Beyond Structured Settlements

The ELNY Due Process Issue

Assuming presiding Judge John M. Galasso signs the Order of Liquidation and Approval of a Restructuring Agreement for Executive Life of New York (ELNY) as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, a critical issue arises:

Will the ELNY structured settlement shortfall payees have been afforded "due process" before being deprived of a percentage of their payment rights?

The Fifth and Fourteenth Amendments to the United States Constitution provide in part:

• Fifth Amendment - "No person shall be ... deprived of life, liberty, or property, without due process of law;"
• Fourteenth Amendment Section 1 - "No State shall ... deprive any person of life, liberty, or property, without due process of law."

The United States Supreme Court has interpreted these clauses as creating two doctrines: substantive due process and procedural due process.

Substantive Due Process

Substantive due process addresses whether the government has an adequate reason for taking away a person's life, liberty or property. The most obvious, and presumably adequate, reason why the ELNY liquidation hearing could result in some persons (shortfall payees) being deprived of property (percentage of their annuity payments) is that ELNY is insolvent.

ELNY does not have sufficient assets to meet all of its future payment liabilities. Because of variations in state guaranty association laws (primarily coverage caps) as well as individual ELNY contracts (size of annuities), approximately 15 percent of ELNY's annuity payees (mostly structured settlement payees) anticipate shortfalls while the other 85 percent expect to receive 100 percent of their promised future payments from ELNY's successor company, Guaranty Association Benefits Company (GABC).

Alternative Legal Recourse

Some of the structured settlement shortfall payees should have recourse against defendants and/or liability insurers who funded their structured settlement using a "buy and hold" methodology. Other structured settlement payees, whose structured settlements were funded with qualified assignments, likely would not have similar secondary payment options because First Executive Corporation (FEC), the purchaser and owner of their annuities, declared bankruptcy in 1991 and no longer exists. For an explanation of the difference between "buy and hold" funding and qualified assignments, see this prior S2KM blog post.

Although ELNY shortfall victims (including both policyholders and payees) might have a legal claim against the Superintendent, as Receiver, and his agents, including the New York Liquidation Bureau (NYLB), the Superientent's proposed Liquidation Order includes an immunity clause intended to protect the Superintendent and his agents from any legal claims that they mismanaged the ELNY Rehabilitation and are responsible for ELNY's insolvency. For additional information about the ELNY immunity issue, see this prior S2KM blog post.

Procedural Due Process

Procedural due process addresses whether the government has followed adequate procedures in taking away a person's life, liberty or property. A denial of procedural due process occurs only when there is a denial of life, liberty or property without adequate procedures. For many ELNY structured settlement payees, the probable result of the ELNY Liquidation Order and Restructuring Agreement will be to deny them of a portion of their future structured settlement payment rights. The key question for purposes of procedural due process is whether the procedures that could result in this loss of property have been "adequate".

Structured settlement payees who anticipate shortfalls and their attorneys have argued "no" - the procedures have not been adequate and therefore they anticipate suffering an unconstitutional taking of their property because of:

• Inadequate notice - ELNY's financial records indicate ELNY became insolvent as early as 2002. Former New York Governor Eliot Spitzer held a press conference in 2007 announcing "an agreement in principle" that all future ELNY payments would be paid in full and on time. The NYLB mailed letters to individual ELNY annuity payees on December 7, 2011: 1)  notifying them about the proposed ELNY Liquidation and Restructuring Agreement; and 2) alerting them of anticipated shortfalls for specific ELNY annuity contracts and a January 16, 2012 deadline for filing written objections. Responding to objections of inadequate notice, the Superintendent has argued the ELNY notice and briefing schedule balanced the need for a prompt resolution of ELNY’s deepening insolvency against the ability of affected parties to review and object to the proposed liquidation and Restructuring Agreement.
• Denial of information - ELNY shortfall victims and their attorneys claim they have received inadequate information to properly evaluate the proposed Restructuring Agreement in order to propose possible improvements and/or alternatives. The Superintendent's response: this objection does not constitute grounds for rejecting the Restructuring Agreement because the information sought has been provided or is premature and unnecessary for the Court’s consideration and approval of the Restructuring Agreement. The Superintendent further points out the objectors have not offered a competing plan. During the ELNY hearing, Judge John Galasso denied a motion by attorneys for the structured settlement shortfall victims to gain access to source materials utilized by Jack Gibson, the Superintendent's expert, who testified: 1) GABC is "financially viable"; 2) the Superintendent's proposed plan was "the best plan"; and 3) all ELNY shortfall victims will be better off under the proposed Restructuring Agreement than under a straight liquidation.
• Denial of witnesses - Judge Galasso refused to allow attorneys for ELNY shortfall payees to introduce several expert witnesses stating "they wouldn't help". Among the witnesses not permitted to testify:
  • A former Chief Executive Officer of ELNY.
  • Two expert actuaries.
  • Two forensic accountants one of whom is also an insurance fraud investigator.

In an article published in the Touro Law Review (Vol 16 page 871), titled "Procedural Due Process Claims", constitutional legal expert Erwin Chemerinsky highlights the following three-part balancing test the United States Supreme Court articulated in Mathews v. Eldridge (1976) to determine whether an individual has been denied procedural due process:

• The more important the interest to the individual, the more procedural protections the reviewing court is going to require.
• The reviewing court must balance the ability of additional procedures to increase the accuracy of the fact finding; how likely is it that the additional procedures will reduce the risk of erroneous deprivation?
• Whether the government's interest in administrative efficiency is such that the more expensive the procedures would be, the less likely it would be that the reviewing court would require them.

