Beyond Structured Settlements

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.

QSF Symposium 2012 - 1

Evolve Bank and Trust will host the first Annual Qualified Settlement Fund Symposium September 27-28, 2012 in Memphis, Tennessee.  Dedicated exclusively to the advancement of qualified settlement fund (QSF) professionals, the purposes of the Symposium are to stimulate dialogue among QSF industry leaders and experts and to help shape industry thinking on QSF issues.

QSF Symposium 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

Defined in Treasury Regulation 1.468B-1(c),  QSFs represent an important settlement planning tool and provide benefits for both defendants and plaintiffs. Defendants can use QSFs to resolve complex claims in exchange for a release and immediate tax deduction. Plaintiffs and their advisers can use QSFs to marshall assets, determine which plaintiffs and counsel receive which amounts, satisfy government benefits and other lien obligations and engage in thoughtful settlement planning without the pressures that accompany negotiations, mediations and litigation.

Revenue Procedure 93-34

One QSF advantage is the unlimited time QSFs allow for claimants to consider multiple investment options - including structured settlements provided the QSF satisfies rules set forth in Revenue Procedure 93-34 to qualify as a "party to a suit or agreement":

1. Claimants must agree in writing to the assumption by a IRC 130 qualified assignee of the QSF's obligation to make periodic payments.
2. Each qualified assignment must relate to a claim “on account of personal injury or sickness (in a case involving physical injury or sickness)”.
3. Each qualified funding asset purchased by each qualified assignee must relate to a liability to make periodic payments for damages to a single claimant.
4. No qualified assignee can be “related” to the QSF.
5. No qualified assignee can be controlled by nor control, directly or indirectly, the QSF.
6. Each transaction must meet all other section 130 requirements.

Single Claimant QSF Controversy

Whether a QSF can be established for a single claimant remains controversial - especially among structured settlement and settlement planning stakeholders.

The arguments in favor of allowing single claimant QSFs include the language in IRC section 468B and, more specifically, in the 468B regulations. These regulations, which also define a QSF (see above), 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)

The Society of Settlement Planners (SSP) requested a ruling from the U.S. Department of Treasury on this single claimant issue in 2004. To date, however, the Treasury has not provided definitive tax authority for the single claimant QSF issue.

The National Structured Settlement Trade Association (NSSTA) historically opposes the issuance of guidance by the Treasury Department or the Internal Revenue Service on the single claimant QSF issue. NSSTA’s position appears to be that broad approval of single-claimant 468B funds would undermine and diminish the use of structured settlements. NSSTA maintains structured settlements are best created when both plaintiffs and defendants actively participate.

For more detailed 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"

ELNY Appeal - Injunction 2

Eighteen Executive Life of New York (ELNY) structured settlement shortfall payees (shortfall payees), as Objectors and Appellants, have challenged the Order of Liquidation and Approval of the ELNY Restructuring Agreement approved by Judge John M. Galasso on April 16, 2012 by filing an appeal with the Appellate Division of the Supreme Court of the State of New York, Second Department,

In prior blog posts, S2KM:

• Summarized the ELNY shortfall payees' preliminary appellate brief:
  
  • Due process allegations (ELNY Appeal - Due Process 1)
  • Arguments against the judicial immunity granted to the Superintendent of the New York State Department of Financial Services (Superintendent), (ELNY Appeal - Immunity 1)
  • Arguments against the judicial injunctive protection granted to the Superintendent (ELNY Appeal - Injunction 1)
• Provided additional due process analysis (ELNY Due Process Issue);
• Featured analysis of the ELNY Immunity Issue by New York attorney Peter Bickford.
• Summarized arguments in appellate briefs filed by the Superintendent and NOLHGA, as a non-party respondent, as well as the reply brief filed by the ELNY shortfall payees:
  • ELNY Appeal - Due Process 2
  • ELNY Appeal - Immunity 2.

This S2KM blog post summarizes the injunction arguments in the Superintendent's brief and the ELNY shortfall payees' reply brief. NOLHGA's appellate brief was limited to due process issues.

Superintendent

• The Supreme Court properly granted and continued its prior injunctions prohibiting lawsuits against the Superintendent.
• The Supreme Court had jurisdiction to continue and to grant the injunctions.
• New York Insurance Law Section 7419(b) grants trial courts broad discretion to issue anti-suit injunctions during liquidation and rehabilitation proceedings.
• Section 7419(b) does not preclude courts from enjoining claims seeking to hold the Superintendent personally liable for malfeasance or breach of fiduciary duty.
• The ELNY shortfall payees' challenge to the injunctions was not properly preserved in the Supreme Court.
• The injunctions protecting the Superintendent and his agents were first issued in 1991 as part of the ELNY rehabilitation order.
• The ELNY shortfall payees failed to appeal the 1991 and 1992 ELNY orders containing the injunction against the Superintendent and his agents.
• Because those injunctions are final and non-appealable, the shortfall payees are precluded from seeking to overturn those injunctions now.
• The proper avenue for ELNY shortfall payees to challenge the scope of the injunctions is to file a motion to modify with the Supreme Court.
• The shortfall payees never objected to the scope of the injunctions during the ELNY liquidation hearing nor demonstrated that the interests of justice required modification.
• Because the shortfall payees did not seek modification below, their attempt to raise this issue for the first time on appeal is not appropriate.
• The Supreme Court did not abuse its discretion by issuing and continuing its prior injunctions.
• The shortfall payees' assertions are based upon the false premise that the Superintendent and his agents were acting in their individual capacities in the ELNY rehabilitation.
• The ELNY shortfall payees are now asking the Appellate Court to allow ELNY policyholders and creditors to file lawsuits against the Superintendent outside of the receivership court and process.
• This request by the ELNY shortfall payees is directly contrary to the public interest in the single management of a liquidation that New York insurance law is intended to protect.

