Beyond Structured Settlements

Spencer v. Hartford - 3

Spencer v. Hartford is a class action civil lawsuit potentially involving more than 9000 plaintiffs who received structured settlement annuities from Hartford insurance subsidiaries. The plaintiffs allege:

• Hartford has conducted a structured settlement program called "Secured Benefit Services" (SBS) since 1992 that violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford, who are not named as defendants in the civil class action, to further the mission of the SBS program. 

The case is currently on appeal to the U.S. Second Circuit Court of Appeals following a March 10, 2009 decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel .

Prior S2KM blog posts:

• Spencer v. Hartford - 1 summarizes the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal.
  
• Spencer v. Hartford - 2 provides S2KM commentary about the plaintiffs' allegations, potential damages, the NSSTA Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.

This S2KM blog identifies and recommends:

• Questions;
• Lessons;
• A proposed solution.

Questions:

• Will the plaintiffs' RICO and state fraud allegations in Spencer v. Hartford be adjudicated or settled?
• How does Hartford, recognized as "one of the World's Most Ethical Companies" and honored for "its products, services, research, philanthropy, and programs supporting individuals with disabilities" justify its SBS and BAP structured settlement programs?
• Did any Hartford employees or participating structured settlement intermediaries (incorrectly called "brokers') question the legality of the SBS and BAP programs?
• Has any structured settlement intermediary, defendant or plaintiff, in any Hartford case ever refused to share or receive annuity commissions from Hartford on account of the SBS and BAP programs?
• Will federal authorities initiate criminal RICO charges against Hartford and the structured settlement intermediaries who participated in Hartford's SBS and BAP programs?
• Should federal officials consider Spencer v. Hartford if and when Hartford applies for TARP funds?
• Should trial attorneys who originally represented Spencer v. Hartford plaintiffs in structured settlements with Hartford be held accountable for their incompetency, lack of due diligence, or poor advice?
• How widespread among insurance companies and structured settlement intermediaries are Hartford's allegedly illegal structured settlement business practices?
• Does Spencer v. Hartford reveal a continuing pattern of industry business behavior consistent with allegations in prior lawsuits such as Weil v. Manufacturers and Macomber v. Travelers?
• Regardless of case outcome:
  • What lessons, if any, will the structured settlement industry learn from Spencer v. Hartford?
  • What, if anything, about Spencer v. Hartford causes "shocked disbelief" among structured settlement stakeholders - to borrow a term and line of inquiry from Father Oliver Williams' Ethics Course at the NSSTA 2009 Winter Meeting.
  • Will Spencer v. Hartford promote the structured settlement industry "wake-up call" Joseph DiGangi recommended when he criticized the traditional business model during his "settlement consulting" discussion at the NSSTA 2009 Winter Meeting?

Lessons

• Structured settlements are complex and involve many federal and state laws and potential long-tail legal and financial liabilities.
• If you are a structured settlement participant and/or stakeholder, you should understand, obey and help improve the laws.
• The traditional structured settlement business model ("claim management") is inherently flawed and promotes conflicts of interests which are rarely identified, discussed or disclosed.
• Structured settlement compensation arrangements and relationships generally are not disclosed.
• Most plaintiff trial attorneys lack professional competence to advise their clients about settlement issues.
• Structured settlement stakeholders are not capable of self-regulation.
• The NAIC and state insurance regulators are not capable of regulating structured settlements or settlement planning under current laws, regulatory authority and budgets.

Proposed Solution

• Controlling criteria:
  • Judicial approval of structured settlements;
  • Standards and requirements:
    • Best interest test;
    • Due diligence;
    • Disclosure - compensation and conflicts of interest;
    • Informed consent;
    • Licensing;
    • Certification.
• Laws and regulations
  • Identify, preserve and promote existing structured settlement laws;
  • Improve state structured settlement protection statutes;
  • Apply the state protection statutes to the primary market;
  • Better integrate structured settlement laws with Social Security, Medicare, Medicaid, Veterans' benefits; and Federal housing laws.
• New business models
  • Re-define the "claim management" structured settlement business model:
    • Defendants' first priority in structured settlement cases should be to obtain a full legal release.
    • If defendants want to participate in settlement planning, they should:
      • Study settlement planning;
      • Understand the laws, products, documentation and participants;
      • Re-organize and re-focus their structured settlement business models, objectives, procedures and partners.
  • Grow the "settlement planning" business model featuring:
    • Qualified settlement funds (QSFs);
    • Structured settlement annuities - qualified and non-qualified under IRC 130;
    • Settlement trusts;
    • MSAs;
    • SNTs;
    • New products such as tax-free disability funds;
    • Secondary life and annuity markets.
• Re-learn and re-market structured settlements
  • Re-study structured settlements from a settlement planning perspective;
  • Feature and promote structured settlements as a strategic component for settlement planning learning, certification, products and business standards.
  • Identify settlement planning knowledge experts and learn about their expertise, work product, professional associations, online communities, networks and learning resources.
  • Design new business models utilizing, and compatible with, existing and emerging Internet technologies as well as new settlement planning laws and products.
  • Schedule and require ethics classes focused on structured settlement and settlement planning business conduct;
  • Organize, promote and participate in community service activities with and for disability associations.

Spencer v. Hartford - 2

Spencer v. Hartford is a class action lawsuit currently on appeal to the U.S. Second Circuit Court of Appeals following a decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel on RICO and state-law fraud claims.

A prior S2KM blog post (Spencer v. Hartford - 1) summarized the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal. This S2KM post begins S2KM's commentary.

