More than 1400 structured settlement annuity payees are expected to suffer payment shortfalls under the Executive Life of New York (ELNY) Liquidation Plan approved by New York State Supreme Court Judge John Galasso on April 16, 2012. The average individual shortfall is estimated to exceed $600,000 present value.
Under what circumstances, if any, will defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?
This issue was highlighted in a recent Motion by liability insurers asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. Judge Galasso denied the Motion on July 23, 2012.
The Motion attempted to distinguish two types of structured settlement funding alternatives ("buy and hold" vs. qualified assignments). "Buy and hold" annuities, according to the Motion, "are those whereby the underlying insurer retained, or held the liability for future payments, and funded that liability through its ownership of a qualified funding asset, or annuity."
In contrast, the Motion states, "where a structured settlement includes a qualified assignment, the defendant and its liability insurer are fully released from future liability - which liability is assumed by the assignee, here, First Executive Corporation." (emphasis added). Of course, one of the problems for all ELNY stakeholders is that First Executive Corporation ceased to exist in 1991.
As S2KM has previously written, those "suggestions" and/or "assumptions" are not necessarily or universally true. Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.
Three Funding Choices
As more fully explained in Section 3.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J): with a structured settlement, each defendant and/or liability insurer has three choices regarding its obligation to fund future periodic payment obligations to the claimant (1) to have no obligation; (2) to assume or share the obligation; or (3) to assume and then transfer the obligation without recourse. In general:
- "No obligation" means either a claim is paid on a lump sum basis or a structured settlement occurs and all parties agree that the particular defendant or liability insurer shall have no duty to make any future periodic payments.
- “Assume the obligation” means that a particular defendant or liability insurer ("obligor") assumes a legal obligation to pay future periodic payments. This obligor may be solely, jointly, or jointly and severally liable for the payments and, by assuming the obligation, accepts certain risks. One such risk is the potential insolvency of the financing company (e.g. ELNY).
- "Transfer the obligation" means "novation" as defined in Section 280 of the Restatement (Second) of Contracts (Restatement): "A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty." Comments to Section 280 further provide:
- "Effect of novation. A novation discharges the original duty, just as any other substituted contract does, so that breach of the new duty gives no right of action on the old duty.
- "Consideration. A novation is subject to the same requirements as any other contract, including that of consideration.... [C]onsideration to support the discharge of the original duty can usually be found in the promise to undertake a new duty….Assent of the obligee of the original duty and of the obligor of the new duty is always necessary."
- "Substitution of obligor. ….[A] mere promise by a third party to assume the obligor’s duty, not offered in substitution for that duty, does not result in a novation, and the new duty that the third party may owe to the obligee as an intended beneficiary is in addition to and not in substitution for the obligor’s original duty."
- Illustration: "A owes B $1000. B promises C that he will discharge the debt immediately if C will promise to pay him $1000. Intending to benefit A, C so promises. There is a novation under which B’s and C’s promises are consideration for each other, and A’s duty to pay B is discharged. A is the intended beneficiary of B’s promise …and can by disclaimer render the transaction, including the discharge, inoperative from the beginning."
The most common method for transferring a structured settlement obligation is a "qualified assignment" as defined in IRC Section 130(c). For purposes of understanding "transfer of obligation" in the context of structured settlements, however, the Section 130 definition of "qualified assignment" presents two significant problems:
- IRC section 130 does not address whether the assignor's duty is discharged as a result of a qualified assignment.
- Section 130 incorrectly uses the term "assignment" when it should have utilized the term "delegation".
Restatement of Contracts
Comments to Section 316 of the Restatement explain both the difference and the significance of these two terms:
- "Assignment and delegation. In this Chapter rights are said to be 'assigned'; duties are said to be 'delegated' ….. 'Assignment' is the transfer of a right by the owner (the obligee or assignor) to another person (the assignee)."
- "Comparing delegation to assignment. A person subject to a duty (the obligor) does not ordinarily have such a power to substitute another in his place without the consent of the obligee; that is what is meant when it is said that duties cannot be assigned. 'Delegation' of performance may be effective to empower a substitute to perform on behalf of the obligor, but the obligor remains subject to the duty until it has been discharged by performance or otherwise."
Comments to Section 318 of the Restatement further differentiate "delegation" and "novation" as follows: "An obligor is discharged by the substitution of a new obligor only if the contract so provides or if the obligee makes a binding manifestation of assent, forming a novation….Otherwise the obligee retains his original right against the obligor, even though the obligor manifests an intention to substitute another obligor in his place and the other purports to assume the duty. The obligee may, however, have rights against the other as an intended beneficiary of the promise to assume the duty."
NSSTA Model Agreements
After ELNY entered rehabilitation in 1991, the National Structured Settlement Trade Association (NSSTA) published Model Qualified Assignment Agreements (with and without a Release) which documents were updated following the enactment of IRC 5891 in 2001. Both versions of NSSTA's current Model Qualified Assignment Agreements reference IRC section 130 and utilize "assignment" to describe what the Restatement more properly characterizes as a "delegation".
Here is the relevant comparative language from current paragraphs 1 of the NSSTA Model Agreements:
- With Release - "Assignment and Assumption; Release of Assignor. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments. Each Claimant hereby accepts and consents to such assignment by Assignor and assumption by Assignee. Effective on the Effective Date, each Claimant hereby releases and discharges Assignor from all liability to make the Periodic Payments."
- Without Release - "Assignment and Assumption. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments."
Impact for Defendants and ELNY Victims
How does this discussion impact whether defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?
- NSSTA's Model Qualified Assignment Agreements did not exist during the time period (1985-1990) when ELNY was selling structured settlement annuities.
- Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.
- Whatever language parties used to describe and/or label their transactions (e.g. annuity financing; buy and hold; qualified assignment; novation; transfer; etc.) is not by itself determinative of the rights and responsibilities set forth in the actual language of the settlement documentation.
- Some common industry practices, at least during the 1985-1990 time period, could create problems for defendant/liability insurers.
- For example, in the paper he delivered at the Society of Settlement Planners (SSP) 2012 Annual Meeting, attorney David Higgins pointed out how some defendants and liability insurers have attempted "to collapse the creation of the liability with the assignment of the liability to the assignee."
- Higgins, who drafted the text of the 1982 structured settlement law introduced in the House and the Senate, warned that "such a collapse is to be avoided if the definition [of a qualified assignment] is to be met."
- Under U.S. common law, whether a novation has occurred is a question of fact, and the burden of proving it is generally upon the party asserting it.
- The Restatement identifies potential defenses for ELNY structured settlement shortfall victims who attempt to void a novation including misrepresentation (Sections 159-162) and disclaimer (Section 306).
- All ELNY structured settlement shortfall payees, as well as defendants and/or liability insurers who purchased the related ELNY structured settlement annuities, should retain qualified legal counsel to review their settlement documentation.
For S2KM's complete reporting about the ELNY liquidation, see the structured settlement wiki.