ELNY Shortfall Payees

• The Supreme Court lacked jurisdiction and statutory authority to permanently enjoin claims against the Superintendent in his personal capacity.
• Without addressing common law, the Superintendent's sole argument supporting subject matter jurisdiction is that New York Insurance Law authorizes the injunction.
• The ELNY shortfall payees agree that, if Section 7419 does authorize an injunction against personal-capacity claims, then the Supreme Court possessed subject matter jurisdiction.
• As a threshold issue, however, the Superintendent argues that the standard for reviewing the injunction order should be "abuse of discretion". That is incorrect.
• The dispositive issue on appeal is statutory interpretation. Can the words "prevents interference with the superintendent" authorize the injunction of claims against the Superintendent in his personal capacity?
• The Supreme Court's exercise of discretion becomes an issue only if the New York statute authorizes such an injunction.
• Section 7419 of the New York Insurance Law does not authorize permanent injunctions against personal-capacity claims.
• The Superintendent claims the statutory reference to injunctions as "the court deems necessary to prevent interference with the superintendent or the proceeding" insulates the Superintendent from liability for his own personal conduct.
• This interpretation is inconsistent with the Insurance Law and requires the Appellate Court to read the words "interferance with the superintendent" in isolation, ignoring all other words in Article 74.
• None of the cases cited by the Superintendent support the proposition that Section 7419 authorizes an injunction against personal-capacity claims - as opposed to official-capacity claims.
• The words and the distinction are taken directly from multiple New York appellate cases, and they are dispositive.
• Even if Article 74 authorized an injunction, it would be an abuse of discretion for Judge Galasso to use that authority to ban claims for which the Superintendent is not immune.
• Because New York law limits the immunity granted to private receivers, it is an abuse of discretion to grant unrestricted immunity in the guise of a blanket injunction.
• The Superintendent's claim that the ELNY shortfall payees are seeking an "unfettered right for all policy holders and creditors of ELNY to commence actions against the [Superintendent] outside of the receivership court" is incorrect.
• The ELNY shortfall payees merely ask that the scope of the injunction be consistent with New York law.
• The shortfall payees could not have appealed the original 1991 ELNY rehabilitation order. They lacked standing because they had not incurred any loss of benefits in 1991.
• Their basis for seeking appellate relief only occurred once Judge Galasso entered the ELNY liquidation order and injunction causing their loss of property.

For S2KM's complete and continuing ELNY reporting, plus copies of the shortfall payees' appellate briefs and an Executive Life timeline, see the structured settlement wiki.

ELNY Appeal - Immunity 2

Eighteen Executive Life of New York (ELNY) structured settlement shortfall payees (shortfall payees), as Objectors and Appellants, have challenged the Order of Liquidation and Approval of the ELNY Restructuring Agreement approved by Judge John M. Galasso on April 16, 2012 by filing an appeal with the Appellate Division of the Supreme Court of the State of New York, Second Department,

In prior blog posts, S2KM:

• Summarized the ELNY shortfall payees':
  • Due process allegations (ELNY Appeal - Due Process 1);
  • Arguments against granting judicial immunity to the Superintendent of the New York State Department of Financial Services, as ELNY Receiver and Respondent, (Superintendent) (ELNY Appeal - Immunity 1)
  • Arguments against granting judicial injunctive protection to the Superintendent (ELNY Appeal - Injunction 1)
• Provided additional due process analysis (ELNY Due Process Issue);
• Featured analysis about the ELNY Immunity Issue by New York attorney Peter Bickford.
• Summarized due process arguments in the appellate briefs filed by the Superintendent and NOLHGA, as a non-party respondent, as well as the due process responses in the reply brief filed by the ELNY shortfall payees. (ELNY Appeal - Due Process 2)

This S2KM blog post summarizes the immunity arguments in the Superintendent's brief and the ELNY shortfall payees' reply brief. NOLHGA's appellate brief was limited to due process issues.

