Beyond Structured Settlements

Structured Settlements in 2012 - 4

Executive Life of New York

At one time or another, each of us may have become acquainted with individuals who have overcome personal injuries and successfully transformed their disabilities and special needs into special lifetime accomplishments. Kyle Walsh, profiled in a 2012 S2KM blog post, is one such individual. The late Randy Snow, featured in a 2008 S2KM blog series, was another.

Structured settlements are supposed to provide economic security for people with serious injuries and disabilities - to help them rebuild their lives and, in many cases, to achieve special lifetime accomplishments. Instead of an all-cash personal injury settlement, structured settlement recipients accept a promise of future periodic payments.

What happens, if and when, that promise is broken? What happens when a structured settlement funding company, and the regulators and guaranty system responsible for protecting the structured settlement recipients, fail to make and/or insure full payment?

These questions are highlighted by the Executive Life of New York (ELNY) liquidation - the dominant structured settlement story of 2012 and one of the most important developments in the history of the United States structured settlement industry.

The story of ELNY, as well as its affiliate Executive Life of California (ELIC), and their parent company, First Capital Corporation (FEC), is long and complex. For background of events prior to ELNY's 1991 receivership, S2KM recommends Gary Schulte's 1992 book "The Fall of First Executive".

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. When then New York's Insurance Commissioner Salvatore Curiale seized control of ELNY on April 16, 1991 and placed it in receivership, he stated: "The company is currently neither in an insolvent or impaired condition. . . . I have not petitioned the Court to make a finding of insolvency. ELNY is a company well able to meet its current obligations."

Exactly twenty-one years later, on April 16, 2012, following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso approved an Order of Liquidation and a Restructuring Agreement for ELNY as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, and the National Organization of Life and Health Guaranty Funds (NOLHGA).

The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to more than 1400 ELNY payees out of a total of approximately 9700 current ELNY payees. The remaining ELNY payees expect to receive 100 percent of their promised future payments. The average individual shortfall is estimated to exceed $600,000 present value. Although an ELNY Hardship Fund has been created, it has not yet been funded.

An appeal was filed May 30, 2012, on behalf of 18 ELNY structured settlement shortfall payees, challenging the ELNY liquidation order and restructuring agreement on the basis of due process. The appeal also alleges that immunities and injunctions granted under the liquidation order are improper. Oral arguments occurred on November 15, 2012 in Brooklyn before the Appellate Division of the Supreme Court of the State of New York, Second Department. No decision has been announced.

Another legal challenge to the ELNY liquidation order occurred June 14, 2012 when attorneys for several liability insurers filed a Motion asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. The motion indirectly raises the issue of whether qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation? Judge Galasso denied the Motion without further explanation. 

In a subsequent development, somewhat related to the liability insurers' motion, the ELNY website announced an ELNY Facilitation Plan to assist owners of ELNY structured settlement annuities (SSAs) make supplemental payments to ELNY SSA payees and to coordinate those payments with the ELNY benefit payments scheduled to be made by the Guaranty Association Benefits Company (GABC) under the ELNY Restructuring Plan approved by Judge Galasso on April 16, 2012 as part of the ELNY liquidation order.

The same attorneys who filed the ELNY appeal, Edward Stone and representatives of the Christensen & Jensen law firm, filed a class action lawsuit November 8, 2012, on behalf of ELNY shortfall victims, against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, and his predecessor ELNY Rehabilitators, as well as MetLife and Credit Suisse. The class action allegations provide a critical litany of mismanagment and non-disclosure during the 21 years ELNY's estate was being supervised by these defendants.

In response, attorneys representing Benjamin M. Lawsky, in his capacity as ELNY's Receiver, filed a Notice of a Motion with the Nassau County New York State Supreme Court requesting oral argument on January 4, 2013 at 9:30 a.m. or as soon thereafter as the parties may be heard:

• to enjoin three ELNY structured settlement shortfall payees and their legal counsel from proceeding with a class action lawsuit in the United States District Court Southern District of New York;
• to hold in contempt of court the shortfall payees' legal counsel; and
• to require their payment of the related costs and attorney's fees incurred by the Superintendent.

