor; that is, it lends money to law firms, and the loans are secured by the firm's accounts receivable.
Khorrami is a partner at the Law Firm, a California limited partnership based in Los Angeles. On June 17, 2009, Hamilton and the Law Firm entered into a Credit Agreement, pursuant to which the Law Firm was provided with a $6 million revolving credit facility with a maturity date of June 12, 2012. See Dkt. 108. The money borrowed by the Law Firm under this credit facility was secured by Collateral, defined in Section 1.20 to mean:[A]ll property and proceeds thereof now owned or hereafter acquired by [the Law Firm] or any other Person who has granted Lien to [Hamilton], in or upon which a Lien hereafter exists in favor of [Hamilton], as security for the Obligations.
See id. at 6. The Law Firm provided Hamilton with a $6 million note (see Dkt. 111), and the Collateral was secured pursuant to a Security Agreement. See Dkt. 110. Khorrami also personally guaranteed the Law Firm's payment obligations under the Credit Agreement. See Dkt. 5. These contracts are collectively referred to in the Credit Agreement as the "Transaction Documents." See Dkt. 108 at 14.
Section 2.5(a) of the Credit Agreement provides that the amount borrowed carries interest "at a rate equal to the lesser of 24% per annum and the Maximum Rate (which interest accruing at the Maximum Rate shall compound at the maximum frequency permitted under Applicable Law)." See id. at 15. Maximum Rate is defined in Section 1.61 as "the maximum rate or amount of interest that Lender is allowed to contract for, charge, take, reserve or receive under Applicable Law."[FN3] See id. at 11. Section 2.5(c) provides that "[a]t all times after the occurrence and during the continuation of any Event of Default, interest shall be payable on demand. If interest in excess of the Maximum Rate is at any time received by [Hamilton], as determined by a court of competent jurisdiction, such excess shall be applied against other outstanding Obligations."[FN4] See id. at 15. Section 2.5(d) provides that "[a]t the option of Lender, [*3]following any Event of Default and to the extent permitted by Applicable Law, all Obligations shall bear interest at the per annum rate set forth in Section 2.5 plus 11% (the "Default Rate") until paid, regardless of whether such payment is made before or after entry of a judgment, provided that the Default Rate shall never exceed the Maximum Rate." See id.
Section 2.7, titled "Revenue Interest", provides:As additional compensation to [Hamilton] for entering into this Agreement and extensions of credit under this Agreement, [Hamilton] shall have fully earned and be entitled to the greater of (i) 10% of [the Law Firm's] Gross Revenues [FN5]between the Closing Date [June 17, 2009] and the third anniversary of the Closing Date or (ii) 10% of [the Law Firm's] Gross Revenues until such time as the total amount of Gross Revenues equals $100,000,000 (the "Revenue Interest") and [the Law Firm] shall pay to [Hamilton] on a monthly basis in arrears in each Payment Date an amount equal to 10% of the Gross Revenues since the last Payment Date (and in the case of the initial payment since the Closing Date) until the later [*4]of third anniversary of the Closing Date or such time as the total amount of all Revenue Interest payments equals 10% of $100,000,000. [The Law Firm] shall be obligated to make the Revenue Interest payments provided for in this Section 2.1 regardless of whether (x) this Agreement has been terminated, (y) there are any other Obligations outstanding at the time of such request or at any other time and (z) there are any claims, defenses or offsets, it being understood that said obligation is not subject to any rights, claims defenses or offsets each of which are knowingly, expressly and unequivocally waived by [the Law Firm] with respect to the obligations contained in this paragraph.
See id. at 16.
Section 7.1 provides that a failure by the Law Firm to make a payment due under the Credit Agreement is an Event of Default. See id. at 42. Section 8 provides that, upon an Event of Default, Hamilton may, inter alia, "declare the entire unpaid balance of the Obligations, or any part thereof, immediately due and payable, whereupon it shall be due and payable." See id. Section 8.4 provides that Hamilton may recover its costs and legal fees in an action to enforce the Credit Agreement. See id. at 46.