Plaintiffs' Allegations

• Plaintiff allegations are summarized in "Spencer v. Hartford - 1 ".
• The U.S. District Court has neither affirmed nor denied any of the plaintiffs' allegations against Hartford.
• Pending a decision by the U.S. Second Circuit Court of Appeals, the District Court Judge is holding all case deadlines in abeyance.
• Defendants' appeal is limited to the District Court Order granting plaintiffs' Motion for Class Certification and will not address plaintiffs' allegations.
• Even if the Court of Appeals rejects the defendants' appeal, the District Court may never address the plaintiffs' allegations against Hartford.
• As defendants state in their Petition to Appeal: "...putative class actions alleging financial fraud almost always involve extremely large claims for damages, and an order certifying a class therefore exerts pressure to settle whether or not the claims have merit."

Potential Damages

• The civil component of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) allows for the recovery of damages in triple the amount of actual compensatory damages.
• Plaintiffs contend their two RICO subclasses ("cost" and "value") exceed 9000 persons and their damages total at least 15% of Hartford's applicable structured settlement premium from 1997 to the present.
• Using an assumed industry per case average structured settlement premium of $176,000, plaintiffs' potential RICO damages against Hartford in the Spencer class action case can be estimated as follows: $176,000 x 15% x 9000 cases x 3 = $712,800,000.
• The District Court's Class Certification Order also includes state-law fraud claims.

NSSTA Code of Ethics

• Hartford Life is a member of the National Structured Settlement Trade Association (NSSTA).
• NSSTA's Board of Directors and membership approved the NSSTA Code of Ethics May 9, 1997.
• Plaintiffs' Revised Second Amended Complaint alleges Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford to further the mission of Hartford's "Secured Benefit Services" (SBS) structured settlement program.
• Selected excerpts from the NSSTA Code of Ethics:
  
  • "This Statement of Ethics and Professional Responsibility (Statement) has been adopted by the Board of Directors and Membership of the National Structured Settlements Trade Association (NSSTA) to provide guiding principles to its members and member organizations."
  • "Implicit in the acceptance of this Statement is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services."
  • "This Statement applies to all NSSTA member companies, their employees and to individual members, regardless of their voting rights and responsibilities."
  • "The NSSTA member must exercise the utmost integrity when providing professional structured settlement services."
  • "The nature and extent of services rendered must be dictated by professionalism, honesty and candor which should not be compromised for personal gain or advantage."
  • "All persons engaged in the provision of any part of a structured settlement shall perform their duties in an honest, ethical and fair manner."
  • "Fairness mandates intellectual honesty and disclosure of relevant conflict(s) of interest."
    
  • "A NSSTA member should comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided." (emphasis added).
    

NSSTA 2009 Winter Meeting

• S2KM's Managing Director, Patrick Hindert, is a member of NSSTA and attended the NSSTA 2009 Winter Meeting.
• Plaintiff and Defense Panel
  • One of the educational programs at the NSSTA 2009 Winter Meeting was titled "Plaintiff and Defense Panel".
  • Program description: "There is a need for brokers on both sides to serve as their client's advocate and there should be mutual respect for what each broker contributes to the resolution of the claim and what they bring to the "settlement table". This session will cover some of those concerns."
  • Selected Hindert notes from the panel discussion:
    • "Most structured settlement brokers are 'Good People'."
    • "Our most important role is taking care of the plaintiff."
    • "IRC 468B is bad because it prevents defendants from initiating structured settlements."
    • "Our clients should have no right to dictate how we earn our living" - responding to a question about the need to disclose commission sharing.
    • "I will fight for my clients' right to spend their money the way they want" - responding to a question about approved lists of annuity providers.
    • "We are part of an adversarial system and must support our clients."
• Ethics Course
  • Father Oliver F. Williams, from the Notre Dame Center for Ethics & Religious Values in Business, taught an ethics course at the NSSTA 2009 Winter Meeting.
  • Selected Hindert notes from Father Williams' ethics course:
    • "NSSTA's Code of Ethics is as good as it gets in the structured settlement industry."
    • "Alan Greenspan (Chairman of the Federal Reserve from 1987 to 2006) expressed 'shocked disbelief' following the September 2008 financial crisis. What causes you (NSSTA members) to feel 'shocked disbelief' about the structured settlement industry?"
    • "The life cycle of social moral issues has six stages:
      • Stage 1 - changes occur;
      • Stage 2 - problems are recognized;
      • Stage 3 - organizations are established;
      • Stage 4 - policy agendas are set;
      • Stage 5 - solutions are formalized;
      • Stage 6 - social control becomes routine.
    • "There are three levels of analysis for social moral issues:
      • Individual;
      • Organizational;
      • Systemic.
    • "There are three types of social moral standards:
      • Utilitarianism - the greatest benefit at lowest cost;
      • Rights - protect entitlements set around individuals pursuit of interests;
      • Justice - distribute benefits and burdens fairly."
• Settlement Consulting
  • Joseph DiGangi spoke about "Comprehensive Settlement Consulting" at the NSSTA 2009 Winter Meeting.
  • In what he termed "a wake up call for the industry", DiGangi criticized the traditional structured settlement business model and knowledge standards.
  • S2KM summarized and analyzed DiGangi's NSSTA presentation in a four-part blog series titled "Settlement Consulting"
    • Settlement Consulting
    • Settlement Consulting - 2
    • Settlement Consulting - 3
    • Settlement Consulting - 4

S2P2J Release 45

Release 45 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) is now available from publisher Incisive Media. Incisive Media purchased ALM (American Lawyer Media) in 2008 including publishing rights to S2P2J.

