Beyond Structured Settlements

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.

ELNY Periodic Payment Obligations

More than 1400 structured settlement annuity payees are expected to suffer payment shortfalls under the Executive Life of New York (ELNY) Liquidation Plan approved by New York State Supreme Court Judge John Galasso on April 16, 2012. The average individual shortfall is estimated to exceed $600,000 present value.

Under what circumstances, if any, will defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?

Recent Motion

This issue was highlighted in a recent Motion by liability insurers asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. Judge Galasso denied the Motion on July 23, 2012.

The Motion attempted to distinguish two types of structured settlement funding alternatives ("buy and hold" vs. qualified assignments). "Buy and hold" annuities, according to the Motion, "are those whereby the underlying insurer retained, or held the liability for future payments, and funded that liability through its ownership of a qualified funding asset, or annuity."

In contrast, the Motion states, "where a structured settlement includes a qualified assignment, the defendant and its liability insurer are fully released from future liability - which liability is assumed by the assignee, here, First Executive Corporation." (emphasis added). Of course, one of the problems for all ELNY stakeholders is that First Executive Corporation ceased to exist in 1991.

As S2KM has previously written, those "suggestions" and/or "assumptions" are not necessarily or universally true. Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.

Three Funding Choices

As more fully explained in Section 3.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J): with a structured settlement, each defendant and/or liability insurer has three choices regarding its obligation to fund future periodic payment obligations to the claimant (1) to have no obligation; (2) to assume or share the obligation; or (3) to assume and then transfer the obligation without recourse. In general:

• "No obligation" means either a claim is paid on a lump sum basis or a structured settlement occurs and all parties agree that the particular defendant or liability insurer shall have no duty to make any future periodic payments.
• “Assume the obligation” means that a particular defendant or liability insurer ("obligor") assumes a legal obligation to pay future periodic payments. This obligor may be solely, jointly, or jointly and severally liable for the payments and, by assuming the obligation, accepts certain risks. One such risk is the potential insolvency of the financing company (e.g. ELNY).
• "Transfer the obligation" means "novation" as defined in Section 280 of the Restatement (Second) of Contracts (Restatement): "A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty." Comments to Section 280 further provide:
  • "Effect of novation. A novation discharges the original duty, just as any other substituted contract does, so that breach of the new duty gives no right of action on the old duty.
  • "Consideration. A novation is subject to the same requirements as any other contract, including that of consideration.... [C]onsideration to support the discharge of the original duty can usually be found in the promise to undertake a new duty….Assent of the obligee of the original duty and of the obligor of the new duty is always necessary."
  • "Substitution of obligor. ….[A] mere promise by a third party to assume the obligor’s duty, not offered in substitution for that duty, does not result in a novation, and the new duty that the third party may owe to the obligee as an intended beneficiary is in addition to and not in substitution for the obligor’s original duty."
  • Illustration: "A owes B $1000. B promises C that he will discharge the debt immediately if C will promise to pay him $1000. Intending to benefit A, C so promises. There is a novation under which B’s and C’s promises are consideration for each other, and A’s duty to pay B is discharged. A is the intended beneficiary of B’s promise …and can by disclaimer render the transaction, including the discharge, inoperative from the beginning."

Qualified Assignment

The most common method for transferring a structured settlement obligation is a "qualified assignment" as defined in IRC Section 130(c). For purposes of understanding "transfer of obligation" in the context of structured settlements, however, the Section 130 definition of "qualified assignment" presents two significant problems:

• IRC section 130 does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• Section 130 incorrectly uses the term "assignment" when it should have utilized the term "delegation".

Restatement of Contracts

Comments to Section 316 of the Restatement explain both the difference and the significance of these two terms:

• "Assignment and delegation. In this Chapter rights are said to be 'assigned'; duties are said to be 'delegated' ….. 'Assignment' is the transfer of a right by the owner (the obligee or assignor) to another person (the assignee)."
• "Comparing delegation to assignment. A person subject to a duty (the obligor) does not ordinarily have such a power to substitute another in his place without the consent of the obligee; that is what is meant when it is said that duties cannot be assigned. 'Delegation' of performance may be effective to empower a substitute to perform on behalf of the obligor, but the obligor remains subject to the duty until it has been discharged by performance or otherwise."

Comments to Section 318 of the Restatement further differentiate "delegation" and "novation" as follows: "An obligor is discharged by the substitution of a new obligor only if the contract so provides or if the obligee makes a binding manifestation of assent, forming a novation….Otherwise the obligee retains his original right against the obligor, even though the obligor manifests an intention to substitute another obligor in his place and the other purports to assume the duty. The obligee may, however, have rights against the other as an intended beneficiary of the promise to assume the duty."

NSSTA Model Agreements

After ELNY entered rehabilitation in 1991, the National Structured Settlement Trade Association (NSSTA) published Model Qualified Assignment Agreements (with and without a Release) which documents were updated following the enactment of IRC 5891 in 2001. Both versions of NSSTA's current Model Qualified Assignment Agreements reference IRC section 130 and utilize "assignment" to describe what the Restatement more properly characterizes as a "delegation".