Although the ELNY liquidation has so far received limited coverage in the mainstream media, specialty insurance experts and analysts have not been silent. Examples:

• Peter Bickford - In his article titled "The Elephant in the Court Room" (summarized here by S2KM), Bickford argues New York’s receivership system has failed ELNY, its policyholders and beneficiaries, as well as the insurance industry and its customers due to a lack of basic accountability standards. Although the ELNY restructuring plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), Bickford maintains it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. Bickford's article also provides succinct summaries of objections raised by ELNY shortfall victims and ELNY legal issues which he states "could linger in the courts for years"
• LifeHealthPro - In an article titled "The Complete ELNY Saga: 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", (summarized here by S2KM), the authors assign primary blame for ELNY insolvency to the NYLB which they describe as "a rogue agency known for its codes of secrecy and characterized by many who spoke for this story as ineffective and mismanaged at best, and a snake pit of corruption at worst". In a companion article (reviewed here by S2KM), writer Warren Hersch asks: "is the structured settlement process in need of reform"?  In a follow-up oped article titled "Governor Cuomo I'm Calling You Out", (summarized here by S2KM), Bill Coffin, LifeHealthPro's Group Editor, charges New York Governor Andrew Cuomo with personal responsibility to clean up the "ELNY debacle".

The final results of the ELNY liquidation will depend upon the outcome of the continuing litigation highlighted in this article. It also remains to be seen what reforms, if any, will result from the failed ELNY receivership process.

In conclusion, it should also be noted that ELIC-related litigation continued in 2012 (Garamendi v. Altus Finance S.A.) when a federal jury in Los Angeles rejected a claim by California's Insurance Commissioner that, but for a conspiracy by French investor group Artemis S.A.:

• ELIC's original conservator (then California insurance commissioner John Garamendi) would have accepted an alternative bid in 1991 by state insurance guaranty associations; and
• The alternative bid would have retained profits from ELIC's junk bond portfolio for the benefit of policyholders including ELIC structured settlement recipients.

For S2KM's complete and continuing reporting about the ELNY liquidation, see the structured settlement wiki.

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

• Part 1 - Primary market
• Part 2 - Settlement planning
• Part 3 - Secondary market
• Part 4 - Executive Life of New York

ELNY Facilitation Plan

The New York Liquidation Bureau (NYLB) website for Executive Life of New York (ELNY) has announced an ELNY Facilitation Plan to assist owners of ELNY structured settlement annuities (SSAs) make supplemental payments to ELNY SSA payees and to coordinate those payments with the ELNY benefit payments scheduled to be made by the Guaranty Association Benefits Company (GABC) under the ELNY Restructuring Plan approved by Judge John Galasso on April 16, 2012 as part of the ELNY Liquidation Order.

The ELNY Liquidation Order is currently being appealed by 18 structured settlement shortfall payees who allege due process violations and improper granting of immunities and injunctions to protect the Superintendent of New York's Department of Financial Services, and his agents, acting as ELNY's Receiver. For more detailed S2KM reporting about the ELNY appeal, see the structured settlement wiki.

Key Elements of the ELNY Facilitation Plan

• Optional agreement between GABC and each ELNY SSA owner that chooses to become party to it.
• Ancillary to the Restructuring Plan and, therefore, does not need to be executed in order for the Restructuring Plan to close.
• GABC has contracted with third-party administrator Alliance-One Services, Inc. to make benefit payments to SSA payees on behalf of GABC.
• Participating ELNY SSA owners will have the option to direct supplemental payments to their SSA payees through Alliance-One Services.
• If SSA Owners exercise this option, they will be responsible to provide funds to Alliance-One Services who will then make payments to the appropriate SSA payees.
• Neither GABC nor Alliance-One Services will be responsible for funding any SSA owner payments.
• If SSA Contract owners prefer to make other arrangements to pay SSA payees, they are not required to participate in the Facilitation Plan.
• Drafted and negotiated by representatives of GABC and a group of ELNY SSA owners, the Facilitation Plan is not subject to negotiation by individual ELNY SSA owners.

For a summary of the Facilitation Plan as well as the Facilitation Plan itself, see the NYLB's ELNY website.

ELNY Liquidation Order

S2KM's summary of Judge John M. Galasso's Memorandum Decision for Executive Life of New York (ELNY) left open the question of whether Judge Galasso had granted judicial immunity to the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver.

Immunity Issue

The corresponding Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge on April 16, 2012 confirms the grant of immunity as follows:

"Judicial immunity is extended to the Receiver and his successors in office, the New York Liquidation Bureau, and their respective attorneys, agents and employees, and such immunity is extended to them for any cause of action of any nature against them, individually or jointly, for any action or omission by any one or more of them when acting in good faith, in accordance with this Order, or in the performance of their duties pursuant to Insurance Law Article 74 ..."