Superintendent

• Judge Galasso's order properly recognized that receivers, like the Superintendent, have judicial immunity for actions undertaken pursuant to court orders and statutory duties.
• Doing so is consistent with the judicial immunity that attached in the 1992 ELNY Rehabilitation Plan Order and with various Court of Appeals’ decisions and common law holding that judicial immunity protects court-appointed receivers from personal liability when they act pursuant to the court’s charge.
• The Supreme Court has subject matter jurisdiction to determine whether actions by the Superintendent, as ELNY Receiver, fall within the scope of judicial immunity.
• The objecting ELNY shortfall payees do not cite a single case addressing subject matter jurisdiction in this context.
• An action against a former receiver may not be maintained unless the order of discharge is vacated and leave to prosecute an action is granted.
• Article 74 proceedings are exclusive in their operation and furnish a complete procedure for protecting the rights of all interested parties.
• The Supreme Court recognized in 1992 that the Superintendent, as ELNY's Receiver, and those working on his behalf were “discharged from any liability for their acts ... in the performance of their duties incident to the rehabilitation of ELNY”.
• Judge Galasso's recognition that the Superintendent has judicial immunity for actions he took as court-appointed ELNY Receiver is uncontroversial.
• Any attack by ELNY shortfall payees on the judicial immunity should be rejected as moot because their counsel conceded during the ELNY liquidation hearing that "any claims that my clients might have had against anyone have gone stale due to the passage of time.”
• Although the shortfall payees suggest the Superintendent should be personally liable for “overcompensating himself and his agents” or “investing ELNY assets in risky ventures” the Supreme Court earlier reviewed and approved the investment strategies contained in the ELNY Rehabilitation Plan Order.
• Efforts by the ELNY shortfall payees to insert a “care and prudence” requirement into the immunity recognized by the Supreme Court would be inconsistent with the recognition that receivers are immunized even for negligence.
• To fall outside judicial immunity, the Superintendent’s conduct would need to constitute ultra vires acts such as fraud or self-dealing actions.
• The notion that “waste” necessarily is ultra vires is unsupportable.
• The ELNY shortfall payees' argument that immunity is improper rests on false premises, namely that it somehow shields the Superintendent from personal liability for ultra vires actions that have nothing to do with ELNY’s rehabilitation, including whether he acted with bad faith for his own pecuniary interest.
• The ELNY shortfall payees' admission that the Superintendent is “entitled to assert immunity for conduct related to [his]receivership duties” demonstrates that their challenge to judicial immunity is not ripe because claims have not yet been filed against the Superintendent.
• Because any liability resulting from the Superintendent's official conduct is charged to the property of the ELNY estate, there is no property against which to seek relief once the property is transferred from the ELNY estate and the Superintendent could be inundated by lawsuits absent immunity.

ELNY Shortfall Payees

• The Supreme Court would possess subject matter jurisdiction to address claims against the Superintendent in his official capacity as ELNY Receiver.
• That is not true, however, of claims against the Superintendent "in his own shoes" and "against his own assets".
• By statute, the Superintendent's personal assets are not before the Supreme Court in rehabilitation and/or liquidation proceedings under New York Insurance Law Section 7404.
• This distinction is both critical and dispositive of the jurisdiction issue before the Court of Appeals.
• The Superintendent's appellate brief fails to acknowledge this basic distinction between official-capacity and personal-capacity claims.
• The Superintendent points out the ELNY shortfall payees do not cite a single case addressing subject matter jurisdiction in this context. That is correct. Neither does the Superintendent.
• The issue, therefore, appears to be one of first impression. In this case, however, determining whether a statute limits jurisdiction requires only a reading of the statute.
• One requirement for subject matter jurisdiction is the existence of a "justiciable" issue.
• The Superintendent argues the ELNY shortfall payees' challenge to judicial immunity is "not ripe" because claims have not yet been filed against the Superintendent.
• Assuming the Superintendent is correct that the shortfall payees' challenge is "not ripe", then there was no justiciable issue in the lower court either.
• As worded, the immunity provision in Judge Galasso's order exceeds the scope of immunity afforded to private court-appointed receivers.
• The Superintendent does not dispute that his status and role, as a receiver, are no different than any other court-appointed private receiver. (citing Matter of Dinallo v. DiNapoli)
• Having gone to considerable effort to secure that ruling in the Dinallo case for his benefit (avoiding audits by the State comptroller), the Superintendent must accept the consequences in the ELNY case.
• In other words, his status and role are no different than any other court-appointed private receiver.
• The only immunity issue for the Appellate Court to decide, therefore, is narrow: what is the immunity to which private receivers are entitled in New York?
• To the extent the wording of Judge Galasso's ELNY liquidation order exceeds that scope, it is erroneous.
• Where the objecting ELNY shortfall payees and the Superintendent disagree on the immunity issue is the "scope of that immunity"
• The correct standard is: "As a general rule, a receiver who acts in good faith and with appropriate care and prudence is immune from personal liability for losses."
• The Superintendent's brief ignores this settled rule and argues instead that he is automatically immune for all actions as ELNY Receiver unless the shortfall payees show his actions were "ultra vires" or in bad faith.
• Lacking authority for this proposition, the Superintendent suggests the ELNY shortfall payees "concede" it. They do not.
• Having unilaterally deemed himself immune from all but undefined "ultra vires" acts, the Superintendent then asks the Appellate Court to rule that any "waste" by the Superintendent of ELNY's assets would not be "ultra vires".
• The Superintendent, however, does not dispute that the ELNY 1992 Rehabilitation Order prohibited waste by anyone, including the Superintendent, as ELNY Receiver.
• The objecting ELNY payees recognize that acting pursuant to specific court authorization is a legitimate defense for the Superintendent.
• During the 20 plus year ELNY rehabilitation, however, the Superintendent chose not to seek court approval for most of his actions.
• Although the Superintendent argues that the 1992 ELNY Rehabilitation Order contained immunity language similar to what Judge Galasso approved, the presence of such language in an interim order does not make such language any more correct in a final order.
• The Superintendent also argues that judicial immunity should be available after the ELNY liquidation concludes and there is no property in the ELNY estate from which to seek relief.
• The ELNY shortfall payees agree. In personal capacity claims, however, no relief would be sought from the ELNY estate. Nor would such claims be chargeable against the ELNY estate.
• The Superintendent's arguments concerning the merits of potential claims against the Superintendent are baseless and not before the court.
• Whether such claims would ultimately prove baseless is for another day and another court.
• The Superintendent also argues that all unspecified future claims against the Superintendent are time-barred because counsel for some of the objecting ELNY shortfall payees stated during the ELNY liquidation hearing: "any claims my clients might have had against anyone have gone state due to the passage of time."
• That argument is incorrect. Counsel was referring to potential claims against third parties such as persons who recommended the purchase of an ELNY annuity.
• With respect to the Superintendent, the statute of limitations might not yet be running because no final order has been finalized triggering benefit cuts.

