Beyond Structured Settlements

Rapid v. Symetra

A recent, unpublished legal decision (Rapid Settlements v. Symetra Life Insurance Company) from the California Court of Appeals (Fourth Appellate District; Division Two) confirms the general rule that, even following the enactment of IRC Section 5891, courts will enforce a clear and explicit anti-assignment provision in structured settlement agreements provided the interested parties timely object after having been given notice and an opportunity to be heard. In this case, those interested parties were Symetra Assigned Benefits Service Company (SABSCO) and Symetra Life Insurance Company (Symetra Life) - collectively referred to as Symetra.

The decision over-ruled the trial court which had earlier approved the transfer to Rapid of $40,000, one-third of a $120,000 future periodic payment due to claimant Randy L. Griffin pursuant to a structured settlement agreement (SSA) signed in September 1993. In appealing the order approving the transfer, Symetra successfully contended the order should be reversed and the transfer declared void because the $40,000 payment was not assignable under the terms of the SSA. Based upon its ruling in favor of Symetra, the appellate court did not consider Symetra's additional contention that the transfer failed to comply with the requirements of California's structured settlement protection act.

When an interested party objects to the assignment of structured settlement payment rights, there are two basic legal questions: 1) does the structured settlement agreement clearly forbid assignment?  And if so, 2) does state law override a contractual anti-assignment provision?

The appellate ruling in this case is consistent with the majority of prior cases addressing these issues. It rejected the trial court's decision which "relied on the 'general policy favoring the free alienation of contract rights' to payment, as opposed to contractual duties, and indicated that the non-assignment provision appeared to be 'solely for tax purposes.' "

What makes this decision interesting, and controversial, is Rapid's argument that Symetra had itself actively solicited the assignment of Griffin's payment rights despite the anti-assignment language in the structured settlement agreement and that this "establishes that the practical interpretation of the contract, as evidenced by Symetra's words, acts and conduct, is that Griffin's payment rights are in fact assignable and Symetra has objected on a purely competitive basis."

The California appellate court disagreed with Rapid. It reasoned: "...under California law it is clear that non-assignment provisions are for the benefit of the obligor, and only the obligor has the right to waive the provisions...As the obligor, Symetra may choose to enforce or waive the non-assignment provisions of the SSA. That it chose not to waive the provisions in favor of Rapid does not mean Symetra may not waive the provision in favor of itself or an affiliate entity."

Therefore, at least in California, when structured settlement documentation includes clear and unambiguous anti-assignment provisions, an annuity provider such as Symetra appears to have the power: 1) to prevent a proposed transfer; and 2) to restrict a transfer to a specific factoring company including an affiliated factoring company.

This result is similar to a defense insurance company conditioning a structured settlement upon the selection of its affiliated annuity provider.

Both practices are anti-competitive and should be avoided.

For current and future cases, all structured settlement participants should review the settlement language in NSSTA's revised Model Qualified Assignment (MQA) Agreement - paragraph 7 (Acceleration, Transfer of Payment Rights) and the related footnote.

For additional information about anti-assignment language in structured settlements, see "Structured Settlements and Periodic Payment Judgments" - Chapter 16 ("Transfers of Structured Settlement Payment Rights").

For additional S2KM blog posts about factoring, see:

• Structured Settlement Transfers: Good or Bad?
• How the Primary Market Views Factoring
• Self-funded Settlement Transfers
• Review of "Structured Settlements: Factor vs. Commute?" - an article by Robert W. Wood

Structured Settlements and Periodic Payment Judgments-Release 41

Release 41 of "Structured Settlements and Periodic Payment Judgments",  co-authored by  Daniel Hindert, Joseph Dehner and Patrick Hindert, is now available from American Lawyer Media (ALM).  Highlights include a new chapter titled "Government Benefits and Structured Settlements".  This chapter provides a primer on government benefits for structured settlement attorneys and other professionals interested in structured settlements.  Release 41 discusses the interaction of structured settlements with:

• Social Security Income and Social Security Disability Insurance
• Medicare and Medicaid
• Medicare Secondary Payer Rules
• Medicare Set-Aside Arrangements
• Medicaid Liens and Paybacks
• Self-settled Special Needs Trusts
• Pooled Trusts

Release 41 also includes:

• Analysis of how the Deficit Reduction Act of 2005 (DRA) impacts structured settlements.  For additional information about the DRA, see: Inconvenient Questions.
• An update on the Murphy v. IRS case.