Here is the relevant comparative language from current paragraphs 1 of the NSSTA Model Agreements:

• With Release - "Assignment and Assumption; Release of Assignor. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments. Each Claimant hereby accepts and consents to such assignment by Assignor and assumption by Assignee. Effective on the Effective Date, each Claimant hereby releases and discharges Assignor from all liability to make the Periodic Payments."
• Without Release - "Assignment and Assumption. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments."

Impact for Defendants and ELNY Victims

How does this discussion impact whether defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?

• NSSTA's Model Qualified Assignment Agreements did not exist during the time period (1985-1990) when ELNY was selling structured settlement annuities.
• Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.
• Whatever language parties used to describe and/or label their transactions (e.g. annuity financing; buy and hold; qualified assignment; novation; transfer; etc.) is not by itself determinative of the rights and responsibilities set forth in the actual language of the settlement documentation.
• Some common industry practices, at least during the 1985-1990 time period, could create problems for defendant/liability insurers.
• For example, in the paper he delivered at the Society of Settlement Planners (SSP) 2012 Annual Meeting, attorney David Higgins pointed out how some defendants and liability insurers have attempted "to collapse the creation of the liability with the assignment of the liability to the assignee."
• Higgins, who drafted the text of the 1982 structured settlement law introduced in the House and the Senate, warned that "such a collapse is to be avoided if the definition [of a qualified assignment] is to be met."
• Under U.S. common law, whether a novation has occurred is a question of fact, and the burden of proving it is generally upon the party asserting it.
• The Restatement identifies potential defenses for ELNY structured settlement shortfall victims who attempt to void a novation including misrepresentation (Sections 159-162) and disclaimer (Section 306).
• All ELNY structured settlement shortfall payees, as well as defendants and/or liability insurers who purchased the related ELNY structured settlement annuities, should retain qualified legal counsel to review their settlement documentation.

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

Liability Insurers' ELNY Motion Denied

Without further explanation, Judge John Galasso has denied a Motion by liability insurers, including Travelers, Fireman's Fund and Hartford, asking the Judge to "clarify and/or correct" his August 16, 2012 Executive Life of New York (ELNY) Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. (see Addendum below)

The ELNY Memorandum Decision states in relevant part: "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party."

In their June 14, 2012 Motion, attorneys representing those liability insurers, as well as Jefferson Insurance Company, Allianz Global Risks US Insurance Company dba Allianz Global Corporate and Specialty North America, John Hancock Property and Casualty Insurance Company and John Hancock Indemnity Company, asked the Court to "amend its decision to omit what the Court likely intended as an aside, or background, which is not material to the Court's approval" of the ELNY Liquidation Plan.

Their Motion had attempted to distinguish two types of structured settlement funding alternatives: "buy and hold" vs. qualified assignments. The Motion maintained that "at no time" did the liability insurers "undertake liability following qualified assignments - liability was extinguished pursuant to the qualified assignment arrangements."

The Motion further attempted to clarify statements made during the ELNY Liquidation hearings by attorneys representing liability insurers including Fireman's Fund attorney Peter Vodola and Traveler's attorney Craig Ulman. (see Addendum below)

According to the Motion, Vodola's promise on behalf of Fireman's Fund that structured settlement shortfall payees "will receive a hundred percent of their benefits regardless of what happens here" was specifically limited to ELNY annuitants "who are entitled to payments under annuities owned by Fireman's Fund."

Similarly, the Motion sought to clarify Ulman's testimony which provided in part: "l can't speak for any but Travelers but they will in fact be covering the shortfalls under their structured settlements. So that the payees will receive the same number of dollars that they are -- were scheduled to receive eventually." Ulman further stated: "The fact is, their obligations are what they are and they will not be affected by the status of the plan." (see Addendum below)

As S2KM has previously written, the legal rights and responsibilities of ELNY qualified assignments represents a critical issue that may subsequently be litigated by the ELNY structured settlement shortfall victims. The Motion suggested that all qualified assignments release all defendants and liability insurers from future liability for promised periodic payments and that annuity ownership determines liability.

Those "suggestions" and/or "assumptions", however, are not necessarily or universally true. For example:

• IRC section 130, which defines a "qualified assignment", does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• IRC section 130 does include requirements which must be met to successfully create a qualified assignment.
• The Monarch Capital case demonstrates some judges apply "creative" legal analysis to protect structured settlement payees following the bankruptcy of a qualified structured settlement assignee.

In subsequent blog posts, S2KM will review IRC section 130 history and requirements and summarize, in the context of ELNY structured settlement shortfall payments, relevant sections of the Restatement (Second) of Law of Contracts addressing:

• Assignment of Rights
• Delegation of Duties
• Delegation vs. Novation
• Disclaimer by a Beneficiary
• Misrepresentation and Voidable Contracts

For S2KM's complete coverage of the ELNY liquidation, see the structured settlement wiki.