For S2KM's complete and continuing ELNY reporting, plus copies of the shortfall payees' appellate briefs and an Executive Life timeline, see the structured settlement wiki.

ELNY Appeal - Due Process 2

Eighteen Executive Life of New York (ELNY) structured settlement shortfall payees (shortfall payees), as Objectors and Appellants, have challenged the Order of Liquidation and Approval of the ELNY Restructuring Agreement, approved by Judge John M. Galasso on April 16, 2012, by filing an appeal with the Appellate Division of the Supreme Court of the State of New York, Second Department,

Status of Appeal:

• The ELNY shortfall payees served and filed their brief and the record on appeal on Friday, August 17, 2012. For S2KM's summary, see: ELNY Appeal - Objectors' Brief.
• The Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY Receiver and Respondent, served and filed his brief on Friday, September 7, 2012.
• The National Association of Life and Health Guaranty Associations (NOLHGA), as a non-party respondent, also served and filed a supporting brief on September 7, 2012.
• The ELNY shortfall payees served and filed a reply brief on Friday September 14, 2012.
• The Appellate Court is expected to schedule oral argument "as soon as practicable".

In prior blog posts, S2KM:

• Summarized the ELNY shortfall payees':
  • Due process allegations (ELNY Appeal - Due Process 1)
  • Arguments against granting judicial immunity to the Superintendent (ELNY Appeal - Immunity 1)
  • Arguments against granting judicial injunctive protection to the Superintendent (ELNY Appeal - Injunction 1)
• Provided additional due process analysis (ELNY Due Process Issue)
• Reported on the ELNY Immunity Issue featuring analysis by New York attorney Peter Bickford.

This blog post summarizes the due process arguments presented in the appellate briefs filed by the Superintendent and NOLHGA as well as the due process responses included in the reply brief filed by the ELNY shortfall payees. A subsequent S2KM blog post will summarize and compare the immunity and injunction arguments.

Superintendent

• The Court-ordered notice for the ELNY liquidation hearing satisfied due process requirements.
• Not only was the notice constitutionally adequate, it far exceeded the notice usually provided in insurer liquidation cases.
• A longer notice period would not have had any relevant impact upon the Court’s approval of the liquidation and restructuring plan.
• The Court properly exercised its broad discretion in:
  • Denying objecting shortfall payees' motion to compel discovery.
  • Sealing objections containing personal information.
  • Denying the shortfall payees' mid-hearing request to call newly disclosed witnesses.
• Conclusions - the Court:
  • Correctly held that the notice provided complied with the insurance law and due process.
  • Properly exercised its discretion in ruling on discovery and case management issues.

ELNY Shortfall Payees' Response

• The notice was inadequate in numerous respects. For examples:
  • The Court required payees to disclose all of their supporting documentation without discovery requests. Until the hearing, the payees had no reason to suspect that this obligation would be one-sided.
  • The Court-approved notice did not tell the payees that they would be required to file formal discovery requests or how to do so.
  • Although the Superintendent says he sent notices to the last known address in "ELNY's" records, the Superintendent had been managing ELNY for 20 years. The records, therefore, were his records and he had responsibility for keeping the addresses current.
• The lack of fair process prejudiced the payees.
  • The Superintendent's brief does not refute most of the payees' facts on this issue.
  • The Superintendent argues that any constitutional deprivation did not prejudice the payees.
  • However, an undisputed inability to challenge an opponent's evidence, resulting in a one-sided presentation, is patently prejudicial.
  • The inability to obtain assistance from an expert on complicated issues to permit a meaningful defense is prejudicial.
  • Findings based upon improperly one-sided evidence are inherently defective.
  • The Superintendent's "no prejudice" argument ignores the very purpose of due process - to allow people a true day in court.
  • Due process does not require ELNY shortfall payees to prove in advance that they would have procured a different outcome if they had been granted a fair hearing.