Section 9.15 provides that the Credit Agreement "shall be construed in accordance with and governed by the laws of the State of New York without regard to conflict of law principles that would result in the application of other law, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of New York." See id. at 50. Section 9.16, titled "Maximum Interest Rate", provides:It is the intention of the parties hereto to comply with applicable usury laws (now or hereafter enacted); accordingly, notwithstanding any provision to the contrary in this Agreement, the Note, the other Transaction Documents, or any other document relating hereto, in no event shall this Agreement or any such other document require the payment or permit the collection of interest in excess of the maximum amount permitted by such laws. If from any circumstances whatsoever, fulfillment of any provision of this Agreement or of any other document pertaining hereto or thereto, shall involve transcending the limit of validity prescribed by law for the collection or charging of interest, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if from any such circumstances Lender shall ever receive anything of value as interest or deemed interest by Applicable Law under this Agreement, the Note, the other Transaction Documents, or any other document pertaining hereto or otherwise an amount that would exceed the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the obligations or on account of any other Indebtedness of [the Law Firm] to [Hamilton], and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of such indebtedness, such excess shall be refunded to [the Law Firm].
See id. (underline in original; bold added).
The Transaction Documents were amended three times. First, on March 25, 2011, the parties executed amendments of the Transaction Documents to increase the credit facility limit to $7 million. See Dkt. 109 & 112. Then, on June 29, 2012, the parties executed another amendment to extend the maturity to July 31, 2012. See Dkt. 10. Finally, a third amendment was executed on July 31, 2012, further extending the maturity date to August 15, 2012. See Dkt. [*5]11.
The Law Firm defaulted by failing to pay its outstanding balance under the credit facility by the August 15, 2012 maturity date. Complaint ¶ 36. By letter dated October 11, 2012, Hamilton notified the Law Firm of its default and contended that "as of the date hereof, the [the Law Firm's] total indebtedness to the [Hamilton], including principal and interest but excluding Revenue Interest, default interest and other fees and expenses, is $6,679,139.07." See Dkt. 12. During the following months, the parties attempted to resolve the matter. Thus, on June 17, 2013, the parties executed a Letter Agreement in which the Law Firm acknowledged its default and agreed to pay Hamilton a total of $600,000 in four installments between July 2, 2013 and August 10, 2013. See Dkt. 13. On July 3, 2013, the parties entered into a Second Letter Agreement in which the Law Firm again acknowledged its default and Hamilton demanded full payment of all amounts due under the Credit Agreement if, inter alia, it was not paid $250,000 by July 9, 2013. See Dkt. 14. The Law Firm did not pay. On August 1, 2013, the parties entered into a Third Letter Agreement containing yet another payment plan. See Dkt. 15. Once more, the Law Firm did not abide by this payment plan.
On August 19, 2014, Khorrami, as the managing partner of the firm, executed a notarized Affidavit of Confession of Judgment. See Dkt. 16. In that affidavit, Khorrami states that he designates New York County as "the proper county in which entry of this Confession of Judgment is authorized." Khorrami further affirmed: "to the extent permitted by law, I hereby acknowledge that [the Law Firm] is indebted to Hamilton pursuant to the Credit Agreement in the aggregate amount of $8,511,238.49, including aggregate principal of $6,509,418.75 and interest of $2,001,819.64, which is justly due and unconditionally owing by [the Law Firm] to Hamilton without offset, recoupment, claim, counterclaim, or third-party claim of any kind plus accrued interest and I hereby confess judgment to Hamilton in the amount of $8,511,238.49 plus any accrued interest." See id. at 2.[FN6] The parties then attempted to work out a settlement, but no settlement occurred due to Khorrami's refusal to provide sufficient information about the Law Firm's finances. The parties' negotiations permanently broke down in February 2015.
Hamilton commenced this action on March 13, 2015, filing a complaint with seven causes of action: (1) breach of the Transaction Documents against the Law Firm; (2) breach of the Guaranty against Khorrami; (3) accounts stated against the Law Firm; (4) unjust enrichment against the Law Firm and Khorrami; (5) an injunction for the appointment of a receiver for the Law Firm; (6) an accounting; and (7) an injunction prohibiting defendants from dissipating assets.