ADDENDUM (July 29, 2012) - Please note two corrections to the above report:

1. Although Judge Galasso's Memorandum Decision specifically mentions Travelers, Travelers had nothing to do with the Motion "to clarify and/or correct" the Memorandum Decision. Travelers was "not a party to [the Motion] and learned about it only after it was filed" according to Craig Ulman, Travelers' attorney.
   
2. Although Ulman's testimony, as quoted above, appears in the ELNY liquidation hearing transcript, the Motion "to clarify and/or correct" does not mention Ulman's testimony at the hearing.  Instead, Ulman's hearing testimony, as quoted by S2KM above, appears in the "Affirmation of Edward S. Stone in Opposition to Motions to Clarify and/or Correct the Court's Memorandum Decision."

The following related ELNY documents are accessible on the structured settlement wiki:

• Memorandum Decision
• Motion to Clarify and/or Correct
• Affirmation in Opposition
• Reply in Support
• Decision denying the Motion
• Craig Ulman Testimony from the ELNY Liquidation Hearing Transcript

ELNY Qualified Assignments

Do qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the liquidation of Executive Life of New York (ELNY)?

That issue is highlighted by a Motion filed June 14, 2012 on behalf of several liability insurers ("Motion") asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. For additional background, see S2KM's blog post "ELNY Shortfall Payments".

Judge Galasso's ELNY Memorandum Decision states in relevant part: "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party."

The Motion attempts to distinguish two types of structured settlement funding alternatives ("buy and hold" vs. qualified assignments). "Buy and hold" annuities, according to the Motion, "are those whereby the underlying insurer retained, or held the liability for future payments, and funded that liability through its ownership of a qualified funding asset, or annuity."

In contrast, the Motion states, "where a structured settlement includes a qualified assignment, the defendant and its liability insurer are fully released from future liability - which liability is assumed by the assignee, here, First Executive Corporation." (emphasis added). Of course, one of the problems for all ELNY stakeholders is that First Executive Corporation ceased to exist in 1991.

Regardless of whether Judge Galasso grants the liability insurers' motion, the legal rights and responsibilities of ELNY qualified assignments represents a critical issue that may subsequently be litigated. The Motion suggests that all qualified assignments release all defendants and liability insurers from future liability for promised periodic payments and that annuity ownership determines liability.

Those "suggestions" and/or "assumptions" are not necessarily or universally true. Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis for multiple reasons:

• IRC section 130, which defines a "qualified assignment", does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• IRC section 130 does include requirements which must be met to successfully create a qualified assignment.
• The Monarch Capital case demonstrates some judges apply "creative" legal analysis to protect structured settlement payees following the bankruptcy of a qualified structured settlement assignee.

See "Structured Settlements and Periodic Payment Judgments" (S2P2J) Section 3.05[9] for information about life insurance insolvencies including ELNY; Section 3.06 for information about qualified assignments; and Section 5.04 which addresses the risk of non-payment to a structured settlement payee.

See the structured settlement wiki for S2KM's complete and continuing reporting about Executive Life of New York,

Structured Settlement Sales Decline

Compared with prior years, total United States structured settlement annuity premium dropped sharply in 2011 to $4,974,710,838 according to a newly released report by Melissa Evola. Evola, President of Structured Financial Associates, Inc., has tracked structured settlement industry sales since 2002 based upon input from life insurance companies that participate in the structured settlement market.

The 2011 structured settlement annuity premium total represents an approximate 10 percent decline from 2010 and an approximate 20 percent decline from 2008. Evola's report further indicates 28,811 structured settlement annuities were sold during 2011 for an average per case premium of $172,667.

Based upon Evola's report, MetLife and Prudential Life were the leading structured settlement annuity providers in 2011. Their combined structured settlement premium of $2,119,300,000 represented approximately 43 percent of total 2011 U.S. structured settlement sales. According to Evola's report, 12 life insurance companies comprised the U.S. structured settlement market in 2011 compared with 22 companies in 2002.

Evola's report also tracks "non-qualified" structured settlement sales which are included in her total structured settlement premium figures. Structured settlements that are non-qualified [under IRC sections 130 and 104(a)(2)] are utilized to defer future payments from immediate income tax. Only two annuity providers currently offer this product. Total non-qualified structured settlement annuity premium in 2011 was $119,513,424, according to Evola's report, compared with $123,532,247 in 2010 and an historic high of $192,501,540 in 2008.

Historic annual U.S. structured settlement annuity premium - as reported by Evola:

• 2011 - $4,974,710,838
• 2010 - $5,524,359,408
• 2009 - $5,383,998,395
• 2008 - $6,226,578,725
• 2007 - $5,998,277,764
• 2006 - $6,111,583,112
• 2005 - $6,125,251,601
• 2004 - $6,135,000,000
• 2003 - $5,965,000,000
• 2002 - $6,142,000,000

For estimated structured settlement annuity sales estimates from 1975-2011, see the structured settlement wiki which features estimates from the authors of "Structured Settlements and Periodic Payment Judgments" (S2P2J) based upon historical input from industry sources including Evola since 2002.

