A Recent Appellate Ruling Just Voided a “Non-Recourse” Funding Deal as a Loan
This July, the First Department reversed the trial court, granted summary judgment to the funded party, and declared a six-figure “purchase” void as a usurious loan.
September 24, 2026
By John J. Hanley & Blake Trueblood
This July, the First Department reversed the trial court, granted summary judgment to the funded party, and declared a six-figure “purchase” void as a usurious loan. Here is what its reasoning means for consumer and commercial funding transactions alike.
New York appellate law now draws a clear line: a genuinely non-recourse purchase of litigation proceeds is not a loan, but a transaction that assures repayment independent of a recovery can be recharacterized and tested for usury. Cash4Cases, Inc. v. Brunetti established the first proposition in 2018. Denemark v. New Chapter Capital, Inc. applies the second—and it reaches every litigation funding agreement in New York, not just the matrimonial deal in front of it. What changes is the level of scrutiny: stack a UCC-1 reaching beyond the proceeds, an unconditional repayment guaranty, and a death or bankruptcy trigger, and the agreement is a loan regardless of what the parties called it.
From Trial-Court Disagreement to Appellate Guidance
New York’s earliest reported decision on litigation funding and usury did not go the funder’s way. In Echeverria v. Estate of Lindner, 7 Misc. 3d 1019(A), 2005 N.Y. Slip Op. 05675(U) (Sup. Ct., Nassau County 2005), a Nassau County trial judge held that a $25,000 advance to an injured construction worker was, in substance, a loan—and a usurious one—because the underlying claim was a strict-liability labor law case in which recovery was “almost guaranteed.” With no genuine risk that the funder would go unpaid, the court reasoned, the non-recourse label did not reflect the deal’s actual economics. That is the same “no genuine litigation risk” factor that resurfaces in Denemark two decades later; the reasoning is not new, it simply lacked appellate backing at the time.
Five years later, a different trial court reached the opposite conclusion on different transaction terms. Lynx Strategies LLC v. Ferreira, 957 N.Y.S.2d 636 (Sup. Ct. 2010), treated a third-party investment for a share of litigation proceeds as non-usurious. Until Brunetti, New York therefore lacked controlling appellate guidance directly addressing whether a genuinely contingent litigation advance constituted a loan.
Cash4Cases, Inc. v. Brunetti, 167 A.D.3d 448, 449 (1st Dep’t 2018), supplied that guidance. The First Department held that an advance was not a loan where repayment of principal depended entirely on success in the underlying action and the litigant had no guaranteed repayment obligation apart from recovered proceeds. Because usury requires a loan or forbearance, and “where there is no loan, there can be no usury” (LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664, 664 (2d Dep’t 2020); Seidel v. 18 E. 17th St. Owners, 79 N.Y.2d 735, 744 (1992)), that genuinely non-recourse structure fell outside the usury statutes.
What Denemark Held
Denemark v. New Chapter Capital, Inc. arose from a matrimonial action. Under a Purchase and Sale Agreement dated May 23, 2018 (the PSA), the funder advanced approximately $200,000 to help the plaintiff fund his divorce litigation, in exchange for an assignment of his right to divorce proceeds. The advance carried interest at 1.58% per month—18.96% annually—with a six-month minimum: $222,134.94 owed if repaid within six months, increasing every three months after that. The agreement stated, in capital letters, that “THIS IS NOT A LOAN,” that repayment was contingent on a “successful” recovery, and that “if there is no recovery on the Claim, nothing will be owed.”
The First Department looked past that language to a set of provisions that, together, gave the funder a real path to repayment regardless of outcome. The Court applied the settled standard that a transaction is judged “in its totality and by its real character, rather than by the name, color, or form which the parties have seen fit to give it” (Abir v. Malky, Inc., 59 A.D.3d 646, 649 (2d Dep’t 2009); accord Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 334 (2021)), and concluded the agreement was, in substance, a loan carrying a usurious rate—void and unenforceable under General Obligations Law § 5-501 and Banking Law § 14-a. Notably, the trial court had found questions of fact requiring a trial on contingency and usury; the First Department reversed and granted the funded party summary judgment outright, on the documents alone.
The Court did not announce a formal six-factor checklist. It identified several features that, together, eliminated genuine contingency. Organized for reviewing a transaction, they read as follows—their weight depends on the agreement as a whole, and no single item is a mechanical safe harbor or an automatic defect:
A UCC-1 that reaches beyond the litigation proceeds.