On March 24, 2015, Hamilton moved by order to show cause for an order appointing a temporary receiver. Defendants opposed the motion. The court heard oral argument on April 8, 2015, but adjourned the motion to permit the parties to negotiate a settlement. See Dkt. 81 (4/8/15 Tr.). They did not settle. The parties were next before the court on April 24, 2015, at [*6]which time certain disclosures were ordered. See Dkt. 93 (4/24/15 Tr.). On May 5, 2015, the court heard further oral argument on Hamilton's motion to appoint a temporary receiver, after which the court issued an order granting the motion. See Dkt. 96 (order) & Dkt. 118 (5/8/15 Tr.). On June 3, 2015, the court issued a Supplemental Order, appointing Sylvia Elizabeth Di Pietro as the Law Firm's temporary receiver. See Dkt. 122.
In the interim, on May 5, 2015, shortly after oral argument, defendants filed the instant motion to dismiss by order to show cause. Hamilton filed opposition on June 19, 2015. The court reserved on the motion after oral argument. See Dkt. 148 (7/7/15 Tr.).[FN7]
II. Legal Standard
On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v Gani Realty Corp., 60 AD3d 491 (1st Dept 2009); Skillgames, LLC v Brody, 1 AD3d 247, 250 (1st Dept 2003), citing McGill v Parker, 179 AD2d 98, 105 (1992); see also Cron v Harago Fabrics, 91 NY2d 362, 366 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged and the inferences that can be drawn from them, the complaint states the elements of a legally cognizable cause of action. Skillgames, id., citing Guggenheimer v Ginzburg, 43 NY2d 268, 275 (1977). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 NY3d at 491. "However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration." Skillgames, 1 AD3d at 250, citing Caniglia v Chicago Tribune-New York News Syndicate, 204 AD2d 233 (1st Dept 1994). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed only if "the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law." Goshen v Mutual Life Ins. Co. of NY, 98 NY2d 314, 326 (2002) (citation omitted); Leon v Martinez, 84 NY2d 83, 88 (1994).
A. Enforceability of the Credit Agreement
Defendants argue that Section 2.7 of the Credit Agreement is unenforceable because it is a prohibited fee sharing agreement, under New York law, between a law firm and a non-lawyer.[FN8] [*7]As noted earlier, Section 2.7 entitles Hamilton to a percentage of the Law Firm's gross revenue as part of the consideration for the money loaned to the Law Firm. Defendants aver that since the Law Firm's gross revenue is essentially composed of contingent fees earned on client settlements and verdicts, Section 2.7 is an illegal fee sharing agreement with Hamilton.[FN9] Defendants are wrong.[FN10]
This is not an issue of first impression.[FN11] As Hamilton correctly notes, other courts have analyzed the legality of similar financing arrangements between factors and law firms and held them not to run afoul of the applicable ethical rules. Most on point and persuasive is Justice Bransten's decision in Lawsuit Funding, LLC v Lessoff, 2013 WL 6409971, 2013 N.Y. Slip Op. [*8]33066(U) (Sup Ct, NY County 2013), which relied on an equally persuasive Delaware case, where the court explained:[D]efendants suggest that it is "inappropriate" for a lender to have a security interest in an attorney's contract rights. Yet it is routine practice for lenders to take security interests in the contract rights of other business enterprises. A law firm is a business, albeit one infused with some measure of the public trust, and there is no valid reason why a law firm should be treated differently than an accounting firm or a construction firm. The Rules of Professional Conduct ensure that attorneys will zealously represent the interests of their clients, regardless of whether the fees the attorney generates from the contract through representation remain with the firm or must be used to satisfy a security interest. Parenthetically, the Court will note that there is no suggestion that it is inappropriate for a lender to have a security interest in an attorney's accounts receivable. It is, in fact, a common practice. Yet there is no real "ethical" difference whether the security interest is in contract rights (fees not yet earned) or accounts receivable (fees earned) in so far as Rule of Professional Conduct 5.4, the rule prohibiting the sharing of legal fees with a nonlawyer, is concerned. It does not seem to this Court that we can claim for our profession, under the guise of ethics, an insulation from creditors to which others are not entitled.