Co-authored by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert, S2P2J was first published in 1986 with 45 semi-annual updates. NSSTA and SSP both utilize S2P2J in their certification programs.

New S2P2J chapters since 2001:

• Chapter 15: "Government Benefits and Structured Settlements"
• Chapter 16: "Transfers of Structured Settlement Payment Rights"

Recently expanded S2P2J sections:

• Section 3.06A: "Non-Qualified Assignments"
• Section 3.07A: "Settlement Trusts"
• Section 6.02: "Structured Settlement Consultants"

S2P2J Release 45 features a new and expanded Section 3.08B discussion of Section 468B settlement funds. This up-to-date analysis includes:

• A practical explanation of Section 468B settlement funds;
• When and how to use them;
• Statutory and regulatory background for designated settlement funds (DSFs) and qualified settlement funds (QSFs);
• Discussion of the Tenth Circuit decision in United States v. Brown validating the settlement QSF regulations;
• Mechanics of settling up, operating and winding down Section 468B settlement funds;
• Summary of how Section 468B settlement funds are taxed under federal and state income tax laws;
• Sample terms of fund administration;
• Recommendations when evaluating the proposed terms of settlement fund administration;
• Practice pointers for courts, litigators, and fund administrators as they define their 468B duties and responsibilities.

Concurrent with the recent publication of Robert W. Wood's legal treatise, "Qualified Settlement Funds and Section 468B", S2P2J Release 45 underscores how important 468B funds are for structured settlements and settlement planning. Both professional communities need more and improved education about 468B funds. So do judges, trial attorneys, mediators, trustees and guardians.

Robert Wood's book and S2P2J Release 45 substantially upgrade the available learning resources.

S2KM's review of Robert Wood's 468B book: "Robert Wood and 468B Funds".

Robert Wood's commentary about 468B funds:"Robert Wood QSF Interview".

Tim Nay Interview

Tim Nay, a partner in the law offices of Nay & Friedenberg, is one of the leading special needs and elder law attorneys in the United States. As an adjunct to his legal career, Nay was also educated as a clinical social worker and practiced in that profession for many years.

Among his professional contributions, Nay is the founding President and a Fellow of the National Academy of Elder Law Attorneys (NAELA) and continues to participate on NAELA committees, task forces and educational programs. Nay is a Director of the Society of Settlement Planners (SSP) as well as a founding member, former Director and officer of the National Association of Medicare Set-Aside Professionals (NAMSAP). Nay is a member of the Academy of Special Needs Planners (ASNP) and serves on ASNP's Advisory Board.

On the state level, Nay is a member of the Oregon and Washington Bar Associations. He is a past President of the Oregon Gerontological Association, past Chairman and founding member of the Elder Law Section of the Oregon State Bar and past President of the Oregon Chapter of the Alzheimer’s Association.

Earlier this month, at the ASNP 2009 Annual Meeting, Nay participated as Chairman and presenter for the ASNP educational program titled "Special Needs Settlement Planning" (SNSP) following which he provided S2KM with this exclusive interview.

S2KM: Greetings, Tim. In addition to your legal practice, how do you find time for, and what motivates, your many professional association activities?

Nay: Planning educational conferences has evolved into a small passion of my practice. My role as CEO of Nay & Friendberg, as well as our practice model, allows me to commit time to plan and present at conferences related to our practice. I always learn something.

S2KM: What do you consider your most important professional accomplishments?

Nay: Helping people and touching lives positively have been the most rewarding aspects of my career. When a client sends a handwritten "thank you" note to me or a member of our team, it means a lot. I am proud of my educational accomplishments including graduate degrees in counseling psychology and clinical social work prior to law school. My professional association work is a continuing source of many friendships and shared accomplishments.

S2KM: What connections do you see among elder law, special needs law and settlement planning?

Nay: Elder law practitioners champion special needs trusts, initially in the context of estate planning. Bringing special needs trusts to settlement planning is a logical extension of what elder law attorneys have been doing for more than 20 years. To contribute to the settlement process at the highest level, however, special needs attorneys must understand, or at least be aware of, other substantive legal issues important to the settlement process.

S2KM: How do you define "special needs settlement planning"?

Nay: Our firm views settlement planning as a process. We use a team approach which I supervise. Sandy Conley, senior legal assistant in our probate department, coordinates our special needs planning cases. She also drafts the settlement documents and papers in the state court proceedings to establish any guardianship and/or conservatorship. Jackie Appleton, senior legal assistant in our Legal/Financial department, is a third party special needs expert. Whenever third party planning is appropriate for the family of an injury victim, she drafts the documents and supervises their execution. Other members of our probate and estate planning staffs frequently assist our settlement planning process. Whenever difficult legal issues appear in settlement planning cases, we triage the case with our attorney staff as well as Sandy and Jackie.

S2KM: In addition to special needs trusts and estate planning, what potential roles exist in settlement planning for special needs attorneys?

Nay: Some special needs attorneys also serve as judges; mediators; trustees; conservators; and guardians for minors or incapacitated adults. All of these roles help prepare special needs attorneys to best serve injury victims and their families.

S2KM: In your experience, what impact do 468B Qualified Settlement Funds (QSFs) have on settlement planning?

Nay: Use of 468B QSF trusts allow defendants to conclude their settlement liabilities and responsibilities so other planning priorities such as liens, allocations, government benefits and funding options can be addressed by plaintiffs and their advisors in a less-adversarial context.

S2KM: What do you like and dislike about structured settlements and structured settlement consultants?

Nay: I like the product. In most of our catastrophic injury cases, structured settlement annuities are part of the settlement package. What many special needs attorneys, including myself, do not like are the business practices of some structured settlement consultants: over-structuring; single product focus; limited product comparisons.

