Beyond Structured Settlements

SEC Bulletin Addresses Structured Settlement Transfers

The Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy has issued an Investor Bulletin titled "Pension or Settlement Income Streams: What You Need to Know Before Buying or Selling Them". 

Although the SEC Investor Bulletin "is neither a legal interpretation nor a statement of SEC policy" it provides advice for individuals who are contemplating selling or purchasing (as investors) structured settlement payment rights and/or future pension payments.

The Investor Bulletin highlights questions potential sellers and investors should ask before proceeding with proposed transactions.

For sellers:

• "Is the transaction legal?"
• "Is the transaction worth the cost?"
• "What is the reputation of the company offering the lump sum?"
• "Will the factoring company require life insurance?"
• "What are the tax consequences?"
• "Does the sale fit your longer term financial goals?"

For investors:

• "Is the financial professional selling the product registered with a state or federal regulator or with FINRA?"
• "How is the salesperson being compensated?"
• "Is the salesperson authorized to sell this product?"
• "What is the reputation of the company selling the product to me?"
• "What are the tax consequences?"
• "What organization is ultimately paying you?"
• "Who is sending the check?"

To check the registration status of a salesperson, the SEC Bulletin recommends investors check these resources:

• The SEC's Investment Adviser Public Disclosure (IAPD) website.
• FINRA's BrokerCheck or telephone number (800-289-9999).
• Your state securities regulator.
• The NAIC's website or telephone number (866-470-6242) for your state's insurance commission.

The SEC's Investor Bulletin includes a number of additional warnings and resource links and concludes with the following admonition:

"Whether you are thinking about selling a pension or structured settlement, or buying one from someone else, remember that the risks in doing so are substantial and the safety net if things go wrong may not be very strong. Don’t shy away from asking probing questions—and shop around. there may be less risky alternatives to help you achieve your financial objectives."

Also note: The SEC Investor Bulletin provides a generic definition for a structured settlement plus an indirect reference to state structured settlement protection statutes. It does not, however, specifically reference or discuss the definitions, requirements and protections for structured settlement transfers provided in:

• Internal Revenue Code section 5891; and
• The state structured settlement protection statutes.

For a detailed analysis of transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

Reliance Structured Settlement Annuities

What happens, or should happen, to structured settlement payees when the owner of their structured settlement annuities becomes insolvent?

Reliance Insurance Company (Reliance), a liability insurer, is the most recent example where these issues are being adjudicated. Previous examples include Monarch Capital Corporation and First Executive Corporation, both non-insurance companies which, as "qualified assignees", owned structured settlement annuities issued by their subsidiary life insurance companies.

The Commonwealth Court of Pennsylvania (Liquidation Court) declared Reliance insolvent and issued an Order of Liquidation which appointed the Pennsylvania Insurance Commissioner as Liquidator in 2001.

The Reliance Estate, however, remains open and its current assets include approximately 3,400 structured settlement annuity contracts which the Liquidator estimates have a present discounted value of $95.1 million. The Liquidator further estimates:

• Over 85 percent of the structured settlement annuity contracts owned by the Reliance Estate are “qualified assignment” contracts and the rest are “buy and hold” contracts.
• Over 95 percent of the qualified assignment contracts owned by the Reliance Estate involve annuity contracts issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

As part of the Reliance liquidation process, current Pennsylvania Insurance Commissioner Michael F. Consedine requested the Liquidation Court on September 10, 2012 to enter an Order approving transfer of ownership of these structured settlement annuity contracts to the annuity payees which, in many cases, now include factoring companies and investors who have purchased structured settlement payment rights from factoring companies.

On February 28, 2013, Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter ordered the Liquidator’s Application for Approval to Transfer Ownership (Transfer Application) “be held in abeyance until further order of this Court.”

As justification for the proposed transfer of structured settlement ownership, the Transfer Application provides in part:

• With the exception of several structured settlement annuities issued by Executive Life of California and Executive Life of New York (ELNY), all payments related to structured settlement annuities owned by the Reliance Estate have been paid by the annuity issuers.
• The structured settlement annuity payees will have the same right to receive payments from the annuity issuers assuming transfer of ownership to the payees.
• As owner of the annuity contracts, Reliance has the right to transfer ownership upon notice to the annuity issuers.
• The Liquidator has concluded that transferring ownership of the annuity contracts to current payees under those contracts, with the simultaneous discharge of Reliance’s related structured settlement payment obligations:
  • Would be in the “best interest” of the Reliance Estate and represents “the only viable option”; and
  • Would not create any federal income tax liability for Reliance.
• Recognizing that any asset transfer requires prior court approval, the Liquidator “explored several other options” including transfer of the annuity contracts to:
  • A newly-formed entity such as a subsidiary corporation; and/or
  • A trust owned by Reliance.
• The Liquidator, however, concluded that any and all such alternative options would fail to provide the Reliance Estate with finality and expense reduction.

