Jeremy Babener Interview - 2

S2KM introduced, summarized and reviewed a paper written by Jeremy Babener  titled "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper), in four prior blog posts:

• Single Claimant 468B QSF Update;
• Jeremy Babener's QSF Paper;
• S2KM Reviews Jeremy Babener's QSF Paper - 1;
• S2KM Reviews Jeremy Babener's QSF Paper - 2.
  

S2KM previously interviewed Babener (Jeremy Babener Interview) as part of the S2KM blog series "Dissipation Studies" which featured Babener's paper titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements".

This S2KM post publishes an exclusive interview with Jeremy Babener about his QSF paper. S2KM also features Babener in S2KM's structured settlement public policy wiki.

S2KM: Jeremy, what are the principle conclusions and recommendations in your QSF paper?

Babener: The paper focuses on the Treasury’s treatment of single-claimant QSFs, recommending their explicit eligibility for the structured settlement tax subsidy. In order to properly consider the subject, however, one must view the present question in the context of three decades of structured settlement tax and policy history.

The paper narrates a pattern of increased economic control being allowed to structured settlement recipients, the most well known example being factoring. It also analyzes previously made arguments in the single-claimant QSF debate. Doing both provides the legal and interpretive bases for future Treasury action.

The paper describes the historical benefits that defendants and casualty insurers have captured by using structured settlements, arguably at the expense of personal injury claimants. The paper explains how single-claimant QSFs are currently being used, and how such use helps to achieve the structured settlement tax subsidy’s purpose. Doing both provides the policy rationale for future Treasury, or perhaps legislative action.

S2KM: What surprised you most about your findings?

Babener: I was quite surprised by the methods used by some plaintiff representatives to avoid defendants' detection of QSF use (so as to avoid defendant opposition to the QSF's creation). Representatives sometimes arrange for QSFs to be created in a state different from that in which the personal injury action was filed, and direct the defendant to write a lump sum check to a name not typically associated with a QSF. In fact, because QSF regulations merely require that a government entity create the QSF, some have contemplated petitioning non-judicial entities.

S2KM: What caused you to focus on single claimant QSFs?

Babener: I clerked at the U.S. Department of Justice’s Federal Tort Claims Act Section during the summer of 2008. After being introduced to structured settlements there I began researching their use, purpose, and the policy behind Congress’ subsidy for them. In my research I focused on the effectiveness of the subsidy.

The subsidy’s purpose is to decrease premature dissipation by encouraging long-term planning (by committing to periodic payments over time). It is important to ask if the plaintiff-defendant negotiation table, where settlements are typically structured, is the opportune place for long-term planning to occur.

This led me to QSFs, which offer defendants a fast and permanent settlement option, and plaintiffs an unhurried and less combative option. Thus, my work addresses the great deal of uncertainty among practitioners as to whether their single-claimant clients can use QSFs and still benefit from the structured settlement tax subsidy.

S2KM: Did you write your QSF paper for a specific class or seminar?

Babener: I wrote both my papers – the dissipation paper and the QSF paper – for a course called Tax and Social Policy.

S2KM: What were the primary resources for your research?

Babener: I set out to use all relevant sources that I could find on structured settlements and QSFs. The paper relies on treatises, articles, textbooks, cases, memos, presentations, web sites, and interviews.

S2KM: How many persons did you interview and how did you select them?

Babener: I contacted as many within the structured settlement industry as I could, and spoke with any who were willing. I formally interviewed some two-dozen individuals, including representatives of the National Structured Settlements Trade Association, the National Association of Settlement Purchasers, and the Society of Settlement Planners. Among those interviewed were plaintiff and defense attorneys, plaintiff and defense side structured settlement brokers, casualty and life insurance representatives, factoring attorneys, QSF administrators, structured settlement commentators, law professors, treatise authors, and a state court judge.

S2KM: What linkage, if any, exists between your QSF paper and your dissipation paper?

Babener: The dissipation paper was actually the result of research for the QSF paper. In order to explain the justification for the structured settlement tax subsidy I needed to find the basis for the claim that lump sum recipients frequently dissipate their settlements. In time, I realized that the empirical work cited could not be found.
The dissipation paper observes that there is no empirical foundation for the structured settlement tax subsidy, though much anecdotal evidence exists. The QSF paper looks to increasing the effectiveness of that subsidy by structuring in a non-combative and less hurried context.

S2KM: Why, in your opinion, has Treasury delayed clarifying the application of 468B to single claimants?

Babener: The issue has been in the Treasury’s Priority Guidance Plan since 2004. It is not unclear why it has not been addressed. I cite to work recommending against such clarification in the paper, and to disagreement within the Treasury. However, needed regulations are delayed all the time for any number of reasons.

S2KM: What are the strongest public policy arguments for and against single claimant QSFs?

Babener: The public policy argument for allowing single-claimant QSF structured settlements to benefit from the tax subsidy is very strong. Settlements are often hurried and contentious. In addition, the parties, including the plaintiff, are likely concerned with the final amount more than scheduling future periodic payments to accurately match future needs. QSFs, as Robert Wood has observed in his work, provide a “tax free way station” for settlement monies. This allows the plaintiff, hopefully with the help of informed advisers, to properly structure the receipt of future monies. It may also enable plaintiffs to capture more of the benefits of structuring, including more of the tax subsidy, by removing the defendant from the structuring process.

Opponents of such Treasury action argue that the use of single-claimant QSFs will lead to less structured settlements, and therefore more premature dissipation of settlement monies. Because defendants have historically been able to decrease settlement costs by structuring, they have had an incentive to push for using a structured settlement during negotiations. By removing defendants from the structuring process, QSFs may result in many plaintiffs not being pushed to structure.

However, there are at least two problems with this argument. First, it must be remembered that while defendants have an economic incentive to structure, they do not have an economic incentive to structure accurately, matching the timing of plaintiff’s future payments with future needs. Second, just as defendants have an incentive to structure to mitigate settlement costs, other parties have an economic incentive to encourage plaintiff to structure even outside of plaintiff-defendant negotiations. These are structured settlement advisers (and possibly QSF administrators), whose business depends upon plaintiffs understanding the benefits of structuring.

There will surely be plaintiffs whose use of single-claimant QSFs ends in a lump sum distribution rather than structuring. But, there are likely many more who will structure, who otherwise would not have as a result of the plaintiff-defendant settlement process. By increasing the frequency of structuring, and the accurate matching of future payments to future needs, the use of QSFs will prevent premature dissipation (and the need to factor) in many cases.

S2KM: When and where will your QSF paper be published?

Babener: The paper will be published by the NYU Journal of Legislation & Public Policy in March, 2010.

S2KM: What other structured settlement issues, if any, interest you?

Babener: The processes of settling, structuring, and factoring raise many practical and policy questions from the perspectives of plaintiff, defendant, and society alike. A previous S2KM post listed several issues that neither of my papers have addressed, such as structured settlement public policy in relation to government benefits such as Social Security, Medicare, and Medicaid. These are subjects of increasing importance, and I hope to join the ongoing discussion.

Thank you, Jeremy, for this interview and for sharing your QSF paper. Good luck with your professional career.