A copy of both Judge Galasso's ELNY Decision and the ELNY Liquidation Order are posted on the structured settlement wiki.

Although expected, this judicial grant of immunity is controversial because, according to some legal experts:

• New York insurance laws do not specifically grant legal immunity to the Superintendent, as Receiver.
• ELNY was not judicially determined to be insolvent until Judge Galasso signed the April 16, 2012 Order.
• The Superintendent and its agents, including the NYLB, have "managed" ELNY since it first entered Rehabilitation in 1991.

For background about the immunity issue, see "The Trouble with ELNY", S2KM's review of an article by Peter Bickford.

Factoring Companies

Neither the ELNY Memorandum Decision nor the Liquidation Order address another controversial ELNY issue: whether participating state guaranty associations (PGAs) will provide coverage for ELNY structured settlement annuities where payment rights have been transferred to factoring companies and subsequently sold to investors as securities.

One result of protecting factoring companies and ELNY structured settlement payment right investors could be a reduction in funds available to other ELNY shortfall victims. Some industry experts have estimated that payment rights from as many as 1000 of ELNY's 4168 structured settlement annuities (SSAs) have been transferred to factoring companies and their investors.

According to Schedule 1.15 of the ELNY Restructuring Agreement, 1459 SSAs will experience shortfalls ("uncovered amounts") as a result of ELNY's liquidation and restructuring even assuming state guaranty association contributions and enhancements.

No Closing Date Set

Neither the ELNY Memorandum Decision nor the Liquidation Order identify a closing date for the ELNY Restructuring Agreement. Until that date, the Receiver is directed to continue full payment of all benefits for all ELNY contracts. The Court will retain subject matter jurisdiction over the Restructuring Agreement and ELNY successor company, Guaranty Association Benefits Company (GABC).

The ELNY Liquidation Order requires that all claims against ELNY must be presented to the Receiver within four months of ELNY's Liquidation Date. However, all ELNY policyholders and "holders of Claim-Overs" who appear on ELNY's books and records as of Liquidation Date are deemed to have satisfied this requirement.

The ELNY Liquidation Order requires the Receiver to provide notice of the Order to all ELNY creditors, policyholders and other interested parties and provides a Notice Form as an Exhibit.

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 - 5

Attorney Edward Stone ignited a firestorm of objections yesterday from Sidley Austin attorneys representing the Superintendent of the New York State Department of Financial Services (Superintendent), as Receiver for Executive Life of New York (ELNY), when he introduced Douglas A. Hartz as an expert witness on behalf of ELNY structured settlement shortfall victims.

Hartz, a consultant, federal receiver and special deputy receiver, is the principal member of Insurance Regulatory Consulting Group (IRCG) which "focuses on insurance regulation, and the transactions and issues involving troubled or insolvent insurance companies."

According to his Curriculum Vitae, which Stone entered an an exhibit, Hartz has administered or assisted in the receivership proceedings of numerous insurers and directed the closure of estates with long-tail claims. He has also developed:

• Procedures for internal audit and accounting analysis (including reinsurance) leading to the recovery of millions of dollars in estate assets.
• A system of insurer liquidation accounting that has, in large part, served as the model for the NAIC Global Receivership Information Database financial reporting requirements.
• Claims and reinsurance tracking systems that meet fiduciary, statutory and guaranty fund requirements

Although Sidley Austin attorneys objected vociferously on the basis of both procedure (lack of notice) and substance (lack of New York liquidation expertise), presiding Judge John M. Gallaso overruled the objections and allowed Hartz to testify. Stone's direct examination of Hartz, and Sidley Austin's related objections, consumed the entire ELNY court hearing on Monday.

Stone's examination of Hartz focused on the methodology Hartz would utilize and the source materials he would require if Hartz were asked to develop an alternative restructuring plan for ELNY. Although the Sidley Austin attorneys objected, arguing lack of relevance, Judge Galasso also permitted Stone to introduce ELNY financial statements from 1989 which showed that ELNY contributed $40 million to capital and surplus and had cash and other liquid assets of close to $600 million in 1989.