The Liquidator’s Transfer Application provides the following additional comments about the Reliance structured settlement payees:

• Tax consequences – The Liquidator concluded “it is impossible and imprudent” for the Liquidator to make predictions or provide tax advice for the payees because each has unique circumstances. Accordingly, “payees may want to consult a tax advisor or accountant with respect to the [proposed] transfer.”
• Priority in liquidation – If any structured settlement annuity issuer fails to meet its structured settlement obligation (which the Transfer Application questionably refers to as “the primary obligation”), the Liquidator has determined a claim against the Reliance Estate under a “qualified assignment” contract “would warrant no higher than class (e) priority" under the Pennsylvania Insurance Company Act. The Liquidator, however, anticipates no Reliance creditors below class (b) priority will receive any distribution from the Reliance Estate.
• Notice – The Liquidator does not have a complete list of current names and addresses of Reliance structured settlement payees in part because Reliance did not retain copies of either the annuity contracts or other structured settlement documents issued by United Pacific Life Insurance Company when it sold the company in 1993. The Liquidator assumes Reliance structured settlement annuity issuers have the ability to furnish individual notice. In addition, the Liquidator plans to publish notice in multiple regional and national newspapers.

Additional Resources

• For additional documents related to the Reliance Liquidation, see the Reliance Documents website.
• For additional information about the resolution of Monarch Capital Corporation structured settlements, see Section 5.04[2][b][ii] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• For additional information about the resolution of First Executive Corporation structured settlements, see the structured settlement wiki and S2P2J Sections 3.05[11-13].
• For a discussion of alternative funding options ("qualified assignments" vs. "buy and hold") in the context of the ELNY liquidation, see "ELNY Qualified Assignments".

Moody's Downgrades JG Wentworth

Moody's Investors Service has announced a downgrade of its Corporate Family Rating (CFR) for JG Wentworth (JGW) from B3 to Caa1 and has issued the same downgrade for JGW's new $425 million senior secured term loan and $20 million senior revolving credit facility issued by Orchard Acquisition Company, a subsidiary of JGW. Moody's outlook for both the CFR and the debt ratings is "stable".

Under Moody's credit rating scale, "B3" signifies a long-term rating "judged as being speculative and a high credit risk" and "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk."

Moody's CFR and debt ratings for JGW are separate and distinct from financial agency ratings applicable to JGW securitizations of structured settlement payment rights which historically have been rated as high quality and low risk investments.

Bloomberg News reported in early January 2013 that JLL Partners, owners of JGW, had abandoned plans to sell the company after bids failed to meet expectations and might consider a dividend recapitalization or an initial public offering instead.

Moody's announcement confirmed "JGW is undergoing a leveraged recapitalization that will result in a tripling of the company's corporate debt as it pays its shareholders a very substantial dividend....Net proceeds from the $425 million Senior Secured Term Loan issuance will be used to finance a $309 million capital distribution to JGW's shareholders as well as to repay an existing $142 million term loan." 

Moody's identified multiple reasons for its downgrade of JGW:

• JGW's leveraged recapitalization will result in a "meaningful increase in leverage and decrease in debt service coverage."
• It also "indicates a more aggressive financial policy than was anticipated in the previous B3 rating, given the large size of the capital distribution, the notable increase in debt service requirements and accompanying high corporate leverage."
• Based upon significant capital distributions JGW's financial owners have previously taken, Moody's believes the risk of future aggressive financial policies continues despite JGW low structured settlement portfolio risk and historically strong cash flow.
• JGW's "cash flows are already highly leveraged, with the vast majority of cash flows utilized to support securitization structures' debt servicing requirements."
• "Increased interest coverage requirements will also divert resources that could otherwise be utilized to build the [JGW] franchise or support growth-related infrastructure."
• In addition to its complex organizational structure, JGW lacks clearly defined financial policies and has experienced Chief Financial Officer turnover.
• JGW is significantly dependent on the confidence-sensitive securitization market and its structured settlement payment rights are illiquid.

Moody's also identified factors whereby JGW's rating could be upgraded or downgraded:

• Upgraded - If JGW "meaningfully decreases its leverage, improves interest coverage levels and adopts a more conservative financial policy."
• Downgraded - If JGW's "liquidity risk increases, such as through a failure to renew major warehouse lines or securitize receivables, or due to reduced cash flows, such as through a decrease in net yield, loss of market share or a material adverse legal or regulatory ruling."

As S2KM reported in this prior blog post, JGW, which was founded in 1995, has experienced a tumultuous recent history:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• A June 2011 DBRS report, published prior to JGW's 23rd asset-backed structured settlement securitization, stated that JGW had previously consummated 59.000 structured settlement factoring transactions with aggregate payment streams of $4.5 billion and 0.11% of losses.
• Also in 2011, JGW merged with Peachtree Settlement Funding (Peachtree) in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• Industry estimates obtained by S2KM of the post-merger 2012 market share (revenue and sales) of the now-combined JGW/Peachtree vary from a low of 50% to a high of 75%.
• Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.

Despite JGW's downgrade by Moody's and its tumultuous recent history, industry experts, including some rating agencies, maintain a positive outlook for the 2013 structured settlement secondary market.

For example, in a recent "Secondary Market Update", S2KM reported the following 2013 structured settlement secondary market projections by DBRS, a rating agency that covers various structured finance product groups: "Based on the estimated 15% increase in issuance in 2012 to $630 million, DBRS expects further 10%+ increase in issuance in 2013 amid the continuing popularity of the [structured settlement] asset class among certain investors."

Additional Resources

• For additional S2KM reporting and commentary about the structured settlement secondary market, see the structured settlement wiki.

• For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Secondary Market Update

DBRS 2013 Outlook

DBRS, a rating agency that covers various structured finance product groups including structured settlement payment rights, has published its 2013 Outlook for commercial asset-backed securities. Among DBRS' observations and projections for the structured settlement secondary market:

• "From the structural and rating perspective, implementation of the restructuring plan for Executive Life Insurance Company of New York provides a rare and valuable glimpse into the insurer liquidation process and adds evidence to the expected recovery proceeds assumptions in case of default by an insurer in the future."
• "Based on the estimated 15% increase in issuance in 2012 to $630 million, DBRS expects further 10%+ increase in issuance in 2013 amid the continuing popularity of the asset class among certain investors."
• "Expected steady collateral performance in 2013 will be supported by low delinquencies and improving condition of the insurance industry."

