NSSTA 2007 Winter Regional Meeting-2

This is the second of three posts covering the National Structured Settlement Trade Association (NSSTA) Winter Regional Meeting.

A prior S2KM blog post "NSSTA's 2007 Winter Regional Meeting-1" summarized:

• Preliminary reports from two NSSTA-sponsored projects:
  
  • NSSTA's Marketing Survey; and
  • Broker Relations Initiative.

• NSSTA's new strategic priority to reclaim the structured settlement brand.

A subsequent S2KM blog post "NSSTA 2007 Winter Regional Meeting-3" will address additional program presentations including the Trust Workshop, NSSTA's "All Things Considered" legal panel, AIG's new "transparent" structured settlement initiative, and non-qualified assignments for installment sales.

This post summarizes NSSTA conference highlights related to factoring (aka the transfer of structured settlement payment rights).

Almost six years following the enactment of IRC section 5891, NSSTA has finally added factoring to its educational agenda.

Five experts addressed factoring issues at NSSTA's 2007 Winter Regional including a three person panel titled "Structured Settlements: A View from the Bench". The panel consisted of a judge (Jane S. Solomon from New York), a plaintiff attorney (Daniel W. Hindert from Salt Lake City) plus a partner from NSSTA's legal counsel (Craig H. Ulman). The panel addressed this question: "How are the state structured settlement protection statutes working in practice?" Each panel expert provided commentary in the context of an actual New York case. Here is a summary:

Judge Jane S. Solomon:

• Prior to enactment of IRC section 5891 and New York's structured settlement protection statute, Judge Solomon heard structured settlement "collection cases" from around the country. The documentation, according to Judge Solomon, was dense and imprecise.

• Since enactment of New York's structured settlement protection statute, according to Judge Solomon, most factoring applications are unopposed. New York's law does not require an appearance by the annuity payee - only an affidavit. The factoring company generally provides the court documentation.

• Judge Solomon summarized recent statistical results indicating she approves approximately 75% of factoring applications while approximately 50% of her denials occur without any hearing.

• Although the New York statute includes a definition for "independent financial advice", Judge Solomon does not believe factoring company attorneys are capable of or appropriate for providing such advice.

• Judge Solomon asks the following questions for every application:

• Can the seller obtain money in any other way?

• How will the seller use the money?

• Have their been any prior transfers?

• How was the money spent?

• Judge Solomon believes most sellers are using their factoring proceeds to pay debts and day to day expenses.

• Judge Solomon offered the following recommendations:

• The annuity payee (structured settlement recipient) should be required to appear in court;

• Prior transfers should be disclosed;

• The judge should be required to initiate notice;

• NSSTA should lobby for changes in state statutes to accomplish these recommendations.

Daniel W. Hindert

• Note: Daniel Hindert (Hindert) is a brother of this blog's author and co-author, with this blog's author and Joseph J. Dehner, of "Structured Settlements and Periodic Payment Judgments".

• Hindert told the conference attendees he has handled one factoring application - at the request  of another plaintiff attorney. Although he accepted his fee from the factoring company, Hindert viewed the seller as his client. He stated it was difficult to look through the paper work to the reality of the transaction.
• One important issue for Hindert: does the transfer contravene any applicable statutes or court orders? Who, Hindert asked, should have the burden of proof for this issue? According to Hindert, attorneys representing factoring companies are not paid enough money to permit thorough investigation and representation.

• Hindert identified special problems with minors' settlements. Although parents are generally concerned about a minor receiving substantial money at age of majority, Hindert recommended that structured settlements for minors include a deferred lump sum at age 18 (in addition to any educational fund) to help deter and/or defer a factoring transaction.

Craig H. Ulman

• Note: Ulman, a partner in the law firm of Hogan & Hartson, and Daniel Hindert are co-authors of a 2005 ABA article titled "Transfers of Structured Settlement Payment Rights: What Judges Should Know About Structured Settlement Protection Acts." 

• Ulman stated that judges in some states (example: Pennsylvania) are considering factoring rules that go "beyond the state statute".

• Ulman recommended that structured settlement stakeholders address factoring at the time of settlement. Depending on the claimant, according to Ulman, that might result in making it easier or more difficult to factor.

• Ulman challenged all structured settlement stakeholders to make the factoring process more efficient.

Two additional experts addressed factoring issues as part of the NSSTA Legal Committee's presentation "All Things Considered".

Mark Alpert - Legal Committee Co-chairperson Mark Alpert addressed "Factoring vs. Commute" which he characterized as a "very sensitive" issue.  Alpert highlighted the following issues identified  by tax expert Robert W. Wood in an article titled "Structured Settlements: Factor vs. Commute" which appeared in the December 25, 2006 issue of "Tax Notes":

• Is a commutation an acceleration by the payee?

• Is the IRC section 130 acceleration test a one-time test or a continuing test?

• If the IRC section 130 acceleration test is a continuing test, does a subsequent acceleration jeopardize the tax treatment of the parties to the structured settlement including the qualified assignee and the claimant?

• Does IRC section 5891 apply to a commutation and/or to the acquisition of structured settlement payment rights by an affiliate of the annuity purchaser?

Peter Vodola - During his presentation titled "Factoring: is it a Rubber Stamp Process", attorney Peter Vodola spoke about recent factoring trends and noted:

• No information repository currently exists for factoring. Most of the available information, according to Vodola, is anecdotal.

• Additional information about factoring is becoming available including judicial opinions, legal articles and blogs.

• Despite greater scrutiny of factoring, according to Vodola, bad business practices continue.

• Echoing comments from plaintiff attorney Daniel Hindert, Vodola pointed to the continuing complexity of factoring - especially the requirement that a factoring transaction not contravene any applicable statutes or court orders.

• Vodola identified several additional factoring issues including:

• Proposed judicial rules in Pennsylvania;

• Factoring life contingent payments; and

• Factoring as one component of the growing secondary market for life insurance products - including investment annuities and life insurance as well as structured settlement annuities.