S2KM: Did the ASNP "special needs settlement planning" conference accomplish your objectives?

Nay: The feedback from attendees has been outstanding. Everyone came away with important new learning.

S2KM: What additional actions are needed to improve and grow the "special needs settlement planning" market?

Nay: For the "special needs settlement planning" market to grow, all stakeholders must know when a special needs trust can improve life quality for the injured party. These stakeholders include plaintiff and defense attorneys, judges, mediators, and structured settlement consultants, as well as injury victims and their families. Without that knowledge, the settlement will be gone quickly, leaving the injury victim in grinding poverty.

S2KM: Thank you, Tim, for this interview. Congratulations for your continuing professional contributions and accomplishments.

Fresno County Factoring Cases - 2

An earlier S2KM blog post (Fresno County Factoring Cases-1) summarized two recent decisions (Tomahawk and Ramos) by a California Appellate Court. In those decisions, the Appellate Court reversed earlier decisions against 321 Henderson Receivables, a J.G. Wentworth affiliate, by Superior Court Judges in Fresno County, California.

This S2KM blog post provides S2KM's commentary about the Tomahawk and Ramos cases following telephone conversations with legal experts familiar with the cases.

Case issues:

• The Superior Court decisions raise many issues which are identified in S2KM's earlier blog post.
• The California Appellate Court addressed two issues:
  • In Tomahawk and Ramos - Should a structured settlement transfer petitioner in California be permitted to withdraw a transfer petition prior to a final transfer order? The California Appellate Court said "yes".
  • In Ramos - Are settlement transfer orders final? Restated: can one California Superior Court Judge review and overrule a transfer order approved by another California Superior Court Judge? The California Appellate Court said "yes" to the first question and "no" to the second.

Case results:

• Judicially-approved transfers are now "final" in California - and probably not even an issue in other states!
• J.G. Wentworth won important legal victories in Tomahawk and Ramos for:
  • J.G. Wentworth - appeals in Tomahawk and Ramos are possible but not likely. The California Appellate Court has agreed to accelerate Wentworth's 11 related case appeals which are scheduled to be argued in mid-April.
  • The secondary annuity market - a different result in Tomahawk and Ramos could have closed the Fresno County secondary structured settlement market and perhaps the entire California market.
  • The structured settlement industry - all stakeholders depend upon the finality of judicial orders.
• In retrospect, industry experts say the Tomahawk decision was "positive" and "expected".
• The Ramos decision, by comparison, was "positive" but "somewhat unexpected".
• In Ramos, the California Appellate Court:
  • Did more than simply reverse and remand on the narrow basis that Henderson should be allowed to dismiss its own transfer petition;
  • Exercised its discretion to rule on an issue it did not have to decide: the finality of settlement transfer orders.
  • Ruled the Fresno County Superior (trial) Court did not have the right to re-open or overturn prior transfer orders.
  • Ordered the Fresno County Superior Court to publish the appellate opinion (reversing the Superior Court rulings) on its website for at least as long as the widely reported Superior Court rulings were posted.

Bigger Picture

• Final results for the Fresno County factoring cases are still to be determined.
  
• The primary and secondary structured settlement markets both face unprecedented challenges.
  
• Primary market challenges:
  
  • IRC section 468B Qualified Settlement Funds (QSFs);
  • The secondary market defined by IRC section 5891 and the state protection statutes;
  • Successfully integrating structured settlement laws, processes and documentation with Social Security, Medicare and Medicaid;
  • Surviving the current financial crisis without annuity provider insolvencies and/or payment defaults.
    
• Secondary market challenges:
  • Successfully implementing state structured settlement protection statutes - examples of challenges: the Fresno County cases and the Rapid Settlements cases;
  • Surviving the current financial crisis without annuity provider insolvencies and/or payment defaults.
    • Other bloggers (John Darer and Mark Wahlstrom) have previously reported Standard & Poor's recent downgrade of J.G. Wentworth's:
      • Corporate credit rating from CCC to CC; and
        
      • Bondholder's recovery rating from 4 to 6. 
    • DZ Bank, the financing conduit for several mid-sized structured settlement transfer companies, recently announced closure of its U.S. commercial-paper conduit operation.

Amid these challenges, the Tomahawk and Ramos cases represent important and timely industry victories.  As for the future of structured settlements, other commentators have asked the pertinent question more generally: why waste a crisis?

For more detailed information about the secondary structured settlement market, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

For prior S2KM reporting about Rapid Settlements, see:

• Pacific Life v. Rapid Settlements
• Rapid v. Symetra
• CNA v. Rapid Settlements

Structured Settlements and Government Benefits - 1

One of the challenges for growing the structured settlement market is to successfully integrate existing structured settlement laws and documentation with government benefits including Medicare and Medicaid. Unlike more divisive (but equally important) issues impacting industry growth, such as IRC 468B and 5891, integrating structured settlements with government benefits provides an important and timely opportunity for collaboration and consensus building among all structured settlement stakeholders.

Both SSP (April 26 - 28) and NSSTA (April 28 - May 1) have scheduled their 2009 Annual Meetings in Washington, D.C. Anticipating legislative and regulatory discussions during both meetings, this S2KM blog post summarizes the status of existing Medicare rules for structured settlements. A subsequent S2KM blog post will summarize the status of Medicaid rules. For more detailed information, see Chapter 15 ("Government Benefits and Structured Settlements") in "Structured Settlements and Periodic Payment Judgments" (S2P2J) as well as prior S2KM online reporting links at the end of each blog post.