Based upon interviews with industry experts, S2KM previously estimated total 2012 structured settlement secondary market profit of $120 million calculated as follows:

• $1 billion received from investors;
• Less: $360 million paid to transferors;
• Equals: $640 million of revenue;
• Less: $520 million of expenses;
• Equals: $120 million of profits.

The difference between S2KM's estimated "$1 billion received from investors" and DBRS' estimated $630 million of "issuance" (meaning presumably "total face amount of structured settlement collateral debt obligations sold to investors") can be explained by two factors according to industry experts:

• Except for J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree), most structured settlement factoring companies and brokers currently do not obtain financial ratings when they re-sell structured settlement payment rights.
• JGW, Peachtree and other issuers of rated bonds backed by structured settlement payment rights in 2012 may receive as much as $50 million of additional income from investors in the form of residuals, servicing rights and other income over time.

Drinker Biddle Structured Settlement Alert 

Drinker Biddle's website features summaries of two recent cases where state court judges in Florida and California have denied proposed transfers of structured settlement payments rights paid pursuant to awards under the Longshore Act and the California workers compensation statute, respectively.

In each case, the objecting structured settlement annuity issuer was represented by Drinker Biddle attorneys.

In the Florida case (In Re: Approval for Transfer of Structured Settlement Proceeds by Derrick Robotham), Circuit Court Judge Michelle Morley held the proposed transfer would contravene Federal law which prohibits assignment of Longshore Act payments. It would not, therefore, satisfy the requirements of the Florida structured settlement protection act which prohibits transfers that would violate or conflict with any applicable law.

In the California case (In Re Rudy Andrade), Superior Court Judge Amy D. Hogue applied similar reasoning in denying a petition seeking court approval for the transfer of a payee’s rights to payments under a workers’ compensation settlement. Among other findings, Judge Hogue held that the California structured settlement statute does not apply to transfers of workers' compensation payments. In addition, according to the Judge, the proposed transfer contravened: 1) the California Labor Code which prohibits assignment of workers' compensation payments; 2) California common law because the release agreement signed by the payee prohibited assignment of payments; and 3) a prior order of the California Workers' Compensation Appeals Board that also expressly prohibited assignment of the payments.

Additional Resources

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

J.G. Wentworth Abandons Sale Plan

Bloomberg News reported earlier this week that JLL Partners, owners of J.G. Wentworth (JGW), have abandoned plans to sell the company after bids failed to meet expectations and may now consider a dividend recapitalization or an initial public offering instead.

Earlier reports had indicated that JLL Partners was seeking a $1 billion purchase price for JGW from private-equity firms with Moelis & Co. and Deutsche Bank AG acting as investment bankers.

JGW, which was founded in 1995, has experienced a tumultuous recent history:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• A June 2011 DBRS report, published prior to JGW's 23rd asset-backed structured settlement securitization, stated that JGW had previously consummated 59.000 structured settlement factoring transactions with aggregate payment streams of $4.5 billion and 0.11% of losses.
• Also in 2011, JGW merged with Peachtree Settlement Funding (Peachtree) in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• Industry estimates obtained by S2KM of the post-merger 2012 market share (revenue and sales) of the now-combined JGW/Peachtree vary from a low of 50% to a high of 75%.
• Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.

For S2KM's summary evaluation of the structured settlement secondary market in 2012, see this prior blog post.

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Structured Settlements in 2012 - 3

Secondary Market

In contrast to anticipated 2012 sales declines in the U.S structured settlement primary market, industry experts interviewed by S2KM agree the U.S. structured settlement secondary market achieved record sales and profits in 2012. 

S2KM secondary market estimates for 2012 - based on interviews with industry experts:

• 12,000 secondary market transfers - with less than 120 contested by annuity owners and/or providers.
• $360 million of total secondary market purchases (money paid to transferors).
• $30,000 average individual transfer.
• Average discount rates in the low double digits - with the lowest average discount rates (high single digits) provided by AllState's commutations.
• Total industry profit of $120 million calculated as follows:
  • $1 billion received from investors;
  • Less: $360 million paid to transferors;
  • Equals: $640 million of revenue;
  • Less: $520 million of expenses;
  • Equals: $120 million of profits.

Discount Rates

• As explained by Earl Nesbitt, Executive Director of the National Association of Settlement Purchasers (NASP), during his presentation at the NASP 2011 Annual Meeting: the concepts of "discount rate" and "discounted present value" both play an important role in court hearings to evaluate structured settlement transfer proposals.

• The Model State Structured Settlement Protection Act defines "discounted present value" to mean: "the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service."

• Secondary market experts interviewed by S2KM agree generally that discount rates for structured settlement transfers were "low" during 2012 compared with prior years - especially when compared with 2009 when discount rates were exceptionally "high" as a result of the 2008 financial crisis.
• "Average" discount rates are difficult to define because many factors determine the discount rate for a specific case. For examples: cost and availability of funds; single vs. multiple bid transactions; duration and amount of payments; and whether payments are certain or life contingent.
• During his 2011 NASP presentation, Nesbitt summarized these results from a 2011 survey he conducted of the discount rates approved by judges in Harris County Texas:
  • The average discount rate: 15.8 percent;
  • The weighted average (i.e. taking into consideration the relative case size): 12.96 percent;
  • The lowest discount rate: 7.4 percent; and
  • The highest discount rate ($3494 paid for $7282 due in less than one year): 61.3 percent.