Strategic Objective

Following yesterday's hearing, Stone provided S2KM with this exclusive statement:

"My strategic objective is to get our expert (Hartz) to convince the judge to consider whether an alternative restructuring plan for ELNY is feasible and whether such a plan is more fair and equitable than the Superintendent's proposed plan. The Superintendent's attorneys keep saying 'it can't be done'. But they refuse to show us the existing (ELNY) payment schedules or the proposed (GABC) payment schedules. To propose an alternative plan on behalf of the shortfall victims, my experts and I need to see those payout schedules and related source materials.

"After reviewing those payment schedules and source materials, we want the opportunity to propose an alternative plan that considers some combination of the following: 1) converting (discounting) large deferred lump sum payments to up front cash; 2) converting life contingent payments to period certain payments; 3) introducing a third party company or liquidation trustee to purchase and/or manage ELNY. The best way to restructure ELNY is to make all payments finite - and get rid of the perpetual ELNY machine.

"We object to any judicial grant of immunity for the Superintendent, in his role as ELNY's Receiver, or to his agents including the New York Liquidation Bureau (NYLB). ELNY was solvent when the Superintendent and the NYLB assumed management responsibilities for ELNY in 1991. We want an independent third party to be able to pursue causes of action on behalf of the ELNY estate. We intend to submit an expanded witness list with affidavits on Tuesday."

For S2KM's complete reporting about the ELNY liquidation hearing, see the structured settlement wiki.

ELNY Liquidation Hearing - 4

The Executive Life of New York (ELNY) Liquidation Hearing enters its seventh day today before Judge John M. Galasso in Room 35 of the Nassau County State Supreme Court Building in Mineola, New York. This blog post provides a summary update for S2KM readers. Note: see also the Addendum.

Days 1 and 2 - Attorneys for ELNY's Receiver, the Superintendent of the New York State Department of Financial Services (Superintendent), and the National Organization of Life and Health Guaranty Associations (NOLHGA) present their case for ELNY's liquidation and approval of a proposed Restructuring Agreement to create successor company Guaranty Association Benefits Company (GABC). They present two witnesses: Jonathan Bing, Special Deputy Superintendent of the New York Liquidation Bureau (NYLB), and expert witness Jack Gibson, a Managing Director of Towers Watson.

Attorneys for ELNY structured settlement shortfall victims cross examine Bing and begin their cross-examination of Gibson. Before the Superintendent's attorneys complete their case, Judge Galasso allows ELNY structured settlement shortfall victims attending the hearing to offer oral testimony as an accommodation to their travel schedules.

Day 3 - Attorneys for ELNY structured settlement shortfall victims continue their cross examination of Gibson. Judge Galasso denies their motion to compel immediate disclosure of source materials relied upon by Gibson as well as copies of all objections filed in connection with the Petition to liquidate and restructure ELNY.

Attorneys for the shortfall victims had argued that claims of confidentiality by the Superintendent intentionally deprived their clients of full and fair access to important and relevant information and, accordingly, a full and fair opportunity to challenge the Superintendent's proposed ELNY Restructuring Agreement. They also claimed it is "extremely prejudicial" to require them to cross-examine Gibson ("a highly skilled actuary") without access to the source data and assumptions he used to perform his calculations.

Day 4 - Attorneys representing ELNY structured settlement shortfall victims continue cross-examining Gibson. Judge Galasso agrees to two of their requests: a reservation of rights to call a witness representing NOLHGA to testify about participating Guaranty Association (PGA) coverage amounts and issues; and a Microsoft Excel version of Schedule 1.15 of the proposed ELNY Restructuring Agreement. In addition to Day 2 testimony from ELNY structured settlement shortfall victims, their attorneys have also entered documents into the Court record including:

• Written and oral statements by ELNY structured settlement shortfall victims;
• A Society of Actuaries Structured Settlement Mortality Study;
• An article titled "The Trouble with ELNY" written by Peter Bickford.

Day 5 - Attorneys from Hogan Lovells, representing Travelers Insurance Company as an "Objector", use their opportunity to cross-examine Gibson to show their support for the proposed Restructuring Agreement. Note: Hogan Lovells also serves as General Counsel for the National Structured Settlement Trade Association (NSSTA).

Cynthia Lindsey, an attorney representing a Michigan structured settlement shortfall victim, reaches the opposite conclusion during her cross examination of Gibson. After quoting dictionary definitions for "fair" and "just", Lindsey characterizes the proposed Restructuring Agreement as "a bunch of bull" telling Gibson: "You are asking this Honorable Court to approve this plan based upon your assumptions. You don't have facts." After repeated questioning by Lindsey, Gibson acknowledges NOLHGA has paid Gibson's employer, Towers Watson, "more than $3 million" since 2006 for their ELNY consulting work.