Many structured settlement industry participants attribute declining sales to low interest rates including future forecasts by the Federal Reserve. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981 according to reports published by the Board of Governors of the Federal Reserve System. Here are several historic average annual rates for 30 year Treasury securities based upon the same information source:

• 2011 - 3.91%
• 2010 - 4.25%
• 2009 - 4.08%
• 2008 - 4.28%
• 2007 - 4.84%
• 2000 - 5.94%
• 1990 - 8.61%
• 1980 - 11.27%

Although interest rates represent an important investment consideration, they impact all investment products not just structured settlement annuities. Regardless of interest rates, many other factors, such as mortality risk transfer and relative financial security, favor structured settlement annuities as the core settlement planning product for many personal physical injury victims. For additional information about structured settlement product suitability standards, see the structured settlement wiki.

ELNY Liquidation - 5

Acting as agent for the Receiver of Executive Life Insurance Company of New York (ELNY), the New York Liquidation Bureau (NYLB) mailed letters (shortfall letters) on December 7, 2011 to many individual ELNY structured settlement annuity (SSA) payees notifying them about the proposed ELNY liquidation and restructuring agreement as well as the amount of their anticipated shortfalls.

The ELNY shortfall letters also encourage ELNY SSA payees with anticipated shortfalls to contact their ELNY SSA owner "who may be responsible for supplemental payments, depending upon the terms of the structured settlement agreement, to the extent full payments are not made under the Restructuring Agreement."

Many SSA recipients of the NYLB letters are understandably confused because their annuity contracts identify "First Executive Corporation" (FEC) as the owner of their SSAs. Unfortunately for these ELNY payees and their beneficiaries, FEC declared bankruptcy in 1991 and no longer exists. For a background summary about the rise and fall and ultimate bankruptcy of FEC, see this prior S2KM blog post.

To help SSA recipients of the NYLB shortfall letters better understand their situation, this blog post explains the difference between two alternative methods utilized to fund ELNY SSAs:

• Traditional annuity financing (aka "buy and hold"); and
• Qualified assignments - as defined in Internal Revenue Code Section 130.

Here is a graphic comparison of the "buy and hold" and qualified assignment financing alternatives, courtesy of The Settlement Services Group (TSSG), as set forth in Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Note: Patrick Hindert, author of "Beyond Structured Settlements", is also Managing Director of TSSG and co-author of S2P2J.

Annuity Financing ("Buy and Hold")

As defined in S2P2J, “ 'annuity financing' [buy and hold] means that a defendant or its liability insurer (the 'obligor') (1) gives the claimant an unfunded, unsecured promise to pay money in the future and (2) purchases and owns an annuity to provide a source of funds to meet this obligation."

Applied to ELNY, the owner of the annuity (defendant or its liability insurer) is the obligor and, if ELNY cannot pay, then the owner is obligated to make the periodic payments or make up the difference.

S2P2J further explains the rights and duties of the parties resulting from annuity financing:

1. "In exchange for a release from tort liability, the obligor promises to make periodic payments to the claimant and purchases an annuity to provide a source of funds to meet this obligation.
2. "The obligor owns the annuity, and as such, retains all incidents of annuity ownership, including the right to change the payee of annuity benefits. Of its own volition, the obligor directs that annuity benefits be paid by the annuity issuer to the claimant.
3. "The claimant has the right to receive periodic payments as due and may rely only on the general credit of the obligor for the collection of such payments. The claimant does not have rights in any property or investments owned by the obligor that are greater than rights of the obligor’s other general creditors.
4. "The claimant has no express rights against the annuity issuer because there is no privity of contract between them. Nonetheless, the claimant receives annuity benefits directly from the annuity issuer, and has no reason to complain to the obligor as long as the benefits are received as promised."

Qualified Assignment

As defined in S2P2J, “ 'qualified assignment' means that the defendant or its liability insurer (1) first gives the claimant a promise to pay money in the future; (2) then transfers that obligation to a substituted obligor pursuant to [Internal Revenue Code] Section 130; and (3) thus extinguishes its contractual liability for the obligation so transferred."

Applied to ELNY, the substituted obligor/assignee/annuity owner is FEC and, assuming the qualified assignment complied with all of the statutory requirements, the original obligor/assignor (defendant or liability insurer) thereby extinguished (or intended to extinguish) its contractual liability for the transferred periodic payment obligation.

S2P2J further explains the rights and duties of the parties resulting from a qualified assignment:

1. "In exchange for a release from tort liability, the defendant or its liability insurer or both (the 'assignor') promise to make specified periodic payments to the claimant.
2. "The claimant agrees to discharge the assignor’s duty provided an acceptable new obligor (an 'assignee') promises to make the periodic payments to the claimant.
3. "The assignee makes this promise to the claimant, the claimant accepts the assignee’s promise, and the assignor’s duty is discharged.
4. "For qualified assignments entered into on or before November 10, 1988: The claimant has the right to receive periodic payments as due and may rely only on the general credit of the assignee for the collection of the payments. The claimant does not have rights in any property or investments owned by the assignee that are greater than rights of the assignee’s other general creditors."
5. Note: because of a change in the tax law, for qualified assignments entered into after November 10, 1988, claimants may have a security interest in property owned by the substituted obligor without jeopardizing the tax-free status of the promised payments. If applicable to specific ELNY SSA payees, such a security interest could raise interesting legal issues because FEC also owed Executive Life of California (ELIC).

