Business Law

Fast Trak Investment Company, LLC v. Sax (9th Cir.)

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The following is a case update by Maggie E. Schroedter of Higgs, Fletcher & Mack, LLP analyzing a recent case of interest:


In Fast Trak Investment Company, LLC v. Sax, 962 F.3d 455 (9th Cir. 2020), the U.S. Court of Appeals for the Ninth Circuit analyzed the question of whether a litigation funding agreement violated New York’s usury laws. An attorney entered into a litigation funding agreement with Fast Trak Investment Co., LLC.  The agreement provided that the attorney’s obligation for repayment arose both from his client’s recovery in the litigation as well as his attorneys’ fees recovered in unrelated litigation.

The Ninth Circuit ultimately certified to the New York Court of Appeals the questions of (1) whether a litigation financing agreement qualifies as a “loan” or a “cover for usury” where the obligation of repayments arises not only upon and from the client’s recovery of proceeds from such litigation, but also upon and from the attorney fees the client’s lawyer may recover in unrelated litigation; and (2) if so, what are the appropriate consequences, if any, for the obligor to the party who financed the litigation, under agreements that are so qualified?

To read the full published decision, click here.


Richard Sax and Fast Trak Investment Co., LLC (“Fast Trak”) entered into a series of agreements whereby Fast Trak agreed to fund litigation in which Sax was the attorney of record. In exchange, Sax and his clients agreed to pay Fast Trak some of the proceeds from those lawsuits as well as Sax’s attorneys’ fees recovered in unrelated cases.

The agreements consisted of two types: “Primary Contracts” and “Secondary Contracts.”  Primary Contracts were those between Fast Trak and Sax’s clients.  There, Fast Trak funded the litigation directly to the client, and the client pledged to Fast Trak a portion of future proceeds by way of a “payment schedule”.  The payment schedule outlined the minimum amount that the client must pay to Fast Trak at a given time, on account of the proceeds received from the litigation.  For example, if the client received sufficient proceeds from the litigation the day after executing the Primary Contract, Fast Trak would receive a 57.2% return on investment.  After 20 months, Fast Trak would receive a 167.7% return on investment.  The client, however, had no obligation to pay Fast Trak unless there was sufficient recovery from the litigation. By signing the agreement, the client represented that he or she “intends this transaction to be and agrees that this transaction is a purchase and sale and is not a loan.”

Due to the nonrecourse nature of the Primary Contracts, each Secondary Contract—signed only by Fast Trak and Sax—functioned as Sax’s agreement to guarantee Fast Trak’s recovery of the entire obligation under the related Primary Contract by way of his attorneys’ fees awarded in unrelated litigation.  The import of the Secondary Contract was that if the client either lost or did not receive sufficient proceeds to satisfy Fast Trak’s obligation, Sax personally guaranteed the difference by paying Fast Trak from his recovery of attorneys’ fees in unrelated cases.

After Sax failed to pay as required under the agreement, Fast Trak sued for breach of contract and breach of fiduciary duty.  In the district court, Sax argued that the agreements were usurious loans and therefore unenforceable. The district court rejected this defense and granted summary judgment in favor of Fast Trak, on grounds that “[u]nder New York law, ‘if the transaction is not a loan, there can be no usury, however unconscionable the contract may be.’”

On appeal, Sax argued that because the agreements guaranteed Fast Trak repayment from clients’ and Sax’s assets at interest rates that were usurious, they were unenforceable. The Ninth Circuit held that in order to resolve Sax’s usury defense, it had to address an unanswered question of New York usury law, and therefore certified the question to the New York Court of Appeals.


New York’s usury statute provides:

  1. The rate of interest, as computed pursuant to this title, upon the loan or forbearance of any money, goods, or things in action, … shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.
  1. No person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action at a rate exceeding the rate above prescribed. The amount charged, taken or received as interest shall include any and all amounts paid or payable, directly or indirectly, by any person, to or for the account of the lender in consideration for making the loan or forbearance ….