The Medicare Secondary Payer (MSP) statute enacted in 1980 applies to liability cases as well as workers compensation cases. CMS (the responsible Federal administrative agency) has heretofore limited its Medicare-set aside (MSA) rules and enforcement to workers compensation. Workers compensation cases represent a small fraction of the current structured settlement annuity market.

CMS provides information requirements for structured settlement annuities in its Proposal Requirements Checklist for workers compensation MSAs (WCMSA) plus rules for structured settlements in several WCMSA policy memoranda issued since 2001. Although CMS must approve structured settlements used to fund WCMSAs, CMS has not specifically defined "structured settlement" or linked its structured settlement rules to the tax definition for "structured settlement" in IRC 5891(c)(1).

The good news for structured settlements: existing CMS funding rules for WCMSAs are generally favorable for structured settlement annuities. Because CMS utilizes a "set-off" method for calculating WCMSA present value, annuities currently have an inherent cost advantage compared with lump sum funding alternatives. Arguably, this cost advantage also results in underfunding MSAs because the CMS annuity rules do not require annual increases for inflation. An additional reason favoring structured settlement annuities to fund MSAs is the high percentage of self-administered MSAs and/or MSAs administered by family members.

Structured settlement annuities create additional WCMSA administrative and accounting responsibilities. The responsible CMS contractor must monitor annuity payments annually and make accounting adjustments based upon actual Medicare-related costs incurred and paid. Whenever an annual annuity payment is exhausted prematurely, CMS will provide payments for the remainder of that year. Conversely, if an annuity payment in any year is not exhausted for Medicare services, the remaining amount is carried forward to the following year. Although CMS changed its rules for calculating life expectancy in 2008, structured settlement annuity providers continue to be inundated with requests for rated ages for WCMSA claimants.

Beginning July 1, 2009, Section 111 ("Medicare Secondary Payer") of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) requires liability insurers (including self-insurers, no-fault insurers and workers compensation insurers) to:

• Determine Medicare status for all claimants; and
• Report all claims involving a Medicare beneficiary to CMS when those claims are resolved.

If the reporting for any claimant is not done in a timely manner, MMSEA authorizes CMS to enforce a civil penalty of $1000 per day.

These MMSEA information requirements and penalty provisions could provide the basis for expanded enforcement by CMS of the MSP statute. Liability cases present legal complications for MSAs which do not occur in workers compensation cases such as multiple defendants and contributory negligence. Nevertheless, with Medicare facing increased financial and political pressure, structured settlement stakeholders should anticipate additional Medicare legislation and regulations, including MSAs for liability cases, and develop a unified and favorable political strategy.

Prior S2KM blog posts about the MSP statute, MSAs, and MMSEA:

• MSA Update - 1: Historical Background and Recent Developments
• MSA Update - 2: CMS MSA Rules for Structured Settlements
• MSA Update - 3A&B: Interview with Thomas Spratt
• MSA Update - 3C: CMS MSA Life Expectancy Rules
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA)
• NAMSAP 2008 Annual Meeting

ASNP 2009 Annual Meeting

The Academy of Special Needs Planners (ASNP) hosted its Third Annual Meeting March 6-7, 2009 at the Rancho Bernardo Inn in San Diego, California. Titled "Special Needs Planning in an Era of Change", the program devoted one day of educational discussions to "special needs settlement planning" (SNSP) which ASNP characterized as a "new opportunity" for special needs attorneys.

The ASNP speakers included leading special needs attorneys and plaintiff structured settlement consultants who provided detailed analyses of the following SNSP topics:

• Anatomy of a SNSP Case - Frank Johns, Kevin Urbatsch and Patrick Hindert;
• Structured Settlement Annuities in SNSP Practice - Jack Meligan and Michele Whitmore;
• IRC 468B Qualified Settlement Funds (QSFs) - Jason Lazarus and Richard Risk;
• Integrating SNSP with an Elder Law Practice - Tim Nay and Sandy Conley;
• Medicare Secondary Payer Compliance - Mark Popolizio;
• Lien Resolution Strategies - William Browning, Mark Popolizio and Sylvius von Saucken;
• Marketing to the Trial Bar - Frank Johns, Jason Lazarus, and Kevin Urbatsch.

The SNSP program highlighted three basic issues:

• What is SNSP?
  
• What changes are impacting SNSP?
• What new opportunities does SNSP create for special needs attorneys?

What is SNSP?

Surprisingly, none of the speakers attempted to specifically define SNSP. Hindert recommended web 2.0 knowledge maps, wikis and folksonomies as a strategy for defining and growing SNSP.

Meligan and Whitmore described the related topic of "settlement planning" as both a profession and a process. According to Meligan and Whitmore: "Settlement planning is a profession that helps recipients of settlement proceeds use their proceeds to achieve their post-loss goals and transition successfully into their post-settlement financial lives". Meligan and Whitmore recommended utilizing settlement planning professionals with: credentials; loyalty to plaintiffs; planning approach; and experience. Meligan and Whitmore also described "settlement planning" as part of a three-part process preceded by litigation and followed by financial planning.

von Saucken also described "settlement planning" as a process or "continuum" subject to changing rules that require adjustments in settlement planning prototypes. von Saucken presented a settlement planning timeline:

• Agreement on settlement amount;
• Lien reimbursement;
• Medicare/Medicaid preservation trust;
• Structured settlement paperwork;
• Disbursement.