So what should ELNY SSA payees who received NYLB shortfall letters do?

• First, they should try to locate copies of their annuity contracts, settlement agreements and, if applicable, qualified assignment agreements. If they have not personally retained these documents, they might try contacting:
  • The attorney who represented them in their original lawsuit; or
  • The structured settlement agent who helped purchase their annuity from ELNY; or
  • Metropolitan Life Insurance Company which has been administering ELNY annuities since 1991.
• Second, they should retain legal counsel to review their documents and recommend options keeping in mind:
  • The January 16, 2012 deadline (Martin Luther King Day) for filing objections to the proposed ELNY Liquidation Petition and Restructuring Agreement; and
  • The announced ELNY "Hardship Fund" of at least $100 million (not a component of the Restructuring Agreement) created by a consortium of life insurance companies with a toll-free information line at 1-888-809-2254.

For additional information about FEC and ELNY, see the structured settlement wiki.

For additional information about annuity financing and qualified assignments, see Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

NSSTA 2011 Education Meeting

The National Structured Settlement Trade Association (NSSTA) hosted one of its best-ever educational programs November 2-4, 2011 in Austin, Texas. The conference primarily showcased NSSTA members and NSSTA member executives and encompassed a variety of important industry topics.

Speakers and topics:

NSSTA President Dan Finn - Finn summarized NSSTA's current projects, emphasized NSSTA's improved structured settlement marketing and announced the 2012 NSSTA Annual Meeting which will take place in Washington, D.C. and feature Congressmen Dave Camp and Paul Ryan as Keynote Speakers.

NSSTA Executive Director Eric Vaughn - In addition to reviewing the 112th Congress and Super Committee, Vaughn discussed the following NSSTA challenges and priorities:

• Protect IRC sections 104(a)(2) and 130.
• Defend structured settlements.
• Promote the expanded use of structured settlements.
• Expand the markets for structured settlements.
• Enhance the CSSC designation.
• Provide state court judicial education about structured settlements.

AIG Chief Economist Ardanvan Mobasheri - Mobasheri's economic overview highlighted China's emerging leadership, outlined a "very healthy non-financial business world" and predicted low interest rates for the foreseeable future.

American General Life President Mary Jane Fortin - Describing AIG as "a strong, stable and resilient company dedicated to keeping our promises", Fortin dispelled several "myths" about AIG, summarized AIG's recovery and expressed optimism about the future of life insurance industry and structured settlements.

John McCulloch and Michael Miller - Reprising NSSTA "Tax Posse", McCulloch and Miller introduced the new IRS audit guide for lawsuits, awards and settlements and reviewed recent tax cases addressing employment, factoring and Qualified Settlement Fund issues.

Peter Vodola, Stephen Harris and Amy Ravitz - The co-chairpersons of NSSTA's Legal Committee participated in two separate panels moderated by James Ebel and Michael Kelly and discussed non-tax cases and issues including state structured settlement protection statutes, issues arising from transfer petitions and minors statutes and settlements.

Len Blonder and NSSTA General Counsel Craig Ulman - Blonder and Ulman reported the status of the Executive Life of New York (ELNY) liquidation, discussed the consequences for structured settlements and reviewed hypothetical case examples from the proposed ELNY Restructuring Agreement.

Karen Meyers, LeAnne Sprague, Doug Brand and Kathy Moghadas - In addition to discussing changes to the CSSC designation that will require annual CE credits, NSSTA sponsored a special four hour annuity education session designed to meet the requirements of the new state annuity transaction suitability laws.

CNA Commercial Liability Claims Vice President James Martin - Championing structured settlements as an "important competitive advantage" for liability insurers, Martin also emphasized the importance of linking structured settlements and structured settlement sales to claim department goals and metrics.

Ringler Radio Broadcaster Larry Cohen - When announced co-interviwer Mark Wahlstrom proved a "no show", Cohen glibly volleyed Eric Vaughn toughest questions. Three memorable Cohen quotes: "a lot of a little is a lot"; "vision without execution is hallucination"; and (applying his grandfather's wisdom to Executive Life's annuity rates ) "there is something wrong with this tuna fish."

Liberty Life Chief Underwriter Kevin Smith - Speaking about "Life Company Operating Metrics", Smith pointed out the dearth of structured settlement metrics and announced a collaborative project among multiple NSSTA life company members to develop a preliminary set of structured settlement operating metrics.

Attorney William C Chriss - Author of the new book "The Noble Lawyer", Chriss discussed legal and structured settlement ethics. Among his observations while discussing NSSTA's Code of Ethics:

• "We cultivate beliefs that justify our behaviors, not the other way around.
• "Unconscious bias, as opposed to intentional venality, cannot be deterred by criminal laws or post hoc sanctions.
• "The more people involved, the easier it is to defuse moral responsibility."