In turn, section 14-a of the banking law provides that the maximum rate of interest provided for in section 5-501 is a 16% simple interest rate per year.  Fast Trak Investment Company, 962 F.3d at 462-463, citing N.Y. Gen. Oblig. Law § 5-501 and N. Y. Banking Law § 14-a(1).

In sum, the usury statutes make any contract “void” that provides for a “loan” that charges an effective annual interest rate that exceeds 16%.  

The court concisely identified the conflict under New York law.  Usury laws typically apply only to agreements that constitute a “loan.”  On the other hand, the New York Court of Appeals has 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, and at least one lower court in New York has held that a nonrecourse litigation financing agreement qualifies as a “loan” that violates usury laws.  Id., at 465,citing 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).

Here, the court noted that in order to be a loan, the lender must have the absolute right to collect from the borrower.  Fast Trak argued that because it had the right to collect from Sax only if his clients’ recovery was insufficient, the agreement could not constitute a loan.

The court reasoned however that there is a “possibility” that Sax’s obligation to pay Fast Track was “guaranteed” by the term of the agreement, such that it would be treated like a loan for the purposes of New York usury law.  In Echeverria, the New York state trial court held that a similar non-recourse litigation financing agreement was a “loan”—and subject to usury laws—because the lender’s payment was “almost guaranteed.”  Id., at 466.  Although Fast Trak’s payment was dependent upon a condition, the risk of non-payment may be so low as to qualify it as loan under New York law.

The Ninth Circuit also recognized the principle that if an “agreement was not intended for the purpose indicated upon its face, but as a mere device or subterfuge to conceal a loan of money[,]…. it is quite possible that the defense of usury could be sustained.” Orvis v. Curtiss, 157 N.Y. 657, 661, 52 N.E. 690 (1899).  The court implied that the “real character” of the agreements would make them subject to the usury laws.  “As we see it, there is a nonfrivolous argument that the “real purpose” of these transactions is a loan rather than the purchase of contingent assets: Fast Trak wired funds to Sax; Fast Trak secured future payment by Sax with the potential proceeds in a large number of Sax’s cases, thereby making Sax’s obligation to pay Fast Trak arguably likely.”  Fast Trak Inv. Co., LLC, 962 F.3d at 467.

Because the court concluded that 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,” it certified the following questions to the New York Court of Appeals.

Whether a litigation financing agreement may qualify as a “loan” or a “cover for usury” where the obligation of repayment arises not only upon and from the client’s recovery of proceeds from such litigation but also upon and from the attorney’s fees the client’s lawyer may recover in unrelated litigation?

Andif so, what are the appropriate consequences, if any, for the obligor to the party who financed the litigation, under agreements that are so qualified?

Id., at 469.

On June 23, 2020, the New York Court of Appeals accepted certification of the questions for adjudication.


This opinion underscores the complexity of state usury laws and serves as a reminder that courts will not hesitate to analyze the underlying character of the agreement to determine whether it is simply a ruse for usury.

California’s usury laws are similar to those of New York. In California, courts have ruled that an agreement violates California’s usury laws if it “(1) constitutes a ‘loan or forbearance’; (2) requires the borrower to pay interest in excess of the statutory maximum; (3) mandates that the borrower absolutely must repay the principal and interest; and (4) results from the lender’s “willful intent to enter into a usurious transaction.” Bisno v. Kahn (2014) 225 Cal.App.4th 1087, (quoting Ghirardo v. Antonioli (1994) 8 Cal.4th 791). 

Because litigation financing companies often transact from New York, the ultimate decision of the New York Court of Appeals will likely affect choice of law provisions in litigation financing agreements nationwide.

These materials were written by Maggie E. Schroedter of Higgs Fletcher & Mack, LLP, in San Diego, California (  Editorial contributions were provided by the publications committee of the ILC.  Ms. Schroedter is a member of the Insolvency Law Committee.

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