For years, litigation funding companies have attempted to distinguish their products from traditional loans by labeling them “investments” contingent on the outcome of a lawsuit. A recent decision from the Appellate Division, First Department – Denemark v. New Ch. Capital, Inc., 2026 N.Y. Slip Op. 04553 (1st Dept. July 23, 2026) – underscores that courts will look beyond contractual labels and examine the substance of the transaction.

Under New York law, whether a financing arrangement is a loan depends on its substance rather than its label. Courts generally evaluate three factors: (1) whether the agreement contains a meaningful reconciliation provision tied to actual revenue, (2) whether it lacks a finite term or fixed repayment schedule, and (3) whether the funder lacks recourse in the event of bankruptcy.