Congratulations to NSSTA's speakers and leaders (especially Education Chairpersons Toni Warbington and Don Engels as well as Finn, Vaughn and Associate Director Peter Arnold) for substantially upgrading NSSTA's educational program.

For S2KM reports about prior conferences of NSSTA and other structured settlement and settlement planning professional associations, see the structured settlement wiki.

SSP and NSSTA 2011 Annual Meetings - 5

One of three fundamental transitions reshaping the structured settlement industry is the change from a singular, illiquid and non-assignable product to multiple products with greater flexibility to address changing needs and circumstances of injury victims. This transition includes the potential of greater product liquidity for traditional structured settlements provided by IRC section 5891 and the state protection statutes.

During their 2011 annual meetings and educational conferences, both the Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) addressed this structured settlement industry transition.

NSSTA's Legal Committee organized two educational programs featuring secondary market structured settlement issues:

• Peter Vodola, Katherine Scanlon and Amy Ravitz - "Legal Committee Update on Developments in the Law"; and
• Judge Edward Burke and Judge Steven Denton (moderated by Vodola) - "Judicial Perspective" (on structured settlements).

The Legal Committee Update approached "factoring" from the perspective of "what is it and why should we [NSSTA] care?" Their "what is it" segment:

• Introduced NSSTA members to IRC section 5891;
• Highlighted the "best interest" test and disclosure requirements of state protection statutes; and
• Summarized the Ceron v. Henderson case which S2KM previously reported as part of S2KM's "business standards and practices" series.

NSSTA's "why should we care" (about factoring) comments focused upon:

• How factoring companies are "adversely defining" the term "structured settlement" with aggressive television and internet advertising;
• How structured settlement factoring cases have inundated many state court dockets; and
• How NSSTA members should respond to plaintiff attorneys and judges who resist structured settlements because of proliferating factoring transactions.

The theme of NSSTA's "Judicial Perspective", as stated by participating Judge Denton, might have been: "don't presume that judges understand structured settlements". Previously a plaintiff attorney, Judge Denton claimed a familiarity with structured settlements but acknowledged he had never been asked to approve a structured settlement transfer application. Conversely, Judge Burke stated that his structured settlement experience was limited to reviewing and approving transfer applications.

Among his NSSTA comments, Judge Burke identified his "heroes" to include the superior court judges involved in the California Fresno County factoring cases. Judge Burke's judicial praise is both noteworthy and difficult to understand. In Henderson v. Scieteco (one of the Fresno County factoring cases) , a California appellate court subsequently reversed the entire consolidated order from the Fresno County Superior Court because of "multiple prejudicial errors in making its factual findings and in reaching legal conclusions" (emphasis added).

Also in Henderson v. Scieteco, the California appellate court held that public policy supports state court approved structured factoring transactions (emphasis added). NSSTA's Legal Committee representatives failed to mention this case when they discussed "public policy" and factoring during their structured settlement legal update.

Some judges not only understand structured settlements, but also have experience with both primary and secondary market structured settlement cases and publish local court rules for structured settlements. See, for example, Rule 68.2 and Rule 68.3 of the Local Rules for the Hamilton County, Ohio Probate Court.

SSP offered three presentations about non-traditional structured settlement products as part of its educational program segment titled "Practice Improvement: Marketing and New Products",

• Anthony Prieto and Tim Denehy - "The Use of Structured Settlement Annuity Payment Rights";
• Brian Michaels - "Expanded Use of Non-Qualified Assignments"; and
• Rick Miller - "Equity Indexed Annuities and Settlement Planning".

Prieto and Denehy introduced a product called "The Settlement Asset Management Trust (SAM trust) with Enhanced Structured Income (ESI)" which is essentially an irrevocable spendthrift trust generating level monthly income payments for durations of 10-30 years plus access to discretionary distributions.

The ESI component, according to Prieto and Denehy, consists of payment rights previously sold (i.e., transferred or factored) by a structured settlement recipient to a third party purchaser (factoring company) with an approved court order pursuant to a state protection statute. The SAM trust product managers purchase the payment rights from one or more factoring companies and transfer the payment rights to the SAM trust.

According to Prieto and Denehy, the resulting SAM trust can produce a taxable interest rate that is "typically three (3%) percent higher than comparable fixed products with similar guarantees and safety." Their explanation for the enhanced interest rate: the ESI does not have the same high internal costs as a typical annuity during the first few years of the annuity policy.

Although the flow of structured settlement payment rights purchased from various factoring companies is typically uneven, Prieto and Denehy maintain the SAM trustee can consolidate selected payment rights to create an even payment flow to the SAM trust beneficiary who might be an injury victim or a plaintiff attorney.

In addition to an interest rate risk, Prieto and Denehy acknowledge the ESI has an insurance company insolvency risk similar to a traditional structured settlement. According to Prieto and Denehy, however, a typical SAM trust will include between two and ten separate payment rights purchases thereby diversifying the insolvency risk.

