Denemark v New Chapter Capital, Inc.: Litigation Funding Is a Usurious Loan When Repayment Is Effectively Guaranteed (Security Interest, Escrow Controls, and “Trigger” Guaranties)

1. Introduction

In Denemark v New Ch. Capital, Inc. (2026 NY Slip Op 04553 [1st Dept July 23, 2026]), the Appellate Division, First Department, confronted a recurring issue in modern financing: when a transaction styled as a contingent “purchase” of litigation proceeds is, in substance, a loan subject to New York’s usury laws.

Plaintiff Andrew J. Denemark entered a “Purchase and Sale Agreement” (PSA) with defendant New Chapter Capital, Inc. to obtain approximately $200,000 to fund his ongoing divorce action. The PSA stated “THIS IS NOT A LOAN” and claimed repayment was contingent on “successful” recovery in the divorce. But the structure included (i) a UCC lien mechanism, (ii) an escrow arrangement controlling real-estate sale proceeds, and (iii) a personal guaranty (the “Sweetheart Guaranty”) triggered by events such as reconciliation or death—events that could occur without any divorce recovery.

The key issues were: (1) whether the PSA was a true contingent investment or a loan under the “substance over form” test, and (2) if a loan, whether the pricing exceeded New York’s civil usury cap, rendering the agreement void and unenforceable.

2. Summary of the Opinion

The First Department held that, under the totality of the circumstances, the PSA was a loan, not a contingent investment. Because the agreement charged interest at 18.96% annually, exceeding New York’s 16% maximum legal rate, it was usurious and therefore void and unenforceable as a matter of law.

The Court modified the order below to grant plaintiff summary judgment on the usury claim and to declare the litigation funding agreement void and unenforceable; the parties’ remaining arguments were deemed moot.

3. Analysis

A. Precedents Cited

1) Usury requires a loan: the threshold inquiry

  • LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 (2d Dept 2020): The Court invoked the basic principle that “where there is no loan, there can be no usury.” This framed the First Department’s sequencing: classify the transaction first; apply usury second.
  • Seidel v 18 E. 17th St. Owners, 79 NY2d 735 (1992): Cited for the same foundational rule—usury analysis is triggered only if the arrangement is a loan.

2) Litigation funding can be non-loan—if repayment is truly contingent

  • Cash4Cases, Inc. v Brunetti, 167 AD3d 448 (1st Dept 2018): The Court contrasted the PSA with litigation-funding structures upheld as non-loans where “repayment of principal is entirely contingent on the success of the underlying lawsuit” and there is “no guaranteed obligation to repay, except from the proceeds, if any.” Denemark effectively clarifies that the presence of contractual “contingency” language is not dispositive; the question is whether contingency is real.

3) Substance over form: recharacterization doctrine

  • Abir v Malky, Inc., 59 AD3d 646 (2d Dept 2009): Quoted for the directive that courts judge a transaction by its “real character” rather than its “name, color, or form.” This supported disregarding the PSA’s “THIS IS NOT A LOAN” label.
  • Adar Bays, LLC v GeneSYS ID, Inc., 37 NY3d 320 (2021): Reinforced that “substance—not form—controls” when deciding whether a transaction is a loan.
  • In re Greenwich Retail Group LLC, 2026 WL 482170, 2026 Bankr LEXIS 417 (Bankr SD NY Feb. 20, 2026): The opinion used this to sharpen the inquiry: courts should assess whether the alleged “risks” are real or are disguised evasions of usury laws.

4) Factors showing recourse and “loan-like” characteristics

  • Kapitus Servicing, Inc. v Ragtime Gourmet Corp./Joe-Le Holding Corp., 242 AD3d 638 (1st Dept 2025): Cited for considering recourse features (including bankruptcy-related recourse) as indicators that a purportedly contingent deal is actually a loan.
  • Echeverria v Estate of Lindner, 7 Misc 3d 1019[A], 2005 NY Slip Op 05675[U] (Sup Ct, Nassau County 2005): Treated as a leading trial-level analysis of litigation funding; used here to support the conclusion that the transaction’s structure resembled a loan.

5) Security interests and UCC filings as loan hallmarks

  • NRT New York, LLC v Middlegate Funding LLC, 2020 NY Slip Op 34297[U] (Sup Ct, NY County 2020), affd 202 AD3d 427 (1st Dept 2022): Used to explain Article 9’s function—creditors protect collateral interests through UCC filings—thereby supporting the Court’s view that the PSA’s UCC-1 mechanism was lender-like.

6) “Savings clauses” do not cure usury

  • Bakhash v Winston, 134 AD3d 468 (1st Dept 2015): Controlled the Court’s rejection of PSA paragraph 27 (the clause reducing interest to the “highest rate permitted by law” if deemed a loan). The Court treated this as insufficient to render a usurious instrument nonusurious.

7) Contract construction: ambiguities against the drafter

  • 151 W. Assoc. v Printsiples Fabric Corp., 61 NY2d 732 (1984): In a footnote, the Court invoked contra proferentem to address inconsistency between the PSA’s 18.96% and the guaranty’s 12% figure, construing ambiguity against defendant as drafter.
  • New Chapter Capital, Inc. v Karambelas, 2020 NY Slip Op 31429[U] (Sup Ct, NY County 2020), affd 198 AD3d 513 (1st Dept 2021): Cited alongside contra proferentem principles, reinforcing that ambiguities in defendant’s documents are construed against it.

