U.S. Court of Appeals for the Ninth Circuit in San Francisco. (Photo: Jason Doiy/ALM)

A San Francisco-based federal appeals court asked the highest court in New York to decide whether a litigation funding agreement requiring the repayment of attorney fees in unrelated cases runs afoul of the state's usury laws.

The certified question from the U.S. Court of Appeals for the Ninth Circuit asked the New York Court of Appeals to decide whether the arrangement qualified as a "loan" or "cover for usury" under a state statute, which caps the amount of interest that can be charged for lending.

If so, the Ninth Circuit asked, what, if any, consequences should a litigation financier face?

"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," a three-judge panel of the federal appeals court wrote in a 25-page order.

"This is particularly the case when, as here, the result is likely to have wide-reaching implications. Litigation financing is a rapidly growing industry," the order said.

The question stemmed from Santa Rosa, California, attorney Richard Sax's appeal of a lower court's decision rejecting his claims that a series of contracts he entered with litigation funder Fast Trak Investment Co. were unenforceable as usurious loans.

According to court documents, the agreements included conditional payment obligations for separate cases, which "well exceed" New York's civil statutory maximum of 16% interest per year, as well as the 25% annual cap under the state's criminal usury statutes—meaning that if the contracts did indeed qualify as loans, they would all be void and unenforceable.

Sax had said that unless he lost all of his other cases, Fast Trak would still be able to collect on matters unrelated to the litigation it had funded, potentially draining his firm and sending him into bankruptcy.

A district court judge had ruled against Sax, finding that the contracts, "however unconscionable," did not meet the criteria to be considered loans under New York Law.

On Thursday, however, the Ninth Circuit panel said the New York Court of Appeals had never directly addressed the issue, and without controlling precedent, the judge were unable to predict how the court might rule.

"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," the panel said.

The case in the Ninth Circuit, captioned Fast Trak v. Sax, has been stayed pending a decision by the New York Court of Appeals on whether it will take up the question.

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