Review of "Structured Settlements: Factor vs. Commute?"

Robert W. Wood, an expert tax attorney whose specialties include structured settlements, has written a provocative new article titled "Structured Settlements: Factor vs. Commute?" for the December 25, 2006 edition of "Tax Notes". The article is also accessible on the Wood & Porter website.

Wood's article addresses the strategic question of "whether an insurance company can commute periodic payments due under its own annuity policy (or that of an affiliate) and still comply with the federal income tax law."

Note: quotations and italics are from Wood's article.

Summary of Wood's Conclusions

• There is "no clear answer" - which, in and of itself, Wood characterizes as "unnerving";
• "Factoring someone else's annuity is clearly okay" (meaning in the context of Wood's article, the transaction does not violate section 130's prohibition against acceleration) - provided the parties obtain a court order pursuant to IRC Section 5891 and meet the requirements of the appropriate state structured settlement protection statute.
• But a commutation (see analysis below) "appears to accelerate payments" - in violation of IRC section 130's prohibition against acceleration.
• Wood also differentiates "automatic commutations" (see analysis below) whose features, according to Wood, do not appear (based upon LTR 9812027) to cause an acceleration in violation of IRC section 130;
• Because commutations and third party factoring produce different results for the qualified assignee and annuity issuer, Wood argues they should be treated differently for tax purposes.
• "Issuers risk violating section 130 when they commute their own annuities (with or without a qualified order under section 5891)" and whether directly or using an affiliate company.
• "Given the preponderance of authorities discounting the value of court orders as controlling (or even bearing on) federal income tax consequences, a court order .... cannot prevent (or cure) a violation of section 130."
• Based upon his "serious concerns" about potential adverse and unexpected tax results from commutations used as a substitute for third party factoring, Wood concludes such commutations "should not be recommended by prudent tax practioners."

Summary of Wood's analysis:

• Key terminology
  • Insurance companies - for Wood's article, insurance companies also specifically include "companies that do not actually issue structured settlement annuities but are wholly owned by companies that do. That may include a qualified assignee."
  • Third Party Factoring - For Woods, IRC section 5891 creates a safe harbor for third party factoring. Although commutations and third party factoring produce the same result for the payee (a lump sum), Woods differentiates the results for the qualified assignee and annuity issuer.
  • Commutations
    • One difference between a commutation and third party factoring "is that in a commutation, the payee receives payment from the payer of the periodic payments, not from a third party."
    • A second difference: "in factoring the payments continue (without alteration of amounts or payment frequency) - not so with commutation (which effectively ends the payment stream)"
  • Automatic Commutations -Terminology Wood uses to differentiate commutations meeting the following requirements set forth by the IRS in LTR 9812027 which was issued in 1997:
    • Contemplated in the original structured settlement documents and funding annuity;
    • Caused by events outside the payee's control;
    • The payee has no ability to affect whether a commutation might occur; and
    • The commutation is made to the payee's beneficiaries and not to the payee.
  • Acceleration
    • Both IRC sections 130 and 5891 include prohibitions against acceleration of payments;
    • Acceleration can occur for one party to a structured settlement (payee) and not others (qualified assignee or annuity provider);
      • For the payee, both factoring and commuting represent acceleration;
      • For the annuity issuer and qualified assignee, acceleration only occurs with a commutation. With a factoring transaction, annuity payments continue but to a new person or entity or as part of a new financial security.
• LTR 9812027
  • In which the IRS ruled favorably for a commutation meeting the "automatic commutation" requirements identified above:
    • Structured settlement payments subject to the commutation clause were "fixed and determinable" under IRC section 130(c) (2)(a);
    • The commutation provisions did not cause the assignment to fail to comply with IRC section 130(c);
  • Although a private letter ruling cannot be cited as precedent and LTR 9812027 was issued prior to enactment of IRC section 5891, Wood views LTR 9812027 as important because:
    • No specific IRC section addresses commutations;
    • Besides LTR 9812027, the IRS has not provided any guidance for commutations.
  • Because IRC Section 130(c) prohibits acceleration, Wood characterizes LTR 9812027 as support for his conclusion that automatic commutation features do not cause an acceleration in violation of IRC section 130;
  • As Wood points out, however, in LTR 9812027, the IRS did not expressly address whether an automatic commutation (or any type of commutation) causes an acceleration for 130 purposes.
• Relationship between IRC Sections 130 and 5891:
  • Wood's analysis begins with some fundementals: IRC section 130 provides an exclusion from gross income for the qualified assignee;
  • Without this exclusion, a US-based qualified assignee has a potential tax mismatch - recognizing income immediately, then deducting each periodic payment as paid;
  • If IRC section 130 is satisfied originally, IRC section 5891 provides that any subsequent transfer does not affect the application of IRC section 130 in any year;
  • Third party factoring (pursuant to IRC Section 5891) does not impact the income taxation of any party to the structured settlement including the qualified assignee;
  • IRC section 5891 provides a safe harbor for satisfying the section 130 prohibition against acceleration;
  • There are no statutory pronouncements as to whether a commutation contravenes IRC section 5891;
  • Wood's analysis concludes: whether or not a commutation triggers an IRC section 5891 excise tax, it may still violate IRC section 130's acceleration requirement.
• Significance of a court order
  • To avoid a confiscatory forty (40 per cent) federal income tax, IRC section 5891 requires an acquiring company to obtain a final order, judgment or decree of a state court or responsible administrative authority (court order);
  • Pursuant to IRC section 5891(b)(5), a court order is "dispositive" for avoiding the excise tax;
  • This court order must find that the transfer does not contravene any state or federal statute or the order of any court or responsible administrative authority; accordingly, any such order implicitly states that IRC section 130 (acceleration) is not contravened;
  • Under traditional tax principles, a ruling by a federal or state court is not binding on the IRS or the courts.
  • Therefore, Wood questions why a state court ruling that no statute is violated for IRC Section 5891 purposes should be "dispositive" that the transaction satisfies IRC section 130.
  • Conversely, the state court order required to satisfy IRC section 5891 begs the question: does that proposed transfer violate IRC section 130?

Impact of Wood's Article

• Wood's article represents valuable strategic thinking for three related and overlapping markets: structured settlements; structured settlement transfers (factoring); and personal injury settlement planning.
• His article calls into question the appropriate tax treatment for commutation programs as competitive substitutes for third party factoring.  Wood's analysis should have special interest for companies such as Symetra, All State and National Indemnity who already participate in the secondary market.
• His article helps to explain why most annuity providers have not offered factoring or commutation products and services. 
• Wood's analysis makes it less likely that annuity providers will compete directly with factoring companies - at least until further tax authority or guidance becomes available.
• Nevertheless, Wood's article implicitly challenges structured settlement annuity providers (as well as their distributors and advisors - especially settlement planners) to re-think current structured settlements products, programs and processes in the context of both IRC sections 130 and 5891.
• For astute annuity providers, Wood's analysis offers insights to improve their structured settlement products and simultaneously facilitate the efficient operation of federal and state settlement transfer legislation.
• Wood's article further highlights:
  • The need for additional tax authority and education about factoring and commutations - particularly for state judges; and
  • The important linkage between IRC section 130 and the court orders under state protection statutes required by IRC section 5891.
• Wood's article improves upon and completes Structured Settlements in 2006 - a year in which some of the most important industry developments and some of the best expert commentary have focused on factoring and factoring's impact on structured settlements and personal injury settlement planning.

Release 40 - Chapter 1

Structured Settlement Transaction Diagram,
originally uploaded by Patrick Hindert.

This S2KM blog post highlights important revisions to Chapter 1 ("Introduction and History") contained in Release 40 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) co-authored by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert (author of S2KM's blog) and published by Law Journal Press. For additional S2KM blog posts about S2P2J Release 40, see: Release 40-Introduction.

As demonstrated by the embedded diagram (click to enlarge), a structured settlement can be a complex legal and financial transaction. This complexity results from many applicable statutory and regulatory rules enacted by states and the federal government during the past 30 years. Some of these newer rules (for examples: IRC 5891(c) and many of the 46 state structured settlement protection statutes) include statutory definitions. For attorneys and consultants who work with structured settlements, understanding the sources, significance and restrictions of these definitions represents a professional requirement and challenge.