NOLHGA

• NOLHGA submitted its brief on appeal "to address a core, foundational error in Appellants’ argument": their "subtle but pervasive claim" that NOLHGA's early involvement in developing the ELNY restructuring plan denied the ELNY shortfall payees their due process rights because the shortfall payees were not afforded an equivalent role.
• The insurance laws of New York and other states grant state guaranty funds, operating through NOLHGA, a central and special role in life insurer insolvency proceedings.
• The state guaranty associations had no "conflict of interest" that implicated the due process rights of the objecting ELNY shortfall payees.
• Because the New York Superintendent serves as the statutorily mandated receiver “to protect the interests of policyholders in the liquidation proceeding", there generally is no need for policyholders to speak on their own behalf as a matter of due process.
• Therefore, the pre-liquidation consultations between the Superintendent and the state guaranty associations does not evidence any denial of due process rights for the ELNY shortfall payees.

ELNY Shortfall Payees' Response

• Most significantly, NOLHGA's arguments do not address issues on appeal.
• With respect to insurance industry involvement, the ELNY shortfall payees' chief complaint is one of fairness. While excluding ELNY policyholders, the Court permitted NOLHGA and others access, notice, disclosure and participation. No one has argued otherwise.
• Concerning conflicts of interest, NOLHGA objects to this statement by the ELNY shortfall payees: "[t]he [guaranty] associations' interest was in limiting their contributions, and the payees' interest was in maximizing them."
• In support of their statement, the objecting ELNY shortfall payees cite former New York Superintendent Michael Corcoran who stated the following in 2002 when he testified before Congress about ELNY: "The whole thrust [of state guaranty funds] is to try to pay as little as possible".

For S2KM's complete and continuing ELNY reporting, and copies of the shortfall payees' appellate briefs, see the structured settlement wiki.

AIG Bailout Paid Back

With the sale last week of 636.9 million shares of American International Group, Inc. (AIG) common stock for $20.7 billion, the U.S. Department of Treasury and the Federal Reserve have now recovered a combined total of $197.4 billion from their $182.3 billion bailout of the once-troubled insurer.

The sale reduces U.S. government ownership of AIG to about 15.9%, down from a high of 92%. And, according to Best's Insurance News, the U.S. government expects to gain another $8.1 billion when it sells its last remaining shares in AIG.

Now that the U.S. government is a minority shareholder, AIG could face additional regulation as a savings and loan holding company, Best's Insurance News adds in its September 14, 2012 article. Some of the new regulations are still being finalized as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

AIG, through its insurance subsidiaries, has been an important participant in the U.S. structured settlement market for many years both as a purchaser and as a provider of structured settlement annuities.

Industry estimates of structured settlement annuity premium sold by AIG subsidiaries during the past 10 years provide one perspective of AIG's significant role in the U.S. structured settlement market as well as the impact of the U.S. government bailout on AIG's structured settlement annuity production. AIG's estimated annual share of the U.S. structured settlement annuity market appears in parentheses. Source: annual compilation of U.S. structured settlement annuity premium compiled by Melissa Evola.

• 2002 - $1.179 billion (19%)
• 2003 - $1.195 billion (20%)
• 2004 - $1.221 billion (20%)
• 2005 - $1.316 billion (21%)
• 2006 - $1.463 billion (24%)
• 2007 - $1.468 billion (24%)
• 2008 - $1.454 billion (23%)
• 2009 - $0.429 billion (8%)
• 2010 - $0.499 billion (9%)
• 2011 - $0.395 billion (11%)

ELNY Facilitation Plan

The New York Liquidation Bureau (NYLB) website for Executive Life of New York (ELNY) has announced an ELNY Facilitation Plan to assist owners of ELNY structured settlement annuities (SSAs) make supplemental payments to ELNY SSA payees and to coordinate those payments with the ELNY benefit payments scheduled to be made by the Guaranty Association Benefits Company (GABC) under the ELNY Restructuring Plan approved by Judge John Galasso on April 16, 2012 as part of the ELNY Liquidation Order.

The ELNY Liquidation Order is currently being appealed by 18 structured settlement shortfall payees who allege due process violations and improper granting of immunities and injunctions to protect the Superintendent of New York's Department of Financial Services, and his agents, acting as ELNY's Receiver. For more detailed S2KM reporting about the ELNY appeal, see the structured settlement wiki.

Key Elements of the ELNY Facilitation Plan

• Optional agreement between GABC and each ELNY SSA owner that chooses to become party to it.
• Ancillary to the Restructuring Plan and, therefore, does not need to be executed in order for the Restructuring Plan to close.
• GABC has contracted with third-party administrator Alliance-One Services, Inc. to make benefit payments to SSA payees on behalf of GABC.
• Participating ELNY SSA owners will have the option to direct supplemental payments to their SSA payees through Alliance-One Services.
• If SSA Owners exercise this option, they will be responsible to provide funds to Alliance-One Services who will then make payments to the appropriate SSA payees.
• Neither GABC nor Alliance-One Services will be responsible for funding any SSA owner payments.
• If SSA Contract owners prefer to make other arrangements to pay SSA payees, they are not required to participate in the Facilitation Plan.
• Drafted and negotiated by representatives of GABC and a group of ELNY SSA owners, the Facilitation Plan is not subject to negotiation by individual ELNY SSA owners.