By comparison, during his recent presentation at the NSSTA 2009 Winter Meeting, Joseph DiGangi defined "settlement consulting" as a four-stage process:

• Analysis
• Planning
• Implementation
• Monitoring

Most of the ASNP presenters identified and addressed "structured settlements" as an essential component of SNSP. As part of his 468B QSF comments, Risk reviewed several structured settlement definitions including the tax definition in IRC section 5891(c)(1). To S2KM's knowledge, Risk thereby becomes the first structured settlement primary market participant to review the IRC section 5891 tax definition for "structured settlement" during a national conference. By comparison, not a single NSSTA or SSP conference speaker has reviewed the IRC Section 5891 definition for "structured settlement" since IRC 5891 was enacted in 2001. Risk also becomes, to S2KM's knowledge, the first conference speaker to link IRC 468B and 5891 which S2KM views as a strategic SNSP construct.

Several ASNP speakers addressed various types of settlement trusts in the context of SNSP. Browning highlighted settlement trust "due diligence" as an increasingly important SNSP issue. Three settlement trust providers, but not one structured settlement annuity provider, exhibited at the SNSP conference.

What changes are impacting SNSP?

ASNP speakers identified and highlighted the following changes impacting SNSP:

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case;
• 468B qualified settlement funds (QSFs);
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Recent MSA rules promulgated by CMS;
• The structured settlement secondary market;
• State structured settlement protection statutes;
• Transition of knowledge and knowledge work to the Internet.

Additional changes referenced by ASNP speakers which deserve more detailed analysis in future SNSP discussions:

• Transitional SNSP business models:
  • How the claim management SNSP model differs from the 468B QSF SNSP model; and
  • How to develop multi-professional SNSP teams and knowledge networks.
• How the current financial crisis impacts SNSP;
• Proposed and/or needed SNSP legislative and regulatory changes.

What new opportunities does SNSP create for special needs attorneys?

Traditional special needs legal practice and education have focused on special needs trusts, estate planning, government benefits and probate. As the ASNP conference demonstrated, SNSP encompasses traditional special needs expertise, but also new fields of related legal practice.

Four leading SNSP legal treatises (listed alphabetically by title) define these new fields of SNSP legal practice:

• "Negotiating and Settling Tort Cases" - by Matt Garretson and Guy O. Kornblum;
• "Qualified Settlement Funds and Section 468B" - by Robert W. Wood;
• "Structured Settlements and Periodic Payment Judgments" - by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert;
• "Taxation of Damage Awards and Settlement Payments" - by Robert W. Wood.

The ASNP presentation by speakers Johns, Lazarus and Urbatsch titled "Marketing to the Trial Bar" offered valuable advice for special needs attorneys as well as other SNSP stakeholders. S2KM's structured settlement transaction diagram, developed in 2005 with graphic artist Keith Burtoft, may help special needs attorneys identify other potential SNSP clients and roles. In addition, as S2KM's blog post "Structured Settlement Surveys" demonstrates, further market research would be useful to define and grow the SNSP market.

Congratulations to ASAP and SNSP program Chairperson Tim Nay for the timely and educational SNSP program. Prior S2KM blog posts about ASNP:

• 2008 ASNP Conference;
• 2007 ASNP Conference.

For additional information about settlement consulting, see S2KM's four-part blog series "Settlement Consulting".

Settlement Consulting - 4

This post continues S2KM analysis and commentary about "settlement consulting" as an alternative business model for structured settlements introduced by Joseph DiGangi at the NSSTA 2009 Winter Meeting.

DiGangi characterized structured settlements as a fundamental settlement consulting product and featured structured settlements in a settlement consulting case example.

DiGangi's discussion identified four stages within the settlement consulting process:

• Analysis - including needs assessment;
• Planning;
• Implementation; and
• Monitoring.

DiGangi raised the issue of whether settlement consulting includes "litigation support" services.

Prior S2KM posts about settlement consulting have:

• Reviewed DiGangi's NSSTA presentation;
• Discussed business definitions and boundaries; and
• Outlined settlement consulting history - from a structured settlement perspective.

This S2KM post republishes and analyzes a structured settlement transaction diagram S2KM developed in 2005 with graphic artist Keith Burtoft. The purposes of the transaction diagram:

• Demonstrate the complexity of structured settlements:
  • In the context of settlement consulting; and
  • From the perspective of an injury victim.
• Provide an analytic framework to:
  • Study the role of structured settlements in settlement consulting;
  • Compare alternative structured settlement business models:
    • Settlement consulting (or planning); and
    • Traditional claim management.
  • Discuss the roles, expertise and work product of various settlement consulting stakeholders;
  • Define "due diligence" and discuss potential professional liabilities;
  • Identify settlement consulting legal entities and improve legal documentation;
  • Improve settlement consulting business standards and performance metrics;
  • Highlight the importance of IRC 468B QSFs;
  • Demonstrate linkage between various settlement consulting components: including
    • Primary and secondary structured settlement annuity markets;
    • Structured settlement annuities and settlement trusts;
    • Settlement trusts and the secondary annuity and life markets.
  • Prioritize legislative and regulatory issues and develop lobbying strategies.

In comparison with 468B QSF settlement consulting, traditional structured settlement analysis (the claim management model):

• Focuses more narrowly on the IRC 130 qualified assignment transaction;
• Assumes structured settlement payees are injury victims - as opposed to trustees and custodians;
• Ignores:
  • IRC 468B qualified settlement funds (QSFs);
  • The secondary structured settlement market;
  • Non-qualified structured settlements.
• Attempts to construct planning strategies and solutions as part of the litigation and negotiation process;
• Encourages "early involvement" by plaintiff and defense structured settlement agents who:
  • Represent the same annuity providers;
  • Collaborate to maximize shared annuity sales;
  • Provide similar "value-added" services (including litigation support) to justify commissions;
  • Lack licensing and training to sell non-annuity products;
  • Fail to disclose their conflicts of interest or their compensation-sharing arrangements.
  • Assume, but fail to address, the "best interests" of injury victims and other structured settlement stakeholders.

