One of three fundamental transitions reshaping the structured settlement industry is the change from a singular, illiquid and non-assignable product to multiple products with greater flexibility to address changing needs and circumstances of injury victims. This transition includes the potential of greater product liquidity for traditional structured settlements provided by IRC section 5891 and the state protection statutes.
During their 2011 annual meetings and educational conferences, both the Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) addressed this structured settlement industry transition.
NSSTA's Legal Committee organized two educational programs featuring secondary market structured settlement issues:
- Peter Vodola, Katherine Scanlon and Amy Ravitz - "Legal Committee Update on Developments in the Law"; and
- Judge Edward Burke and Judge Steven Denton (moderated by Vodola) - "Judicial Perspective" (on structured settlements).
The Legal Committee Update approached "factoring" from the perspective of "what is it and why should we [NSSTA] care?" Their "what is it" segment:
- Introduced NSSTA members to IRC section 5891;
- Highlighted the "best interest" test and disclosure requirements of state protection statutes; and
- Summarized the Ceron v. Henderson case which S2KM previously reported as part of S2KM's "business standards and practices" series.
NSSTA's "why should we care" (about factoring) comments focused upon:
- How factoring companies are "adversely defining" the term "structured settlement" with aggressive television and internet advertising;
- How structured settlement factoring cases have inundated many state court dockets; and
- How NSSTA members should respond to plaintiff attorneys and judges who resist structured settlements because of proliferating factoring transactions.
The theme of NSSTA's "Judicial Perspective", as stated by participating Judge Denton, might have been: "don't presume that judges understand structured settlements". Previously a plaintiff attorney, Judge Denton claimed a familiarity with structured settlements but acknowledged he had never been asked to approve a structured settlement transfer application. Conversely, Judge Burke stated that his structured settlement experience was limited to reviewing and approving transfer applications.
Among his NSSTA comments, Judge Burke identified his "heroes" to include the superior court judges involved in the California Fresno County factoring cases. Judge Burke's judicial praise is both noteworthy and difficult to understand. In Henderson v. Scieteco (one of the Fresno County factoring cases) , a California appellate court subsequently reversed the entire consolidated order from the Fresno County Superior Court because of "multiple prejudicial errors in making its factual findings and in reaching legal conclusions" (emphasis added).
Also in Henderson v. Scieteco, the California appellate court held that public policy supports state court approved structured factoring transactions (emphasis added). NSSTA's Legal Committee representatives failed to mention this case when they discussed "public policy" and factoring during their structured settlement legal update.
Some judges not only understand structured settlements, but also have experience with both primary and secondary market structured settlement cases and publish local court rules for structured settlements. See, for example, Rule 68.2 and Rule 68.3 of the Local Rules for the Hamilton County, Ohio Probate Court.
SSP offered three presentations about non-traditional structured settlement products as part of its educational program segment titled "Practice Improvement: Marketing and New Products",
- Anthony Prieto and Tim Denehy - "The Use of Structured Settlement Annuity Payment Rights";
- Brian Michaels - "Expanded Use of Non-Qualified Assignments"; and
- Rick Miller - "Equity Indexed Annuities and Settlement Planning".
Prieto and Denehy introduced a product called "The Settlement Asset Management Trust (SAM trust) with Enhanced Structured Income (ESI)" which is essentially an irrevocable spendthrift trust generating level monthly income payments for durations of 10-30 years plus access to discretionary distributions.
The ESI component, according to Prieto and Denehy, consists of payment rights previously sold (i.e., transferred or factored) by a structured settlement recipient to a third party purchaser (factoring company) with an approved court order pursuant to a state protection statute. The SAM trust product managers purchase the payment rights from one or more factoring companies and transfer the payment rights to the SAM trust.
According to Prieto and Denehy, the resulting SAM trust can produce a taxable interest rate that is "typically three (3%) percent higher than comparable fixed products with similar guarantees and safety." Their explanation for the enhanced interest rate: the ESI does not have the same high internal costs as a typical annuity during the first few years of the annuity policy.
Although the flow of structured settlement payment rights purchased from various factoring companies is typically uneven, Prieto and Denehy maintain the SAM trustee can consolidate selected payment rights to create an even payment flow to the SAM trust beneficiary who might be an injury victim or a plaintiff attorney.
In addition to an interest rate risk, Prieto and Denehy acknowledge the ESI has an insurance company insolvency risk similar to a traditional structured settlement. According to Prieto and Denehy, however, a typical SAM trust will include between two and ten separate payment rights purchases thereby diversifying the insolvency risk.
Although some secondary market brokers and factoring companies have previously sold "re-cycled" structured settlement payment rights to individuals, Prieto and Denehy believe their product is different because the SAM trust integrates multiple streams of separate payment rights and also includes a cash allocation permitting discretionary distributions.
For additional S2KM reporting about the SSP and NSSTA 2011 Annual Meetings, see the structured settlement wiki.
See "Structured Settlements and Periodic Payment Judgments" (S2P2J) for additional information about:
- Non-qualified (under IRC section 130) assignments and products - Section 3.08A; and
- Judicial review of transfer applications - Section 16.05