Acting as agent for the Receiver of Executive Life Insurance Company of New York (ELNY), the New York Liquidation Bureau (NYLB) mailed letters (shortfall letters) on December 7, 2011 to many individual ELNY structured settlement annuity (SSA) payees notifying them about the proposed ELNY liquidation and restructuring agreement as well as the amount of their anticipated shortfalls.
The ELNY shortfall letters also encourage ELNY SSA payees with anticipated shortfalls to contact their ELNY SSA owner "who may be responsible for supplemental payments, depending upon the terms of the structured settlement agreement, to the extent full payments are not made under the Restructuring Agreement."
Many SSA recipients of the NYLB letters are understandably confused because their annuity contracts identify "First Executive Corporation" (FEC) as the owner of their SSAs. Unfortunately for these ELNY payees and their beneficiaries, FEC declared bankruptcy in 1991 and no longer exists. For a background summary about the rise and fall and ultimate bankruptcy of FEC, see this prior S2KM blog post.
To help SSA recipients of the NYLB shortfall letters better understand their situation, this blog post explains the difference between two alternative methods utilized to fund ELNY SSAs:
- Traditional annuity financing (aka "buy and hold"); and
- Qualified assignments - as defined in Internal Revenue Code Section 130.
Here is a graphic comparison of the "buy and hold" and qualified assignment financing alternatives, courtesy of The Settlement Services Group (TSSG), as set forth in Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Note: Patrick Hindert, author of "Beyond Structured Settlements", is also Managing Director of TSSG and co-author of S2P2J.
Annuity Financing ("Buy and Hold")
As defined in S2P2J, “ 'annuity financing' [buy and hold] means that a defendant or its liability insurer (the 'obligor') (1) gives the claimant an unfunded, unsecured promise to pay money in the future and (2) purchases and owns an annuity to provide a source of funds to meet this obligation."
Applied to ELNY, the owner of the annuity (defendant or its liability insurer) is the obligor and, if ELNY cannot pay, then the owner is obligated to make the periodic payments or make up the difference.
S2P2J further explains the rights and duties of the parties resulting from annuity financing:
- "In exchange for a release from tort liability, the obligor promises to make periodic payments to the claimant and purchases an annuity to provide a source of funds to meet this obligation.
- "The obligor owns the annuity, and as such, retains all incidents of annuity ownership, including the right to change the payee of annuity benefits. Of its own volition, the obligor directs that annuity benefits be paid by the annuity issuer to the claimant.
- "The claimant has the right to receive periodic payments as due and may rely only on the general credit of the obligor for the collection of such payments. The claimant does not have rights in any property or investments owned by the obligor that are greater than rights of the obligor’s other general creditors.
- "The claimant has no express rights against the annuity issuer because there is no privity of contract between them. Nonetheless, the claimant receives annuity benefits directly from the annuity issuer, and has no reason to complain to the obligor as long as the benefits are received as promised."
As defined in S2P2J, “ 'qualified assignment' means that the defendant or its liability insurer (1) first gives the claimant a promise to pay money in the future; (2) then transfers that obligation to a substituted obligor pursuant to [Internal Revenue Code] Section 130; and (3) thus extinguishes its contractual liability for the obligation so transferred."
Applied to ELNY, the substituted obligor/assignee/annuity owner is FEC and, assuming the qualified assignment complied with all of the statutory requirements, the original obligor/assignor (defendant or liability insurer) thereby extinguished (or intended to extinguish) its contractual liability for the transferred periodic payment obligation.
S2P2J further explains the rights and duties of the parties resulting from a qualified assignment:
- "In exchange for a release from tort liability, the defendant or its liability insurer or both (the 'assignor') promise to make specified periodic payments to the claimant.
- "The claimant agrees to discharge the assignor’s duty provided an acceptable new obligor (an 'assignee') promises to make the periodic payments to the claimant.
- "The assignee makes this promise to the claimant, the claimant accepts the assignee’s promise, and the assignor’s duty is discharged.
- "For qualified assignments entered into on or before November 10, 1988: The claimant has the right to receive periodic payments as due and may rely only on the general credit of the assignee for the collection of the payments. The claimant does not have rights in any property or investments owned by the assignee that are greater than rights of the assignee’s other general creditors."
- Note: because of a change in the tax law, for qualified assignments entered into after November 10, 1988, claimants may have a security interest in property owned by the substituted obligor without jeopardizing the tax-free status of the promised payments. If applicable to specific ELNY SSA payees, such a security interest could raise interesting legal issues because FEC also owed Executive Life of California (ELIC).
So what should ELNY SSA payees who received NYLB shortfall letters do?
- First, they should try to locate copies of their annuity contracts, settlement agreements and, if applicable, qualified assignment agreements. If they have not personally retained these documents, they might try contacting:
- The attorney who represented them in their original lawsuit; or
- The structured settlement agent who helped purchase their annuity from ELNY; or
- Metropolitan Life Insurance Company which has been administering ELNY annuities since 1991.
- Second, they should retain legal counsel to review their documents and recommend options keeping in mind:
- The January 16, 2012 deadline (Martin Luther King Day) for filing objections to the proposed ELNY Liquidation Petition and Restructuring Agreement; and
- The announced ELNY "Hardship Fund" of at least $100 million (not a component of the Restructuring Agreement) created by a consortium of life insurance companies with a toll-free information line at 1-888-809-2254.
For additional information about FEC and ELNY, see the structured settlement wiki.
For additional information about annuity financing and qualified assignments, see Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).