Settlement consulting occurs, and will continue to occur, in both the claim management (defense) structured settlement model and the settlement planning (468B QSF) structured settlement model.

• S2KM believes the 468B QSF settlement consulting (and/or planning) model is "vastly superior" to the claim management model for the vast number of settlement consulting stakeholders.
• Settlement Consulting Stakeholders:
  • Injury victims and their families;
  • Federal and state governments including regulators;
  • Judges;
  • Mediators;
  • Guardians;
  • Trustees;
  • Custodians;
  • Defendants and their insurers and re-insurers;
  • Plaintiff trial attorneys;
  • Special needs attorneys;
  • Medicare set-aside professionals;
  • Financial and insurance advisers and intermediaries;
  • Life care planners; and
  • Allocators.
• "Vastly superior" should be (and hopefully will be) defined and demonstrated by industry metrics (including time and money metrics) comparing the claim management and settlement planning models and developing the best alternative with continuing improvements.
• S2KM further believes the 468B QSF settlement consulting model will substantially grow the structured settlement market.

For additional S2KM analysis:

• Structured Settlement Surveys
• Structured Settlement Credo
• Settlement Trust Due Diligence
  
• Knowledge Management and Structured Settlements
  

Robert Wood QSF Interview

Robert W. Wood has written a new legal treatise "Qualified Settlement Funds and Section 468B" published by the Tax Institute and available for purchase on the Tax Institute website. Following S2KM's earlier review of Wood's book, the noted author and tax expert provided S2KM with the following exclusive interview.

S2KM:  Welcome Rob. Let's begin with a controversial issue. Why doesn't "one or more" encompass single claimant QSFs?

Wood:  That's a perfectly logical question, and I wish I had a complete (or even a logical) answer. Of course, the question suggests its own answer. After all, given the statutory language, it might seem that this SHOULD be enough. But tax lawyers are (and ought to be) cautious creatures. When we know the IRS has said it is looking at an issue and we are not certain how it will come out, our hackles understandably go up. In the last analysis, I don't think there should be a problem with single claimant funds, but I am risk averse, and I don't want to end up being a test case!

S2KM:  Does public policy support single claimant QSFs?

Wood:  As I have commented previously, I am not sure I see enough of the big picture to consider the public policy implications of anything in the tax world. In the 30 years I have been practicing as a tax lawyer, I have seen lots of things done in the name of public policy that end up getting changed. Here, I think there ought to be a public policy of encouraging structured settlements, since they encourage financial and tax planning, and encourage the conservation of assets. To the extent Qualified Settlement Funds aid in that endeavor (which I personally think they do), we should also encourage QSFs. That is probably so regardless of how many or how few claimants are in the fund.

S2KM:  How does 468B, as a potential settlement planning "standard", impact settlement negotiation, planning and funding?

Wood:  First, at the present time, I don't think Section 468B trusts are a standard. QSFs are certainly being used more and more today, but we are quite a ways away from seeing the use of the QSF as a standard for every case that structures. I doubt we will ever see that. But if I make a big assumption and think about QSFs in this context, I suppose it would be a good thing. Again, regardless of whether there are many or few claimants, QSFs encourage a kind of regimen, a protocol that involves court supervision and court orders. This is good. Plus, QSFs allow the time necessary to develop and implement plans. In the absence of a QSF, there are sometimes hasty decisions made as a case is settling.

S2KM:  Why don't plaintiff attorneys and settlement planners utilize QSFs in more cases?

Wood:  I'm not sure, but I'd guess the primary reason is simple lack of familiarity. Just as structured settlements were not as widely used 25 years ago because many people lacked familiarity with them, today the QSF is in a similar posture. A second reason may be expense. Some lawyers and clients may say: why spend even a few thousand dollars setting up something if you can structure without it? Although QSFs can almost always help the situation, they may simply not be needed in many simple cases, so they don't get used. Of course, a third reason is the whole single claimant controversy, which understandably causes people to have cold feet in cases where there is only one claimant.

S2KM:  How best can QSF performance metrics be defined and improved?

Wood:  Every case is different, so I am not sure there is a one-size-fits-all kind of answer. Still, you seem to be implying that QSFs will become the standard for structuring settlements in the future. I personally find it hard to imagine that will happen. That is, I think we will see lots more QSFs going forward, but I doubt we will ever see a QSF for every structured settlement. But if it does happen, then it should encourage structured settlements, and the thoughtful and orderly implementation of plans. I may be wrong, but I suspect that in the vast number of cases, the plaintiff/claimant feels enormous pressure to make a decision quickly about structured settlements at settlement time. These structured settlements end up being locked in place for many years and potentially for life. QSFs can release the pressure by allowing more time for decision making.

S2KM:  How can QSFs improve and grow the structured settlement and settlement planning markets?

Wood:  First, to reiterate my answer to the prior question, I think QSFs can act as a safety valve to allow more time, so claimants can fully evaluate and tailor their structured settlements. I don't have any statistical evidence to back this up, but I would bet that more time would produce more (and more carefully constructed and personally tailored) structured settlements. To begin with, though, I suppose there needs to be a critical mass, more use of QSFs, so more lawyers, brokers, insurance companies and defendants become more comfortable with them. That includes class action administrators too, although many in that context are already familiar with QSFs. Even so, someone needs to consistently remind all these people about structured settlements - and I mean structures of tax-qualified Section 104 payments, as well as structures of taxable monies. Regardless of the context, in almost every case, SOMEONE ought to be asking whether there is interest in structuring all or part of the recovery. We all need to make sure we are offering adequate choices and adequate disclosure.