Although some secondary market brokers and factoring companies have previously sold "re-cycled" structured settlement payment rights to individuals, Prieto and Denehy believe their product is different because the SAM trust integrates multiple streams of separate payment rights and also includes a cash allocation permitting discretionary distributions.

For additional S2KM reporting about the SSP and NSSTA 2011 Annual Meetings, see the structured settlement wiki.

See "Structured Settlements and Periodic Payment Judgments" (S2P2J) for additional information about:

• Non-qualified (under IRC section 130) assignments and products - Section 3.08A; and
• Judicial review of transfer applications - Section 16.05

SSP and NSSTA 2011 Annual Meetings - 3

Whether and when personal injury settlements are taxable to their recipients represents one of the most important structured settlement legal issues. Both the Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) featured multiple tax presentations during their 2011 educational conferences.

At the SSP conference, Robert Wood and Jeremy Babener each separately addressed multiple settlement tax issues. Wood discussed: "468B Qualified Settlement Funds" (QSFs) and "Common Settlement Tax Mistakes and How to Fix Them". Babener's SSP presentation addressed three topics:

• Maximizing the medical expense deduction;
• Emotional distress and the medical care exception; and
• Inheritance of personal injury proceeds.

The NSSTA conference also featured a QSF presentation by Martin Jacobson titled "The Ins and Outs of 468B Funds". In addition, NSSTA's Legal Committee Update included a summary of a 2011 tax case, Espinoza v. Commissioner, plus an introduction to IRC Section 5891 as part of a discussion about the secondary structured settlement market.

Wood, who has written both a textbook and a Tax Management portfolio about QSFs, utilized case examples to explain several QSF issues: when is a QSF available; formation of a QSF; who should serve as QSF administrator; what are the QSF administrator's responsibilities; determining QSF income and deductions; information reporting responsibilities; amounts to report and forms to use; reporting of structured settlements; and terminating a QSF.

In his presentation about identifying and fixing settlement tax mistakes, Wood highlighted several issues: the need for professional tax computations; interest is always taxable; punitive damages; attorney fees; tax allocations; miscellaneous itemized deductions; above-the-line deductions; the unclear scope of section 104; sex abuse and wrongful imprisonment cases; the Murphy case; constructive receipt; employment disputes; Form 1099; as well as qualified and non-qualified structured settlements. For related writing by Wood, see the Wood & Porter website as well as S2KM's structured settlement public policy wiki.

Like Wood, Babener is both a prolific writer about settlement tax issues, as evidenced by Babener's website and related commentary appearing on S2KM's structured settlement public policy wiki, and a frequent speaker at educational conferences sponsored by SSP and the National Association of Settlement Purchasers (NASP). Also similar to Wood, Babener's SSP presentation and handouts utilized case examples (as well as tables) to help communicate his analysis. Equally appropriate for their audience, both Wood and Babener emphasized settlement tax planning and incorporated structured settlements into their discussions.

Jacobson's QSF discussion at the NSSTA conference specifically addressed the single claimant issue. Jacobson focused his analysis on the statutory language of IRC 468B, related Treasury Regulation 1.468B-1(c) and related Revenue Procedure 93-34.

• Treasury Regulation 1.468B-1(c) requires and permits a QSF to be "established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability ..." (emphasis added).
• Revenue Procedure 93-34 sets forth the rules under which a QSF will be considered a "party to the suit or agreement" for purposes of Section 130 and includes a stipulation that all Section 130 requirements still apply (emphasis added).

Jacobson highlighted the issue of whether Revenue Procedure 93-34 means that constructive receipt and economic benefit apply to single claimant QSF-funded Section 130 Qualified Assignments. For purposes of the single claimant QSF issue, Jacobson identified what he termed "the real questions":

• Does a single claimant have economic benefit of the funds placed in the QSF?
• Does the single claimant have "unqualified availability" of those funds?
• Has IRC Section 130(c) been satisfied?
• Is there going to be an IRS ruling applicable to single claimant QSFs?
• In the continuing absence of such an IRS ruling, Jacobson quoted Robert Wood's recommendation to "avoid the single claimant controversy" by establishing QSFs with multiple claimants.

With deference to Martin Jacobson for his valuable presentation and gratitude that NSSTA's educational programs have begun to address important and controversial industry issues, S2KM suggests these additional "real questions" concerning single claimant QSFs:

• Why haven't any NSSTA or SSP members applied for one or more IRS rulings applicable to single claimant QSFs?
• For example, what constitutes "multiple claimants" for purposes of QSFs - multiple family members as claimants? government liens? a plaintiff attorney's compensation claim?
• Does public policy favor or not favor single claimant QSFs? If not, why not?
• As Jeremy Babener addresses in his important QSF paper, how far has existing federal legislation eroded the applicability of the constructive receipt and economic benefit tax doctrines to structured settlements:
  • Technical and Miscellaneous Revenue Act of 1988 - allowing "secured creditor status"; and
  • Victims of Terrorism Tax Relief Act of 2001 - allowing transfers of payment rights ("factoring") pursuant to state protection statutes.