On re-direct examination, attorneys for the Superintendent (Sidley Austin) and NOLHGA (Faegre Baker Daniels) encourage Gibson to repeat claims from his earlier testimony that the proposed ELNY Restructuring Agreement represents the "best plan" and that none of the ELNY payees will be worse off compared with a straight liquidation.

Day 6 - Edward Stone, an attorney representing several structured settlement shortfall victims, continues questioning Gibson on re-cross examination. Stone questions whether all shortfall victims will be better off under the proposed Restructuring Agreement compared with a straight liquidation. In a straight liquidation, ELNY shortfall victims could receive full coverage payments from PGAs instead of net payments under the proposed Restructuring Agreement. Stone also introduces the idea of an alternative restructuring plan for ELNY and asks Gibson whether he considered various plan options.

Among Stone's suggested alternatives: 1) discounting ELNY's future deferred lump sum obligations to reduce ELNY's future liabilities and provide immediate cash for ELNY payees; and 2) selling ELNY to an existing life insurance company that could benefit from (and pay a premium for) ELNY's net operating loss carryforwards. Note: in an earlier interview with the Courthouse News Service, Stone stated he could develop a more "fair and equitable" alternative ELNY restructuring plan if he had access to the same information provided NOLHGA and Gibson since 2006.

When Gibson finally steps down (after six days of testimony and cross-examination), attorneys for the Superintendent and NOLHGA call NOLHGA's President, Peter Gallanis as a witness. On cross-examination, Carrie Tendler, an attorney representing multiple structured settlement shortfall victims, gets Gallanis to confirm that PGA contributions under the Superintendent's proposed Restructuring Agreement will be "net amounts" - i.e. their full coverage caps minus credits for current ELNY assets.

The ELNY Liquidation Hearing resumes Friday March 23, 2012 with Tendler continuing her cross-examination of Gallanis. For S2KM's complete reporting about ELNY, see the structured settlement wiki.

Day 7 ADDENDUM - Testimony by, and cross-examination of, NOLHGA's President Peter Gallanis continued on Friday March 23 eliciting the following information: Gallanis acknowleged GABC has not yet selected an investment manager or developed an investment strategy. Attorneys for structured settlement shortfall victims raised two issues related to the proposed ELNY Restructuring Agreement:

• Orphan contract enhancements create a potential public policy issue because they shift available funds that could be paid to other ELNY shortfall payees.
• If an ELNY structured settlement payee with life contingent payments dies, that payee could receive less than the present value posted on Schedule 1.15 creating a potential legal claim for his/her estate.

The ELNY Hearing continues on Monday March 26 with attorneys for the ELNY structured settlement shortfall victims expected to present witnesses.

ELNY Liquidation Hearing - 3

The fourth day of the Executive Life of New York (ELNY) Liquidation Hearing ended just like the previous three days - with attorneys representing ELNY Objectors (shortfall payees and policyholders) cross-examining Jack Gibson, the expert actuary retained by ELNY's Receiver, the Superintendent of the New York State Department of Financial Services (Superintendent).

Although presiding Judge John M. Galasso had earlier denied a motion by the ELNY Objectors' attorneys to compel disclosure of Gibson's source materials (see ELNY Liquidation Hearing - 2), Judge Galasso did agree on Tuesday March 20, 2012 to meet two new requests made on behalf of the ELNY structured settlement shortfall victims:

• A reservation of rights to call a witness representing the National Organization of Life and Health Guaranty Associations (NOLHGA) to testify about participating Guaranty Association (PGA) coverage amounts and issues;
• A Microsoft Excel version (as opposed to hardcopy and pdf versions) of Schedule 1.15 of the proposed ELNY Restructuring Agreement.

What exactly are the attorneys for the ELNY Objectors trying to accomplish with their still unfinished cross-examination of Gibson whose testimony and report conclude that Guaranty Association Benefits Company (GABC), the proposed successor company to ELNY, will be "financially viable"?

Edward Stone, an attorney representing multiple ELNY structured settlement shortfall victims, has informed S2KM that part of his cross-examination strategy is to characterize Gibson's expert report as "Garbage In, Garbage Out" work product. Stone does not dispute Gibson's impressive professional credentials. However, if Gibson has relied on faulty data that has not been independently verified and/or vetted, then Stone maintains Gibson's conclusions become suspect.