Lawsuit Funding, 2013 WL 6409971, 2013 N.Y. Slip Op. 33066(U) at *5, quoting PNC Bank, Delaware v Berg, 1997 WL 527978, at *10 n.5 (Del Super Ct 1997) (emphasis added).[FN12] As Justice Bransten observed, PNC Bank "has been quoted by the First Circuit, several federal district courts, and the Court of Appeals of Ohio." Lawsuit Funding, 2013 WL 6409971, at *5 (collecting cases); see id. at *6 ("[t]here is a proliferation of alternative litigation financing in the United States, partly due to the recognition that litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation.") Justice Bransten adopted the reasoning of PNC Bank and held that the litigation financing agreement at issue did not violate Rule 5.4(a). See id.
This court agrees.[FN13] While it is well settled that actual fee-sharing agreements are illegal [*9]and unenforceable [see Ungar, 260 AD2d 485; see also Bonilla v Rotter, 36 AD3d 534 (1st Dept 2007)], the case law cited by defendants does not support the proposition that a credit facility secured by a law firm's accounts receivable constitutes impermissible fee sharing with a non-lawyer. To the contrary, as Justice Bransten explained, courts have expressly permitted law firms to fund themselves in this manner. 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. This laudable goal would be undermined if the Credit Agreement were held to be unenforceable. The court will not do so.
Defendants also argue that the Credit Agreement is unenforceable because it violates California's usury laws.[FN14] As noted earlier, the Law Firm is located in California, Hamilton is [*10]located in New York, and all of the contracts are governed by New York law. Defendants argue that if the court conducted a choice of law analysis [see generally Matter of Allstate Ins. Co. (Stolarz), 81 NY2d 219 (1993)], the court would conclude that California law should be applied. Hamilton, however, avers that conducting a choice of law analysis is prohibited where, as here, the parties have designated the applicable law in their contract. Hamilton is correct.
New York General Obligations Law (GOL) § 5-1401 provides:The parties to any contract ... arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars ... may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.
(emphasis added). In this case involving a law firm and lawyer who practice throughout the country, the contracts contain a New York choice of law clause, and the amount in dispute is in excess of $250,000. See Int'l Union of Bricklayers v Bank of NY Mellon, 2014 WL 234343, at *3 (Sup Ct, NY County 2014) ("It is well-settled that where the parties have selected New York law to govern their contractual relationship under a choice of law provision, and the provision is enforceable, New York substantive law applies.'"), quoting IRB-Brasil Resseguros, S.A. v Inepar Investments, S.A., 20 NY3d 310, 315 (2013); Stokoe v Marcum & Kleigman LLP, 2015 WL 1306995, at *6 (Sup Ct, NY County 2015) ("The parties' decision to apply New York law to their contract mandates the application of New York substantive law, not New York's conflicts principles"); VFS Financing, Inc. v Elias-Savion-Fox LLC, 2014 WL 6765827, at *6 (SDNY 2014) ("Because this turnover action, in which VFS seeks more than $600,000 in order to vindicate a judgment of more than $2.4 million, clearly meets the statute's monetary requirement, the parties' choice of New York substantive law must be respected"). In IRB, the Court of Apples was clear that when GOL § 5-1401 applies, application of New York law is mandatory and conducting a choice of law analysis is prohibited.