The PSA authorized the funder to “file a financing statement in any jurisdiction it chooses to protect its lien,” without expressly barring a pre-recovery filing—and the funder used that authority to file what the opinion calls a UCC-1 financing statement reaching the plaintiff’s property in Walkill, New York, not the divorce proceeds, while the case was still pending. (UCC-1s ordinarily perfect interests in personal property, not real estate; the opinion does not specify whether this was a fixture filing or something filed more broadly. Whatever its formal validity as a real estate encumbrance, it operated as a practical cloud on title serious enough that the plaintiff had to negotiate an escrow arrangement before he could close a sale.) The Court called the funder’s authority to file it “the hallmark of a loan.” Filing a UCC-1 against the litigation proceeds themselves is standard practice and would not, on its own, suggest a loan; the flag is a filing that reaches other, unrelated assets.
Pre-recovery escrow arrangements.
When the plaintiff later sought to sell that property, the funder agreed to release its lien only if an escrow agreement routed the sale proceeds toward repayment—up to 50% to the plaintiff’s then-wife, the balance to the funder. The escrow agreement went further, reciting that the “amount presently owed” to the funder was $318,309.52, at a time when the property sale had not closed and the divorce remained pending. The Court flagged that language directly: a genuinely contingent balance cannot be “presently owed” before there is anything to be contingent on.
Repayment triggered by an event unrelated to recovery.
A separate provision made reconciliation, or any settlement or discontinuance of the divorce action outside a court judgment, an event “requiring repayment ... of the amounts advanced.” Repayment tied to the marriage ending amicably, rather than to a recovery, is functionally a repayment trigger, not a bet on the litigation’s outcome.
A guaranty of repayment, as opposed to a guaranty against bad acts.
The plaintiff personally executed what the agreement called a “Sweetheart Guaranty,” unconditionally guaranteeing prompt payment of principal plus interest upon a “Trigger Event” defined as voluntary reconciliation. (The guaranty’s stated 12% rate conflicted with the PSA’s 18.96% rate; the Court resolved the inconsistency against the funder as the drafter.) A guaranty limited to a claimant’s own misconduct—fraud, an unauthorized settlement, breach of a cooperation covenant—is standard and does not convert a purchase into a loan. An unconditional guaranty of repayment itself, as here, is the version that does.
Recourse to an estate or in bankruptcy beyond the purchased interest.
A “Death of Seller” provision made the death of either the plaintiff or his spouse a triggering event obligating the plaintiff’s estate to pay the full balance, and a separate provision gave the funder recourse if the plaintiff filed for bankruptcy. Together, the Court found, these provisions stripped the agreement of its “contingent recovery cloak.” An estate having some interest in a pending claim is unremarkable on its own; a claim reaching the estate’s general assets, triggered by a death unrelated to the claim’s outcome, is not.
No genuine litigation risk.
Given the size of the marital estate and New York’s equitable distribution rules, the Court found the odds that the funder’s principal would ever actually be “put in hazard” were “low if not nonexistent.” A bankruptcy court put the same inquiry more generally earlier this year: courts must ask whether the risk a funder claims to have taken is real, “or instead [is] just [a] disguised effort[] to evade the usury laws” (In re Greenwich Retail Group LLC, 2026 WL 482170, *17 (Bankr. S.D.N.Y. Feb. 20, 2026)). The Ninth Circuit raised a related version of this question outside New York, in the portfolio-funding context: in Fast Trak Inv. Co., LLC v. Sax, 962 F.3d 455 (9th Cir. 2020), a funder’s right to collect from a client’s fees in unrelated matters was enough to prompt a certified question to the New York Court of Appeals—later withdrawn on settlement and never resolved.
A savings clause will not cure it.
One more provision is worth flagging on its own, because funders sometimes treat it as a backstop. The PSA included a clause providing that if a court ever found the agreement to be a loan, interest would instead be payable “at the highest rate of interest permitted by law.” The First Department held that this kind of savings clause does not cure usury (citing Bakhash v. Winston, 134 A.D.3d 468, 469 (1st Dep’t 2015)). A funder cannot draft around a usury finding after the fact—the agreement is tested on the terms it actually imposed.