Market Shares

• Industry experts interviewed by S2KM disagree on who controls what percentages of the structured settlement secondary market.
• Estimates of the post-merger 2012 market share (revenue and sales) of the now-combined J.G. Wentworth and Peachtree Financial Solutions (JGW/Peachtree) vary from a low of 50% to a high of 75%.
• The remaining 2012 market shares (revenue and number of transfers) are believed to be split relatively evenly among other NASP members and non-NASP members including re-sellers.
• Not all secondary market participants, however, share equally in industry profits.
• Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.
• Many new secondary market participants, including re-sellers, who began entering the market in 2009, are experiencing lower profits (or losses) in 2012 according to industry experts interviewed by S2KM. In addition, attorneys representing insurance companies report these newer (non-NASP member) factoring companies and re-sellers frequently lack legal and transactional knowledge ("don't know what they are doing") and cause an inordinate number of transfer problems.

Primary Market Response

As S2KM previously reported, continuing secondary market sales growth has occurred despite restrictive actions by primary structured settlement participants. Examples:

• The National Structured Settlement Trade Association (NSSTA) continues to prohibit its members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements?"
• In Stone Street Capital v. McClendon, a Louisiana state court ruled that Travelers Insurance, as owner of structured settlement annuities, had no right to order structured settlement annuity issuers (in this case MetLife) to stop making payments to transfer companies following the death of the original annuitant/payees because of the existing court orders approving those transfers.

Historic Metrics

Based upon interviews with industry experts and DBRS' June 8, 2011 Pre-Sale Report for J.G. Wentworth's Fixed Rate Asset-Backed Notes Series 2011-1, S2KM estimates the following historic (1986-2012) structured settlement secondary market metrics:

• 136,000 transfers - involving 68,000 structured settlement recipients.
• $4 billion - aggregate sums paid to transferor structured settlement recipients. For comparison, S2KM estimates the primary market has sold $134 billion of structured settlement annuities since 1975.
• $10.4 billion - aggregate periodic payments purchased by secondary market companies.

2012 Secondary Market Developments

• Vermont became the 48th state to enact a structured settlement protection statute. The new Vermont statute is generally based upon the NCOIL Model Act with some variations related to independent professional advisors, notice requirements for certain state agencies and the required court appearance by the structured settlement payee.
• JLL Partners, owners of J.G. Wentworth, are reportedly attempting to sell the company for $1 billion with several private-equity firms identified as potential purchasers.

For additional S2KM structured settlement secondary market reporting and resources, see the structured settlement wiki.

Additional post in S2KM's blog series: "Structured Settlements in 2012":

• Part 1 - Primary market

• Part 2 - Settlement planning

• Part 3 - Secondary market

• Part 4 - Executive Life of New York

Stone Street Capital v. McClendon

A Louisiana state court has ruled in Stone Street Capital v. McClendon that MetLife and Travelers had no right to withhold a structured settlement payment from Stone Street Capital which Stone Street had previously purchased, with court approval pursuant to the Louisiana structured settlement protection act, despite the original annuitant/payee's death prior to the payment date.

This 2012 case, which was featured in a presentation by Earl Nesbitt at the NASP 2012 Annual Conference, reinforces the finality of settlement transfer orders. According to Nesbitt, it also calls into question other cases where Travelers, as owner of structured settlement annuities, has ordered structured settlement annuity issuers to stop making payments to transfer companies following the death of the original annuitant/payees despite existing court orders approving those transfers.

Background

• In 1990, Shelia McClendon entered into a structured settlement in which Travelers Insurance Company, as assignee, purchased an annuity from Travelers Life and Annuity Company, which later became MetLife Annuity Company of Connecticut in 2006.
• On July 27, 2007, Shelia McClendon entered into a purchase and sale agreement with Stone Street Capital to sell her right to a $51,800.51 payment due October 15, 2010.
• On September 20, 2007 the same court which subsequently heard the Stone Street v. McClendon case signed an order approving the transfer.
• In the 2007 transfer proceeding, Stone Street gave proper notice to MetLife (as annuity issuer) and Travelers (as annuity owner) neither of whom raised any objections.
• MetLife subsequently sent a letter to Stone Street advising that MetLife would make the assigned payment to Stone Street in compliance with the order.
• The transfer order provided an indemnity, allegedly requested by Travelers and MetLife, to protect them from any further suit by any party asserting an ownership claim or a right to the assigned payment.
• Shelia McClendon died in 2008.
• Pursuant to instructions from Travelers, MetLife did not pay Stone Street the October 15, 2010 payment when due.
• Following Stone Street's inquiry, MetLife and Travelers informed Stone Street that other persons had competing demands for the October 15, 2010 payment and, to resolve the conflict, Stone Street must file a declaratory judgment action which Stone Street did file.
• On July 15, 2011, Travelers filed a preemptory exception of nonjoinder of indispensable parties.
• Travelers' exception claimed Shelia McClendon had passed away and that both her estate and the estate of Peatrice Jackson, whom Travelers claimed was the annuity beneficiary, were indispensable parties to Stone Street's declaratory judgment lawsuit.
• On August 4, 2011 MetLife answered Stone Street's petition and included a reconventional demand for consursus (a form of interpleader).
• None of the parties disputed, either at the time of the 2007 transfer hearing or at the time of the subsequent declaratory judgment suit, that Stone Street properly complied with Louisiana's structured settlement protection act.

