A recent ruling from the Appellate Division of the Supreme Court of the State of New York has declared a divorce funding agreement as usurious, effectively rendering it unenforceable. This decision, made on July 23, 2026, affects the parties involved in the case, Andrew J. Denemark and New Chapter Capital, Inc., and sets a significant precedent for future litigation funding agreements.
The dispute centers around a litigation funding agreement between Denemark and New Chapter Capital, where the latter agreed to provide financial assistance for Denemark's divorce proceedings in exchange for a portion of any proceeds from the divorce settlement. The court's ruling clarifies the legal boundaries of such agreements, particularly concerning interest rates and the definition of loans.
In this case, Denemark, the plaintiff, sought a declaration that the funding agreement was usurious and thus void under New York law. He argued that the terms of the agreement imposed an interest rate exceeding the maximum allowed, which is 16% per year. The case originated when Denemark filed a lawsuit against New Chapter Capital after he claimed that the agreement constituted a loan rather than a legitimate investment.
The parties entered into a Purchase and Sale Agreement (PSA) on May 23, 2018, where New Chapter Capital agreed to advance approximately $200,000 to Denemark to fund his divorce legal costs. In return, Denemark agreed to assign New Chapter Capital a portion of any proceeds from his divorce settlement. The PSA included terms that stated, “THIS IS NOT A LOAN,” asserting that repayment was contingent on Denemark's successful recovery in his divorce action. However, the agreement also contained provisions that allowed New Chapter Capital to recoup its funds even without a successful outcome in the divorce case, raising questions about its true nature.
Denemark's lawsuit, filed on March 7, 2023, claimed that the agreement was usurious, and he also alleged that New Chapter Capital had improperly interfered with his divorce proceedings. The defendant, on the other hand, argued that the agreement was an investment rather than a loan, which would exempt it from usury laws.
Judge Marsha D. Michael, writing for the court, concluded that the funding agreement was indeed a loan. The ruling highlighted several key points, stating, “the parties' PSA was in fact a loan.” The court emphasized that the interest rate of 18.96% exceeded the legal limit, making the agreement usurious and unenforceable. The ruling also noted that the terms of the PSA and the Sweetheart Guaranty indicated that New Chapter Capital had a right to repayment regardless of the outcome of the divorce case.
The court found that the provisions allowing New Chapter Capital to file a UCC financing statement on Denemark's property and the stipulations in the Escrow Agreement suggested that the agreement was structured more like a loan than an investment. The court noted that the PSA’s language, which stated the amount owed was “presently owed” to New Chapter Capital, indicated that repayment was not contingent solely on the divorce outcome.
In its decision, the court modified the earlier ruling from the Supreme Court, New York County, which had denied both parties' motions for summary judgment. The appellate court granted Denemark’s motion for summary judgment on his usury claim, declaring the litigation funding agreement void and unenforceable. The ruling was unanimous among the judges on the panel, including Judge Sallie Manzanet-Daniels, Judge Barbara R. Kapnick, and Judge Llinét M. Rosado.
This ruling has significant implications for future litigation funding agreements, particularly those related to divorce proceedings. By categorizing such agreements as loans, the court reinforces the importance of adhering to usury laws. This decision may deter similar funding arrangements that do not comply with legal interest rate limits, ensuring that individuals seeking financial assistance for legal matters are protected from exploitative practices.
The ruling also raises questions about the legality of funding agreements that may incentivize divorce proceedings over reconciliation, as the PSA included provisions that penalized reconciliation. This aspect of the ruling could influence future discussions about the ethics and legality of litigation funding in divorce cases.
As for what’s next, the parties may consider appealing the ruling to a higher court, but details were not available in the court filing regarding any pending appeals. The case serves as a reminder of the complexities involved in litigation funding and the importance of understanding the legal implications of such agreements.