Beyond Structured Settlements

Structured Settlements in 2007

Happy holidays from S2KM Limited. Thank you for reading S2KM's blog during 2007. This final 2007 S2KM blog post highlights some of this year's important structured settlement developments and issues.  For additional background information, see:

• S2KM Mid-2007 Structured Settlement Report
• Structured Settlements in 2006

Industry Growth and Development

• Industry insiders are predicting final 2007 structured settlement annuity sales (qualified and non-qualified) will match or slightly exceed total 2006 production of $6.1 billion.
• Membership growth in 2007 for the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP), the primary structured settlement trade associations, also appears flat. Neither of these associations has articulated a strategy for growing the structured settlement industry.
• NSSTA replaced long-time Executive Director Randy Dyer in 2007 with association management company Smith Bucklin. NSSTA has announced it will continue a business relationship with Dyer. However, NSSTA has not yet announced Dyer's new role or responsibilities.
• Annuity provider Mass Mutual exited the structured settlement industry in 2007 joining other recent industry departures such as Genworth, Travelers and Aegon. No new annuity providers entered the structured settlement market in 2007.
• The secondary life and annuity markets continued to be controversial within the structured settlement industry in 2007. Semetra resigned from NSSTA in 2007 based in part on their disagreement with NSSTA's Bylaw Amendments related to structured settlement factoring. Neither NSSTA nor SSP allows factoring companies to join their associations.
• Although the secondary structured settlement market continues to grow in 2007, the overall pace of its growth appears to have leveled off for many, but not all, participants.
• Preliminary strategic recognition and some consolidation continued during 2007 within these overlapping markets:
  
  • Structured settlements;
  • Personal injury settlement planning;
  • Litigation funding;
  • Special needs planning;
  • Secondary insurance and annuity markets.

Legislation and Regulations    

• New York Governor Eliot Spitzer announced a $750 million "agreement in principle" for Executive Life of New York in 2007. The agreement is designed to continue paying all ELNY annuitants 100% of their benefits. The announcement represents a public relations victory for the structured settlement industry. Many questions about the agreement, however, remain unanswered. For example: the amount of contributions from indemnity (casualty) insurers who own or have assigned structured settlement annuities.
• State Medicaid Agencies are continuing to adopt annuity provisions from the Deficit Reduction Act into their state Medicaid Plans. Interpretations and applications of these new annuity rules remain inconsistent creating process bottlenecks and denials. The impact of the secondary annuity markets on Medicaid qualification remains unclear in 2007. The Social Security Administration (SSA) announced in 2007 that it will draft POMS for annuities in 2008. For additional information about the Deficit Reduction Act, see:
  • Release 41 of "Structured Settlements and Periodic Payment Judgments";
  • Inconvenient Questions; and
  • NAELA Annuity Policy White Paper.
• 48 states have enacted structured settlement protection statutes. Overall, these statutes appear to be accomplishing their purposes and functioning with increasing certainty and efficiency. Pennsylvania's judiciary adopted Pennsyvania Rule 229.2 in 2007 tightening some rules and processes within that state's protection statute.
• The U.S. Treasury has not ruled on single claimant 468B funds in 2007.

Case Law - some of the significant 2007 cases:    

• DOJ Sovereign Immunity Defense - see "Drinker Biddle's Structured Settlement Update" for analysis of two DOJ sovereign immunity cases: Transamerica v. Settlement Capital and Continental Casualty v. United States.
• Primary Market Disclosure Case - "Pullman & Comley's Structured Settlement Insights" provided the first Internet analysis of Joseph v. The City of New York which Pullman & Comley characterizes as ""the first court opinion to analyze the requirements in structured settlement protection acts that disclosures be made when negotiating a structured settlement."
• Rapid Settlements cases challenging secondary market laws and business practices including:
  
  • Rapid v. Symetra; and
  • CNA v. Rapid Settlements

• Murphy v. IRS - Eleven months after ruling that taxing damage awards for nonphysical compensatory damages violated the United States Constitution, the United States Court of Appeals for the District of Columbia Circuit has reversed itself in Murphy v. IRS by holding that the United States can tax awards for emotional distress and injury to reputation.
• Macomber v. Travelers - the parties agreed to a confidential settlement in 2007.  It is unclear what legal precedents, if any, the earlier Connecticut State Supreme Court rulings in this case will hold for current or future structured settlement litigation.
  