Several of these features are standard, legitimate practice on their own—a UCC-1 against the proceeds, a bad-acts guaranty, an estate’s routine interest in a pending claim. None of the six is fatal in isolation, and a well-drafted agreement has a legitimate reason for most of them. The fact pattern Denemark was written to catch is narrower and more specific: a UCC-1 that reaches beyond the proceeds, a guaranty of repayment rather than of good conduct, or a claim against an estate’s general assets rather than just the purchased share—particularly stacked together, as they were here.
Why The Reasoning Extends Beyond Consumer Funding
Denemark involved an individual in a matrimonial case, but the recharacterization risk it confirms is live for every litigation funding book—personal injury, commercial, matrimonial, anything a funder advances against. The Court’s reasoning didn’t stay confined to divorce cases when it was built; the cases it relied on came from merchant cash advances, convertible notes, and a bankruptcy proceeding decided months earlier, none of them litigation funding at all:
LG Funding, LLC v. United Senior Props. of Olathe, LLC — 181 A.D.3d 664 (2d Dep’t 2020)
A merchant cash advance case—ordinary commercial business financing—cited by Denemark for the core rule that a litigation funding agreement is not a loan where repayment is entirely contingent on success.
Adar Bays, LLC v. GeneSYS ID, Inc. — 37 N.Y.3d 320 (2021)
A Court of Appeals decision on convertible note financing, cited for the governing principle that substance, not form, controls whether a transaction is a loan. Statewide authority, with no litigation-funding or consumer limitation.
Kapitus Servicing, Inc. v. Ragtime Gourmet Corp./Joe-Le Holding Corp. — 242 A.D.3d 638 (1st Dep’t 2025)
Another merchant cash advance dispute—commercial financing to a business—cited for the same factor-weighing approach Denemark applied.
In re Greenwich Retail Group LLC — 2026 WL 482170 (Bankr. S.D.N.Y. Feb. 20, 2026)
A bankruptcy court decision from earlier the same year, applying the same real-risk inquiry outside litigation funding entirely, and cited by Denemark for the point that courts must test whether a claimed risk is real or a disguised evasion of the usury laws.
This test wasn’t built for litigation funding. It applies to it anyway — to every claim type, every transaction.
These authorities support applying Denemark’s substance-over-form inquiry outside matrimonial funding. They do not make every feature discussed in Denemark equally probative in every transaction. The relevant question remains whether the particular agreement gives the funder an unconditional right to repayment, or leaves repayment genuinely dependent on the purchased proceeds—whatever the underlying claim looks like.
Obligor Status and Transaction Size Change the Usury Analysis
Even if a funding transaction is recharacterized as a loan, the available usury defense depends on the obligor, the amount committed under the written agreement, and the effective annual rate. Those threshold questions should be analyzed before applying Denemark’s fact-intensive recharacterization inquiry.
Entity Status
A corporation generally may not assert civil usury under General Obligations Law § 5-521(1), and the same rule applies to LLCs and PLLCs under Limited Liability Company Law § 1104(a). An individual guarantor of an entity’s obligation ordinarily shares that civil-usury disability; the guaranty does not restore a defense unavailable to the entity (Schneider v. Phelps, 41 N.Y.2d 238 (1977)). Corporations, LLCs, PLLCs, and their guarantors may, however, assert criminal usury where the effective annual rate exceeds 25% (Gen. Oblig. Law § 5-521(3); Ltd. Liab. Co. Law § 1104(c); Penal Law § 190.40). Courts also examine whether an entity was interposed merely to conceal what was substantively a personal loan (see Fred Schutzman Co. v. Park Slope Advanced Med., PLLC, 128 A.D.3d 1050 (2d Dep’t 2015)).
Transaction Amount
New York law contains two distinct amount thresholds. For a loan or forbearance of $250,000 or more, General Obligations Law § 5-501(6)(a) removes the civil interest-rate limitation but expressly preserves the criminal-usury provisions. At $2.5 million or more, § 5-501(6)(b) removes both civil- and criminal-usury limits entirely. When advances are made in installments under a written commitment, the statute generally measures the aggregate amount the funder agreed to advance, not merely the amount funded on a particular date.
The resulting framework differs for consumer and commercial transactions:
ENTITY AND COMMERCIAL FUNDING
Corporations, LLCs, PLLCs, and individual guarantors of their debt generally cannot assert civil usury. Below $2.5 million, criminal-usury exposure may still remain if a recharacterized loan exceeds 25%. At $2.5 million or more, New York's statutory usury limits generally do not apply.