While referencing statutory definitions, S2P2J Release 40 revisits and revises the book's definition for structured settlement. As used in S2P2J, "structured settlement" describes "the resolution of tort cases that are settled by a claimant's accepting payments over time rather than a single sum". Compare this definition with the definition for periodic payment which S2P2J defines as "a commitment to make future payments to a claimant according to agreed schedule on specific terms." These two definitions highlight the focus and scope of S2P2J which include the resolution "of injury claims that involve non-taxable recoveries arising from tort cases where physical personal injury or physical sickness has occurred or where a workers' compensation system provides funds to injured workers." They also point out the need for standard definitions for structured settlements, settlement transfers and settlement planning - for example: the need for consistency among definitions which already appear, or can be expected, in different statutes impacting structured settlements such as the Internal Revenue Code, Medicare and Medicaid, plus any related state legislation.  For additional information about standards, see the article "How Standards Impact Structured Settlements" on S2KM's website.

In summarizing the history of structured settlement in the United States, Release 40 incorporates two diagrams (Structured Settlement History and Stage 3 Transition) which originally appeared in an S2KM blog post titled: "The Future of Structured Settlements". The history diagram organizes the changing characteristics and key influences defining structured settlements by category within a time line. The historical dates (1982 and 2001) highlighted by this time line represent strategic industry transitions which are supported by the historical growth and acceleration of structured settlement annuity premium. The Stage 3 transition matrix provides an overview of the changes resulting in industry business practices as a result. 

To fully understand the changes re-shaping the structured settlement industry, it is also necessary to study the impact of the Internet and, more specifically, Web 2.0.  For an introduction to Web 2.0 for Attorneys, see S2KM's earlier blog post titled "CBA Presentation" as well as the article "Knowledge Management and Structured Settlements" featured on S2KM's website.

Release 40 - Introduction

"Structured Settlements and Periodic Payment Judgments" (S2P2J) is a hardcopy legal textbook co-authored by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert (author of S2KM's blog) and originally published by Law Journal Press in 1985. Since 1985, the co-authors and publisher of S2P2J have written and distributed 40 semi-annual updates. The most recent update (Release 40) marks S2P2J's 20th anniversary and provides this co-author with the incentive and opportunity to review S2P2J Release 40 in an historical context as a series of forthcoming S2KM blog posts. These S2KM blog posts will summarize and highlight topics addressed in Release 40 on a chapter specific basis.

Additional Comments About S2P2J and Release 40:

• S2P2J's primary audience includes attorneys, judges, mediators, professional advisors and product providers who participate as stakeholders in structured settlements, structured settlement transfers, settlement planning and periodic payment judgments;

• Additional information about S2P2J including a summary, the table of contents and "how to order" are available online.

• While each co-author alternately contributes to and updates S2P2J, Joe Dehner was the principle author for Release 40 which features some of Joe's most valuable thinking and commentary about multiple structured settlements topics and developments.

• Many professionals and organizations have assisted the co-authors as guest authors or by contributing valuable information. For Release 40, special thanks to NSSTA and Little, Meyers & Associates for their contributions.

• Release 40 includes substantive updates for the following S2P2J Chapters - several of which will be separately reviewed in subsequent S2P2J blog posts:

• Chapter 1 - Introduction and History

• Chapter 2 - Taxation of Damages

• Chapter 3 - Financing Alternatives

• Chapter 4 - Role and Responsibilities of Defense Counsel

• Chapter 5 - Role and Responsibilities of Plaintiff Counsel

• Chapter 6 - Case Preparation

• Chapter 8 - Case Closing

• Chapter 10 - State Periodic Payment of Judgment Statutes

• Chapter 13 - Environmental Cases

• Chapter 14 - Workers Compensation Cases

• For an overview of the structured settlement market, see this earlier S2KM  blog post.
• For a summary of S2P2J Release 39 (which featured a new Chapter 16 titled: "Transfers of Structured Settlement Payment Rights"), see this earlier S2KM blog post.
• For summaries of the most recent S2P2J releases, see S2KM's website.