Stone Street's Argument

• The declaratory judgment action was filed against MetLife and Travelers and also against the parties Travelers told Stone Street to file against.
• Stone Street subsequently asserted, however, that MetLife was the only party against whom Stone Street needed a judgment in this lawsuit.
• Therefore, Stone Street asked that everyone else be dismissed from Stone Street's motion for summary judgment.
• According to Stone Street, the declaratory judgment proceeding should not have been necessary.
• Stone Street fully complied with the Louisiana structured settlement protection act and a transfer order was previously entered without objections from MetLife or Travelers.
• The 2007 transfer order required MetLife to make the October 15, 2010 payment to Stone Street.
• MetLife ignored their own prior letter wherein MetLife stated it received the order and agreed to comply.
• The principle of res judicata should prevent MetLife from pleading concursus because its claim was previously prosecuted to judgment.
• Traveler's request for a declaratory judgment and MetLife's consursus proceeding represented "improper accumulations of actions".
• Although some state structured settlement protection statutes require a change of annuity beneficiary, the Louisiana statute does not because beneficiaries are not required to receive notice or be named parties.
• Louisiana law further holds:
  • Until a person dies that person has the right to sell assets that person owns.
  • Except for irrevocable beneficiaries, no one has a vested right to the status of a beneficiary under a life insurance contract if the death of the insured has not occurred.

MetLife's Argument

• Neither MetLife nor Travelers were parties to the 2007 transfer order so that order had no res judicata effect on MetLife.
• Travelers, the annuity owner, told MetLife not to make the October 15, 2010 payment to Stone Street.
• Nothing in the 2007 transfer order addressed what would happen to the October 15, 2010 payment if Shelia McClendon died prior to that date.
• When Shelia McClendon died, her named beneficiary in the annuity contract was Peatrice Jackson who predeceased McClendon.
• Peatrice Jackson's heirs filed a competing claim for the October 15, 2010 payment.
• Although Stone Street alleges Shelia McClendon filed a request to change her annuity beneficiary, neither MetLife nor Travelers had any record of receiving this request.
• Because a discrepancy existed among the documents submitted to MetLife, a concursus proceeding became necessary and appropriate.

Travelers' Argument

• The Louisiana structured settlement protection act did not impact Shelia McClendon's settlement agreement.
• The settlement agreement remained valid even following the transfer agreement.
• The transfer agreement did not change either the settlement agreement or the annuity contract beneficiary designation.
• The settlement agreement and the annuity contract both provide that Peatrice Jackson, the named beneficiary, would receive the future payments in the event of Shelia McClendon's death.
• If Stone Street and Shelia McClendon had followed through on their request to name Stone Street the annuity beneficiary, this declaratory judgment lawsuit would not have been necessary.
• Travelers had no proof that Shelia McClendon made any attempt to initiate a beneficiary change.
• Therefore, material issues of fact existed concerning: 1) who was Shelia McClendon's rightful beneficiary; and 2) who was entitled to the October 15, 2010 payment.

Judgment - Louisiana District Court Judge Kay Bates:

• Dismissed MetLife's concursus with prejudice and costs payable by MetLife.
• Denied Travelers' exception of failure to join indispensable parties with costs payable by Travelers.
• Granted Stone Street's motion for summary judgment with costs payable by MetLife.
• Granted Stone Street's motion to dismiss the other defendants without prejudice.
• Ordered MetLife to remit the October 15, 2010 payment to Stone Street within 15 days of the mailing of the judgment.

Judge Bates' Reasoning

• In the 2007 transfer proceeding, Shelia McClendon and Stone Street were parties, and MetLife and Travelers were properly notified and served with the petition and order.
• Under the Louisiana structured settlement protection act, Shelia McClendon was clearly entitled to sell the October 15, 2010 payment.
• The 2007 transfer order was valid, final, and not subject to appeal as all delays had passed.
• MetLife's claims against Stone Street arose out of the same subject matter as the 2007 transfer proceeding.
• MetLife's issues existed when the 2007 transfer order was signed and neither MetLife nor Travelers objected at that time.
• Therefore, MetLife's concursus is barred by res judicata.
• Neither MetLife, nor Travelers, nor any of the other claimants had any continuing interest in the October 15, 2010 payment.
• Because Stone Street established it was entitled to the October 15, 2010 payment as a matter of law, no genuine issue of material fact remained.

Additional Resources

• For a 2009 California appellate case addressing the finality of structured settlement transfer orders, see Henderson v. Ramos reported in "Fresno County Factoring Cases" - Part 1 and Part 2 .
• For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.
• For a more comprehensive and updated analysis of structured settlement transfers, see Chapter 16 of "Structured Settlements and Periodic Payment Judgements" (S2P2J).

NASP 2012 Annual Conference - 3

The National Association of Settlement Purchasers (NASP) hosted its 8th annual educational conference October 16-19, 2012 in New Orleans with a record number of attendees consisting of transfer company executives and staff, in-house and outside legal counsel, investors, service providers and, for the first time, primary market participants.

NASP President Matthew Bracy set the conference theme by challenging speakers and attendees to continue to improve the structured settlement secondary market: "We have some of the brightest minds in the country assembled here to discuss the status of this industry and how to improve what we do. And, as is our habit, we have invited people who might have critical things to say about how we are doing and what we can do better. Improvement can only come from the honest and sometimes harsh assessment of outside critics."