In his direct testimony, Gibson testified that an ELNY annuity administrative database prepared by MetLife had formed the sole basis for his projections regarding ELNY's future liabilities which, under the proposed Restructuring Agreement, would become liabilities of GABC. He also testified that all of MetLife's administrative reports (covering the years 2002-2010) were compiled in 2011 and that he determined that MetLife data with respect to ELNY structured settlement mortality prior to 2002 was not credible.

"Gibson was hired by the Superintendent and NOLHGA to produce the results they wanted", Stone stated. "His assignment is to help get the proposed Restructuring Agreement approved not to determine whether it is fair or whether better alternative plans exist."

Although the ELNY Objectors have not yet presented their own case, their attorneys have already entered several documents into the Court record including:

• Written and oral statements by ELNY structured settlement shortfall victims;
• A Society of Actuaries Structured Settlement Mortality Study;
• An article titled "The Trouble with ELNY" written by Peter Bickford.

The ELNY Liquidation Hearing is scheduled for only one-half day on Wednesday March 21, 2012 and is expected to conclude later this week. For S2KM's complete ELNY reporting, see the structured settlement wiki.

ELNY Liquidation Hearing - 1

Following two days of testimony March 15 and 16, 2012 before Judge John M. Galasso, the hearing to consider the proposed liquidation and restructuring of Executive Life Insurance Company of New York (ELNY) will continue Monday March 19 in Room 35 of the Nassau County New York Supreme Court Building.

In addition to the direct testimony of Jonathan Bing, Special Deputy Superintendent of the New York Liquidation Bureau (NYLB), and expert witness Jack Gibson, a Managing Director of Towers Watson, the first two days featured cross examinations by attorneys representing ELNY structured settlement payees and testimony from ELNY annuitants who would suffer significant payment shortfalls under the ELNY Restructuring Agreement proposed by ELNY's Receiver, the Superintendent of the New York State Department of Financial Services (Superintendent).

According to Schedule 1.15 for the proposed ELNY Restructuring Agreement, 4168 of ELNY's remaining 9694 annuities are structured settlement annuities of which 1459 (approximately 15 percent) will experience shortfalls, some more than 50 percent, even assuming proposed state guaranty association contributions and life insurance company enhancements. The remaining ELNY annuities (approximately 85 percent) are expected to be paid in full by a new special purpose entity to be named Guaranty Association Benefits Company (GABC).

Attorneys representing the Superintendent (Sidley Austin) and NOLHGA (Faegre Baker Daniels) led Bing and Gibson through their direct testimony and introduced multiple Exhibits including Bing's Affidavit and Gibson's Expert Report both of which S2KM summarized in a prior blog post. The essence of the Superintendent's case:

• ELNY is insolvent with assets sufficient to pay for only 34 percent of its future obligations.
• ELNY's insolvency resulted from unfavorable investment results with sustained low interest rates and poor capital market performance.
• The proposed Restructuring Agreement is in best interest of policyholders, creditors and the public.
• Differences among individual annuitants result from variations in state guaranty association limits as applied to specific ELNY contracts.
• ELNY annuitants with anticipated shortfalls received adequate notice to raise objections and no one has proposed an alternative restructuring plan.
• No ELNY annuitant will be worse off under the Restructuring Agreement than with a straight liquidation.
• GABC is financially viable because of its initial funding, participating guaranty association (PGA) contributions plus voluntary life insurance company enhancements.
• GABC will be run by professional insurance managers and supervised by the New York Superintendent.
• Any surpluses earned by GABC will be paid to former ELNY annuitants on a pro rata basis.
• As ELNY's Receiver and Liquidator, the Superintendent is granted discretion under New York Law and should be granted legal immunity along with his agents including the NYLB.