For a summary of the Facilitation Plan as well as the Facilitation Plan itself, see the NYLB's ELNY website.

ELNY Appeal - Injunction 1

As reported earlier by S2KM, attorney Edward Stone filed a Notice of Appeal May 30, 2012 with the Appellate Division of the Supreme Court of the State of New York, Second Department, on behalf of 18 Executive Life of New York (ELNY) structured settlement shortfall payees, as Objectors and Appellants, challenging the Order of Liquidation and Approval of the ELNY Restructuring Agreement approved by Judge John M. Galasso on April 16, 2012.

The Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY Receiver and Respondent, and attorney Stone, on behalf of Appellant/Objector ELNY shortfall payees, subsequently and jointly agreed to and requested calendar preference and an accelerated briefing schedule for this Appeal.

Status of Appeal:

• The Appellant/Objectors' served and filed their brief and the record on appeal on Friday, August 17, 2012. For S2KM's summary, see: ELNY Appeal - Objectors' Brief.
• The Superintendent/Respondent served and filed its brief on Friday, September 7 ,2012. In addition, the National Association of Life and Health Guaranty Associations (NOLHGA) also served and filed a supporting brief the same day.
• Appellant/Objectors served and filed a reply brief on Friday September 14, 2012.
• The Appellate Court is expected to schedule oral argument "as soon as practicable".

Copies of the Objectors' brief and reply brief are posted on the structured settlement wiki.

In prior blog posts, S2KM:

• Summarized the Appellant/Objectors' due process allegations (ELNY Appeal - Due Process 1);
• Provided additional related due process analysis (ELNY Due Process Issue);
• Reported on the ELNY Immunity Issue featuring analysis by New York attorney Peter Bickford.
• Summarized the Appellant/Objectors' arguments against granting immunity to the Superintendent (ELNY Appeal - Immunity 1)

This blog post summarizes the Appellant/Objectors' 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).

The objecting structured settlement shortfall payees have requested the Appellate Court to reverse the following sentence contained in the ELNY liquidation order:

"All persons are enjoined and restrained from commencing or further prosecuting any actions at law or other proceedings against ELNY or its assets, the Receiver or the New York Liquidation Bureau, or their present or former employees, attorneys, or agents, with respect to this proceeding or the discharge of their duties under Insurance Law Article 74.

To support their objection and request, the Appellant/Objectors maintain:

• The liquidation court lacked subject matter jurisdiction to enter an injunction unrelated to the collection or disposition of ELNY assets.
• The injunction is not authorized by Article 74 of the New York Insurance Law.
• The injunction is not supportable on any non-statutory basis.

Subject matter jurisdiction

• Subject matter jurisdiction is “the authority of the courts to adjudicate classes of cases.”
• Subject matter jurisdiction may be limited by statute (e.g. Article 74 of the New York Insurance Law).
• A court cannot entertain actions in which it lacks subject matter jurisdiction.
• In this case, the New York Supreme Court had before it the ELNY estate – and only the ELNY estate.
• Under Article 74, subject matter jurisdiction in a liquidation proceeding is limited to the collection and disposition of the insurer’s assets.
• As a liquidation court, the New York Supreme Court does not have jurisdiction to prospectively adjudicate claims or issue orders not involving the estate’s assets.
• During the ELNY liquidation hearing, the Superintendent incorrectly suggested that all claims against him and/or against his agents, regardless of capacity, constituted claims against the estate.
• Injunctions granted to the Superintendent as regulator, however, do not apply to his role as Receiver where he stands in the shoes of management and should be subject to the same standard of care and responsibility.
• Claims against the Superintendent and/or his agents acting in their personal capacities as ELNY's Receiver, therefore, are not claims against the ELNY estate.
• The Superintendent also argued that similar injunctions were included in interim orders during the rehabilitation proceeding.
• However, the same rationale upon which the injunctive provision is void and unauthorized by law should also invalidate similar provisions in interlocutory orders.
• Because Judge Galasso's injunctive protection for the Superintendent, as ELNY's Receiver, and for his agents, in their personal capacities extends beyond ELNY's assets in liquidation, it exceeds the New York Supreme Court’s subject matter jurisdiction and should be void.