One of those critics was keynote speaker Jan Schlictmann who called out "cash now" advertizing as a "primitive denomination". Schlichtmann's broader message echoed Bracy's theme of bettering oneself through self-criticism and the need for higher industry goals. "It is not just who we serve that matters, but how we serve", Schlictmann stated. Schlictmann reviewed his client experience with structured settlements and acknowledged a personal paradigm shift resulting from recent industry developments including low interest rates and the ELNY liquidation.

The Judges Panel has become a regular and popular feature of NASP educational conferences. Moderator Earl Nesbitt encouraged this year's panel members, Judge Patricia Wise, Chancery Court Judge, Hinds County, Mississippi and Judge Dean Lum, Superior Court for King County, Washington, to share their concerns about structured settlement transfers and their advice for transfer company representatives and attorneys. Selected highlights:

• Judge Wise: "We (Mississippi judges) have a good relationship with transfer attorneys. I don't look at transfers as inherently good or bad. I don't have any preconceived notion whether to approve or disapprove."
• Judge Lum: "It is not my job to talk someone into or out of a transfer. Judges, however, think about the worst case scenario - a recipient who has just turned 18. The closer to this worst case scenario, the more scrutiny a person receives."
• Judge Wise: "What judges are looking for is credibility and what structured settlement payees say they will do with the funds. We do focus on whether prior transfers have occurred. Also, the older the payee, the more likely they have the ability to make a good decision."
• Judge Lum: "Attorneys should prepare the structured settlement payee for his or her court appearance - how to dress and behave; how the best interest test applies; what the impact will be on dependents."
• Judge Lum: "We have a saying in King County: 'there is no party like ex parte'. In unopposed cases, people try to run things by you. Its kind of like the wild west. In unopposed cases, it is important for attorneys to go the extra mile. Your reputation matters. There are two degrees of separation in the legal profession."

Another regular and popular feature of NASP educational conferences are the small group break out sessions. The individual breakout sessions S2KM attended addressed participants' state-specific experience with:

• Court Approval Issues - judicial negotiation of discount rates; the meaning of full disclosure; statutory history of the "best interest" test; independent professional advisor qualifications and fees; transfer application exhibits; and the importance of judicial education.
• Underwriting Issues - annuity provider transfer requirements; "applicable state laws" requirements; judgment creditor issues including bankruptcy and child support; annuity provider administrative fees; and problems related to incompetent payees, identity theft and relatives or friends coercing payees.

The NASP conference doubled down on underwriting issues with an informative presentation about "Life Contingent Transactions" by NASP President-elect Patricia LaBorde. LaBorde, who also served as Chairperson for the 2012 NASP conference and was credited with upgrading the NASP website, discussed the two paths for funding life contingent transactions:

• Purchasing a life insurance policy to hedge against the risk of an early annuitant death; or
• Evaluating the risk and pricing the risk into the transaction.

Jack Kelly, a federal lobbyist who assisted NASP in securing enactment of IRC 5891 in 2002, provided a Legislative Update. Kelly summarized NASP's 2012 involvement with legislative proposals in Vermont, Minnesota and New Hampshire. Vermont, in 2012, became the 48th state to enact a structured settlement protection statute. The new Vermont statute is generally based upon the NCOIL Model Act with some variations related to independent professional advisors, notice requirements for certain state agencies and the required court appearance by the structured settlement payee.

Earl Nesbitt, NASP's Executive Director and General Counsel, presented the 2012 Litigation Update. Among several important court decisions, Nesbitt highlighted the Stone Street v. McClendon case which he characterized as an "important victory" for NASP and the structured settlement industry in general. In McClendon, a Louisiana state court found that Travelers Insurance and MetLife had no grounds for withholding payments following a valid transfer of payment rights pursuant to the Louisiana structured settlement protection statute. The court ordered MetLife to pay interest from the date the payments were originally due. Note: S2KM will publish a more detailed review of the McClendon case in a subsequent blog post.

Attorney Joseph Feltes' 2012 NASP presentation titled "Privacy Issues in Structured Settlement Transactions (Part 2)" supplemented his 2011 NASP presentation on the use and disclosure of confidential information by transfer companies. This year, Feltes discussed privacy issues related to electronic and digital communications, especially Internet-based communications. Among other issues, Feltes highlighted: cyber-bullying; the increase in defamation cases; the blurred boundaries between public and private communications; FTC blog rules requiring disclosures of paid endorsements; social media policy and practices; limits on constitutional rights; cloud technology issues; and the importance of company Internet policies.

In his "Primary Market Update", Mark Wahlstrom emphasized why the primary and secondary structured settlement markets are part of the same business. He called the primary market "the secondary market's best friend" despite the primary market's criticism of, and "needless obstacles" for, the secondary market. As one example of "needless obstacles", Wahlstrom mentioned Chartis for aggressively promoting an anti-factoring pledge among its structured settlement brokers.

Wahlstrom described 2012 as "another bad year for the primary market". He characterized declines in primary market annuity premium as a "negative trend that will eventually impact the secondary market" and identified the following causes:

• The structured settlement is an insular, closed community with aging leadership and a shrinking sales force.
• Structured settlement annuity providers, and most brokers, lack marketing and innovation skills.
• Primary market participants are intimidated by the Internet.
• Instead of offering customer solutions, the primary market continues to sell a single product.
• With historically low interest rates, that product produces a zero return when you consider inflation.
• The primary market has not responded strategically to tort reform and increasing competition from other professionals.
• By continuing their "factoring wars", the primary market has missed opportunities to cooperate with the secondary market.
• The ELNY liquidation means the primary market can no longer claim all structured settlement recipients have received 100% of their payments.

