On Oct. 31, 2001, the 9th District Court of Appeals affirmed a trial court decision that transactions between a plaintiff and two non-recourse funding companies, wherein repayment was contingent on the successful resolution of the plaintiff`s lawsuit, constituted usurious loans in violation of the Ohio Small Loan Act, R.C. 1321.02. (Rancman v. Interim Settlement Funding Corp. Lawyers Weekly No. 109-512-01.)



To reach that conclusion, the court stretched the definition of what constitutes a loan so far that it abolished any real distinction between a loan and a contingent transaction in Ohio. And while this act of judicial activism will likely be reversed if reviewed, the ruling begs the question, what is a loan?





Repayability

It is basic hornbook law that "to constitute usury it is essential that the sum loaned be repayable absolutely; if it is payable only upon some contingency, then the transaction is not usurious." 45 Am. Jur. 2d Sect. 132. Whether principle and interest are "repayable absolutely" is a question of fact based on a determination of whether or not the contingency was a "real hazard." See 61 Ohio Jur. 3d (1958), Interest and Usury, Sect. 58.



The Rancman court concluded that, although repayment was contingent on the success of the plaintiff`s underlying lawsuit against an insurer, there was no real hazard and, therefore, the transaction was repayable absolutely. The court then went on to conclude that, since the transaction was repayable absolutely, it was a loan subject to the provisions of the Small Loan Act.



This ruling stands in stark contrast to more reasoned rulings from other jurisdictions. See, e.g., Dopp v. Yari, 927 F.Supp. 814, 822-24 (D.Ct. N.J. 1996) (an investment in a pending lawsuit was not a loan because repayment was contingent on the plaintiff`s recovery of proceeds from the lawsuit); Kraft v. Mason, 668 So.2d 679 (Fla. Dist. Ct. App. 1996) (upholding the enforceability of a non-recourse funding transaction). In fact, Rancman appears to be the first time that any court has concluded that a contingent advance, secured only by a speculative recovery from a lawsuit, is a loan.





Inherent Risks

In reaching its ruling, the Rancman court ignored the inherent risks of our adversarial system of justice. The courts [see Kraft, 668 So.2d at 684 (at the time of the transaction any talk of recovery was pure speculation; quite possibly, there would be no successful recovery from the litigation)], and commentators all recognize these risks. As Gary Sasso, Editor-in-Chief of Litigation, the ABA`s Journal of the Section Of Litigation, noted in the Fall 2001 addition, aptly entitled "Chance": "Litigation is a game of chance. From the moment your client walks in the door, every choice you make involves risk. You might not like to see it that way, but your cannot escape it ... So we get the best information we can, maybe the best advise, and we call upon our experience, judgment and instincts and play the percentages. We take our best shot and move on."



Clearly every lawsuit, prior to settlement or final judgment, carries with it real hazards that can jeopardize a positive result. Considering this, the Rancman ruling appears logically and legally flawed and should be reversed.





Ramifications

However, in the meantime, trial attorneys should take a close look at the ramifications this ruling has on their own day-to-day practice. Applying the Rancman reasoning to attorney case expense advances, it appears that every time a trial attorney advances case expenses in an amount less than $5,000 for his client, he has made a loan, subject to the provisions of the Small Loan Act.



If a loan is made in violation of the Small Loan Act, the loan is void and the lender, in this case the attorney, must forfeit any principal, interest, or charges.



Even if the trial attorney does not charge her client any interest, she risks forfeiture of all the money she advanced to the client. (See R.C. 1321.02.)



The Rancman court concluded that, although the only collateral for the transaction was a pre-settlement lawsuit, the "contracts were loans because no real probability existed that non-payment would occur." Taken to its logical conclusion, funds advanced by trial counsel for case expenses are likewise a loan, since no greater risk applies to such advances than to the non-recourse transactions of the defendants in Rancman. In fact, since the client must ultimately remain liable for attorney advanced case expenses, in deed, less risk is involved. See Disciplinary Rule 5-103(B).



If case expense advances are loans, as the Rancman ruling suggests, then, whenever case advances of $5,000 or less are made, they are subject to the provisions of the Small Loan Act. The Small Loan Act requires lenders to obtain a license from the division of financial institutions under R.C. 1321.01. Without such a license, the loan is "void and the lender has no right to collect, receive, or retain any principal, interest or charges." R.C. 1321.02. Therefore, even after a successful resolution of a case, a client could refuse to repay the case expenses her attorney advanced on her behalf and seek to avoid payment altogether under the Small Loans Act. And under the precedent set by Rancman, the client should prevail.



Unlikely? Perhaps. But the fate of the defendants in Rancman should serve as a cautionary tale.