That being said, defendants still argue that California's usury laws should be applied out of respect for California's public policy. However, "California does not have a strong public policy against enforcing contracts valid under chosen law but usurious under California law." Mencor Enterprises, Inc. v Hets Equities Corp., 190 CalApp3d 432, 440 (Cal Ct App 1987), citing Ury v Jewelers Acceptance Corp., 227 CalApp2d 11 (Cal Ct App 1964); see also Hyundai Secs. Co. v Lee, 232 CalApp4th 1379, 1391 (Cal Ct App 2015). Nonetheless, California law differs from New York in that choice of law provisions will not be applied absent a choice of law analysis. See Cobalis Corp. v Cornell Capital Partners, LP, 2011 WL 4962188, at *6 (D NJ 2011) (discussing usury and enforceability of choice of law provision, noting that "California courts will not enforce a choice of law provision absent a determination that the state of the chosen law has a relationship to the parties or the contract."); see also Petters Co. v BLS Sales Inc., 2005 WL 2072109, at *4-5 (ND Cal 2005) (same); see REF & Assocs. v Texaco Refining [*11]& Marketing, Inc., 937 F2d 613 (9th Cir 1991) ("California's choice of law rule with respect to the interpretation of contracts provides that the contracting parties' selection of another state's law will ordinarily be upheld if enforcement of the contract does not result in an evasion of settled public policy or California law protective of the rights of its citizens.'"), quoting Mencor, 190 CalApp3d at 435. In other words, California courts have no qualms about enforcing loans legal under New York law, but usurious under California law, so long as California's choice of law analysis would conclude that application of a New York choice of law provision comports with California law. In New York, however, IRB and GOL § 5-1401 preclude courts from questioning a validly agreed-to choice of law clause. Hence, even if a California court might, for its own public policy reasons, deem the parties' New York choice of law clause unenforceable, this court may not do so. The court must apply New York law, including New York's usury laws. The Law Firm, therefore, is not entitled to dismissal based on California law.Accordingly, it is
ORDERED that the motion to dismiss the complaint by defendants Khorrami, LLP and Shawn Khorrami is denied; and it is further
ORDERED that the court's order dated August 12, 2015 (Dkt. 197) is hereby amended as follows: the preliminary conference scheduled on September 24, 2015 will take place at 10:30 am.
Dated: August 17, 2015ENTER:
Footnote 1:It should be noted that the material facts do not seem to be in dispute. Default under the subject contracts, discussed below, is uncontested.
Footnote 2:When the relevant contracts were entered into, Hamilton was known as Centurion Credit Opportunities, LLC. Likewise, the Law Firm went through various name changes, reflected in the caption, as different partners joined and left. It is undisputed that the parties to this action are the same parties that contracted with each other.
Footnote 3:Applicable Law is defined in Section 1.11 to mean "all provisions of statutes, laws, rules, regulations, ordinances, writs, interpretations, injunctions and orders of any Governmental Authority applicable to any Person, property, transaction or event, and all orders and decrees of all courts and arbitrators in proceedings or actions in which the Person in question is a party or which such property, transaction or event is the subject including applicable federal, state and local laws and regulations." See id. at 5.
Footnote 4:Obligation is defined in Section 1.64 as: [A]ll present and future obligations, indebtedness and liabilities of any Loan Party to [Hamilton] or any of its affiliates at any time and from time to time of every kind, nature and description arising under any Transaction Document, whether direct or indirect, secured or unsecured, joint and/or several, absolute or contingent, due or to become due, matured or unmatured, now existing or hereafter arising, contractual or tortious or liquidated or unliquidated, including, without limitation, the Revenue Interest, all interest, fees, charges, expenses and indemnities, all amounts paid or advanced by [Hamilton] to, on behalf of or for the benefit of any such Loan Party in accordance with the terms of the Transaction Documents, for any reason at any time, and all obligations of performance as well as obligations of payment and all interest, fees and other amounts that accrue after the commencement of any receivership, insolvency or bankruptcy proceeding by or against any such Loan Party or its Properties. See id. at 11.
