Beyond Structured Settlements

Superintendent Seeks ELNY Contempt Order

Attorneys representing Benjamin M. Lawsky, Superintendent of Financial Services for the State of New York (Superintendent), in his capacity as Receiver of Executive Life Insurance Company of New York (ELNY), have filed Notice of a Motion with the Nassau County New York State Supreme Court requesting oral argument on January 4, 2013 at 9:30 a.m. or as soon thereafter as the parties may be heard:

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

The purpose of motion, according to the notice, "is to punish the accused for a contempt of court, and such punishment may consist of fine or imprisonment, or both, according to the law."

Class Action Lawsuit

The named ELNY shortfall payees, Jeanice Dolan, Daniel A. Malin, and Keith Vincent, (objector plaintiffs) through their legal counsel, Edward S. Stone, and Roger P. Christensen, Karra J. Porter, and Kristen C. Kiburtz of Christensen & Jensen, P.C. (objector legal counsel), filed the class action lawsuit November 8, 2012 naming as defendants the Superintendent in his non-regulatory capacity as ELNY's Receiver, including predecessor ELNY Receivers (Receiver), Metropolitan Life Insurance Company (MetLife) and Credit Suisse Group, AG (Credit Suisse).

This S2KM blog post re-configures selected allegations from the class action complaint into an ELNY "allegation timeline". A copy of the class action complaint is posted on the structured settlement wiki.

ELNY Appeal

Previously, on May 30, 2012, the objector legal counsel, on behalf of 18 ELNY shortfall payees, filed a Notice of Appeal (ELNY appeal) with the Appellate Division of the Supreme Court of the State of New York, Second Department, challenging the Executive Life of New York (ELNY) Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by New York State Supreme Court Judge John M. Galasso on April 16, 2012.

The oral arguments in the ELNY appeal occurred November 15, 2012 and a decision is expected before 2012 calendar year end.

• This S2KM blog post summarizes the Appellant/Objectors' appellate allegations that no statutory or common law basis existed for Judge John Galasso's "extraordinarily broad grant of injunctive relief" to protect the Superintendent and his agents, including the New York Liquidation Bureau (NYLB).
• This S2KM blog post summarizes the injunction arguments in the Superintendent's appellate brief and the ELNY shortfall payees' reply brief.

Preemptive Correspondence

Prior to filing the December 8, 2012 Notice of Motion seeking to enforce injunctions and a contempt order, attorney Steven M. Bierman, representing the Superintendent, and objector legal counsel exchanged preemptive letters, copies of which S2KM has reviewed.

In response to attorney Bierman's threats to file a motion "to enforce the Receivership Orders and to obtain an order of contempt", the objector legal counsel replied in part:

• "[W]e view your recent letter on behalf of the Superintendent as an attempt at intimidation and as further evidence of complicity by the Superintendent in the long-standing cover-up regarding the aborted rehabilitation of ELNY and the illegal wasting of its assets. As you know such wasting was in direct violation of the Supreme Court's orders."
• "[I]f you do elect to initiate contempt proceedings, you can anticipate a cross motion raising, among other things, the Superintendent's violation of the Supreme Court's orders, which are serious and numerous."
• "[W]e are puzzled by the current position taken by Superintendent Lawsky. While it was proper to name him in the subject complaint, he is currently in a position to distance himself from the failings of his predecessors under whose watch the critical failings occurred."
• "[W]e are willing to explore with you the possibility of Superintendent Lawsky's joining with us in protecting and asserting the rights of the shortfall payees."

Legal Memorandum in Support of Motion

In support of their motion to enforce the court's injunctions and for a contempt order, attorneys for the Superintendent also filed a Memorandum of Law from which selected excerpts follow:

• "During the rehabilitation and liquidation proceedings of ELNY under Article 74 of the Insurance Law, and consistent with Insurance Law § 7419, this Court has entered various antisuit injunctions—in 1991, 1992 (which were continued by this Court’s order on December 17, 2010), and 2012—that 'enjoined and restrained [all persons] from bringing or further prosecuting any action at law, suit in equity, special or other proceeding against [ELNY] or its assets, or the Superintendent of Insurance of the State of New York and his successors in office as Rehabilitators thereof, or their agents'.”
• "In their pending appeal, those objectors and their counsel recognized the force of these injunctions, stating that this Court 'granted the Receiver’s request to permanently enjoin the bringing of any claims against the Receiver or others, including claims in their personal capacities.' They also conceded that '[l]eave of the court must be obtained to sue a receiver in his or her representative, as opposed to individual, capacity.'”
• "Notwithstanding their admissions that the Court enjoined 'the bringing of any claims against the Receiver,' three of the objector-appellants, Jeanice Dolan, Daniel A. Malin, and Keith Vincent ..., through their counsel Edward S. Stone and Roger P. Christensen, Karra J. Porter, and Kristen C. Kiburtz of Christensen & Jensen, P.C. ..., recently filed a putative class action in the United States District Courtfor the Southern District of New York that violates this Court’s anti-suit injunctions."
• "It is literally hornbook law that '[a] violation of an injunction constitutes a contempt.'”
• "Here: (1) this Court’s anti-suit injunctions expressly enjoined actions against the Superintendent as ELNY’s Receiver, (2) the Objector Plaintiffs and Counsel unquestionably violated these injunctions by filing suit in federal district court, (3) Counsel for the Objector-Plaintiffs admittedly had knowledge of the Court’s injunctions, and (4) the Superintendent has been prejudiced because, inter alia, he has had to retain counsel, to analyze the claims, and to begin preparing a responsive pleading to the federal court complaint against him, which has distracted from his work and that of his staff in orderly liquidating ELNY."
• "Disobedience of a court order is 'sufficient to sustain a finding of civil contempt, regardless of motive, where . . . it was calculated to or actually did defeat, impair, impede, or prejudice the [other party’s] rights.'”
• "Counsel for Objector-Plaintiffs’ refusal to comply with the anti-suit injunctions has caused the Receiver to incur costs and expenses, including attorney’s fees (both in analyzing and preparing a response to the Complaint and in bringing this contempt action)."
• "Accordingly, the Court should include such costs and fees as part of a contempt order and require Counsel for Objector-Plaintiffs to pay to the Superintendent the full amount of his costs and attorney’s fees that are incurred as a result of their contempt."

For S2KM's complete ELNY reporting and an Executive Life timeline, see the the structured settlement wiki.

Need for Reform?

In a companion article to the National Underwriter's recent comprehensive analysis of the Executive Life of New York (ELNY) Liquidation ("The Complete ELNY Saga"), writer Warren Hersch asks: "is the structured settlement process in need of reform"?