For S2KM's complete reporting about the ELNY Liquidation Hearing, see the structured settlement wiki.

New York Liquidation Hearing - 9

Following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso is deciding whether to sign an Order of Liquidation and Approval of a Restructuring Agreement for Executive Life of New York (ELNY) as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver.

The ELNY hearings have raised a variety of issues not all of which Judge Galasso will be expected or required to address:

• Will Judge Galasso approve the ELNY Liquidation Order and Restructuring Agreement as proposed by the Superintendent? 
• Does Judge Galasso have any other options?
• Why wouldn't Judge Galasso appoint a "Special Master" to consider objections and/or alternatives to the proposed ELNY Restructuring Agreement?
• Would his denial of the proposed Order necessarily result in a "statutory liquidation" under New York law?
• What would a statutory liquidation mean for: 1) ELNY annuity policyholders and payees; 2) NOLHGA and the participating Guaranty Associations (PGAs); 3) New York Governor Andrew Cuomo and Superintendent Benjamin Lawsky; 4) the structured settlement industry?
• Would any of the ELNY structured settlement shortfall payees be better off under a statutory liquidation?

Assuming Judge Galasso does approve the proposed Order:

• Will the Liquidation Order grant legal immunity to the Superintendent, as ELNY Receiver, and his agents, including the New York Liquidation Bureau (NYLB), for their acts and omissions in managing ELNY's Rehabilitation since 1991?
• What is the legal justification for any such grant of immunity?
• Did Judge Galasso commit reversible errors when he denied various motions by attorneys representing ELNY structured settlement payees who expect to experience shortfalls under the proposed Restructuring Agreement?
• Would attorneys for the ELNY shortfall payees appeal the result?
• What would be the basis for their appeal?
• Assuming an appeal bond is required, how much would it cost?
• Assuming the ELNY shortfall payees won an appeal, what would they hope/expect to accomplish with a new hearing?
• Besides an appeal, what other options, if any, exist for ELNY structured settlement shortfall payees?

Additional issues raised, but not definitively resolved, during the ELNY hearing:

• When did ELNY become insolvent?
• Who was responsible for ELNY's insolvency?
• How many of the ELNY structured settlement shortfall annuities are funded with Qualified Assignments as opposed to "Buy and Hold" funding?
• Who are the defendants, liability insurers and/or brokers who purchased or funded ELNY annuities with anticipated shortfalls?
• Which PGAs will contribute to specific ELNY contracts?
• Which life insurance companies have offered to make voluntary contributions and/or enhancements to Guaranty Association Benefits Company (GABC)?
• Why would they contribute anything? And, why won't they contribute more?
• How much additional money would be required to make all ELNY structured settlement payees whole?
• What impact, if any, will the ELNY Liquidation have upon:
  • The structured settlement industry?
  • The existing state insurance regulatory system?
  • The insurance liquidation process in New York?

For additional S2KM reporting about the ELNY liquidation, see the structured settlement wiki.

ELNY Liquidation Hearing - 7

Day 10 of the Executive Life of New York (ELNY) Liquidation Hearing was consumed by the closing summations of attorneys representing Objectors to the ELNY Restructuring Agreement proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as Receiver for ELNY. The Objectors included: ELNY structured settlement shortfall payees, ELNY policyholders and at least one structured settlement factoring company.

Attorney Megha Charalambides, speaking on behalf of her shortfall victim clients, proposed to presiding Judge John M. Galasso that he appoint a "Special Master" to meet with representatives of all parties for the purpose of considering possible alternatives to the Superintendent's proposed plan. If an alternative plan materialized by a specified deadline, the Judge could consider it. Otherwise, he could approve the Superintendent's plan. Judge Galasso did not immediately respond to Charalambides' proposal.

Representing Travelers, attorney Craig Ulman confirmed his client was prepared to make whole any ELNY-related structured settlement payment obligations funded on a "buy and hold" basis and that Travelers had already sent out notices to payees under such ELNY annuity contracts. On "cross-summation" attorney Edward Stone pointed out that Travelers is already legally obligated to make those payments and that Travelers' offer apparently does not apply to ELNY structured settlement payment obligations Travelers funded using a "Qualified Assignment".

Note: This prior S2KM blog post explains the difference between buy and hold and Qualified Assignment structured settlement funding. The problem for most, if not all, of the ELNY structured settlement shortfall victims with Qualified Assignment funding is that First Executive Corporation (FEC), the assignee/owner, collapsed in 1991 and no longer exists. This prior S2KM blog post provides a background summary of FEC's history.

Judge Galasso denied two motions by attorney Stone during his closing summation without offering explanations:

• Stone moved for a mistrial (which Judge Galasso re-characterized as a motion for a misorder) on the grounds that his clients' property was being taken without due process.
• Stone also moved for a 30 day stay of hearing to allow structured settlement shortfall victims to develop and present an alternative ELNY restructuring plan.

Closing summations continue on Thursday. For S2KM's complete reporting about the ELNY Liquidation Hearing, see the structured settlement wiki.

ELNY Liquidation - 5

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:

1. "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.
2. "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.
3. "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.
4. "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."

Qualified Assignment

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:

1. "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.
2. "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.
3. "The assignee makes this promise to the claimant, the claimant accepts the assignee’s promise, and the assignor’s duty is discharged.
4. "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."
5. 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).