Fast Trak Inv. Co. v. Sax
| Decision Date | 11 June 2020 |
| Docket Number | No. 18-17270,18-17270 |
| Citation | 962 F.3d 455 |
| Parties | FAST TRAK INVESTMENT COMPANY, LLC, a Delaware limited liability company, Plaintiff-Appellee, v. Richard Philip SAX, individually and as principal for The Law Offices of Richard Sax; Law Offices of Richard Sax, a sole proprietorship, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Richard Sax, Law Office of Richard Sax, Santa Rosa, California, for Defendants-Appellants.
Kira A. Schlesinger, Schlesinger Conrad PLLC, Phoenix, Arizona, for Plaintiff-Appellee.
D.C. No. 4:17-cv-00257-KAW, CERTIFICATION ORDER TO THE NEW YORK COURT OF APPEALS
Before: Richard A. Paez and Carlos T. Bea, Circuit Judges, and Janis Graham Jack,* District Judge.
This case asks us to determine whether a litigation funding agreement violates New York's usury laws. Richard Sax1 and Fast Trak Investment Co., LLC ("Fast Trak") entered a series of contracts in which Fast Trak agreed to fund lawsuits Sax brought as the attorney of record, in exchange for his and his clients’ pledges of proceeds from those cases, as well as Sax's pledges of his attorney fees in unrelated cases. After Sax obtained proceeds or attorney fees in some of those cases but did not pay them to Fast Trak as purportedly required by the agreements, Fast Trak sued Sax for, among other things, breach of contract and breach of fiduciary duty.
Below and on appeal, Sax argued that the contracts are unenforceable because they are usurious loans.2 The district court rejected both arguments and granted Fast Trak's summary judgment motion, holding that the agreements were enforceable under New York law (which the parties had contractually selected). The court subsequently awarded Fast Trak $323,611.11 in damages, which Sax does not appeal.
To resolve Sax's purported usury defense, however, would require us to address what appears to be an unanswered question of New York usury law. In New York, usury laws typically apply only to agreements that constitute a "loan." See Seidel v. 18 E. 17th St. Owners, Inc. , 79 N.Y.2d 735, 744, 586 N.Y.S.2d 240, 598 N.E.2d 7 (1992) () (quoting Orvis v. Curtiss , 157 N.Y. 657, 661, 52 N.E. 690 (1899) ). On the other hand, the New York Court of Appeals has long held that a device to cover a usurious loan, even if not technically a loan, will permit a defense of usury to claims of breach. See, e.g. , Orvis , 157 N.Y. at 660–61, 52 N.E. 690. And at least one lower court in New York has found a nonrecourse litigation financing agreement to qualify as a "loan" that violates usury laws. Echeverria v. Estate of Lindner , 801 N.Y.S.2d 233, 2005 WL 1083704, at *8 (Sup. Ct.), judgment entered sub nom. Echeverria v. Lindner, 2005 WL 6050781 (N.Y. Sup. Ct. 2005). Given the novelty of the issue and the impact its resolution may have in a rapidly growing industry,3 we certify to the New York Court of Appeals the following question:
Fast Trak, a Delaware LLC with its principal place of business currently in New Jersey, is in the litigation finance business. Sax is a personal injury lawyer whose residence and principal place of business is in California. Fast Trak entered a series of agreements with Sax and Sax's clients in the spring of 2013, each of which contained a New York choice-of-law clause. These agreements can be divided into two categories, "Primary Contracts" and "Secondary Contracts."
Primary Contracts are those between Fast Trak and one of Sax's clients , in which Fast Trak agreed to provide funds directly to the client, who in turn pledged to Fast Trak a portion of the future proceeds, if any, from his or her litigation (in which Sax acted as the client's attorney). Most payments by Fast Trak to Sax's clients ranged from $3,000 to $15,000. One client received a total of $96,000 from Fast Trak as memorialized in four agreements. Even though the Primary Contracts state that Fast Trak provides the funds directly to the client (the "Seller" under each agreement), the funds appear to have been wired directly from Fast Trak to Sax in most cases. The exact amount that Fast Trak transferred to Sax and/or his clients is disputed, with Sax arguing that it is $125,000 and Fast Trak claiming it was "at least" $132,000.