Kira Brereton, an attorney who specializes in asset-backed securitizations, provided a comprehensive introduction to "Financing Structured Settlements". Her presentation: reviewed a typical transaction structure; provided a market overview including legal and regulatory developments; summarized rating agency considerations; discussed split payment issues; addressed the creditworthiness of insurers backing the collateral pools; considered bankruptcy and receivership issues; and highlighted relevant securities laws and regulations including the Investment Company Act of 1940, private placements, Dodd-Frank and Regulation AB 2.0.

Elizabeth Yingling, a securities law expert, discussed "Implications of Federal and States Securities Laws on Structured Settlements". She addressed fundamental issues such as: What statutes govern securities? What is a "security"? What is an "investment contract"? and How do promotional materials impact the analysis? In addition, Yingling offered a detailed analysis of the "Howey test" and provided practical tips.

Alexander Hamilton Award

NASP also named S2KM blog author, Patrick Hindert, as the 2012 recipient of its Alexander Hamilton Award. NASP has bestowed this award five times "to distinguished individuals who have supported and defended the right to free alienability of property rights. This right is the corner stone of NASP and the foundation of the structured settlement factoring business." Previous Alexander Hamilton Award recipients:

• State Senator Alan Sanborn of Michigan.
• U.S. Representative Eric Cantor of Virginia.
• State Representative Van Tran of California.
• Earl S. Nesbitt, Esq., of Texas.

In announcing the 2012 award, NASP President Matt Bracy stated: "Hindert was chosen to receive this award based upon his longstanding support of the factoring business and option. In particular, his position as a founder and leader in the primary structured settlement business, who early on recognized the legitimacy and value of the secondary market, led to this honor."

For complete S2KM reporting on NASP conferences plus other structured settlement and settlement planning conferences, see the structured settlement wiki.

NASP 2012 Annual Conference - 2

Celebrating the 10th Anniversary of the enactment of IRC 5891, the National Association of Settlement Purchasers (NASP) hosted its 2012 Annual Conference last week in New Orleans.

The conference featured an ambitious and successful educational program highlighting prior NASP accomplishments and focusing on emerging issues that impact both the primary and secondary structured settlement markets. For the first time in NASP's history, conference attendance was open to primary market participants.

S2KM previously published an introductory blog post identifying NASP 2012 conference speakers and topics and providing links to S2KM reports from previous NASP conferences. Subsequent S2KM blog posts will recap speaker presentations.

This blog post offers S2KM's general observations and impressions of some of the broader structured settlement industry issues based upon NASP's 2012 conference.

Why Has Factoring Flourished?

Compared with the primary structured settlement market, both NASP and the secondary market appear to be flourishing. What explains this paradoxical success?

The groundwork for secondary structured settlement market success began in 1997 when NASP launched a strategic lobbying initiative resulting in the enactment of IRC 5891 and NCOIL's Model State Structured Settlement Protection Act (Model Act).

Although neither legislative development would have been possible without support from the National Structured Settlement Trade Association (NSSTA), the lobbying agendas of the two associations were markedly different. Ultimately NASP prevailed on several critical issues including:

• "Best interest" standard vs. NSSTA's preferred "financial hardship" standard.
• Denying annuity owners and providers the right to veto proposed transfers.
• Eliminating maximum discount rates.

In addition to NASP's lobbying success, NASP's members have achieved considerable, and controversial, marketing success utilizing aggressive television advertizing and sophisticated Internet techniques. As one measure of this marketing success, the primary market now claims the secondary market has "stolen the structured settlement brand".

Both the primary and the secondary structured settlement markets were devastated by the 2008 financial crisis which:

• Temporarily shut down asset-backed securities markets including securities backed by structured settlement payment rights.
• Created an industry liquidity crisis which resulted in:
  • J.G. Wentworth, the largest secondary market company, entering bankruptcy in 2009.
  • AIG, the largest primary market company, receiving a financial bailout from the U.S. government in 2008 and 2009.
  • Both Wentworth and AIG have subsequently recovered and regained their respective market leadership roles.
• Reduced interest rates to historic low levels causing a substantial reduction in primary market sales beginning in 2009.

As of the 2012 second calendar quarter, the secondary structured settlement market appears to have fully recovered from the 2008 financial crisis. The primary market has not yet recovered. Part of the reason is that interest rates, whether high or low, affect the primary and secondary structured settlement markets differently.

Other reasons, however, also help explain the growing success of the secondary structured settlement market.

• Structured settlement transfers improve the structured settlement product by addressing a critical need for many structured settlement recipients - a liquidity need that was not properly addressed in the original settlement plan or, alternatively, resulted from unanticipated developments.
• Continuing strong demand exists among some institutional and individual investors for recycled structured settlement payment rights.

Linked Markets - Same Customers

Having failed politically to end structured settlement factoring, NSSTA, and many annuity providers, have adopted alternative strategies which appear to be misguided attempts to create obstacles and impede the growth of the secondary structured settlement market.

NSSTA's 2006 bylaw amendments represent one such example. As NSSTA explained to its members: "because [the secondary market] activities [prohibited by the amendments] are inconsistent with the membership qualifications, engaging in those activities can lead to suspension or expulsion from membership and to denial of new membership applications." (emphasis added).