Educational Programs and Resources

• Both NSSTA and SSP offered certification programs in 2007.    
• S2KM attended educational programs for the following trade associations in 2007 and wrote blog posts (see links) evaluating their structured settlement educational programs:          
  
  • National Structured Settlement Trade Association (NSSTA).          
  • Society of Settlement Planners (SSP)          
  • American Association for Justice (AAJ)          
  • National Academy of Elder Law Attorneys (NAELA)          
  • Academy of Special Needs Planners (ASNP)          
  • National Association of Settlement Purchasers (NASP)    
• The structured settlement industry continued to offer various additional educational resources in 2007:          
  
  • Blogs, podcasts, wikis and concept maps;          
    
  • Digital and hardcopy newsletters;          
    
  • Hardcopy legal textbooks.

Business Standards and Practices

• 2007 developments
  
  • Broker Relations Initiative - status report provided in this S2KM blog post.
  • SSP Ethics Project - status report provided in this S2KM blog post.
• 2007 issues:
  
  • Structured settlement public policy
  • Claim management vs. settlement planning
  • Consumer and investor protection including:
    
    • Compensation disclosure;
    • Informed consent;
    • Single claimant 468B funds;
    • Unfair claim practice legislation;
    • Fiduciary responsibilities for professional advisors.

• Additional compensation issues:
  • Rebating
  • Affinity programs
  • Secondary market transactions
• Unauthorized practice of law.

Deal Flow Media Webinar

Deal Flow Media publishes reports, and also sponsors webinars and conferences, about specialized financial markets.

Deal Flow Media's markets include:

• Life Settlements
• Private Investments in Public Equity (PIPEs)
• Special Purpose Acquisition Companies (SPACs)
• Reverse Mortgages
• Distressed Debt

On November 29, 2007, Deal Flow Media will enter the structured settlement market by sponsoring its first structured settlement webinar.  Please note the Postcript at the end of this post. Deal Flow Media will be rescheduling and expanding this structured settlement webinar.

In addition to Brett Goetschius, Karen Meyers and Dan Finn, this author will be one of the featured speakers. My topic will be "The Structured Settlement Secondary Market".  Some of the questions my presentation will address:

• What is a structured settlement?   
• What is a structured settlement factoring transaction?
• What are structured settlement payment rights?
• What is the secondary structured settlement market?
• How do the primary and secondary markets interact?
• Why do payees sell structured settlement payment rights?
• What definitions and legal rules apply to this secondary market?
• How large is the structured settlement secondary market?
• Who are the leading secondary market participants - and why are they successful?
• What does an investor in structured settlement payment rights actually purchase?
• What are the business and investment risks?

Additional S2KM online resources about the structured settlement primary and secondary markets:

• Structured Settlements
  • Overview of the Structured Settlement Market
  • History of Structured Settlements
  • Future of Structured Settlements
  • Structured Settlement Transaction Diagram
  • Structured Settlement Public Policy Wiki
  • Structured Settlements and Government Benefits
  • Blog posts featuring Robert Wood's podcasts
    • Structured Attorney Fees
    • Single Claimant 468B Funds
• Structured Settlement Secondary Market
  • Structured Settlement Transfers
  • Settlement Transfer Update
  • Settlement Transfers - Release 39
  • How the Primary Market Views Factoring
  • NSSTA Bylaw Amendments
  • J.G. Wentworth v. Peachtree Settlement Funding
  • Settlement Transfers: Wentworth and Symetra
  • Rapid v. Symetra
  • Review of Robert Wood's article: "Structured Settlements: Factor vs.Commute".
• National Association of Settlement Purchasers (NASP)
  
  • 2007 Annual Meeting
  • 2006 Annual Meeting
  • NASP Wiki

Postcript - added November 28, 2007

• Deal Flow Media has decided to reschedule and expand its structured structured webinar.  Deal Flow Media will announce new dates and details for its expanded webinar on Deal Flow Media's website.   This author will appear as a participant in Deal Flow Media's structured settlement webinars- and will also provide continuing S2KM blog coverage of Deal Flow Media's structured settlement publications.
• S2KM has added corrected links for the following concept maps developed by Dr. Barbara Bowen of Sound Knowledge Strategies.  Each concept map includes embedded submaps and links.
  • Overview of Structured Settlement Markets
• How the Primary Market Views Factoring

For additional information about S2KM's collaboration with Barbara Bowen, see "Web 2.0 for Lawyers Concept Map".

NASP 2007 Annual Meeting - 1

The National Association of Settlement Purchasers (NASP) hosted its 2007 Annual Meeting October 18-19 at the Grand Hyatt in Washington, D.C.   This author was privileged to participate. 

