NC Litigation Funding Ban: Implications for Officer and Director Indemnification

Summary — North Carolina’s new Prohibit Litigation Investments Act, effective June 22, 2026, broadly bans third-party litigation funding but may have unintended implications for corporate advancement and indemnification of directors and officers. By defining “litigation investment” to include advancements tied to case outcomes, the Act creates tension with longstanding practices that condition repayment of defense costs on the outcome of civil proceedings. Although the law excludes certain contractual indemnity and defense obligations, it does not clearly address advancement or statutory indemnification, leaving key questions unresolved. Companies should review governing documents now as courts work through these issues.

North Carolina has become the first state in the nation to prohibit third-party litigation investment, enacting House Bill 315 (the Prohibit Litigation Investments Act, codified as Article 52 of Chapter 66) on June 22, 2026. While the law was championed as a way to keep outside investors from “bankrolling litigation for profit” and to protect the integrity of the state’s civil justice system (NC Chamber, North Carolina Becomes First State in the Nation to Ban Third-Party Litigation Investment (June 22, 2026)), its broad statutory language raises an unanticipated question for ordinary corporate governance: whether routine advancement and indemnification of directors, officers, managers and LLC members could be swept into the prohibition. Companies and their boards should review their governing documents now, because the answer is not yet settled.

What the New Law Does

The Act makes it unlawful for any person to engage in, or to furnish, “litigation investment” to a party or counsel of record in a civil proceeding in North Carolina. N.C. Gen. Stat. § 66-513. The statute defines a civil proceeding broadly to include civil actions, arbitrations, mediations and administrative proceedings. N.C. Gen. Stat. § 66-512(1). The central concept is “litigation investment,” defined as providing money–whether as a direct payment, advancement, loan, investment or otherwise–for the fees, costs and expenses of a pending or potential civil proceeding in exchange for a right to repayment or other consideration that is contingent in any respect on the outcome of that proceeding. N.C. Gen. Stat. § 66-512(3).

The penalties are significant. A contract that violates the Act is void, the Attorney General may seek injunctions and civil penalties of up to $50,000 per violation, and an injured person may recover damages, including treble statutory damages, plus court costs and attorneys’ fees. N.C. Gen. Stat. § 66-514. The Act also directs courts to construe it liberally to effectuate its purpose.  N.C. Gen. Stat. § 66-515.

Importantly, the law contains several exclusions. It does not cover contingency-fee legal services or an attorney’s advancement of costs under the Rules of Professional Conduct, non-contingent direct loans to a party, law firm, or attorney, or funding where the source receives no share of the recovery and no other outcome-contingent return. N.C. Gen. Stat. § 66-512(3). The Act applies to civil proceedings commenced on or after June 22, 2026, and to contracts entered into, renewed, or amended on or after that date. S.L. 2026-14, § 3.

Most relevant for businesses, the Act excludes “an insurer or other entity’s contractual obligation to indemnify or defend a party to a civil proceeding.” N.C. Gen. Stat. § 66-512(3)(c). The exception, however, does not include statutory indemnity. This is critical, because indemnification of directors, officers, managers and LLC members is provided by statute.

Why This Matters for Indemnification and Advancement

North Carolina law has long encouraged companies to protect the people who serve them. The Business Corporation Act requires a corporation to indemnify a director who is “wholly successful” in defending a proceeding brought because of his role and extends that protection to officers. N.C. Gen. Stat. §§ 55-8-52, 55-8-56. It also expressly authorizes corporations to advance defense expenses before a case concludes, so long as the official signs an undertaking to repay the money if it is ultimately determined he is not entitled to indemnification. N.C. Gen. Stat. § 55-8-53. The LLC Act similarly requires an LLC to indemnify a qualifying member, manager or other company official who is wholly successful in defense. N.C. Gen. Stat. § 57D-3-31. As the North Carolina Business Court has emphasized, advancement is a distinct and powerful protection that gives officials “immediate interim relief” and must be paid during the litigation, not after it ends. Vanguard Pai Lung, LLC v. Moody, No. 18 CVS 13891, 2020 WL 4477043, at *2 (N.C. Super. Aug. 4, 2020) (quoting Homestore, Inc. v. Tafeen, 888 A.2d 204, 211 (Del. 2005)).

The friction with the new law is straightforward. Advancement, by design, involves the company paying defense costs in exchange for a repayment obligation that hinges on the outcome of the case—and the new statute expressly lists “advancement” as a form of “litigation investment” and reaches any repayment right contingent “in any respect” on the outcome. N.C. Gen. Stat. §§ 66-512(3).

Key Uncertainties

The first open question is whether ordinary corporate advancement could be characterized as a prohibited “litigation investment.” Because the Business Corporation Act conditions advancement on a repayment undertaking tied to whether the official ultimately earns indemnification, a literal reading of the Act’s “contingent in any respect” language creates an argument that such advancement falls within the prohibition. The better view is that internal company advancement is not the outcome-contingent investment in lawsuits for profit the law was meant to stop, since the company gains no share of any recovery. But until a court resolves the point, the textual tension is real, and potential effects include allowing a corporation to delay or deny advancement or allowing a recipient of advancement to later claim that his or her obligation to repay is void under the Prohibit Litigation Investments Act.

The second uncertainty is the scope of the exclusion for an “insurer or other entity’s contractual obligation to indemnify or defend.” That exclusion notably says “indemnify or defend” but does not mention “advance”–even though the Business Court and commentators treat advancement as legally distinct from indemnification. See 1 Robinson on North Carolina Corporation Law § 18.06 n.2.4 (observing that the Business Court has treated “the rights to indemnification and advancement [as] correlative but distinct”). A company resisting advancement could argue the omission was deliberate. It is also unclear whether “other entity” plainly covers obligations created by corporate bylaws, indemnification agreements, board resolutions and LLC operating agreements–the very instruments the Business Corporation Act authorizes. Similarly, the exception in section 512(3)(c) applies to “contractual” obligations but does not include a statutory obligation to indemnify, like the kind found in the Business Corporation Act at N.C. Gen. Stat. §§ 55-8-52, 55-8-56 and the LLC Act at N.C. Gen. Stat. § 57D-3-31.

The third uncertainty is unique to LLCs. The LLC Act mandates indemnification but says nothing about advancement; advancement rights for LLC officials exist only if the operating agreement creates them. Vanguard Pai Lung, LLC v. Moody, No. 18 CVS 13891, 2020 WL 4477043, at *3 (N.C. Super. Aug. 4, 2020) (observing that, while the LLC Act does not mention advancement, “[w]ithout question, [a]dvances of expenses may . . . be addressed in an operating agreement.”). An LLC relying on operating-agreement advancement provisions therefore has no statutory advancement provision to point to as authority, which may leave those contractual provisions somewhat more exposed to a challenge under the new law.