Footnote 5:Gross Revenue is defined in Section 1.47 as: [A]ll payment, remuneration, proceeds, rents, fees, funds, receipts, cash, money and/or compensation of any type or kind received by or owed to [the Law Firm] or to which [the Law Firm] becomes entitled to and/or allocated to [the Law Firm] pursuant to the terms of any engagement letter, retainer agreement or similar agreement in whole or in part (irrespective of when [the Law Firm] actually receives it, whether the exact dollar amounts have been fixed or how [the Law Firm] accounts for such amounts on its financial statements) and all other revenues and income from any source, whether earned, accrued or received, provided, however, that any such amounts to which [the Law Firm] may become entitled to pursuant to the terms of any engagement letter, retainer agreement or similar agreement entered into after June 12, 2012 shall not be included as part of Gross Revenue for purpose of Section 2.7(ii); provided, further, that in no event shall Gross Revenue include (i) expenses that are (a) reimbursed directly by a client after the receipt by the [the Law Firm] of all payments, remunerations, proceeds, rents, fees, funds, receipts, cash, money and/or compensation of any type or kind in connection with such client's Case or (b) approved by a court or (ii) payments to co-counsel pursuant to and in accordance co-counsel, joint venture, joint prosecution or similar agreements. In the event an expense is not an expense that must be approved by a court or is not being paid directly by the client, then the exclusion of such reimbursement shall be subject to [Hamilton's] approval. See id. at 8-9 (emphasis added).
Footnote 6:Paragraph 5 acknowledged that events of default had occurred, and paragraph 6 stated: Notwithstanding such Events of Default, Hamilton has agreed to make a Further Advance under the Credit Agreement. As a condition to such Advance, and until a new or amended Credit Agreement is executed, I submit this affidavit for judgment by confession against [the Law Firm] in favor of Hamilton.
Footnote 7:On August 3, 2015, while this motion was sub judice, the court signed two orders to show cause. See Dkt. 174 & 175. One was brought by Morelli Alters Ratner, LLP to be relieved as counsel for defendants.
Footnote 8:Rule 5.4(a) of the New York Rules of Professional Conduct states that "[a] lawyer or law firm shall not share legal fees with a nonlawyer." 22 NYCRR 1200.0; see In re Lung, 112 AD3d 148, 150 (2d Dept 2013). § 491 Judiciary Law also provides that it is a misdemeanor: for any person, partnership, corporation, or association to divide with or receive from, or to agree to divide with or receive from, any attorney-at-law or group of attorneys-at-law, whether practicing in this state or elsewhere, either before or after action brought, any portion of any fee or compensation, charged or received by such attorney-at-law or any valuable consideration or reward, as an inducement for placing, or in consideration of having placed, in the hands of such attorney-at-law, or in the hands of another person, a claim or demand of any kind for the purpose of collecting such claim, or bringing an action thereon, or of representing claimant in the pursuit of any civil remedy for the recovery thereof. See Matarazzo Blumberg & Assocs. P.C. v Abramovitz, 298 AD2d 586 (2d Dept 2003); Ungar v Matarazzo Blumberg & Assocs., 260 AD2d 485 (1st Dept 1999).
Footnote 9:Contrary to defendants' contentions, Hamilton does not have an ownership interest in the Law Firm. A lender who loans money under a revolving credit facility is a creditor of the borrower. Unless the credit agreement provides for equity (for instance, by issuing convertible bonds), the loan results in debt, not equity. Under the Transaction Documents, Hamilton has no right to control any aspect of the Law Firm's cases. Moreover, to the extent the Law Firm relies on Jacoby & Meyers, LLP v Presiding Justices of First, Second, Third and Fourth Dep'ts, Appellate Div. of Supreme Court of NY (J & M), such reliance is misplaced. J & M merely concerned the constitutionality of Rule 5.4 of the New York Rules of Professional Conduct and Section 495 of the Judiciary Law, which prohibit law firms from receiving non-lawyer equity investment. By order dated March 8, 2012, Judge Kaplan dismissed the case for lack of standing. See J & M, 847 FSupp2d 590 (SDNY 2012). On November 21, 2012, the Second Circuit reversed that decision. See J & M, 488 FedAppx 526 (2d Cir 2012). Shortly after oral argument on the instant motion, in an order dated July 15, 2015, Judge Kaplan rejected the plaintiffs' constitutional challenges and dismissed the action. See J & M, 2015 WL 4279720 (SDNY 2015). Here, in contrast to J & M, Hamilton does not own any equity in the Law Firm. J & M, therefore, is inapposite.