S2KM's reporting about NASP's 2007 Annual Meeting begins with this blog post and this wiki which summarizes NASP's 2007 Educational Program -  a learning conversation about "The Structured Settlement Market". 

For prior S2KM commentary about NASP, see this S2KM blog post.

Structured Attorney Fees

Robert W. Wood, the preeminent authority on "Taxation of Damage Awards and Settlement Payments", analyzes structured attorney fees in his second audio podcast interview with Ned Arthur (S2KM Podcast Tape 9).

Rob prefaces his analysis by noting that no specific Internal Revenue Code section addresses structured attorney fees. Instead, Rob views structured attorney fees as an accounting concept confirmed by case law - an attorney pays tax when he or she receives compensation.

According to Rob, when they are properly arranged, structured attorney fees allow a contingently-compensated attorney to:

• Defer portions of his or her compensation; and
• Pay tax upon receipt;
• Regardless of:
  • The type of case; or
  • Whether the client receives a lump sum or periodic payments.

Rob's podcast analysis of structured attorney fees addresses:

• Related tax history;
• Appropriate cases;
• Tax advantages and risks;
• Private annuity regulations;
• Public policy - for and against structured attorney fees.

For articles written by Rob Wood about attorney fee tax issues, see Wood & Porter's website generally including these specific articles:

• "Structuring Attorney Fees When You are Not a Solo";
• "New Regulations Address 1099s for Attorney Fees";
• "Contingent Attorney Fees in the Post-Banks Era";
• "Wood on the Private Annuity Regs and Structured Attorney Fees".

In a separate S2KM audio interview (S2KM Podcast Tape 8), Rob and Ned discuss Single Claimant 468B Funds from multiple perspectives including taxation, administration and public policy.

Rob's audio podcast interviews are featured on S2KM's Structured Settlement Public Policy Wiki.  They are also accessible directly from S2KM's blog (upper left) or subscribe to S2KM Podcast.

Single Claimant 468B Settlement Funds

Robert W. Wood, the pre-eminent authority on "Taxation of Damage Awards and Settlement Payments", analyses Single Claimant 468B Settlement Funds in his first audio podcast interview  with Ned Arthur and S2KM Limited. Rob, a partner at Wood & Porter, is a prolific and highly-respected author and commentator whose specialties include structured settlements.

The Wood & Porter website features a comprehensive listing of Rob's publications - books and articles.

Rob's first audio podcast with S2KM Limited focuses on public policy arguments for and against Single Claimant 468B Settlement Funds. Rob's audio podcast is featured on S2KM's blog (Podcast Tape 8) and S2KM's Structured Settlement Public Policy Wiki.

IRC section 468B was enacted as part of the Tax Reform Act of 1986. IRC section 468B created important settlement funding options for plaintiffs and their attorneys.  The controversial issue is whether IRC section 468B applies to single claimant cases.  The U.S. Treasury Department is currently evaluating the Single Claimant 468B issue. 

What are the stakes for structured settlement stakeholders?  There are many including who (plaintiff or defendant) controls structured settlement decisions and who (plaintiff or defense annuity agent) controls annuity commissions.

Rob Wood is the expert on IRC section 468B Settlement Fund options and issues including Single Claimant 468B Settlement Funds.

Rob's audio podcast interview:

• Outlines IRC section 468B's history and public policy;

• Initiates a strategic online conversation about Single Claimant 468B Funds.

In a separate audio podcast interview with Ned Arthur (S2KM Podcast Tape 9), Rob analyzes structured attorney fees.

Structured Settlement Public Policy Wiki

With the publication of Joseph Dehner's second audio podcast interview with Ned Arthur about structured settlement public policy (S2KM Podcast Tapes 5 and 7), S2KM Limited and Truffle Media Networks are simultaneously launching a structured settlement public policy wiki.   

The purposes of this wiki are to:

• Invite, compare and discuss diverse perspectives about structured settlement public policy;
• Advance structured settlement industry learning; and
• Improve structured settlement laws and business practices.

In his podcast interviews, Joe Dehner addresses:

• Structured Settlement Public Policy Introduction  - S2KM Podcast Tape 5;
• Continental v. United States - S2KM Podcast Tape 7.

S2KM is inviting structured settlement and public policy knowledge leaders to contribute to this public conversation about structured settlement public policy.  S2KM will post updates about this public policy wiki periodically on S2KM's blog: "Beyond Structured Settlements".