On cross-examination of Bing and Gibson, attorneys for objecting ELNY annuitants highlighted the following issues:

• In fulfilling NYLB's responsibilities for ELNY, Bing has consulted with representatives of NOLHGA, the NOLHGA ELNY Task Force, ELNY PGAs, contributing ELNY life companies, ELNY policyholders, past and present Superintendents, plus the Superintendent's ELNY attorneys and experts. Bing has not, however, consulted with any ELNY annuitants or their representatives.
• Although representatives of NYLB and NOLHGA have access to all of the written objections filed with the Court by ELNY policyholders and payees, representatives of annuitants do not have access to all of the written objections and those objections have not been posted on the ELNY website.
• Although it is difficult, even for Bing, to specifically define the NYLB, it is not a taxpayer funded state agency.
• Except for individual notices mailed to ELNY annuitants on December 7, 2011, none of the other ELNY "notifications" (public notices, press releases, websites, or 800 numbers) informed individual ELNY annuitants whether they would experience shortfalls under the proposed Restructuring Agreement.
• January 16, 2012, the deadline for ELNY policyholders and payees to file objections with the Court was a legal holiday and the Court was closed.
• Until ELNY's 2006 audited financial statements were completed showing a surplus deficit of $1.266 billion, the NYLB was unaware that ELNY had insufficient assets to pays its future obligations.
• In formulating his expert opinions, Gibson relied upon source materials that annuitants and their attorneys have not been given an opportunity to review.
• Note: Judge Galasso set a Monday March 19, 2012 deadline for annuitants' attorneys to file separate motions requesting access to Gibson's source materials and to all written objections previously filed by ELNY policyholders and payees with the Court.

Before the Superintendent's attorneys completed presenting their case, Judge Galasso allowed ELNY annuitants attending the hearing to offer oral testimony as an accommodation to their travel schedules. Some of the highlights of their testimony:

• All of the testifying ELNY annuitants asserted the ELNY Restructuring Agreement and notification process were "unfair" because:
  • The Governor of New York and the Superintendent had assured the public as recently as 2007 that all ELNY benefits would be paid in full.
  • The Superintendent had years to prepare the Restructuring Agreement with assistance from NOLHGA, sophisticated attorneys, actuaries, accountants and financial advisers plus a staff of 250 NYLB employees.
  • When they received their notification letters just prior to the 2011 Christmas holidays in what some described as "junk mail envelopes", ELNY shortfall victims who wanted to challenge the Restructuring Agreement were required to:
    • Comprehend complex legal and financial materials without access to any independent professional evaluation;
    • Locate qualified attorneys willing to assist them on short notice during the holidays;
    • File written objections and propose an alternative restructuring proposal without access to critical source materials on or before a deadline that turned out to be a legal holiday.
• None of the testifying ELNY annuitants thought it was fair that 15 percent of the ELNY annuitants should bear 100 percent of the total ELNY shortfall while 85 percent of the ELNY annuitants continue to receive 100 percent of their payments.
• Some testifying ELNY annuitants stated:
  • Negotiation participants, structured settlement sales materials and/or language in their settlement documents assured them their annuity payments were "guaranteed" for life and/or a period certain.
  • It is unconscionable that: 1) the Superintendent, as ELNY's Receiver, and his agents, including the NYLB, should be granted immunity from lawsuits; and/or 2) the Superintendent should be given any supervisory role for GABC.
  • It is unfair to treat ELNY structured settlement annuitants differently depending upon whether or not original tort defendants funded their payment obligations with a Qualified Assignment.
• One ELNY annuitant (currently serving as a California State Appellate Judge) with an Article 75 (pre-1986) ELNY contract stated that three named representatives of the New York Insurance Department assured him in 1991 that he would receive all of his ELNY payments in full. Note: Judge Galasso requested briefing on the Article 75 New York Guaranty Association issues.

Based upon S2KM's written notes, here are some selected quotes from Judge Galasso during the first two days of the ELNY hearing taken out of context and sequence:

• "We are trying to be fair to everyone."
• "This company has been in trouble since 1991 and unlike banks, you cannot take your money out."
• "I have a gun to my head; if the annuitants don't get the Restructuring Agreement, they get a straight liquidation."
• "It seems unfair that 15 percent of the annuitants bear all of the loss."
• "When agents sold you your policy did they say you exceeded the guaranty association cap?"
• "My problem is that people buy their annuities and think they are 'guaranteed'"
• "Who determined the amount of voluntary life insurance contributions?"
• "Whatever I decide probably will be appealed."
• "How can insurance companies make contributions for orphan contracts but not for seriously injured payees?"
• "Results in many cases depend upon where you live. Why is that fair?"
• "Who is representing the annuitants interests? Does the Superintendent have a conflict of interest?"

The ELNY liquidation hearing continues on Monday March 19, 2012. For S2KM's complete ELNY reporting, see the structured settlement wiki.