For additional information about:

• Structured settlement tax issues - see Chapter 2 of "Structured Settlements and Periodic Payment Judgments" (S2P2J);
• Single claimant 468B QSFs - see S2KM's blog post "Single Claimant QSF Update"
• SSP and NSSTA 2011 Annual Meetings - see S2KM's structured settlement wiki.

SSP and NSSTA 2011 Annual Meetings - 1

This blog post begins S2KM's reporting and outlines results from the 2011 annual meetings of the Society of Settlement Planners (SSP - May 15-17) and the National Structured Settlement Trade Association (NSSTA - May 18-20).

Elections

• NSSTA
  • President - Dan Finn
  • New Directors - Tom Donahue; Christine Logan; Kevin Silo; Mike Wostoupal
• SSP
  • President - Jack Meligan
  • New Directors - Tony Alfieri; Tim Denehy; Charles Schell; Michelle Whitmore.

Honors - NSSTA

• President's Award - Betty Gregware
• Leadership Award - Toni Warbington
• CSSC Designation Certificates
• NSSTA Past Presidents - honoring NSSTA's 25th Anniversary

Educational Programs - speakers by topic with recommended related resources from "Structured Settlements and Periodic Payment Judgments" (S2P2J), S2KM wikis and prior S2KM blog posts.

Legislative Update

• NSSTA - Eric Vaughn: Washington Update
  
• SSP - Roy Franco: HR 1063
  

Government Benefits

• NSSTA
  • MSA Panel -Toni Warbington; Doug Brand; David Korch; David Hayes
  • Special Needs Trusts - Jay Sangerman
• SSP
  • Liability MSAs - Jason Lazarus; Roy Franco; Mark Pololizio; Doug Shaw
  • Liens Panel - Roy Franco; Tevra Johnson
• Recommended resources
  • S2P2J Chapter 15 - "Government Benefits and Structured Settlements"
  • S2 wiki - "Government Benefits"

Taxation

• NSSTA: 468B QSF Funds - Martin Jacobson
• SSP
  • 468B QSF Funds - Robert Wood
  • Taxation of Damages - Robert Wood
  • Medical Expense and Estate Tax Issues - Jeremy Babener
• Recommended resources
  • S2P2J Chapter 2 - "Taxation of Damages"
  • S2P2J Section 3.08B - "Section 468B Settlement Funds"
  • S2 public policy wiki pages featuring: Robert Wood and Jeremy Babener

Stakeholder Perspectives

• NSSTA
  • Attorneys - William Robinson lll, President-Elect of the American Bar Association
  • Legal Committee Update (including secondary market) - Peter Vodola; Amy Ravitz; Kathy Scanlon
  • Financial Planners - Laura Tarbox
  • Judges - Peter Vodola, Edward Burke, Stephen Denton
  • Unions - Michael Rott
• SSP
  • Special Needs Attorneys - Kevin Urbatsch; Michele Fuller
  • Plaintiff Attorneys - Jay Fisher
• Recommended resources
  • S2P2J Chapter 4 - "Defense Counsel"
  • S2P2J Chapter 5 - "Plaintiff Counsel"
  • S2P2J Chapter 6 - "Case Preparation"
  • S2P2J Section 16.05 - "Judicial Review of Transfer Applications"
  • S2 wiki - "Secondary Market"
  • S2KM blog - "Ceron v. Henderson"

Marketing

• NSSTA: Business Communications - LuAnn Reeb
• SSP
  • Marketing to Personal Injury Attorneys - Joe Didier
  • Electronic Media and Social Networking - Mark Wahlstrom
• Recommended resources
  • S2 wiki - "S2 and KM"
  • Web 2.0 for Lawyers wiki

Practice Improvement and New Products

• NSSTA: CSSC Continuing Education Online - Karen Meyers; Kathy Moghadas
• SSP
  • Dissecting a Settlement Plan - Jack Meligan; Joseph Tombs
  • Non-qualified Assignments - Brian Michael
  • Indexed Annuities - Rick Miller
  • Re-cycling Structured Settlement Payment Rights - Anthony Prieto; Tim Denehy
• Recommended resources
  • S2P2J Section 3.06A - "Non-Qualified Assignments"
  • S2 wiki - "Re-thinking Structured Settlements"
  • S2 wiki - "Settlement Consulting"
  • S2 wiki - "Business Standards and Practices"
  • S2 wiki - "Spencer v. Hartford"
  • S2KM blog - "Online S2P2J" 

Strength of Life Companies

• NSSTA
  • Strength of Life Insurance Companies - Jim Morris, Chairman, President and CEO of Pacific Life Insurance Company
  • State Guarantee Associations - Tom Ronce; Craig Ulman
  • ELNY Update - Len Blonder; Randy Dyer; Dan Finn; Craig Ulman

• Recommended resources
  • S2P2J Section 3.05[9] - "Life Insurance Guaranty Associations"
  • S2P2J Section 3.05[10] - "Executive Life Insolvency"
  • S2KM blog - "Executive Life of New York"

For S2KM reporting and analysis of prior SSP and NSSTA meetings, see S2KM's structured settlement wiki.