The increasing "administrative fees" annuity providers charge factoring companies, either as a condition to avoid "opposed transfers" or to allow transfers of life contingent payment rights, represents another example. Ultimately, the structured settlement recipients who transfer payment rights pay for those administrative fees which, for some annuity providers, now represent a new profit center.

How do these types of actions help the structured settlement customer or improve the structured settlement industry?

Both NSSTA and NASP, and their members, share a common existential interest in IRC 104(a)(2) and 130. Both NSSTA and NASP recognize the anticipated re-writing of the U.S. tax code expected to begin following the 2012 Presidential election represents a threat to those tax sections.

Arguably, the existence of IRC 5891, which not only links to IRC 104(a)(2) and 130, but also to the 48 state structured settlement protection statutes, has both expanded and strengthened the U.S. structured settlement legislative framework.

Having collaborated to help enact IRC 5891 and the NCOIL Model Act, shouldn't NSSTA and NASP also collaborate to defend and maintain IRC 104(a)(2) and 130 - and to identify additional shared interests for structured settlement industry improvement and growth?

Improving Industry Education

In his opening comments at the NASP 2012 conference, outgoing NASP President Matthew Bracy challenged attendees to make the structured settlement transfer business better: "better in the marketplace, better in the courts, and above all better for the customers who so need the service this industry provides."

One way NASP "walks the walk" of secondary market improvement is by inviting its critics to speak at NASP conferences. NASP challenges these critics not only to address secondary market problems but also to recommend improvements.

Critics who have spoken at past NASP conferences include: Jack Meligan, Stephen Harris, Peter Vodola, John Darer, and Richard Risk. Other critics, including NSSTA leaders, have been invited but have declined to participate.

Jan Schlichtmann, keynote speaker for the 2012 NASP conference, began by stating: "I don't like your advertizing". He then praised NASP for inviting and encouraging criticism to better itself and the secondary structured settlement market.

NSSTA also has permitted criticism as part of its educational programs. Examples include: Joseph DiGangi (see: "Settlement Consulting") and Dan Clark (see: "SSP and NSSTA 2010 Annual Meetings"). Whenever NSSTA has addressed strategically important and/or controversial issues (egs. IRC 468B and IRC 5891), however, NSSTA members generally hear only "politically correct" speakers and perspectives.

Because of the importance of issues such as qualified settlement funds (QSFs) and the secondary market for the future of structured settlements, NSSTA members increasingly must rely upon non-NSSTA educational programs and educational resources to interact with the people and ideas challenging and changing the structured settlement industry.

During 2012, these educational programs have included: the SSP conference, the ASNP conference, the Risk settlement planning practicum and the QSF symposium.

Fortunately for NSSTA members, as well as members of the Society of Settlement Planners (SSP), NASP has now opened an entirely new educational forum to challenge and expand their understanding of structured settlements.

NASP 2012 Annual Conference - 1

The National Association of Settlement Purchasers (NASP) will host its 2012 Annual Conference October 16-19 in New Orleans. For the first time in NASP's history, conference registration will be open to persons who are not NASP members or affiliated attorneys.

Speakers and Topics

• Matt Bracy - Welcoming Remarks
• Jack Kelley - Legislative and Regulatory Developments at State and Federal Level
• Earl Nesbitt - Litigation Update
• Joseph Feltes - Privacy Issues in Structured Settlement Transactions
• Jan Schlictmann - Keynote Address
• Mark Wahlstrom - Executive Life of New York Rehabilitation and Other Issues Facing the Primary Structured Settlement Market
• Kira Brereton - Financing Structured Settlement Transactions
• Patricia LaBorde - Issues in Life Contingent Transactions
• Elizabeth L. Yingling - The Application of the Securities Laws to the Sale of Structured Settlement Purchasing Transactions
• The Judges' Panel - How Judges Interpret the Best Interest Standard and Other Concerns in Structured Settlement Transfers
  

  • Judge Patricia D. Wise, Chancery Court Judge, Hinds County Mississippi

  • Judge Dean S. Lum, Superior Court for King County, Washington

• Breakout Session One - Practical and Ethical Issues Facing Transfer in Obtaining Court Approval of Structured Settlement Transactions
• Breakout Session Two - Issues in Underwriting Structured Settlement Transactions

S2KM Reporting for Prior NASP Conferences

• 2011 NASP Conference
  
  • Part 1 - speakers and topics
  • Part 2 - S2KM's primary and secondary market perspective
• NSSTA and NASP 2010 Educational Conferences
  • Part 1 - industry issues
  • Part 2 - discussion topics
  • Part 3 - "protect and preserve" vs. "improve and grow"
  • Part 4 - strategic questions
• 2009 NASP Conference
  
  • Part 1 - a listing of educational issues and participants
  • Part 2 - a summary of the educational discussions
  • Part 3 - a closer look at the strategic discussions
• 2008 NASP Conference
  
  • Part 1 - Speakers and topics
  • Part 2 - Panel discussion: structured settlement industry issues
  • Part 3 - Panel discussion: how to improve and grow the structured settlement market
• 2007 NASP Conference - see related NASP 2007 educational wiki
• 2006 NASP Conference
  
  • Part 1 - Speakers and Highlights
  • Part 2 - Primary and Secondary Market Introductions
  • Overview of the Structured Settlement Market
  • How the Primary Market Views Factoring