Footnote 10:While not dispositive, it should be noted that prior to entering into the Transaction Documents, defendants obtained two legal opinion letters concluding that the contracts are legal under both New York and California law. See Dkt. 128 & 129.
Footnote 11:The ethical implications of non-lawyer investors having control over cases are complex. See, e.g., Anthony J. Sebok, What Do We Talk About When We Talk About Control?, 82 Fordham L. Rev. 2939 (2014).
Footnote 12:It should be noted that Lawsuit Funding inaccurately cites PNC Bank's Westlaw citation and, therefore, the version of Lawsuit Funding on Westlaw neither hyperlinks to PNC Bank nor does it appear in its "Citing References."
Footnote 13:To the extent defendants contend this case should be decided differently than Lawsuit Funding based on differences in the loan agreements, such argument is rejected for the reasons set forth in Hamilton's brief: Under the Credit Agreement here, just as in Lawsuit Funding, [the Law Firm agreed to pay its lender, Hamilton, a percentage of contingency fees it received, up to the greater of 10% of the gross revenues over three years or 10% of $100,000,000 (later raised to 15%). Defendants attempt to distinguish Lawsuit Funding from this case on the ground that the borrower in Lawsuit Funding only agreed to pay the lender a percentage of contingency fees on particular cases rather than all cases. The attempted distinction fails because the law firm-borrower in Lawsuit Funding agreed to pay the lender a percentage of fees collected on all its cases, including cases other than the specific ones being financed, until the full amount of the advances and interest was repaid. Id. at *3. Moreover, as in Lawsuit Funding, [the Law Firm's] obligation to pay a percentage of its contingency fees to its lender was capped, albeit at a specific dollar amount rather than by a specific group of cases. Defendants do not explain why these minor differences in the specifics of the financing arrangements agreed to by the different law firms warrants a different result in this case from Lawsuit Funding or PNC Bank. See Dkt. 123 at 20-21.
Footnote 14:Defendants do not argue, even in the alternative, that the Credit Agreement violates New York's usury laws. That being said, Hamilton notes that New York's usury laws do not apply where, as here, the amount of the loan exceeds $2.5 million. See Shasho v Pruco Life Ins. Co. of N.J., 67 AD3d 663, 665 (2d Dept 2009), citing GOL § 5-501(6)(b) ("No law regulating the maximum rate of interest which may be charged, taken or received shall apply to any loan or forbearance in the amount of two million five hundred thousand dollars or more"). It also bears mentioning that in Lawsuit Funding, Justice Bransten noted that "courts in similar cases have held that agreements nearly identical to the Sale Agreement and Stipulation are not loans and therefore are not subject to usury laws." See id. at *4, citing Kelly Grossman & Flanagan, LLP v Quick Cash, Inc., 35 Misc 3d 1205(A) (Sup Ct, Suffolk County 2012) (Pines, J.) & Lynx Strategies, LLC v Ferreira, 28 Misc 3d 1205(A) (Sup Ct, NY County 2010). These cases rely on the rule that the usury laws only apply to loans, not investments. See Kelly Grossman, 35 Misc 3d 1205(A), at *5. Hence, where the rate of return on a loan to a law firm is dependent on the outcome of the firm's cases, the effective interest rate is considered to be "based upon a contingency which is in the control of the debtor" and, therefore, usury laws do not apply. See id., accord Sumner v People, 29 NY 337 (1864); see also Prof'l Merch. Advance Capital, LLC v Your Trading Room, LLC, 2012 WL 12284924, at *5 (Sup Ct, Suffolk County 2012) (case involving factor, noting that "Unless a principal sum advanced is repayable absolutely, the transaction is not a loan" and that "[w]here payment or enforcement rests upon a contingency, the agreement is valid even though it provides for a return in excess of the legal rate of interest") (collecting cases). The court will not opine on whether such logic applies to the facts of this case since GOL § 5-501(6)(b) appears to obviate the need to consider New York's usury laws given the amount in controversy.