Structured settlement transfers require that payment rights be assignable. Otherwise, transfer (factoring) companies have no direct right against the structured settlement obligor or annuity issuer.
Prior to enactment of IRC 5891 and the state protection acts, the validity and enforceability of structured settlement transfers typically depended upon three basic issues:
- Did the structured settlement documentation clearly forbid assignments?
- If yes did state law override the anti-assignment provision?
- Or, did the parties to the structured settlement waive the anti-assignment provision?
Although IRC 5891 and state structured settlement protection acts set forth procedures and conditions allowing transfers of structured settlement payment rights, courts continue to enforce anti-assignment restrictions when parties to the original structured settlement object.
Most transfer courts, however, have held that the anti-assignment restrictions are not self-executing and have granted transfers when no one objects. Objections to transfers by obligors and annuity issuers have become increasingly rare since the enactment of IRC 5891 and the state protection acts.
The Brenston Case
Settlement Funding v. Cathy Brenston represents a high profile and controversial case where an Illinois Appellate Court overruled prior state court approval of structured settlement transfers based upon anti-assignment restrictions - even though the parties to the original structured settlement waived the anti-assignment provisions. The case currently is subject to a petition for review by the Illinois Supreme Court.
In the Brenston case, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, determined Brenston’s settlement agreement contained an enforceable anti-assignment provision. As a result, the panel decided the state court, which had previously approved requested transfers, had a duty to enforce the anti-assignment provision and “it had no authority under the Act to approve” the transfer petitions.
In other words, despite the existence of the Illinois transfer statute, the Appellate panel declared court orders approving assignments to be "void ab initio", as a matter of Illinois law, whenever structured settlement documentation purports to limit assignability.
If the Illinois Supreme Court upholds the Brenston appellate decision, or decides not to review it, the case would render the Illinois transfer statute "a practical nullity", according to an Amicus curiae brief filed by the National Association of Settlement Purchasers (NASP).
"Without the certainty and finality of a court order, there is no viable secondary market," the NASP brief states. "Because every structured settlement contains boilerplate language that purports to limit or restrict assignability, every Illinois court approved transfer could be subject to challenge at any time."
The validity of assignments, including structured settlement transfers, depends in part on public policy issues. Transfers arguably undermine the fundamental purpose of structured settlements - to provide spendthrift protection for injury victims and their dependents.
This public policy perspective is captured in the statutory history of the structured settlement tax exclusion. To qualify, IRC 130 provides in part "periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments"
Over time, many structured settlement documents have expanded this IRC 130 prohibition to include "transferred, assigned, mortgaged or encumbered" or words to that effect. (emphasis added). Although anti-assignment provisions are incorporated into many state workers compensation statutes, they are not specifically required by IRC 130, I04(a)(1) or 104(a)(2).
Factoring advocates offer competing public policy arguments to support structured settlement transfers. Unanticipated needs or poorly constructed settlement plans may necessitate immediate cash and outweigh other public policy considerations. Factoring advocates also criticize the "paternalistic" viewpoint of factoring opponents. They argue the structured settlement recipient, as owner of payment rights, should have the right to decide whether to transfer or assign those rights.
Many other statutes either permit or favor assignment of payments rights. These statutes include the 48 state structured settlement protection acts, IRC 5891, and recent revisions to UCC Article 9 as well as the Restatement (Second) of Contracts. Unfortunately, the authors of revised UCC Article 9 did not carefully consider the impact of their revisions on structured settlement transfers which has resulted in conflicting statutory language and interpretations among various states.
The National Structured Settlement Trade Association (NSSTA) amended its Model Qualified Assignment and Release Agreement following the enactment of IRC 5891 and the Model State Structured Settlement Protection Act. Paragraph 7, titled "Acceleration, Transfer of Payment Rights", now provides:
"None of the Periodic Payments and no rights to or interest in any of the Periodic Payments (all of the foregoing being hereinafter collectively referred to as “Payment Rights”) can be
i. Accelerated, deferred, increased or decreased by any recipient of any of the Periodic Payments; or
ii. Sold, assigned, pledged, hypothecated or otherwise transferred or encumbered, either directly or indirectly, unless such sale, assignment, pledge, hypothecation or other transfer or encumbrance (any such transaction being hereinafter referred to as a “Transfer”) has been approved in advance in a “Qualified Order” as defined in Section 5891(b)(2) of the Code (a “Qualified Order”) and otherwise complies with applicable state law, including without limitation any applicable state structured settlement protection statute.
No Claimant or Successor Payee shall have the power to effect any Transfer of Payment Rights except as provided in sub-paragraph (ii) above, and any other purported Transfer of Payment Rights shall be wholly void. If Payment Rights under this Agreement become the subject of a Transfer approved in accordance with sub-paragraph (ii) above the rights of any direct or indirect transferee of such Transfer shall be subject to the terms of this Agreement and any defense or claim in recoupment arising hereunder." (NSSTA's emphasis).
Peachtree Settlement Funding, the transfer company involved in the Brenston case, has filed a petition for review with the Illinois Supreme Court. The Illinois Supreme Court will likely act on Peachtree's petition by December, although a decision whether to review could be delayed until February, according to NASP Executive Director Earl Nesbitt who reported on the case during the NASP 2013 Annual Conference. Assuming the petition for review is granted, Nesbitt stated a final decision is not expected for nine to 12 months.
NASP President Patricia LaBorde characterized the Brenston case as "troubling" for several reasons during a recent S2KM interview:
- The Appellate Court decision challenges the finality of transfer orders. "No one wants litigation over closed cases."
The only issue on appeal was timeliness. The Appellate Court expanded the issues to discuss anti-assignment restrictions.
- The case had settled before the appeal. Both Brenston and Settlement Funding filed motions to stay the appeal which the Appellate Court ignored.
- The trial judges who approved the transfers were experienced with structured settlement transfers and aware of existing anti-assignment clauses. They never mentioned or suggested they were defrauded.
- The Appellate Court ignored waiver language and references to IRC 5891 which appeared in some of the original structured settlement documents.
- All of the relevant parties had waived the anti-assignment provisions.
- Unlike Brenston, all of the cases cited by the Appellate Court supporting enforcement of anti-assignment restrictions involved objections by structured settlement obligors or annuity providers.
- Brenston had other potential remedies against Settlement Funding including a separate cause of action for fraud.
- The Brenston Appellate Court decision probably puts a hold on transfers in Illinois until the case is appealed or the Illinois transfer statute is amended.
- For more detailed analysis concerning anti-assignment restrictions, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
- For the results of prior California transfer cases involving anti-assignment and finality of judgment issues, see - Fresno County Factoring Cases: