Business Standards and Practices - 4

In a decision filed January 26, 2011 (Ceron v. 321 Henderson Receivables), a California Court of Appeals has unanimously affirmed one portion of a California Superior Court judgment sustaining demurrers by J.G. Wentworth and its affiliates (J.G. Wentworth) to purported class action legal challenges against prior court approved structured settlement transfers while simultaneously reversing another portion of the same Superior Court judgment which had denied injunctive relief under California's unfair competition law for alleged continuing violations by J.G. Wentworth of the California Structured Settlement Protection Act.

Plaintiff Raul Ceron alleged in his complaint that J.G. Wentworth violated the California Structured Settlement Protection Act by deducting up to $1500 from every transfer purchase to off-set independent legal and/or financial advice received by plaintiff and other structured settlement payment right transfer payees as required under the California statute.

Plaintiff's complaint further alleged:

• In making the structured settlement transfers, J.G. Wentworth engaged in an illegal scheme of directing individuals towards specific attorneys;
• J.G. Wentworth required plaintiff and other individual transfer payees to pay up to $1,500 for the purported independent professional advice whereas the California protection act requires the factoring companies to pay the cost;
• J.G. Wentworth concealed the facts it made attorney referrals and that individual transfer payees paid up to $1,500 for the referrals in violation of the California protection act.
• This scheme violated section 10134, subdivision (f)(3) of the California protection act;
• Section 10134, subdivision (f) sets forth requirements for an independent adviser: "Independent professional advice' means advice of an attorney, certified public accountant, actuary, or other licensed professional adviser meeting all of the following requirements:
  • "(1) The adviser is engaged by a claimant or payee to render advice concerning the legal, tax, or financial implications of a structured settlement or a transfer of structured settlement payment rights.
  • "(2) The adviser's compensation for rendering independent professional advice is not affected by occurrence or lack of occurrence of a settlement or transfer.
  • "(3) A particular adviser is not referred to the payee by the transferee or its agent, except that the transferee may refer the payee to a lawyer referral service or agency operated by a state or local bar association."
• Plaintiff and other potential class members were damaged because J.G. Wentworth paid plaintiffs' attorneys, who were unlawfully referred, out of plaintiffs' proceeds;
• J.G. Wentworth continues to violate the California protection act by asserting plaintiffs' costs for independent legal and financial advice may be collected from transfer payees.

The plaintiff's complaint contained claims for: declaratory relief; unjust enrichment; conversion; unfair business practices in violation of the California Business and Professions Code; injunctive relief; and an accounting. The complaint requested damages and equitable relief including: declarations that J.G. Wentworth's conduct violated the California protection act and the prior court orders approving the transfers were void; determinations that J.G. Wentworth's conduct constituted an unfair business practice; restitution; disgorgement; an accounting; and an injunction against future unlawful, unfair or fraudulent acts. The plaintiff argued his 2004 and 2007 court orders approving transfers were subject to collateral legal attack because J.G. Wentworth obtained the court orders through extrinsic fraud

In response, J.G. Wentworth:

• Demurred to the complaint generally and sought judicial notice of plaintiff's prior written transfer declarations noting inconsistencies between plaintiff's allegations and exhibits attached to his complaint;
• Argued the demurrer should be sustained without leave to amend as to multiple causes of action because Superior Court Judges had approved plaintiff's transfers under the California protection act;
• Pointed out that some of the exhibits attached to the complaint showed that plaintiff was given notices and disclosures about his right to seek independent counsel for his prior transfers and that plaintiff also was advised J.G Wentworth:
  • Would pay up to $1,500 for an attorney to provide legal advice concerning the transfer petition; and
  • Could not make referrals to any specific adviser.
• Asserted plaintiff's unjust enrichment claim had no merit because:
  • Plaintiff did not allege that he paid any attorney fees in connection with the petitions;
  • Plaintiff had confused the duty to notify the payee of the right to seek independent professional advice before entering into the purchase agreement (section 10136, subdivision (b)) with the obligation to pay fees of up to $1,500 in connection with the petition proceedings. (section 10139.5, subdivision (e).);
  • An exhibit to the complaint showed that plaintiff engaged his attorney in connection with the purchase agreement, not the petition proceeding;
  • J.G. Wentworth had no obligation to pay any fees for independent professional advice regarding the purchase agreement.
• Argued plaintiff's unfair competition claim had no merit because plaintiff did not allege he had suffered any injury from the improper referral;
• Asserted some of plaintiff's claims were time barred and the class allegations should be stricken.

