Background
Andrew Denemark obtained funding from New Chapter Capital to pay expenses in his divorce. The agreement was drafted as a purchase of part of his anticipated matrimonial recovery, with repayment and a percentage fee tied to divorce proceeds. Related documents included a guaranty, escrow terms, and a UCC financing statement.
Denemark later sought a declaration that the arrangement was really a loan charging unlawful interest. New Chapter maintained that repayment depended on a successful recovery and therefore represented a nonrecourse investment outside New York’s civil-usury rules.
Supreme Court denied both sides summary judgment. On cross-appeals, the First Department examined the transaction’s substance under the totality of the circumstances, including whether principal repayment was genuinely at risk.
The documents called Denemark a seller and described his potential matrimonial recovery as the purchased claim, but labels do not control New York usury analysis. Courts ask whether the funder advanced money with an absolute right to repayment or instead assumed a genuine risk of receiving nothing. New Chapter’s return accumulated over time and was protected by overlapping triggers, a guaranty, escrow terms, and a financing statement. Denemark argued that the divorce proceeds were merely one repayment source, not an uncertain asset whose failure would leave the funder without recourse.
The First Department contrasted the agreement with true nonrecourse litigation finance, where a funder may lose principal if the claimant recovers nothing. Reconciliation, death, bankruptcy, and security provisions protected New Chapter from that central litigation risk. The matrimonial setting added policy concerns. Lawyers may not charge a fee contingent on securing a divorce, and New York favors marriage and reconciliation. New Chapter was not matrimonial counsel, but a contract that made reconciliation an immediate repayment event could discourage ending the case. Those concerns reinforced the court’s focus on substance, although the dispositive holding rested on loan and usury law.
The remedy makes classification especially consequential. A lender cannot preserve an above-cap return merely by inserting a clause that lowers the rate if litigation later exposes usury; otherwise every unlawful agreement could draft around the statute. Funders should test the realistic downside at origination. If principal remains payable through nearly every litigation outcome, the transaction should be priced and documented within lending rules.
The Court’s Holding
The First Department held that the agreement was a loan. Repayment did not truly depend on a favorable divorce award: reconciliation and discontinuance triggered repayment, Denemark’s death obligated his estate, and bankruptcy provisions supplied additional recourse. Those protections stripped away the asserted contingent-recovery character.
The surrounding economics pointed the same way. Denemark’s substantial marital assets made loss of principal unlikely, and the documents broadly secured New Chapter’s right to recover its advance plus an accumulating return. The court found it difficult to identify a realistic scenario in which full repayment would be placed in hazard.
The loan was civilly usurious because its annual rate was 18.96%, above New York’s 16% maximum. A savings clause reducing interest if a court later characterized the deal as a loan could not cure the violation. The court declared the funding agreement void and unenforceable.
Key Takeaways
- Litigation funding may be treated as a loan when repayment triggers make the funder’s principal effectively unconditional.
- Courts assess economic substance, including death, reconciliation, bankruptcy, guaranty, and collateral provisions.
- A contractual usury savings clause does not rescue an agreement that charges more than 16% as written.
Why It Matters
The opinion is a major warning for New York litigation funders and matrimonial practitioners. Structuring an advance as a purchase will not avoid usury law if multiple contractual paths assure repayment regardless of the litigation result.
Divorce funding carries added public-policy sensitivity because arrangements may discourage reconciliation or give a third party an economic interest in marital dissolution. Funders and counsel should reassess pricing, true nonrecourse risk, and triggering events before relying on purchase terminology.
The decision also underscores a recurring New York appellate lesson: statutory text, the procedural posture, and a carefully developed record work together. Practitioners should preserve the facts that connect the governing rule to the requested remedy rather than rely on labels or broad policy assertions.