Unpacking Denemark: The Niche Context in Which Litigation Funding Becomes a Loan

October 20, 2026

By Evan Fried & Phil Gasperetti

For roughly two decades, courts in New York have upheld litigation finance transactions on the principle that a deal repaid only out of a recovery is an investment—not a loan—and thus falls outside the usury laws.[1][2] The First Department’s July 2026 decision in Denemark v. New Chapter Capital, Inc. ostensibly calls into question such long-standing jurisprudence.

In Denemark, the Appellate Division reversed denial of a plaintiff-litigant’s usury claim and determined that a litigation funding agreement was a usurious loan as a matter of law. In the underlying dispute, a funder had advanced approximately $200,000 to fund a divorce litigation in exchange for a right to a portion of any divorce proceeds. The contract declared “THIS IS NOT A LOAN” and promised that nothing would be owed absent a recovery. The agreement also required, however, that the funded party enter into a limited personal guarantee, pursuant to which he could be personally liable if he reconciled with his spouse outside of the ordinary litigation process or under various events of default, thus mitigating the risk to the funder.[3] Relying on such protections, the funder filed a UCC-1 financing statement against Denemark’s property mid-case.

Applying the same framework routinely analyzed in the context of merchant cash advances, the First Department evaluated the transaction “in its totality and judgment by its real character, rather than by the name, color, or form which the parties have seen fit to give it.”[4] While the court also weighed the generally non-recourse nature of the transaction—including the contingency on litigation outcomes—the court relied heavily on the fact that the funder kept recourse in event of bankruptcy and the marital estate was large enough that the principal was at little real risk. Judging the deal by its substance, the court held that it was a loan and therefore subject to New York’s usury laws, which cap the interest a lender may charge. Because 18.96% exceeds the 16% civil ceiling, the court declared the agreement void and unenforceable.[5]

While at first glance Denemark appears to cut against the established paradigm, the decision is likely to have limited effect on the current landscape. As an initial matter, Denemark involved a peculiar fact-pattern where the funding agreement was only quasi-non-recourse insofar as the funder established a security provision in the event the litigation failed; most legal funding contracts are truly non-recourse and thus do not suffer from the same infirmities as in Denemark.

Moreover, Denemark involves the unusual situation of funding in the divorce context, in which a spouse with a substantial marital estate almost always leaves with something. The court even flagged public-policy concerns peculiar to divorce, wherein contingency fees are impermissible as a matter of law.[6] By contrast, conventional consumer litigation funding—funding to personal injury plaintiffs—has long been blessed as legal and is now also governed by statute. New York’s Consumer Litigation Funding Act, effective June 17, 2026, covers advances of up to $500,000 to individual New York litigants.[7] That law sets standards for contracts, including mandatory non-recourse provisions, disclosure laws, and capped charges. [8] Contracts that follow that law are presumptively valid, and a deal built like Denemark’s would most likely not pass muster under those rules.

Finally, Denemark has little—if any—implication on commercial litigation funding. Typical funding transactions are truly non-recourse, and thus do not implicate the substance-over-form arguments made in Denemark. Perhaps more significantly, however, commercial funding transactions—with commercial plaintiffs or funding to law firms—tend to be large, and size often keeps them outside the usury laws altogether. Under the New York General Obligations Law § 5-501(6)(a-b), the 16% civil ceiling applicable to usury does not apply to loans of $250,000, and transactions of $2.5 million or more are exempt from both civil and criminal usury.[9] In Khorrami, for example, a multimillion-dollar credit facility was arguably a loan, yet the court rejected the firm’s defenses and observed that New York’s usury laws appeared not to apply at all given the loan’s size.[10]

Denemark is less a new rule than a reminder that New York courts judge a funding agreement by what it does, not what it calls itself.[11]

 

[1] See Denemark v. New Chapter Cap., Inc., 2026 N.Y. Slip Op. 04553, at *3 (1st Dep’t July 23, 2026) (quoting Cash4Cases, Inc. v. Brunetti, 167 A.D.3d 448, 449 (1st Dep’t 2018)); see also Hamilton Cap. VII, LLC, I v. Khorrami, LLP, 48 Misc. 3d 1223(A) at *8-9 (Sup. Ct. N.Y. Cnty. 2015) (collecting cases).

[2] Courts applying New York law have have likewise enforced legal funding facilities across myriad contexts, rejecting arguments that such financing is improper fee-sharing with nonlawyers, Khorrami, 2015 N.Y. Slip Op. 51199(U), at *6–9, or that such arrangements violate champerty, Wimbledon Fund, SPC v. Weston Cap. Partners Master Fund II, Ltd., 184 A.D.3d 448, 449 (1st Dep’t 2020).

[3] Id. at *1–2, *4–5.

[4] Denemark, at *3 (citing Abir v Malky, Inc., 59 A.D.3d 646, 649 (2d Dept 2009); see Adar Bays, LLC v GeneSYS ID, Inc., 37 N.Y.3d 320, 334 (2021) (“When determining whether a transaction is a loan, substance—not form— controls”); In re Greenwich Retail Group LLC, 2026 WL 482170, *17, 2026 Bankr LEXIS 417, *50 (Bankr SD NY, Feb. 20, 2026, Case No. 25-11295 (MEW)) (“If substance (not form) is to be determinative, as it is supposed to be, then a court must consider the scope and likelihood of the “risks” that a party has allegedly taken, and whether such risks are real or instead are just disguised efforts to evade the usury laws”)).

[5] Id. at *3, *6 (citing Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 334 (2021)).

[6] Denemark, at *4 n.2

[7] N.Y. Fin. Serv. Law §§ 1003. 

[8] N.Y. Fin. Serv. Law §§ 1001(c), (f), 1003(h), (k)–(l), 1004, 1009(e); see Act of Dec. 19, 2025, ch. 645, § 4, 2025 N.Y. Laws (providing that the Act takes effect 180 days after enactment), amended by ch. 11, 2026 N.Y. Laws.

[9] N.Y. Gen. Oblig. Law § 5-501(6)(a)–(b); N.Y. Penal Law § 190.40; see also Denemark, 2026 N.Y. Slip Op. 04553, at *6 (applying the 16% civil ceiling).

[10] Khorrami, 2015 N.Y. Slip Op. 51199(U), at *2, *6–11 & n.14. See also Lawsuit Funding, LLC v. Lessoff, 2013 WL 6409971, at *4–5 (Sup. Ct. N.Y. Cnty. Dec. 4, 2013) (holding that a sale-of-contingent-proceeds agreement with a law firm was not a loan subject to usury laws because the funder would receive nothing absent a recovery in the underlying actions); Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 35 Misc. 3d 1205(A), at *5–6,  (Sup. Ct. Suffolk Cnty. 2012) (holding that non-recourse cash advances to law firms secured by anticipated attorneys’ fees were not loans subject to criminal usury because repayment was contingent on case outcomes); Lynx Strategies, LLC v. Ferreira, 28 Misc. 3d 1205(A), at *2 (Sup. Ct. N.Y. Cnty. Jul. 6, 2010) (similar).

[11] See Denemark, at *3.