The Hersch article highlights a "potpourri" of structured settlement issues:

• Business practices - including disclosure and suitability issues
• Structured settlement regulation - or lack thereof
• Industry lobbying
• Industry education
• Broker compensation
• Structured settlement transfers
• IRC 468B qualified settlement funds
• Declining annuity sales
• Increasing case complexity - including annuity/trust blended products
• An evolving settlement planning profession
• Responsibilities of plaintiff attorneys
• Financial strength of annuity providers

In addition to industry criticism, the article features diverse individual perspectives demonstrating a foundation for industry consensus:

• Len Blonder
  • “No other option today can match the structure’s mix of tax-free income and guaranteed security.”
  • "A casualty company should ... be allowed to vet their own representatives of choice.”
  • "Plaintiffs are free to hire any financial professional from among the tens of thousands that are available to them."
• Joseph Dehner
  • "A personal injury attorney for claimants who isn’t even considering a structured settlement in high damage cases is bordering on malpractice."
  • “Structured settlements have become both more flexible and complicated because of the advanced planning that now accompanies these transactions.”
  • "Continuing low interest rates on the fixed annuities used to satisfy settlement claims [is] the key factor" in explaining the recent declines in structured settlement annuity sales.
• Jeremy Babener
  • “The qualified settlement fund (QSF) allows for a significant increase in the amount of time that payees have to make necessary determinations.”
  • "But for the single plaintiff, use of the vehicle comes with uncertainty. That’s because it is unclear whether a single plaintiff is treated for tax purposes as receiving funds deposited into a QSF."
• Timothy Morbach: “More should be done to recognize that the field of settlement planning is highly specialized and that [claimants] should make efforts to retain separate and qualified financial and legal counsel with respect to the strategies they wish to implement.”
• Charles Schell: “If the plaintiff's attorney engages a settlement planner, then .... , more likely than not, the product or plan recommended will be suitable.”
• Peter Gallanis: "The rate of insolvencies among life and health insurers, now at an all-time low, are but a fraction of the hundreds of failures within the commercial and investment banking and thrift sectors during the financial crisis."
• Eric Vaughn: "IRC Section 5891 has effectively prevented many abuses ... that commonly occurred in prior decades."

Perhaps this National Underwriter article will help motivate the structured settlement industry to undertake its own strategic analysis about whether and how to reform the structured settlement process. Immediate existential challenges certainly exist. In addition to the ELNY liquidation, these challenges include:

• Declining primary market annuity premium
• Historically low interest rates
• Potential reforms to the tax code and the tort system
• Implementation and impact of Dodd-Frank and the Affordable Care Act
• Transitioning business skills, relationships and processes to the Internet.

Assuming Charles Darwin was correct: It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.

The primary strategic issues for the structured settlement industry are whether, when, how and to what degree it will become "responsive to change"?

Can industry leaders:

• Be honest ? - Acknowledge the problems. Study the changes. Abandon political correctness. Question traditional assumptions, business models and business practices.
• Be inclusive ? - David Ringler, NSSTA's first president, re-stated NSSTA's original vision during NSSTA's 2011 annual conference: "I still believe having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs is the most important reason for NSSTA. ... If we can continue this tradition, there is no problem we cannot overcome."
• Be open ? - The late James Corman insisted promoters of structured settlements were "on the side of the angels". Does that statement remain true today? To regain public trust, empower stakeholders and expand the customer base, structured settlement strategic planning needs to re-emerge from behind closed doors. Important industry issues need to be articulated and discussed openly.
• Listen to customers ? - The profiles of ELNY structured settlement victims featured in "The Complete ELNY Saga" provide a valuable introduction. Prior market surveys should be re-visited, updated and expanded. The traditional "one and done" structured settlement customer model needs to be re-evaluated.
• Engage critics ? - and challenge/encourage critics to be part of an industry solution by incorporating their relevant issues and best ideas into a strategic thinking process? These critics include legal and financial professionals who view the structured settlement product and market as core components of a larger and more complex settlement planning industry.

For related S2KM reporting and analysis, see the structured settlement wiki:

• Re-thinking Structured Settlements
• Growing the Market
• Business Standards and Practices
• Settlement Planning
• Structured Settlements and Knowledge Management

NASP 2012 Annual Conference - 1

The National Association of Settlement Purchasers (NASP) will host its 2012 Annual Conference October 16-19 in New Orleans. For the first time in NASP's history, conference registration will be open to persons who are not NASP members or affiliated attorneys.

Speakers and Topics

• Matt Bracy - Welcoming Remarks
• Jack Kelley - Legislative and Regulatory Developments at State and Federal Level
• Earl Nesbitt - Litigation Update
• Joseph Feltes - Privacy Issues in Structured Settlement Transactions
• Jan Schlictmann - Keynote Address
• Mark Wahlstrom - Executive Life of New York Rehabilitation and Other Issues Facing the Primary Structured Settlement Market
• Kira Brereton - Financing Structured Settlement Transactions
• Patricia LaBorde - Issues in Life Contingent Transactions
• Elizabeth L. Yingling - The Application of the Securities Laws to the Sale of Structured Settlement Purchasing Transactions
• The Judges' Panel - How Judges Interpret the Best Interest Standard and Other Concerns in Structured Settlement Transfers
  

  • Judge Patricia D. Wise, Chancery Court Judge, Hinds County Mississippi

  • Judge Dean S. Lum, Superior Court for King County, Washington

• Breakout Session One - Practical and Ethical Issues Facing Transfer in Obtaining Court Approval of Structured Settlement Transactions
• Breakout Session Two - Issues in Underwriting Structured Settlement Transactions

S2KM Reporting for Prior NASP Conferences

• 2011 NASP Conference
  
  • Part 1 - speakers and topics
  • Part 2 - S2KM's primary and secondary market perspective
• NSSTA and NASP 2010 Educational Conferences
  • Part 1 - industry issues
  • Part 2 - discussion topics
  • Part 3 - "protect and preserve" vs. "improve and grow"
  • Part 4 - strategic questions
• 2009 NASP Conference
  
  • Part 1 - a listing of educational issues and participants
  • Part 2 - a summary of the educational discussions
  • Part 3 - a closer look at the strategic discussions
• 2008 NASP Conference
  
  • Part 1 - Speakers and topics
  • Part 2 - Panel discussion: structured settlement industry issues
  • Part 3 - Panel discussion: how to improve and grow the structured settlement market
• 2007 NASP Conference - see related NASP 2007 educational wiki
• 2006 NASP Conference
  
  • Part 1 - Speakers and Highlights
  • Part 2 - Primary and Secondary Market Introductions
  • Overview of the Structured Settlement Market
  • How the Primary Market Views Factoring

QSF Symposium 2012 - 2

Will Qualified Settlement Funds (QSFs) eventually replace structured settlements as the standard business model for resolving complex personal injury claims?

QSFs already represent the standard resolution technique for class action lawsuits - and provide advantages for both defendants and plaintiffs:

• Defendants not only obtain an immediate tax deduction and release, they also can reduce their settlement planning costs and risks.
• Plaintiffs can conduct their settlement planning with a sum certain, using their own advisers, free from the pressures of litigation, with unlimited time to analyze and address tax, investment and government benefit issues.
• QSFs can also be utilized to purchase tax-free structured settlements without any direct involvement by defendants.