Article 74

• Unlike immunity, Article 74 of the New York Insurance Law contains a provision involving injunctions. However, it is inapplicable to the Receiver’s request.
• The injunctive provision are concerned with enjoining actions against the assets of ELNY, not those of the Superintendent, as ELNY's Receiver.
• Article 74 Subsection (a) limits injunctions to those which prohibit persons other than the Receiver “from the transaction of its [the insurer’s] business or the waste or disposition of its [the insurer’s] property.”
• Article 74 Subsection (b) permits injunctions as necessary to prevent “waste of the assets of the insurer, or the commencement or prosecution of any actions . . . against the insurer, its assets or any part thereof.”
• An action against the Receiver in his personal capacity is not the same as an action against the insurer or the insurer’s assets.
• Barring all claims against the Receiver is inconsistent with Article 74’s express purpose of protecting policyholders.
• A Receiver is judicially immune from liability if he acts in good faith and with appropriate care and prudence.
• Therefore, the only actions that are effectively enjoined by Judge Galasso's liquidation order are those where the Superintendent, as ELNY's Receiver, breached fiduciary or other duties.
• As a result, Judge Galasso's broad injunction is unsupported by, and inconsistent with, New York Insurance Law.

Non-Statutory Basis

• The Superintendent did not present any evidence that his property rights would be irreparably harmed absent the injunction.
• Instead, without evidence or argument, the Superintendent simply asked for unlimited injunctive relief, and Judge Galasso granted the request.
• As argued above, a lawsuit against the Superintendent in his personal capacity is not the same as a claim against ELNY or its assets.
• Even if the Superintendent might be inconvenienced by claims against him in his personal capacity, mere annoyance and litigation expense, even substantial and unrecoverable cost, does not constitute "irreparable injury” sufficient to authorize an injunction.
• The Superintendent also argued that interlocutory orders issued in 1991 and 1992 as part of ELNY's rehabilitation proceeding contained similar language.
• Those injunctions, however, were by definition temporary, not permanent.
• Any past bar to the filing of claims by ELNY shortfall payees is immaterial where such claims did not accrue until Judge Galasso's liquidation order resulted in a loss of benefits
• Regardless, prior injunctive provisions possess the same jurisdictional and statutory defects as the injunctive provision in the ELNY liquidation order.

For S2KM's complete and ELNY reporting, see the structured settlement wiki.

ELNY Appeal - Immunity 1

As earlier reported by S2KM, attorney Edward Stone filed a Notice of Appeal May 30, 2012 with the Appellate Division of the Supreme Court of the State of New York, Second Department, on behalf of 18 Executive Life of New York (ELNY) structured settlement shortfall payees, as Objectors and Appellants, challenging the Order of Liquidation and Approval of the ELNY Restructuring Agreement approved by Judge John M. Galasso on April 16, 2012.

For a copy of the ELNY liquidation order, as well as an Executive Life timeline, see the structured settlement wiki.

The Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY Receiver and Respondent, and attorney Stone, on behalf of Appellant/Objector ELNY shortfall payees, subsequently and jointly agreed to and requested calendar preference and an accelerated briefing schedule for this Appeal:

• Appellant/Objectors' brief and the record on appeal were served and filed on Friday, August 17, 2012. For S2KM's summary, see: ELNY Appeal - Objectors' Brief.
• The deadline for the Superintendent/Respondent's brief to be served and filed is Friday, September 7 ,2012.
• The deadline for the Appellant/Objectors' reply brief, if any, to be served and filed is Monday, September 14, 2012, with oral argument to be set by the Court as soon as practicable thereafter.

Conclusions of the Appellant/Objectors' Brief

• The expedited procedure of the ELNY liquidation hearing was so flawed, and the prejudice to the ELNY shortfall payees so great, as to violate constitutional principles of due process. Further, no statutory or common law basis existed for Judge Galasso's extraordinarily broad grant of immunity and injunctive relief to protect the Superintendent and his agents, including the New York Liquidation Bureau (NYLB).
• If the appellate court determines a violation of due process occurred, the ELNY shortfall payees have requested the appellate court to reverse Judge Galasso's Liquidation Order in its entirety. In the alternative, the ELNY shortfall payees have requested the appellate court to reverse specific paragraphs of the Liquidation Order granting the injunction and immunity.

 In prior blog posts, S2KM summarized the Appellant/Objectors' due process allegations (ELNY Appeal - Due Process 1) and provided additional related analysis (ELNY Due Process Issue). S2KM has also reported previously on the ELNY Immunity Issue featuring analysis by New York attorney Peter Bickford.

This blog post provides a more detailed summary of the allegations in the Appellant/Objectors appellate brief arguing that no statutory or common law basis existed for Judge Galasso's "extraordinarily broad grant of immunity" for the Superintendent and his agents. A copy of the Appellant/Objectors' brief is posted on the structured settlement wiki.

Judicial Immunity

The ELNY liquidation order signed by Judge Galasso on April 16, 2012 confirms the following grant of immunity:

"Judicial immunity is extended to the Receiver and his successors in office, the New York Liquidation Bureau, and their respective attorneys, agents and employees, and such immunity is extended to them for any cause of action of any nature against them, individually or jointly, for any action or omission by any one or more of them when acting in good faith, in accordance with this Order, or in the performance of their duties pursuant to Insurance Law Article 74 ..."

The objecting ELNY structured settlement shortfall payees allege: 1) Judge Galasso and the ELNY liquidation court lacked subject matter jurisdiction to grant judicial immunity to the Superintendent (along with his employees, agents and attorneys), acting as ELNY's Receiver, in their personal capacities; and 2) the scope of the judicial immunity provision is unsupported by and unprecedented under New York law. What follows is a summary of their arguments.

