A New Jersey law firm faces an $18 million suit over its alleged failure to repay a litigation funder that helped finance personal injury cases.

Besides failing to repay its debt, Callagy Law of Paramus has refused to provide the funder any information about the status of the cases for which the funds were borrowed, according to the suit by Legal Capital Group of Boca Raton, Florida.

Legal Capital provided 16 advances totaling $441,794 from January to September 2013 on personal injury cases brought by the Callagy firm and an additional $150,000 to attorney Benjamin Light and his firm, Aromando & Light, who are not named as defendants in the suit. Callagy, who was litigating several cases on behalf of Light, agreed to give a security interest in his firm's cases to secure the advance to Light, the suit says.

The loans carried interest rates ranging from 1.99% to 4.99%, compounded monthly. The loan agreement includes a clause agreeing to cross-collateralize all personal injury cases the firm has pending and in the future.

The case, before U.S. District Judge Madeline Cox Arleo of the District of New Jersey, names Callagy Law and its principal, Sean Callagy, as defendants.

Callagy referred a reporter's questions about the case to his law partner, Michael Smikun. Smikun said the Callagy Law Firm is not liable for the loans, because they were taken out by a separate entity, The Law Office of Sean R. Callagy, Esq. In addition, the loans were made on a nonrecourse basis and were made in cases that did not result in any recovery. As a result, no repayment is due on the loans, said Smikun, who disputed the claim that his firm withheld the status of the cases from its lender.

The volume of inquiries to legal funders has been strong, and is getting a further boost thanks to the COVID-19 pandemic. The increased volume has resulted in more suits by funders against law firms over nonrepayment of advances.

In the Callagy case, despite the seemingly disproportionate amount of interest compared to the sum originally borrowed, it's unlikely that the loan contract would be set aside by a New Jersey court, said Anthony Sebok, a professor at Cardozo Law School who studies litigation funding. He said many in the legal community consider such high-interest loans a violation of the court's ethics rules, but judges are unlikely to object for that reason. Sebok said he's "puzzled" why this firm agreed to such a high rate of interest. But notwithstanding the Callagy firm's assertion that it's off the hook for the debt because the underlying cases failed to recover, the cross-collateralization clause "increases the likelihood that the obligation to repay is triggered," said Sebok, who reviewed court documents in the case.

The suit against Callagy Law represents a reversal of roles, since the firm, with 21 lawyers, is accused of defaulting on a litigation funding after representing litigation funders in suits against other parties that allegedly defaulted on such loans. Beginning in 2014, Callagy Law represented Prospect Funding Holdings in a dispute with a personal injury litigant who received a $15,000 advance on his case, then claimed the funding company charged usurious rates.

Callagy,the firm principal, has represented George Prussin, the principal of Legal Capital Group, in litigation on behalf of another litigation funding company he owned, Law Funder. In 2014, Callagy won a $33 million verdict on behalf of Law Funder in Bergen County Superior Court.

The suit was filed by Christopher McHattie of the McHattie Law Firm in Boonton. He did not respond to a request for comment.

The suit brings claims for breach of contract and breach of the implied covenant of good faith and fair dealing and seeks an equitable accounting.