The only opponents of QSFs, for becoming the settlement planning standard for all complex personal injury cases, appear to be advocates for the traditional claim management structured settlement business model. These advocates include liability insurers who attempt to direct claim dollars to their affiliate life companies and defense brokers who fear the loss or reduction of their annuity commissions.

Together, with political support from the National Structured Settlement Trade Association (NSSTA), these QSF opponents have spent hundreds of thousands of dollars attempting to limit both the scope of QSFs and the expanded utilization of QSFs. Maintaining that structured settlements are best created when both plaintiffs and defendants actively participate, the QSF opponents argue that broad approval of single-claimant 468B funds would undermine and diminish the use of structured settlements.

To sustain their argument, QSF opponents have organized and promoted a marketing and lobbying strategy that:

• Ignores the IRC section 468B regulations that allow 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)
• Expands their own definition of single claimant to encompass multiple single event claims by family members, their attorneys and lien holders including Medicare and Medicaid.
• Promises defendants questionable structured settlement advantages (e.g. cost savings in a low-interest rate environment) without fully informing defendants of their potential costs and risks using traditional structured settlement business practices.

Fortunately for defendants and plaintiffs, utilization of QSFs (including single claimant QSFs) appears to be expanding as more settlement planning stakeholders learn about the advantages of QSFs and the professional QSF community of practice continues to grow.

That conclusion was S2KM's most important take away from the first QSF Symposium sponsored by Evolve Bank and Trust in Memphis, Tennessee on September 27-28, 2012.

Organized to stimulate dialogue among QSF industry leaders and experts and to help shape industry thinking on QSF issues, the first QSF Symposium was restricted the 20 participants and included the following speakers and topics:

• Sylvius von Saucken - "Establishing the QSF: Account, Fund or Trust / Drafting Considerations"
• Kevin Urbatsch - "Petitioning the Court for Approval"
• Andy Cook - "Investment Policy and Fiduciary Investment Options"
• Peter Wayne - "QSFs and Government Benefits Preservation"
• Will Shapiro - "Lien Holdbacks and Claimant Distributions"
• Jeremy Babener - "QSF Taxation: Filing, Payments, Withholding and Reporting"
• Chris Lordan - "Accounting and Reporting Best Practices"
• Patrick Hindert - "How Structured Settlement Transfers Impact QSF Planning"
• Roundtable Discussion - moderated by Pi-Yi Mayo and Bryn Poland.

The first QSF Symposium provided several benefits in addition to the presentations:

• Networking with QSF experts and hearing multiple QSF professional perspectives.
• Detailed discussions focused on a single (QSF-only) settlement planning topic.
• Open dialogue that encouraged entrepreneurial and collaborative "out-of-the box" thinking.
• Meeting Evolve's officers, shareholders and technology providers.
• Learning how a bank views settlement planning, settlement trusts and QSFs.

For additional information about QSFs, see:

• Robert Wood, "Qualified Settlement Funds and Section 468B"
• Hindert, Dehner and Hindert, "Structured Settlements and Periodic Payment Judgments" - Section 3.08B
• Jeremy Babener, "Structured Settlements and Single Claimant Qualified Settlement Funds"

For additional S2KM analysis of the structured settlement and settlement planning markets, see the structured settlement wiki.

"Only Half the Story"

In an August 2, 2012 blog post titled "Uniform Fiduciary Standards Only Half the Story", John Darer offers the following critique of this earlier S2KM blog post: "It's a pity that an otherwise well written blog post by Patrick Hindert about Uniform Fiduciary Standards, unexplainably omits standards for the secondary market."

S2KM's blog post addressed the following issue: "What impact will a new uniform fiduciary standard, being developed by the Securities and Exchange Commission (SEC) as one result of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have upon existing structured settlement and settlement planning business models and practices?"

Without any discussion of the secondary market, S2KM's blog post also highlighted certain traditional primary market structured settlement business practices that fail to meet any fiduciary standard:

• Misrepresentations or omission of material facts; and
• Conflicts of interest - without written, informed client and/or customer consent.

John's blog post makes two valid points. First, that S2KM's blog post ignored secondary market standards. Second, despite enactment of IRC section 5891 and state structured settlement protection statutes, bad business practices continue to exist in the secondary market. John's blog post identifies several such practices.

By "setting aside the good players", however, John's blog post spotlights existing bad business practices but does not identify or address secondary structured settlement market business standards. What are those secondary market standards - and how do (or should) these standards impact the primary market?

Looking specifically at the "uniform fiduciary standard" (the subject of the S2KM blog post in question), the related secondary market standard is the "best interest" test. There are three sources that establish and/or address this secondary market standard: 1) IRC section 5891; 2) the state structured settlement protection statutes; and 3) judicial interpretations of the "best interest" standard.

IRC Section 5891

IRC section 5891 imposes a 40 percent excise tax on any person who acquires structured settlement payment rights in a factoring transaction. The excise tax, however, does not apply if the transfer is approved in advance in a "qualified order" issued under an applicable state statute by an applicable state court.

IRC section 5891(b)(2) defines a qualified order as “a final order, judgment or decree” that satisfies two requirements: a qualified order must find the transfer of the structured settlement payment rights:

• does not contravene:
  • Any Federal or State statute or
  • The order of any court or responsible administrative authority; and
• Is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.

State Structured Settlement Protection Acts

Forty-seven states have enacted some form of structured settlement protection act. While the various state SSPAs lack uniformity, most adopt the same terminology and share the same basic legislative scheme as the Model SSPA. Echoing IRC section 5891, the state SSPAs provide that structured settlement payment rights transfers are not effective unless they receive advance court approval. Under each of the state SSPAs, key terms are defined, procedures for obtaining court approval are spelled out, and required notices, disclosures and findings are established.

Although all of the state SSPAs incorporate the "best interest" test, the California statute is the only SSPA that defines best interest. Section 10139.5 (b) of the California Insurance Code lists 15 factors that judges should consider "[w]hen determining whether the proposed transfer should be approved, including whether the transfer is fair, reasonable, and in the payee’s best interest, taking into account the welfare and support of the payee’s dependents" including:

“(1) The reasonable preference and desire of the payee to complete the proposed transaction, taking into account the payee’s age, mental capacity, legal knowledge, and apparent maturity level"; and

“(15) Any other factors or facts that the payee, the transferee, or any other interested party calls to the attention of the reviewing court or that the court determines should be considered in reviewing the transfer.”

Judicial Interpretations

In the absence of a state SSPA "best interest" standard, state courts have applied differing determination standards and have been reluctant to provide their own definitions. For example, here is a statement from a 2003 New York trial court opinion (In re Petition of Settlement Capital Corp.):

"Although the [New York] statute does not define the best interests of the Payee, developing case law and the intent of the statute suggest the Court should consider: (1) the Payee’s age, mental capacity, physical capacity, maturity level, independent income, and ability to support dependents; (2) purpose of the intended use of the funds; (3) potential need for future medical treatment; (4) the financial acumen of the Payee; (5) whether the Payee is in a hardship situation to the extent that he or she is in “dire straits”; (6) the ability of the payee to appreciate financial consequences based on independent legal and financial advice; [and] (7) the timing of the application."