California Superior Court Judge Anthony J. Mohr had dismissed the plaintiff's complaint, sustained without leave to amend J.G. Wentworth's demurrer to a purported class action and additionally ruled:

• The transfers of structured settlement payment rights were not subject to collateral attack because they had been approved as fair and consistent with the California protection act in prior final court orders;
• The approval petitions had been litigated to decision where potential class members had received hearings;
• He could not set aside decisions of other judges in the absence of extrinsic fraud;
• To the extent that plaintiff alleged fraud in the complaint, it was only intrinsic fraud which did not provide a basis for relief;
• Factoring companies were not fiduciaries subject to a greater standard of care;
• Plaintiff filed a timely notice of appeal from the order dismissing the complaint.

In its review of the Superior Court decision, the California Appellate Court:

• Noted that California amended its structured settlement protection act in 2009 including section 10136, subdivision (b) which addresses "independent legal and financial advice". Unlike the pre-2009 statute, Current section 10136, subdivision (b) provides that factoring companies must pay the costs for independent professional advice. Because the plaintiff's attorney referral and structured settlement transfers occurred in 2007, the California Appellate Court applied the pre-2009 version of section 10136, subdivision (b) in deciding this case.
• Ruled that Judge Mohr correctly sustained J.G. Wentworth's demurrers to the claims which sought to set aside the prior court approvals stating: "... once a transfer of structured settlement payments has occurred through the detailed court approval process, it cannot be collaterally attacked as void by any party as a violation of statute, absent direct and affirmative evidence of fraud."
• Disagreed with the plaintiff that the court approvals can be collaterally attacked in this case because J.G. Wentworth fraudulently misrepresented the facts in the petition process. According the Appellate Court,
  • Extrinsic fraud (showing that a party has been deprived of a fair opportunity to present a claim or defense in court) provides a basis for relief but intrinsic fraud (when the party has been given notice of the action and has had an opportunity to present his case and to protect himself from any mistake or fraud of his adversary but has unreasonably neglected to do so) does not;
  • Plaintiff's only claims of fraud in this case were intrinsic - i.e. that J.G. Wentworth misrepresented it had complied with the California structured settlement protection act during the court approval process;
  • The plaintiff did not allege he was denied a fair hearing or prevented from presenting any evidence as a result of his legal representation;
  • Although there may be an exception to the extrinsic versus intrinsic fraud rule in some cases where the party concealing material evidence has a fiduciary relationship with the other litigant. the complaint did not allege sufficient facts to show J.G. Wentworth had a fiduciary relationship with the plaintiff or any possible class members;
  • The complaint did not allege that:
    • The lawyers provided to plaintiff or other class members gave incorrect advice; or
    • The plaintiff was improperly advised about the propriety of entering into the transfers; or
    • The plaintiff sought leave to amend to set forth such allegations.
• Dismissed the plaintiff's unjust enrichment claim for past court approved transfers for similar reasons - i.e. the transfers had been adjudicated to be fair, reasonable and lawful through the court approval process and may not subsequently be collaterally attacked.

The California Appellate Court, however, did reverse the Superior Court dismissal related to one cause of action ruling that the plaintiff's complaint sufficiently alleged a claim for injunctive relief against unfair business practices.

• The Appellate Court noted section 10139.4 of the California structured settlement protection act provides that a violation of the act is an unfair business practice within the meaning of the California Business and Professions Code section 17200.
• The complaint alleged that, since March 2002 and continuing to the present time, J.G. Wentworth engaged in conduct which violates the act and sought injunctive relief against the alleged continued violations.
• In reversing the Superior Court on this one cause of action, the Appellate Court did not address the statute of limitations and class certification issues or express any opinion concerning the plaintiff's standing to pursue post-2009 claims for payments made by J.G. Wentworth to alleged unlawfully referred attorneys.

For additional information about transfers of structured settlement payment rights and the California structured settlement protection act see S2KM's structured settlement wiki and Chapter 16 of "Structured Settlements and Periodic Payment Judgments". For S2KM's continuing coverage of structured settlement business standards and practices, see S2KM's structured settlement wiki.