1. Subject matter jurisdiction

• Subject matter jurisdiction is “the authority of the courts to adjudicate classes of cases.”
• Subject matter jurisdiction may be limited by statute (e.g. Article 74 of the New York Insurance Law).
• A court cannot entertain actions in which it lacks subject matter jurisdiction.
• In this case, the New York Supreme Court had before it the ELNY estate – and only the ELNY estate.
• Under Article 74, subject matter jurisdiction in a liquidation proceeding is limited to the collection and disposition of the insurer’s assets.
• As a liquidation court, the New York Supreme Court does not have jurisdiction to prospectively adjudicate claims or issue orders not involving the estate’s assets.
• During the ELNY liquidation hearing, the Superintendent incorrectly suggested that all claims against him and/or against his agents, regardless of capacity, constituted claims against the estate.
• Statutory immunity granted to the Superintendent as regulator, however, does not apply to his role as receiver where he stands in the shoes of management and should be subject to the same standard of care and responsibility.
• As evidence of its own private status, the NYLB, which managed ELNY's day to day operations as the Superintendent's agent during ELNY's 20 plus years of rehabilitation, has acknowledged in prior cases that it retains errors and omissions insurance.
• Claims against the Superintendent and/or his agents acting in their personal capacities as ELNY's Receiver, therefore, are not claims against the ELNY estate.
• The Superintendent also argued that similar immunity language was included in interim orders during the rehabilitation proceeding.
• However, the same rationale upon which the judicial immunity provision is void and unauthorized by law should also invalidate similar provisions in interlocutory orders.
• Because Judge Galasso's judicial grant of immunity to the Superintendent, as ELNY's Receiver, and to his agents, in their personal capacities extends beyond ELNY's assets in liquidation, it exceeds the New York Supreme Court’s subject matter jurisdiction and should be void.

2. New York legal authority

• Judge Galasso's grant of immunity for the Superintendent and his agents is not provided for by statute, and exceeds the proper scope of immunity for a private court-appointed receiver.
• Under common law, judges are immune from liability when acting within their judicial power and authority.
• Receivers are generally considered an arm of the court and are entitled to immunity for conduct related to their receivership duties.
• Unlike a judge, however, judicial immunity applies only when a receiver acts “in good faith and with appropriate care and prudence.”
• Prior to 1909, private individuals acting as court appointed receivers managed the liquidation of impaired insurance companies in New York.
• In 1909, the New York legislature assigned the role of receiver for impaired insurance companies to the Superintendent of Insurance.
• The 1909 legislation was not intended to change the common law with respect to the Superintendent’s role as receiver.
• In prior cases, the Superintendent has successfully argued that it is not a governmental agency when acting as receiver.
• Therefore, there is no legal basis for the Superintendent, as ELNY's Receiver, to claim greater immunity than any other private court-appointed receiver.
• During the Order to Show Cause hearing, the NYLB, as agent for the Superintendent, indicated that it was seeking the same “good faith” immunity normally afforded to receivers.
• However, the NYLB submitted, and Judge Galasso signed, far broader language "purporting to confer immunity for any action taken in conducting the business of the insurer, in both official and personal capacities, regardless of whether his actions were in good faith or with appropriate care and prudence, and even regardless of whether such actions were in violation of court orders."
• The ELNY structured settlement shortfall payees have no problem with immunity for acts taken “in good faith” and "with appropriate care and prudence” or for "acts specifically authorized by a court order".
• Judge Galasso's order, however, eliminated any limitations on immunity inherent in those clauses with the final disjunctive phrase, “or in the performance of their duties pursuant to Insurance Law Article 74.”
• As ELNY's Receiver, the Superintendent's Article 74 duties are broad and general and include, among other things, “conduct[ing] the business of the insurer.”
• Granting immunity to the Superintendent for performing duties permitted by Article 74 means that literally any act or omission related to the management of ELNY or its assets is immunized, whether or not undertaken in good faith, including acts that violate a court order.
• The 1992 ELNY Rehabilitation Order expressly prohibits the wasting of ELNY’s assets by anyone, including the Superintendent, as ELNY's Receiver.
• Under the immunity provision in the ELNY liquidation order, however, the Superintendent could claim immunity for the violation of that order, because any such waste would have occurred during the performance of the Receiver’s duties under Article 74.
• Judge Galasso's immunity order sanctions a wide range of potential breaches of the Superintendent/Receiver’s fiduciary duties to the ELNY shortfall payees.
• For example, the Superintendent could claim immunity for overcompensating himself and his agents, fraudulently concealing ELNY’s financial condition, managing ELNY assets for his benefit or that of vendors, and/or incompetently investing ELNY assets in risky ventures.
• Therefore, Judge Galasso erred because the ELNY liquidation order confers immunity for virtually every act or omission the Superintendent has ever undertaken while managing ELNY, whether in an official or personal capacity, or whether in bad faith or violation of a court order.

For S2KM's complete ELNY reporting, see the structured settlement wiki.