Conclusion

What relevance, if any, therefore, does the secondary structured settlement market "best interest" standard have as primary market stakeholders contemplate the potential impact of a uniform fiduciary standard under the Dodd-Frank legislation?

Neither IRC 5891 nor any of state SSPAs apply their "best interest" test to primary market structured settlement sales. Only four of the state SSPAs (New York, Florida, Massachusetts and Minnesota) establish any primary market sales standards, each requiring certain mandatory written disclosures.

The secondary market "best interest" test, however, does raise important issues for the primary structured settlement markets. Most importantly, If structured settlement transfers are required to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents", why shouldn't a "best interest" test or fiduciary standard apply to the original structured settlement sale?

Thank you, John Darer, for pointing out the importance of this issue.

For additional discussion and analysis of secondary market business practices and the "best interest" test, see:

• Sections 16.02 ("History of Structured Settlement Transfers") and 16.05 ("Judicial Review of Transfer Applications") in "Structured Settlements and Periodic Payment Judgments" (S2P2J); and
• The structured settlement wiki:
  • Secondary market blog posts
  • S2KM reports about Professional Association Meetings including the National Association of Settlement Professionals (NASP).

For S2KM's 2006 analysis of "How the Primary Market Views Factoring", see this concept map. 

Settlement Planning 2012 Conferences

During the past two months, S2KM attended and reviewed three national conferences that featured settlement planning issues:

• ASNP 2012 Annual Meeting
• Risk Settlement Planning Practicum - see also: Structured Settlements and Settlement Planning
• SSP 2012 Annual Meeting
  • Part 1
  • Part 2

 In addition to many technical and product presentations (identified and/or summarized in the above links), what did attendees learn about fundamental settlement planning issues?  And what fundamental issues still need to be addressed more directly at future conferences before settlement planning becomes a recognized profession?

Definitions - Three conference participants offered definitions for "settlement planning" and/or "settlement planner":

• Joseph Tombs - "Settlement planning is a profession helping recipients of settlement proceeds use those proceeds to achieve post-loss goals and transition successfully to post-settlement financial life. Settlement planners represent a blend of several professionals: part tax lawyer, trial lawyer, special needs lawyer, financial planner, annuity specialist, social worker, and medical case worker."
• Timothy Morbach - "Settlement planning requires due diligence and informed consent. In that context, settlement planning provides a framework within which settlement stakeholders are able to craft case-specific terms and conditions, legal documents, financial instruments, plus related work product, to resolve claims and achieve safe harbor reflecting their respective best interests."
• Patrick Hindert - "The primary difference between special needs planning and settlement planning is that special needs planning includes clients whose disabilities result from many causes including but not limited to personal injury or workers compensation accidents."
• Note - "Rule 1: Terminology" in the SSP Standards of Professional Conduct provides multiple definitions related to settlement planning including the following for "settlement planner": "a representative who provides advice and other services to a person participating in the design, negotiation or implementation of a settlement or satisfaction of judgment for the benefit of a person claiming a legal entitlement to an award of damages or other compensation. A settlement planner may represent a plaintiff, a defendant, an insurer, a guardian ad litem, an heir of a claimant, an attorney or another person participating in the settlement process."

Emergent Profession - Several conference speakers who discussed settlement planning from a structured settlement perspective described settlement planning as a larger and more complex successor business and profession:

• Joseph DiGangi - "Today we find our industry at a crossroad. In order to move forward, our only choice is to build great business models around the planning first approach. Settlement planning represents a needs-based consultative business model based on benefits, not products."
• Joseph Tombs - "Selling structures is easy. Expectations are low. Any primate can run quote software. A fixed annuity is one of the most simple financial products in the world. We are building a new profession that requires constant education and practice standards. Settlement planning increases expectations and potential liabilities. The more we study and practice settlement planning, the more we realize its complexity and understand its challenges."
• Charles Schell - "The Claims Management model benefits the settlement planning industry and Settlement Planners should acknowledge the benefits which include product marketing and continued protection of IRC sections 104(a)(2) and 130. Concurrently, defense brokers should recognize the benefits of collaborating, rather than competing, with Settlement Planners. These benefits include access to and trust of the customer, an awareness of financial needs and family issues plus multi-product financial solutions that feature structured settlements and enhance their sale."
• Jack Meligan - "SSP and its members have been promoting the practice of Settlement Planning as a more comprehensive solution for the financial issues facing personal injury victims and their families, and the profession of Settlement Planning as the next evolutionary step for members of the financial and legal communities that serve these injured Americans."
• Patrick Hindert - "The structured settlement business models that seem "normal" today began with a choice that made sense in the late 1970s and early 1980s. They have survived despite changes impacting the justification for that choice. Settlement planning is an emergent system in which many different elements interact. Settlement planning is producing a new business model that is influencing all of its constituent elements including structured settlements."

Multi-Professional - The professional backgrounds of conference participants provides some indication of an emerging community of professional practice and its collective knowledge base:

• Special Needs Attorneys - Michele Fuller, David Lillisand; Kevin Urbatsch; Rene Reixach; Jason Lazarus; Annette Hines; Linda Brown; Vincent Russo; Michael Amoruso; Harry Margolis.
• Tax attorneys - Robert Wood; Jeremy Babener; David Higgins.
• Miscellaneous attorneys - Professor Carl Pierce; Richard Risk; Daniel Hindert; Patrick Hindert; Karen Meyers; Mark Popolizio; Steve Riley.
• Settlement Trustees - Travis Finchum; Frank Maguire; Christi Fried; Wesley Cosgriff; James Creel.
• Financial and insurance professionals - Jack Meligan; Charles Schell; Joseph Tombs; Joseph DiGangi; Mark Wahlstrom; Mal Deener; Timothy Morbach; John Woolway; Robert Noack; Paul Hansen; Major General James W. Comstock; Anthony Prieto; Robert Birney; Jerry Hulick.
• Medicare Set-Aside Specialist - Douglas Shaw.
• Lien Resolution Specialist - Daniel Alverez.
• Note: none of the conferences featured guardian ad litems, life care planners or damage allocators as speakers.