Drinker Biddle's Structured Settlement Update

Drinker Biddle's June 2007 Structured Settlement Update (posted on their website) provides concise legal summaries for two current industry developments:

• Executive Life of New York

• Transamerica v. Settlement Capital

Executive Life of New York (ELNY)

Drinker Biddle's update contains this bombshell about ELNY: "Over the past several weeks, the New York State Insurance Department has notified certain property and casualty insurance companies that own structured settlement annuities issued by ELNY and certain guarantee associations that there will be a shortfall in ongoing payments from annuities issued by ELNY. Although it is unclear how many annuities remain in force, we understand that the total shortfall may amount to as much as $600 million."

Structured settlement industry insiders, who requested anonymity, are divided in their reaction to this news. Some were shocked. One industry leader stated: " We all thought ELNY had a strong financial position." Other industry leaders downplayed the importance of the announcement. From a claimant perspective, they emphasized the strength of the state guarantee funds and the fact that the notice is precautionary. According to one source, no immediate emergency exists.  NSSTA, a structured settlement trade association, monitors Executive Life and continues to report on Executive Life to its members (including this blog author).  NSSTA's most recent Executive Life update (January 8, 2007), however, makes no mention of any ELNY shortfall.

The Drinker Biddle update estimates that, at the time of its rehabilitation in 1992, ELNY had issued as many as 8,500 structured settlement annuities.

Although all 50 states now have insurance guarantee funds, the Drinker Biddle update identifies two significant issues potentially applicable to ELNY:

• Whether the guarantee association of the state of domicile of a payee, or the state of domicile of a contract owner will be called upon to pay benefits to a claimant?

• Whether the claimant entitled to obtain relief is the contract owner or the payee?

Hopefully, NSSTA and its legal committee will address these ELNY developments and provide additional details about ELNY's status.

For additional historical analysis about Executive Life, see "Structured Settlements and Periodic Payment Judgments":

• Section 3.05.10 - "Insolvency of Annuity Issuers"

• Section 3.05.9 - "Life Insurance Guarantee Associations"

Transamerica v. Settlement Capital

Drinker Biddle's June 2007 Structured Settlement Update also features a legal summary of Transamerica v. Settlement Capital, a recent decision from the U.S. Court of Appeals for the Sixth Circuit that reconfirms sovereign immunity as a permissible defense for the United States government in objecting to proposed structured settlement transfers. This case is one of a series of cases where the United States Department of Justice Civil Division Tort Branch (DOJ) has asserted sovereign immunity (after the transfer has been approved by a state court, without making an appearance and despite timely notice) to void a transfer of  payment rights approved by a state court pursuant to the state's structured settlement protection statute - in this case Florida.

Other recent cases supporting sovereign immunity to void state court ordered transfers of structured settlement payment rights include:

• Symetra v. Fentress (2006), a U.S. District Court case in Virginia.

• Settlement Funding v. Garcia (2006), a U.S. District Court case in Texas.

Although not referenced in the Drinker Biddle Structured Settlement Update, a recent, related sovereign immunity case, Continental Casualty v. United States, is significantly more important strategically for structured settlements than Transamerica v. Settlement Capital. In Continental Casualty, decided by U.S. District Court in Northern California in 2006, the plaintiff challenged the DOJ's structured settlement policy. The plaintiff sought an order:

• Imposing restrictions on the DOJ's terms of settlement;

• Imposing the same restrictions on all settlements by the DOJ Torts Branch Civil Division;

• Establishing a 468B settlement trust.

Although the terms of a settlement had been memorialized in Continental Casualty in a letter from the DOJ to the plaintiffs' counsel, the letter did not address a structured settlement. Plaintiffs alleged that the DOJ understood that the agreement was conditioned upon a structured settlement to be approved by CMS. The DOJ argued it never agreed to a structured settlement.

In addition to seeking a court order for a qualified settlement trust (which the court refused to create), the plaintiffs challenged the following DOJ structured settlement requirements:

• DOJ selects the annuity broker;
• Plaintiffs are offered less for a structured settlement than a cash settlement;
• Annuities provide reversionary interests to the United States;
• Limit on available financing options;
• Prohibit assignments of payment rights

In denying the plaintiff's joint petitions, the District Court stated: "The court is not in a position to make policy decisions regarding DOJ settlement practices and finds no illegality in any of the requirements. To the extent these practices are contrary to sound or appropriate public policy, it rests with the executive or legislative branch to regulate."

Does the DOJ's existing structured settlement program support or violate public policy?  This question represents a fundemental political and business issue for all structured settlement stakeholders.  Congress is currently investigating the DOJ and should include this issue within the scope of its ongoing investigation.  All structured settlement stakeholders should separately address and highlight this issue as part of a broader industry discussion of business standards and practices.