Rather than entitling Fast Trak to receive a percentage of any damages award, the Primary Contracts each contain a "Payment Schedule." Each Payment Schedule outlines the minimum amount that the client counterparty must pay to Fast Trak, at a given time, from any received proceeds from the client's litigation. The minimum payment amounts increase in six-month increments from the date of executing the agreement. The Payment Schedule functions such that the longer it takes the client to receive proceeds from his or her litigation, the more the client will pay to Fast Trak (if the client receives any such proceeds at all). For example, Fast Trak's Primary Contract to transfer $3,000 to Sax's client, Roger Gadow, contains the following payment schedule:
A. Property to be purchased from the
Seller under the agreement: $3,000.00
B. Payment Schedule
Total Pay-Off Amount to be paid by the
Seller to FAST TRAK
Minimum amount due on or before the
first six (6) month Anniversary: $4,716.51
After Six (6) month Anniversary, but
on or before One Year Anniversary: $5,631.76
After One Year Anniversary, but on or
before 18 month Anniversary: $6,724.61
After 18 month Anniversary, but on or
before Two Year Anniversary: $8,029.54
After Two Year Anniversary, but on or
before 30 month Anniversary: $9,587.69
After 30 month Anniversary, but on or
before Three Year Anniversary: $11,448.20
After the Three-Year Anniversary, the total pay-off
amount shall continue to increase in a Similar
fashion by $450.00 for each additional six-month
period
In other words, if Gadow receives sufficient proceeds from his litigation the day after executing the Primary Contract, he must pay Fast Trak $4,716.51 (providing Fast Trak a 57.2% return on investment or "ROI"). Or if Gadow receives sufficient proceeds from his litigation, say, twenty months after executing the Primary Contract, Gadow must pay Fast Trak $8,029.54 (a 167.7% ROI for Fast Trak). As we explain below, if we were to hold that the increase in payments over time constitutes "interest" on a "loan," the effective interest rates in all of the agreements between Fast Trak and Sax would exceed the maximum statutory interest rate for both civil and criminal usury.
However, the agreements are clear that if the client does not obtain proceeds from his or her litigation sufficient to make the scheduled payments, the client has no personal obligation to pay Fast Trak out of his or her own pocket or estate: most Primary Contracts state in bold that The limited nature of this obligation, though, appears to be why Fast Trak and Sax entered the Secondary Contracts: to "induce" Fast Trak to invest in Sax.
The Secondary Contracts were signed only by Fast Trak and Sax (and not Sax's clients). After referencing a specific underlying Primary Contract, each Secondary Contract states that it was executed "[i]n order to induce Fast Trak to enter" such corresponding Primary Contract. For example, for the $3,000 Gadow contract, Sax signed a Secondary Contract with Fast Trak to induce Fast Trak to enter that Primary Contract with Gadow. Sax gets no additional funds for signing the Secondary Contract. Instead, Sax provides a list of his cases (deemed the "Secondary" cases) that are unrelated to Gadow's case (the "Primary" case), and promises that:
If there has not been a monetary recovery in the "Primary" case great enough to pay the entire balance due pursuant to [the Payment Schedule of this Agreement] at the time when the first (first means "earliest to occur") "Secondary" case yields any monetary recovery by settlement, judgment or otherwise; SAX shall than pay to FAST TRAK an amount equal to the entire remaining balance then due as per [the Payment Schedule] of this agreement.
In other words, if Gadow's case loses (or wins but does not obtain sufficient proceeds to satisfy the Payment Schedule), the corresponding Secondary Contract functions as Sax's agreement to cover the difference by paying Fast Trak from his receipts of attorney fees in unrelated cases.
For each Secondary Contract, Sax pledged his attorney's fee in about five to ten unrelated cases. In other words, each Primary and Secondary Contract pair is self-described as a non-recourse "purchase" of future proceeds, which does not obligate repayment to Fast Trak from a client or from Sax's personal credit or estates. But because Sax pledged his attorney fees in so many other unrelated cases (such that he states it would be enough to bankrupt his firm), the result of this arrangement is, according to Sax, that payment to Fast Trak by Sax is all but guaranteed.
Additionally, the Primary Contracts each include an exhibit containing "Irrevocable Instructions to Counsel" in which the client directs Sax (or any successor attorney) to pay any received proceeds from the litigation to Fast Trak before paying them to the client. Sax also signed an ...
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