Unanswered Questions - From S2KM's perspective, future settlement planning conferences need to more directly address the following issues:

• How large is the United States settlement planning market?
• Who comprises (and selects) the settlement planning team?
• What criteria and process (e.g. request for proposal) are appropriate for selecting members of the settlement planning team?
• What professional licenses and certifications are applicable?
• What primary laws and regulations apply to settlement planning?
• What work product does each settlement planning team member provide?
• Who integrates their individual work product into a settlement plan - and how?
• When is a settlement plan appropriate?
• What are the standard components of a settlement plan?
• What are the product suitability and disclosure standards for settlement planning?
• What does a settlement plan cost?
• What other metrics (besides cost) are appropriate for evaluating the success of a settlement plan?
• How are settlement planning team members compensated?
• What alternative compensation methods and/or business models would allow settlement planning to become more efficient and/or reduce costs?
• Once implemented, who has responsibility to monitor and/or amend the settlement plan?
• What are the Defendant’s responsibilities and duties in settlement planning?

For professionals and product providers interested in learning more about settlement planning, see:

• The Society of Settlement Planners (SSP) website.
• The Registry of Settlement Planners (RSP) website
• The structured settlement wiki - settlement planning page

Risk Settlement Planning Practicum

Sheltered from the violent storms that unleashed dozens of tornadoes across Oklahoma and the plains states on April 13-14, 2012, the University of Tulsa College of Law hosted the Richard B. Risk Jr. Settlement Planning Practicum which organizers believe was the first time any law school has sponsored a settlement planning educational conference.

Risk, a national authority on structured settlement law and one of the founders of the Society of Settlement Planners (SSP), endowed the settlement planning practicum which is expected to become an annual event for attorneys and law students. Risk invited and introduced the practicum presenters in the following speaking order: Joseph Tombs, Patrick Hindert, Mark Popolizio, Jeremy Babener, Jack Meligan and Professor Carl Pierce.

Joseph Tombs

Tombs, a lawyer, certified financial planner and former SSP President who, working with Risk, helped organize the Registered Settlement Planner (RSP) certification program, addressed "Common Issues Attorneys Face When Settling Cases". As part of his presentation, Tombs contrasted settlement planning and financial planning. One primary difference, according to Tombs, is the relative importance in settlement planning of "dissipation risk". Other differentiating factors identified by Tombs include the importance of: government benefits, medical forecasting and special needs legal issues. Tombs discussed structured settlements as a core settlement planning tool that combines relatively low investment and dissipation risks.

Tombs emphasized the multi-professional skill sets settlement planning requires and described settlement planning as an evolving profession stating: "The more we study and practice settlement planning, the more we realize its complexity and understand its challenges." He offered the following definition for settlement planning: "a profession helping recipients of settlement proceeds use those proceeds to achieve post-loss goals and transition successfully to post-settlement financial life."

Patrick Hindert

In his presentation titled "The History of Structured Settlements", Hindert (co-author of "Structured Settlements and Periodic Payment Judgments" and author of S2KM's blog) provided a visual analysis featuring schematic diagrams to explain how structured settlement has evolved from a claim management tool into a core component of the larger and more complex settlement planning profession - and how competing business models have restricted the growth of the structured settlement annuity market.

Hindert stated key structured settlement stakeholders have succumbed to "path dependence" by failing to strategically study and analyze continuing industry changes. Structured settlement business models and practices that once made sense and represented "industry standards", according to Hindert, have survived despite the eclipse of their justification, benefit and/or better alternatives.

Hindert described settlement planning as an "emergent system" and quoted John McWhorter, a linguist at Columbia University, to help explain the significance for structured settlements:

"Emergent systems [settlement planning] are ones in which many different elements interact. The pattern of interaction then produces a new element [settlement planning] that is greater than the sum of the parts, which then exercises a top-down influence on the constituent elements [including structured settlements]."

To improve and grow the structured settlement market, Hindert recommended more detailed and comprehensive study of alternative structured settlement payment models and life cycles within the broader context of settlement planning as an important and necessary first step.

Mark Popolizio

A nationally recognized legal authority in Medicare Secondary Payer (MSP) compliance and a current board member of the National Alliance of Medicare Set-Aside Professionals (NAMSAP), Popolizio addressed how Medicare impacts settlement planning. Starting with an introductory Medicare road map, he next discussed CMS' reimbursement rights for conditional Medicare payments - who is at risk; what is Medicare's recovery amount; how to challenge conditional payments; how to obtain information; CMS' most recently announced policies and payment options; and recent case law developments.

Popolizio also discussed Medicare set-aside arrangements (MSAs), in the context of both workers compensation and liability cases, as CMS' recommended method for protecting Medicare's future interests under the MSP Act. For liability cases, he began by emphasizing why the key issue is not: "Are liability MSAs required?" Instead, Popolizio reviewed two recent CMS memoranda providing informal information about how CMS looks at liability MSAs. Finally, Popolizio offered his own recommendations (a three-step process) for approaching the liability MSA issue and also reviewed recent related case law.

Jeremy Babener

Babener, a rising star among structured settlement legal and tax experts, offered a comprehensive overview of "Taxation in Personal Injury Cases". He began by outlining sources for tax authority, the variables for tax liability and the character of income. Next, he discussed the exclusion for personal injury damages and explained the language of IRC 104(a)(2) before addressing other damages in personal injury cases - past and future medical expenses; punitive damages; and pre and post-judgment interest.

Babener explained the importance of documentation, including the complaint and the settlement agreement, to maximize the exclusion for personal injury damages. He highlighted specific facts that frequently create problems with the IRS and conversely how to encourage the IRS to respect the documents so as to obtain the preferred tax result. Babener concluded by addressing these additional settlement tax considerations: legal expenses; structured settlements; qualified settlement funds; and transfers of structured settlement payment rights.

Jack Meligan

Meligan, a founder and current President of the SSP, discussed "Pitfalls in Settlement Planning and How to Avoid Malpractice"; offered reasons why personal injury claimants and their attorneys need settlement planning advice from a qualified professional or team of professionals; and reviewed an example of a settlement plan. In addition, Meligan:

• Summarized three cases (Grillo; Lyons; and Spencer) to demonstrate why structured settlements need to be considered and risks associated with certain business behavior;
• Cited statistics from American Bar Association studies to underscore the frequency and risk of malpractice cases against personal injury attorneys;
• Spotlighted danger areas for plaintiff attorneys: MSP compliance; deductability of attorney fees; and documentation of confidentiality clauses; and
• Cautioned plaintiff attorneys against failing to retain an independent settlement advisor; or to advise their clients about all settlement options (including the pros and cons of structured settlements); or to completely document their files as proof of their best practices.

Professor Carl Pierce

Professor Pierce is the W. Allen Separk Distinguished Professor of Law and Director of the Howard Baker, Jr. Center for Public Policy at the University of Tennessee. Among his professional activities, Professor Pierce has served as Reporter for the Tennessee Bar Association Standing Committee on Ethics and Professionalism and as Associate Reporter for the American Bar Association Special Commission on Evaluation of the Rules of Professional Conduct. During 2007-2008, Professor Pierce served as Consultant to the Society of Settlement Planners (SSP) and helped review and draft the SSP's Standards of Professional Conduct for Settlement Planners (SSP Standards).