8) Public policy context (raised but not dispositive)

  • Rosenbaum v Myers, 191 AD3d 445 (1st Dept 2021): Cited to note New York’s public policy barring attorneys from charging divorce contingency fees, illustrating the sensitivity of monetizing divorce outcomes.
  • Gould v Gould, 261 AD 733 (1st Dept 1941) and Castellotti v Free, 138 AD3d 198 (1st Dept 2016): Referenced in the public-policy discussion suggesting that provisions penalizing reconciliation may conflict with policy favoring marriage.

B. Legal Reasoning

The Court applied a “totality of the circumstances” approach (drawing from Abir and Adar Bays) to determine whether repayment was truly contingent or whether defendant had effectively structured repayment to be assured. Several features drove the recharacterization:

  1. UCC-1 financing statement authority and filing during pending divorce: PSA paragraph 3 authorized a UCC filing to “protect its lien.” Defendant filed a UCC-1 against plaintiff’s property while the divorce was still pending. The Court treated this as a classic creditor tool to secure repayment—strong evidence of a loan.
  2. Escrow Agreement functioned like repayment control: The Escrow Agreement required sale proceeds to be held and directed that, after limited distribution to the wife, the balance be paid to defendant up to the PSA amount. It also recited an amount “presently owed” ($318,309.52) despite the divorce remaining unresolved. The Court reasoned that “presently owed” language is inconsistent with genuine contingency.
  3. Repayment triggered without “recovery” (reconciliation): PSA paragraph 9 deemed reconciliation and discontinuance a “settlement” requiring repayment. The Sweetheart Guaranty likewise required payment upon a “Trigger Event” of “voluntary reconciliation,” undermining the PSA’s statement that “if there is no recovery on the Claim, nothing will be owed.”
  4. Repayment triggered without “recovery” (death): PSA paragraph 12 obligated plaintiff’s estate to pay amounts due and deemed death a triggering event under the Sweetheart Guaranty. The Court viewed this as recourse inconsistent with a nonrecourse, contingent investment.
  5. Bankruptcy recourse: The opinion notes PSA recourse upon plaintiff’s bankruptcy as further loan-like protection (citing Kapitus Servicing as relevant to this factor).
  6. Low real risk of nonpayment given the litigation’s nature: Considering “substantial assets” and New York equitable distribution rights, the Court found the likelihood the principal would be “put in hazard” to be “low if not nonexistent,” aligning with the risk-based analysis in Cash4Cases and Echeverria.

Having found a loan, the usury analysis was straightforward: New York’s civil usury cap is 16% (General Obligations Law § 5-501[1], [2]; Banking Law § 14-a[1]). The PSA’s 18.96% annual rate exceeded that cap. The Court then rejected the PSA’s “savings clause” (paragraph 27), relying on Bakhash v Winston to hold that such language does not cleanse usury.

C. Impact

1) Stronger recharacterization scrutiny for litigation funding in New York (especially in family-law contexts): While the decision does not prohibit litigation funding, it signals that New York courts will test whether “nonrecourse” is genuine. Mechanisms that secure repayment—UCC liens, escrow controls, broad trigger events, estate liability, and bankruptcy recourse—may convert a purported “purchase” into a loan.

2) Contract drafting consequences: The Court’s emphasis on “presently owed” language and internal inconsistencies (PSA’s 18.96% vs the guaranty’s 12%) underscores drafting risk for funders. Ambiguities and “not a loan” labels will not defeat substance-based review, and may be construed against the drafter (per 151 W. Assoc.).

3) Usury remedies can be case-dispositive: The Court resolved the dispute via summary judgment once it concluded the agreement was a loan charging more than 16%, rendering the entire arrangement void and unenforceable—an outcome that can erase principal and profit expectations in a single ruling.

4) Public policy sensitivity around divorce proceeds: Although not the holding’s formal basis, the footnote discussion (with Rosenbaum v Myers, Gould v Gould, and Castellotti v Free) flags judicial concern where financing terms may discourage reconciliation or monetize divorce outcomes. Future disputes may see increased policy-based arguments alongside usury.

4. Complex Concepts Simplified

  • Usury: Charging interest above a legal maximum. In New York, the civil cap is generally 16% per year (as cited here). If a transaction is a loan and exceeds the cap, it can be declared void and unenforceable.
  • Loan vs. contingent investment: A true contingent investment puts the investor’s principal at real risk of nonpayment unless a specific recovery occurs. A loan, by contrast, typically ensures repayment through recourse, collateral, guaranties, or other triggers.
  • “Substance over form”: Courts look past labels like “THIS IS NOT A LOAN” to the real economic deal—how repayment works in practice.
  • UCC-1 financing statement: A public filing under UCC Article 9 used to perfect a creditor’s security interest in a debtor’s property. Its presence often indicates a secured lending relationship rather than a purely contingent bet.
  • Escrow agreement: A contract placing funds under a neutral holder’s control with instructions for release—here used to channel sale proceeds toward repayment, functioning like a collection mechanism.
  • Personal guaranty / trigger events: A separate promise to pay (often by an individual) if specified events occur. When trigger events include reconciliation or death—events unrelated to “successful recovery”—they erode contingency and resemble lender recourse.
  • Contra proferentem: If contract language is ambiguous, courts may interpret it against the drafter (here, the funding company).

5. Conclusion

Denemark v New Ch. Capital, Inc. establishes a clear First Department rule for litigation funding agreements: when the “contingency” is largely illusory—because the funder secures repayment through UCC liens, escrow controls, and guaranty triggers that require payment even without litigation recovery—the transaction will be treated as a loan. If that loan charges more than 16% annual interest under General Obligations Law § 5-501 and Banking Law § 14-a, it is usurious and void and unenforceable, and a contractual “savings clause” will not salvage it.