CONSUMER AND INDIVIDUAL FUNDING
For a natural-person obligor, civil usury may be available below $250,000 and criminal usury may be available below $2.5 million. Denemark matters only if the transaction can first be characterized as a loan; amount and rate then determine which usury rule applies.
A Practical Review of Existing Agreements
Denemark does not direct funders to renegotiate existing agreements or establish a special retroactivity rule. It applies existing usury principles to the agreement before it. A focused review should distinguish threshold availability of a usury defense from the separate question whether the transaction can be characterized as a loan.
Identify the obligor, guarantors, written commitment amount, and effective annual rate.
Do not collapse these into a single threshold. A natural-person obligor may assert civil usury below $250,000, and criminal usury may remain until the commitment reaches $2.5 million. An entity obligor generally cannot assert civil usury at any amount, yet criminal-usury exposure may remain below $2.5 million. Confirm whether an individual guarantor guarantees an entity debt or is, in substance, the true borrower.
Test genuine contingency under the totality of the documents and conduct.
Review the funding agreement together with guaranties, escrow agreements, amendments, payoff letters, UCC filings, and actual collection practice. The central question is whether the funder can recover principal or a return even if the purchased proceeds never materialize.
Compare UCC authorization with actual filing practice.
Confirm what collateral the agreement describes, what the financing statement actually covers, and whether the funder has asserted liens against assets unrelated to the purchased proceeds.
Review payoff, reconciliation, and servicing communications.
Terminology alone is not dispositive, but references to an amount “presently owed,” fixed payment duties, or a payoff untethered to a recovery can reinforce loan characterization when they match the transaction’s actual mechanics.
Separate limited bad-acts protection from repayment recourse.
Confirm that any guaranty responds to defined misconduct rather than ordinary litigation loss. Review death, reconciliation, bankruptcy, withdrawal, and termination provisions for payment triggers that operate without proceeds from the funded claim.
Document real underwriting risk and review cross-collateralization separately.
Contemporaneous underwriting should identify the factual and legal risks that could leave the funder unpaid. Portfolio structures require additional attention where proceeds from successful matters can satisfy amounts associated with unsuccessful matters; Fast Trak flags the issue but does not resolve it under New York law.
Do not rely on a savings or reformation clause as a backstop.
A clause promising to convert to the “highest legal rate” if a court finds a loan does not cure usury exposure—Denemark, citing Bakhash v. Winston, rejected exactly that argument.
SOURCES
Echeverria v. Estate of Lindner, 7 Misc. 3d 1019(A), 2005 N.Y. Slip Op. 05675(U) (Sup. Ct., Nassau County 2005).
Lynx Strategies LLC v. Ferreira, 957 N.Y.S.2d 636 (Sup. Ct. 2010).
Cash4Cases, Inc. v. Brunetti, 167 A.D.3d 448, 449 (1st Dep't 2018).
Denemark v. New Chapter Capital, Inc., 2026 N.Y. Slip Op. 04553 (1st Dep't 2026).
Abir v. Malky, Inc., 59 A.D.3d 646, 649 (2d Dep't 2009).
Seidel v. 18 E. 17th St. Owners, 79 N.Y.2d 735, 744 (1992).
Fast Trak Inv. Co., LLC v. Sax, 962 F.3d 455 (9th Cir. 2020) (certifying questions under New York law, later withdrawn on settlement).
In re Greenwich Retail Group LLC, 2026 WL 482170 (Bankr. S.D.N.Y. Feb. 20, 2026).
LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664 (2d Dep't 2020).
Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021).
Kapitus Servicing, Inc. v. Ragtime Gourmet Corp./Joe-Le Holding Corp., 242 A.D.3d 638 (1st Dep't 2025).
Bakhash v. Winston, 134 A.D.3d 468, 469 (1st Dep't 2015).
151 W. Assoc. v. Printsiples Fabric Corp., 61 N.Y.2d 732, 734 (1984).
Schneider v. Phelps, 41 N.Y.2d 238 (1977).
Fred Schutzman Co. v. Park Slope Advanced Med., PLLC, 128 A.D.3d 1050 (2d Dep't 2015).
N.Y. Gen. Oblig. Law §§ 5-501, 5-521.
N.Y. Ltd. Liab. Co. Law § 1104.
N.Y. Penal Law § 190.40.
N.Y. Banking Law § 14-a.