Professor Pierce provided a summary comparative analysis of both the National Structured Settlement Trade Association (NSSTA) Statement of Ethics and Professional Responsibility (NSSTA Code of Ethics) and the SSP Standards. Despite substantial experience working with litigators, Professor Pierce acknowledged surprise by the degree of hostility between some plaintiff and defense structured settlement consultants. Professor Pierce:

• Observed that all law school graduates need some exposure to structured settlements and settlement planning;
• Suggested that the business collaboration models among insurance companies, plaintiff attorneys and settlement planners could look very different in the future; and
• Recommended that representatives of NSSTA and SSP meet to discuss and compare their respective statements of ethics and standards.

Congratulations to Richard Risk, the University of Tulsa College of Law and the guest speakers who participated in the Settlement Planning Practicum. S2KM understands that Tulsa College of Law will publish a video compilation of the practicum speaker presentations on YouTube.

Product Suitability Standards - 4

With declining annuity premium and historically low interest rates, structured settlement stakeholders should be discussing how to improve and grow their business. To help promote this discussion, S2KM's current blog series about "product suitability standards" highlights two fundamental issues rarely addressed during industry educational conferences:

• When is a structured settlement annuity appropriate for a specific physical personal injury claimant?
• What standards exist to help judges, guardians, trustees, mediators, attorneys, settlement planners, structured settlement consultants and other structured settlement stakeholders make this determination?

Potential sources for structured settlement product suitability standards discussed in prior S2KM blog posts:

• Part 1 - NSSTA's Code of Ethics; SSP's Standards of Professional Conduct; and the NAIC's Suitability in Annuity Transactions Model Regulation.
• Part 2 - State minors' statutes and state structured settlement protection statutes.
• Part 3 - The Uniform Prudent Investor Act (UPIA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)

Fiduciary Standard

Among other findings, S2KM's prior review points out a general legislative trend to protect investors and consumers with a more uniform fiduciary, and/or "best interest", standard of care. In general, a fiduciary standard is viewed as the highest legal standard of customer care requiring both a duty of care and a duty of loyalty. A fiduciary is required to act in the best interest of the investor and/or customer and to fully disclose all material facts plus any conflicts of interest. Trustees and investment advisers currently are held to a fiduciary standard which may soon also apply to financial planners and broker dealers. Many state minors' statutes and all state structured settlement protection statutes incorporate "best interest" standards.

Model Annuity Regulations

For some but not all annuity products, the National Association of Insurance Commissioners (NAIC) has created a "Suitability in Annuity Transactions Model Regulation". Significantly, the NAIC Model Suitability Regulation exempts structured settlements and provides less consumer protection than the fiduciary, and/or "best interest" standard. The NAIC has also promulgated an "Annuity Disclosure Model Regulation" "to provide standards for the disclosure of certain minimum information about annuity contracts to protect consumers and foster consumer education." It also exempts structured settlements. The legislative history of the NAIC Model Disclosure Regulation indicates that "[i]nterested parties spoke in favor of an exemption for sophisticated transactions such as ..... structured settlements."

A Hall Pass?

Do these NAIC exemptions mean that structured settlements have been given a "hall pass" for purposes of product suitability requirements? No. If structured structured stakeholders want to improve and grow their business, there are many reasons why they should: 1) understand the meaning and requirements of all three standards (fiduciary duty, best interest, and suitability); and 2) adopt better business practices that address and incorporate one or more of these product standards. Reasons include:

• Blended products - Structured settlement annuities increasingly are paid into trusts (UPIA standard) that also include financial products (Dodd-Frank standard).
• Multiple licenses - In addition to structured settlement annuities, settlement planners increasingly sell securities as well as multiple life insurance and annuity products.
• Competition - To successfully compete in today's economic and legal environment, structured settlement sales persons must adjust upward to match the higher product suitability standards and best business practices of their competitors.
• Clients and Stakeholders - As a matter of self-protection as well as consumer protection, many structured settlement clients (defendants; plaintiff attorneys) and stakeholders ( judges; mediators) will increasingly demand higher product and sales standards for injury victims.
• Lawsuits - In this era of accountability and compliance, all structured settlement participants are likely to be held to higher legal standards.

Three-Card Monte

Why do product suitability standards create issues for the structured settlement industry? At their worst, especially from the perspective of an unrepresented injury victim, some traditional structured settlement business practices not only fall far short of the fiduciary standard - they can resemble a game of "Three-card Monte" .

Misrepresentations or omission of material facts

• Cost or Value - From a claimant's perspective, a core strategy for traditional structured settlements often appears "to make a little money look like a lot of money". The Spencer v. Hartford class action allegations outline one "sophisticated" variation of this strategy which often depends on hiding or misrepresenting annuity "cost" and/or settlement "value".
• Guaranteed payments - Many structured settlement sales brochures continue to promise "guaranteed payments" without specifying who guarantees what if and when an annuity provider like Executive Life of New York (ELNY) becomes insolvent.
• Managed account - Many structured settlement recipients do not understand important product details when their case is settled including how structured settlements differ from managed accounts and why they cannot access funds without court approval pursuant to state structured settlement protection acts.
• Structured settlement myths- historically used to promote sales such as:
  • Studies show that nine out of 10 lump sum recipients squander the entire amount within five years.
  • Structured settlements enable injury victims to live free of reliance on government assistance.

Conflicts of interest - without written, informed client and/or customer consent

• Single product - The danger of single product structured settlement sales persons is not limited to whether his or her product is "suitable" or in the "best interest" of a particular claimant/customer. The danger is also that single product sales persons are inherently conflicted in recommending how much of any settlement should be allocated to their product.
• Multiple roles - A structured settlement sales person introduced into a case by a defendant or liability insurer frequently plays four separate roles each of which potentially conflicts with the other roles: agent for the annuity provider; broker for the defendant; broker for the plaintiff; and agent for the defendant in helping to negotiate and settle the case.
• Compensation sharing - Unless all parties to a settlement are informed about whether and how structured settlement annuity commissions are shared, a structured settlement creates a variety of potential conflicts of interest.
• Funding alternatives - Based upon traditional structured settlement business and compensation models, the potential availability and applicability of 468B qualified settlement funds for "appropriate cases" creates inherent conflicts of interest between defendants and their structured settlement brokers.

Recommendations

• Education - Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) should devote more educational resources to understanding product suitability standards applicable directly and indirectly to structured settlements including standards applicable to their clients and competitors.
• Business standards - SSP's "Standards of Professional Conduct for Settlement Planners" represents an important industry document that has received less attention among structured settlement stakeholders than it deserves. As a result of Dodd-Frank, SSP should review and re-consider the product suitability standards proposed in its current Standards of Conduct.
• Business model - Without violating anti-trust laws, both NSSTA and SSP should encourage their members to continue studying and discussing how transitional settlement planning business models impact traditional structured settlement broker roles, compensation models and business standards.
• Documentation - In the context of transitional business models and standards, structured settlement stakeholders should review and improve core case documents including client requests for proposals, sales materials, settlement agreements, broker of record letters, and commission sharing agreements.