S2KM:  What are the most important QSF educational priorities and opportunities?

Wood:  I guess it depends on where you are in the industry, on what your role is, and who your contacts are within that sphere. I think we can all start small, and attempt to at least discuss the concept with people with whom we work. We can start by using the QSF concept and discussion as a way to bridge difficulties. Regarding the sensitive topic of commissions, I think brokers on the plaintiff side, brokers on the defense side, and the life companies themselves all need to cooperate. No one likes to have the rug pulled out from under them. It may sound like a Rodney King remark, but we all ought to be able to get along!

S2KM:  Rob, thank you for your insightful comments and continued success with your new QSF legal treatise.

Additional S2KM blog posts featuring Robert Wood:

• Robert Wood and 468B Funds
• Single Claimant 468B Funds
  
• Structured Attorney Fees
  
• Factor vs. Commute
  

IRC 468B and 5891

Both IRC 468B and 5891 challenge and change the traditional structured settlement claim management model.

To improve and grow structured settlements as part of the emerging settlement planning model, industry leaders must refocus their strategic analysis beyond defense of IRC 130 and 104(a)(2) with more positive and proactive thinking about IRC 468B and 5891.

This strategic re-focus should:

• Re-prioritize 468B and 5891 as critical for industry growth.
• Re-analyze 468B and 5891 utilizing perspectives and knowledge experts from outside the traditional "structured settlement box".
• Re-set educational targets, priorities, objectives, content and methodologies for 468B and 5891.
• Study how to market structured settlements to settlement planning stakeholders and decision makers by featuring 468B and 5891.
• Develop a settlement planning legal and business framework protecting structured settlements and incorporating 468B and 5891.
• Build a settlement planning lobbying coalition and strategy to grow structured settlements with 468B and 5891.

IRC 468B

• As Robert Wood states in his new 468B legal treatise: the benefits of a QSF "seem to be of staggering proportions" and "QSFs are definitely not tax shelters".
• Wood asks: "how could [anyone] not do handstands over a simple trust that essentially abrogates the fundamental tax concepts of constructive receipt and economic benefit"?
• No one disputes that QSFs can be used to implement qualified assignments and annuity-funded structured settlements.
• The 468B dispute is whether "one or more" means "one or more" - without any existing tax rulings or case law that deny or contradict the obvious meaning.
• Instead of doing handstands over QSFs, traditional claim management structured settlement stakeholders have spent hundreds of thousands of dollars to preserve a stagnant business model.
• Instead of QSFs serving as a platform for growth, the structured settlement industry collectively has created 468B confusion and conflict where otherwise none exists.
• Structured settlement transition and growth should be predicated upon QSFs and structured settlements becoming a standard and integrated claim resolution model.

IRC 5891

• IRC 5891(c)(1) defines "structured settlement" for tax purposes. It references and incorporates IRC 130, 104(a)(1) and (a)(2).
• When QSFs implement structured settlements, the funding must satisfy 5891's "structured settlement" definition.
• IRC 5891 also provides definitions, rules and penalties for a state-run system to review and approve post-settlement transfers of structured settlement payment rights.
• 46 states have enacted structured settlement protection statutes which generally adhere to the Model State Structured Settlement Protection Act.
• With few exceptions, the state protection statutes currently do not apply to the primary market.
• Just as 468B challenges and changes the traditional structured settlement model, so also does 5891 and the state protection statutes.
• Unlike the 468B structured settlement dispute, however, the 5891 dispute does not yet match competing statutory interpretations or divide plaintiff and defense consultants.
• The 5891 dispute exists because the secondary market fundamentally and permanently changes traditional structured settlements.
• Settlement transfers directly attack traditional industry credo: i.e. structured settlements provide permanent solutions and protection for injury victims.
• Instead of proactively adjusting to legislative and business changes, however, the primary structured settlement participants (plaintiffs and defendants) have abandoned their own customers (injury victims) and their own products to the factoring companies.
• Instead of offering alternatives solutions, the primary market's response has featured a public relations campaign highlighting secondary market abuses.
• For the structured settlement market to transition and grow, the primary market needs a more proactive and constructive secondary market strategy.

Court Approval and Protection Statutes

• Court approval and state protection statutes represent two complementary foundations to improve and grow the structured settlement market.
• IRC 468B and 5891 both offer court approval features.
  • The government authority most often responsible for 468B QSFs is a court - although almost any federal or state authority may order and approve QSFs.
  • IRC 5891 requires a state court or responsible administrative agency to approve secondary market transfers.
  • If secondary market transfers require court approval to protect injury victims, why not protect injury victims when structured settlements originate?
  • In addition to other features and benefits, QSFs already provide a court approval process when structured settlements originate.
  • When judges approve QSF-generated structured settlements, why not apply applicable and existing requirements from state protection statutes such as "disclosure" and "best interest"?

Qualifications, Products and Services

• To transition successfully to the settlement planning model, structured settlement leaders must re-think traditional industry standards (qualifications; products; and services) and better address 468B and 5891.
• Questions:
  • What QSF qualifications and licensing should a judge and/or administrator require for structured settlement professionals?
  • Who else is part of the planning team?
  • What QSF products and services are needed beyond traditional structured settlements?
  • Who among the QSF advisers has responsibility for secondary market knowledge and post-settlement transfer services?