For additional S2KM reporting and commentary about structured settlement business standards and practices, see the structured settlement wiki.

Product Suitability Standards - 3

When is a structured settlement annuity appropriate for a specific physical personal injury claimant? And what standards exist to help judges, guardians, trustees, mediators, attorneys, settlement planners, structured settlement consultants and other structured settlement stakeholders make this determination?

In two prior blog posts, S2KM has addressed these issues in the context of:

• Part 1 - NSSTA's Code of Ethics; SSP's Standards of Professional Conduct; and the NAIC's Suitability in Annuity Transactions Model Regulation.
• Part 2 - Minors' statutes and state structured settlement protection statutes.

This blog post discusses product suitability standards created by the Uniform Prudent Investor Act (UPIA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and highlights a general trend to create a more uniform fiduciary, and/or "best interest", standard of care to protect investors.

UPIA

When investing and managing assets (including settlement proceeds and structured settlement annuity payments), trustees historically have been held to a fiduciary standard. According to uslegal.com, "[A] fiduciary duty is an obligation to act in the best interest of another party..... A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client." (emphasis added)

More recently and comprehensively, a trustee's investment responsibilities have been re-defined legislatively by the UPIA which was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1994 and approved by the American Bar Association in 1995. The UPIA now serves as the most important reference, external to the trust document itself, for trustees to determine what fiduciary duties their position requires. With some state-specific modifications, 41 states, U.S. Virgin Island, and the District of Columbia have adopted the UPIA.

Prior to the UPIA, courts applied the "prudent man rule" when evaluating trustee investment performance. The prudent man rule required trustees “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering probable income, as well as the probable safety of the capital to be invested.”

The UPIA, by contrast, adopts "modern portfolio theory" as a different and more appropriate standard for trustees. Compared with the prudent man rule, modern portfolio theory promotes a holistic view of trust assets by focusing on the total return generated by a trust as opposed to viewing a trust's income and principal separately. By viewing all investments comprehensively, modern portfolio theory and the UPIA hold that a trustee (or other investor) can achieve a positive overall investment return despite the poor performance of specific investments. This new standard allows for greater investment diversification so long as the risk/reward ratio matches the purposes and terms of the trust instrument.

Section 2(c) of the UPIA identifies eight factors a trustee should consider when making any investment:

• General economic conditions;
• The possible effect of inflation or deflation;
• The expected tax consequences of investment decisions or strategies;
• The role that each investment or course of action plays within the overall trust portfolio;
• The expected total return from income and appreciation of capital;
• Other resources of the beneficiaries;
• Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
• An asset’s relationship of special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

Significant for structured settlement annuities, the UPIA's list of investment considerations fails to mention mental or physical disabilities of a trust beneficiary. From a settlement planning and/or special needs perspective, injuries or diseases that reduce an individual's normal life expectancy arguably should receive important consideration when a trustee makes investment decisions.

Dodd-Frank

President Obama signed Dodd-Frank into law on July 21, 2010. Among other reforms, this sweeping legislation created the Consumer Financial Protection Bureau (CFPB) and the Federal Insurance Office (FIO). CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....." Among its core functions are addressing consumer complaints and restricting unfair, deceptive or abusive acts or practices under the Federal consumer financial laws. Dodd-Frank provides the CFPB with significant authority that goes beyond existing consumer protection statutes. CFPB has broad authority to ask questions and demand information including consumer complaints. The FIO is part of the U.S. Department of Treasury and has authority to monitor all aspects of the insurance industry.

In addition to creating the CFPB and the FIO, Dodd-Frank directed the Securities and Exchange Commission (SEC) to study the need for a new, uniform, federal fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary. The SEC's assignment also required determining the existence of any gaps, shortcomings, or overlaps in legal or regulatory standards for the protection of retail customers.

Historically, investment advisers and broker-dealers have been subject to differing standards of care. Investment advisers are defined under Federal law as persons who “engage in the business of advising others. . .as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. . .” [15 U.S.C. § 80b-2] They are regulated under the Investment Advisers Act of 1940 and owe a fiduciary duty to their clients.

Broker-dealers are defined under Federal law as persons who engage in “the business of offering, buying, selling, or otherwise dealing or trading in securities. . .” [15 U.S.C. § 78b(12)] and may provide a variety of related services. Broker-dealers generally are not subject to any fiduciary duty under the federal securities laws. They do, however, have a duty of fair dealing which includes a “suitability” standard - i.e. broker-dealers must make recommendations that are consistent with the interests of their customers.

Adding further uncertainty for investors, the existing legislative and regulatory system, according to the Securities Industry and Financial Markets Association (SIFMA), also "leaves states free to develop their own often conflicting definitions of fiduciary standards. This can confuse investors and lead to inconsistent definitions and interpretations under existing state law." SIFMA has recommended adoption of a uniform definition of "fiduciary duty" applicable to broker-dealers and investment advisers that includes both a duty of care and a duty of loyalty. These duties, according to SIFMA, should require both broker-dealers and investment advisers "to act in the best interest of the customer, and to provide full and fair disclosure of material facts and conflicts of interest."

In January 2011, the SEC submitted its "fiduciary standard" study to Congress recommending the adoption of a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice to retail customers. The SEC's proposed standard would be “no less stringent” than the standard currently applicable to investment advisers, and would include the duty to act in the "best interest" of the customer.

Structured Settlement Annuities

Why are the UPIA and Dodd-Frank relevant and important for structured settlement stakeholders?

• Structured settlement annuities increasingly are paid into trusts (UPIA) that also include financial securities (Dodd-Frank).
• Settlement planners, as opposed to traditional structured settlement sales persons, are increasingly licensed to sell financial securities as well as insurance products.
• The UPIA (settlement trustees) and Dodd-Frank (financial planners; investment advisers; broker-dealers) directly impact structured settlement competitors.
• To be successful in the changing financial and insurance environment, anyone selling structured settlement annuities must understand and compete against the highest product suitability standards and best business practices.

Given the diversity, uncertainty and transition of various product suitability standards, how should structured settlement stakeholders address the issue of whether a structured settlement is appropriate for individual physical personal injury claimants? S2KM will offer practical case-specific advice and strategic industry advice in its next blog post.

For additional information about structured settlement business standards and practices, see the structured settlement wiki and Section 6.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Structured Settlements in 2011 - 2

In a prior blog post, S2KM highlighted the historic significance of the ELNY liquidation as the dominant 2011 structured settlement industry development. This blog post offers a strategic perspective of the industry's status in 2011 focusing in part on the industry's three national associations and also providing a broader perspective for ELNY.

Strategic Overview - Primary Market

The National Structured Settlement Trade Association (NSSTA) celebrated its 25th anniversary in 2011. Among its 2011 accomplishments, NSSTA noticeably improved its marketing and educational programs while focusing substantial resources to help minimize problems related to the ELNY liquidation. NSSTA has attempted to balance the need to inform its members (not the public) about ELNY's status with the need to promote the strength of its life insurance markets and the state guaranty fund system.

Speaking at NSSTA's 2011 Annual Meeting, Thomas Ronce, Chairman of NOLHGA, described the current life and health guaranty system in the United States as experienced, well-financed and armed with a multitude of optional legal and financial tools. Applied to ELNY, this state guaranty system will substantially improve the recovery for many ELNY structured settlement recipients. The state guaranty system, however, will not make whole every ELNY structured settlement recipient. Unfortunately, even with guaranty fund payments and additional enhancements, many ELNY structured settlement recipients are expected to experience shortfalls.

NSSTA's 2011 Annual Meeting and Fall Educational Conference also showcased the current strength of the structured settlement market and its product providers.

• Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, accentuated the current financial strength of U.S. life insurance companies generally and explained why structured settlement annuities represent an excellent strategic product for life companies. Confirming Morris' assessment, three new product providers (Mutual of Omaha, National Indemnity and Hartford) entered (or re-entered) the structured settlement marketplace during 2011.
• William T. Robinson III, President of the American Bar Association (ABA) strongly endorsed structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Robinson also suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.
• American General Life President Mary Jane Fortin described AIG, a structured settlement product provider that received more than $180 billion of loans and investments from the United States government in 2008, as "a strong, stable and resilient company dedicated to keeping our promises". Fortin also dispelled several "myths" about AIG, summarized AIG's recovery from the 2008 financial crisis and expressed optimism about the future of life insurance industry and structured settlements.

Despite these positive assurances, however, primary market structured settlement annuity sales have continued to trend downward for the past three years, arguably because of the 2008 financial crisis and historically low interest rates which many experts predict will continue for the foreseeable future. What has been missing from NSSTA's leadership during 2011 has been a positive vision for NSSTA's own future and the future of structured settlements.

David Ringler, NSSTA's first President, spoke during the NSSTA 2011 Annual Meeting. Ringler stated the most important reason for creating NSSTA was "having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs."  Sometime during the past 25 years, NSSTA lost sight of this original vision and now generally excludes industry voices and perspectives that challenge traditional structured settlement business models and practices.

As one result, two additional professional associations have formed with alternative structured settlement perspectives:

• The Society of Settlement Planners (SSP) - SSP espouses the claimant's right to select his or her own structured settlement adviser and funding company. SSP promotes structured settlement annuities as a core product for special needs settlement planning and favors greater utilization of IRC 468B Qualified Settlement Funds (QSFs).
• The National Association of Settlement Purchasers (NASP) - NASP promotes the right of structured settlement recipients, in compliance with federal and state laws, to sell their payment rights provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents.

To its credit, NSSTA expanded the scope of its educational programs in 2011 to discuss QSFs and to provide its members with more detailed information about structured settlement secondary market. The perspective for these NSSTA discussions, however, remains defensive and protective without any attempt to envision or discuss new business opportunities or product improvements.

By comparison, SSP's vision for the the future of structured settlements is defined and supported by its "Standards of Professional Conduct". SSP views structured settlements as a core product for personal injury settlement planning. SSP's vision agrees with and encompasses the business model Joseph DiGangi introduced to NSSTA in 2009 as "Settlement Consulting" which he characterized as "a wake up call for the industry." SSP's educational conferences continue to push structured settlement industry thinking beyond its historic boundaries and the inevitability of its path dependence.

In addition to SSP, three national legal associations are developing special needs business practices and models that expand the framework and opportunities for structured settlements:

• Academy of Special Needs Planners (ASNP)
• National Academy of Elder Law Attorneys (NAELA)
• Special Needs Alliance (SNA).

Faced with the ELNY crisis, declining annuity sales and the continuing prospect of low interest rates, some primary market structured settlement stakeholders now recognize that business practices and models that made sense in the past may have survived despite the eclipse of their earlier justification.  S2KM believes more primary market stakeholders should expand their strategic perspectives and re-think structured settlements in the context of the changing legal and financial landscape.

For example, here are four 2010 developments with important consequences for structured settlement stakeholders that have heretofore received inadequate primary market educational attention:

• Patient Protection and Affordability Care Act - how does health care reform impact injury victims and what opportunities does it create for structured settlements?
• Dodd-Frank Wall Street Reform and Consumer Protection Act - how will the Consumer Financial Protection Bureau (CFPB) address structured settlement complaints?
• NAIC Suitability in Annuity Transactions Model Regulation - what does "suitability" mean for structured settlement annuities and how does "suitability" differ from the "best interest" standard applicable to trustees, investment advisers and structured settlement transfers?
• Spencer v. Hartford class action settlement - what are the lessons learned and resulting new best practices for structured settlements?

Strategic Overview - Secondary Market

The ELNY liquidation is also having a negative impact on the secondary structured settlement market. Some industry experts have estimated that as many as 1000 of ELNY structured settlement annuities (out of the 4168 total) have undergone transfers of some or all payment rights. Investors who have purchased ELNY annuity payment rights may not be eligible to receive contributions from state guaranty funds which historically protect "consumers". The NYLB's December 7, 2011 letters warned ELNY payees "if you have transferred any part of your right to receive ELNY SSA benefits to a third party, you may not be eligible to receive benefits from CABC related to the benefits you transferred."

Although the financial crisis of 2008 had a devastating short term impact on the structured settlement secondary market, the market has experienced robust sales in 2011 as institutional investors continue to be attracted to the relatively high rates of returns generated by restructured (post transfer) payment right obligations. More individual investors, including personal injury claimants and their attorneys, have also begun purchasing restructured payment rights although some industry experts caution against potential tax and securities law uncertainties.

The structured settlement secondary market changed dramatically in 2011 with the announced merger of  J.G. Wentworth and Peachtree Settlement Funding. The merger combined the two largest purchasers of structured settlement payment rights with an estimated 80-85 percent of the market.

The merger highlights a remarkable turnaround for Wentworth whose shareholders control the majority of the combined companies. In 2009, Wentworth and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market". Wentworth laid off 120 of its 200 employees and closed its office in Las Vegas. Its general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar. Less than six months later, Wentworth emerged from bankruptcy with an announcement that JLL Partners (Wentworth's owners) had invested an additional $100 million in the firm.

In a significant case (Symetra v. Rapid Settlements) highlighting controversial business practices which were opposed by NASP as well as structured settlement annuity providers, a Texas court issued injunctions during 2011 prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.

Check the structured settlement wiki for additional S2KM structured settlement reporting:

• ELNY liquidation
• Annual industry reports
• Professional association meetings

ADDENDUM (12/12/2011) - S2KM's report above omits at least one important 2011 strategic structured settlement development. NSSTA and its product provider members launched the first-ever industry metrics study during 2011. For more information about metrics, see S2KM's "Structured Settlement Metrics" series featured on the structured settlement wiki.