Beyond Structured Settlements

Garamendi v. Altus Finance S.A.

As Executive Life of New York (ELNY) stakeholders and structured settlement industry participants await the outcome of the ELNY appeal , challenging the ELNY Order of Liquidation and Approval of the ELNY Restructuring Agreement, they may be surprised to learn the ultimate fate of Executive Life of California (ELIC), ELNY's sister company, likewise continues to be litigated.

The most recent ELIC-related development occurred October 29, 2012, in Garamendi v. Altus Finance S.A., when a federal jury in Los Angeles rejected a claim by California's Insurance Commissioner that, but for a conspiracy by French investor group Artemis S.A.:

• ELIC's original conservator (then California insurance commissioner John Garamendi) would have accepted an alternative bid in 1991 by state insurance guaranty associations; and
• The alternative bid would have retained profits from ELIC's junk bond portfolio for the benefit of policyholders including ELIC structured settlement recipients.

The actual 1991 ELIC sales agreement was a two-part sales agreement with New California Life Holdings, Inc. (NCLH) and Altus Finance (Altus), an affiliate of the French Bank Credit Lyonnais. That agreement was subsequently modified and approved by a California Superior Court on August 13, 1993 as part of the ELIC rehabilitation plan.

Under the 1991 agreement, Altus paid $3.25 billion and acquired ELIC's $6.4 billion junk bond portfolio. The Altus purchase price included $300 million of capital for a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) which assumed ELIC's remaining assets and liabilities including its structured settlement obligations. Also, as part of the actual sales agreement, the Artemis S.A. joint venture acquired a controlling interest in NCLH.

 A California Court of Appeals previously summarized these complex ownership relationships as follows: "Artemis S.A. is the parent of Aurora S.A. Aurora S.A. owns a controlling interest in NCLH. NCLH owns 100 percent of Aurora."

In retrospect, many critics claimed the 1991 agreement substantially undervalued ELIC's junk bond portfolio. Although the junk bond market was depressed and thinly traded in 1991, it was among the best performing investment markets in 1992 and 1993. Even in 1991, a substantial percentage of the junk bonds owned by First Executive Corporation (FEC) and its two Executive Life subsidiaries were current on interest payments and ultimately fulfilled their investment obligations.

ELIC-related legal developments between 1993 and the October 29, 2012 jury decision in Garamendi v. Altus Finance have also been complex. Relevant historical highlights:

• Subsequent to its NCLH purchase, Artemis learned of a conspiracy by Altus/MAAF Group, an investment group which previously controlled NCLH, to evade the prohibition under California law on foreign entities controlling California insurers. Rather than disclose this conspiracy to the California Insurance Commissioner, Artemis submitted multiple filings that contained false or misleading information.
• In 1999, the California Insurance Commissioner learned from a whistleblower about the Altus S.A./MAAF Group conspiracy and filed conspiracy lawsuits against multiple defendants including French bank Credit Lyonnais.
• In 2005, some of the defendants in the conspiracy lawsuits, including Credit Lyonnais, settled for $730,500,000, most of which was distributed to former ELIC policyholders and payees.
• The conspiracy lawsuit against the two remaining defendants, Artemis S.A. and Francois Pinault (Artemis' controlling shareholder), was conducted in Federal Court in 2005. The jurors found Artemis and Pinault liable for engaging in a conspiracy and awarded $0 in compensatory damages and $700 million in punitive damages. The trial court awarded an additional $241 million in equitable restitution.
• On August 25, 2008, the Ninth Circuit Court of Appeals vacated the damage awards against Artemis and Pinault and remanded the case for a new trial on the issue of damages.

For a more detailed background case summary, see S2KM's 2011 blog post "Aurora S.A. v. Poizner".

 In an article published October 30, 2012, Bloomberg Businessweek wrote that, following the most recent Garamendi v. Altus Finance SA verdict, U.S. District Judge Gary Klausner said "he was inclined to reinstate the restitution that the judge presiding over the 2005 trial had awarded the insurance commissioner" and "[Judge] Klausner ordered both sides to file briefs on the restitution including what amounts they thought were appropriate."

 For a background summary of ELIC, see S2KM's blog post "Executive Life of California" and, for greater detail, section 3.05[12] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

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

Structured Settlements in 2011 - 3

Prior S2KM 2011 year-end structured settlement blog posts have highlighted the historic significance of the ELNY liquidation and provided a strategic 2011 industry retrospective . This blog post summarizes additional important 2011 structured settlement developments and information.

Taxation

• IRS Audit Guides - The Internal Revenue Service published an Audit Guide in 2011 to assist its examiners in determining the tax treatment of proceeds from lawsuits, settlements and awards received after August 21, 1996. That date marked the enactment of the Small Business Job Protection Act of 1996 which added a "physical" requirement to IRC § 104(a)(2). The IRS had previously published an Audit Guide to assist its examiners in determining whether the IRC §5891 excise tax applies to specific structured settlement factoring transactions.
• JTC Structured Settlement Estimate - The Joint Committee on Taxation (JCT) in 2011 released its Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCT Report). For the first time, the JCT Report calculated an estimated tax revenue loss for the "exclusion of investment income from structured settlement arrangements". The JCT estimate projected structured settlement tax revenue loss to be "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.

Government Benefits

• Medicare Secondary Payer Protocol - Although no statutory or regulatory authority requires Medicare set-aside arrangements (MSAs) in third party liability settlements, confusion continues as to whether and when MSAs are necessary and/or appropriate for such cases. On May 6, 2011, the United States Attorney's Office for the Western District of New York (USAOWDNY) released a one page "Medicare Secondary Payer Protocol" (MSP Protocol) establishing a voluntary process by which that U.S. Attorney's Office will review MSA proposals for liability cases provided certain conditions are met.

• U.S. v. Stricker - In this case involving periodic payments and the MSP Act, a U.S. District Court in Alabama denied a motion by the U.S. Government to reconsider the court's earlier dismissal based upon its finding that the applicable statutes of limitations barred the Government's complaint. The Government had argued on appeal that the court erred in granting its motions to dismiss without considering the Government's theory of continuing accrual argument.

• WCMSA portal - The Centers for Medicare and Medicaid Services (CMS) announced the creation of an Internet portal for submission of workers compensation MSA (WCMSA) proposals. The new web-based application:
  • Enables WCMSA proposals to be submitted electronically for CMS review;
  • Accepts submission documents and supplemental information CMS may request;
  • Provides online status updates for MSA applications;
  • Generates email alerts when approval letters are issued.
• Conditional payment guidelines - CMS released guidelines during 2011 to provide certainty and finality for conditional Medicare payments. This "self-calculated final conditional payment amount" option, will be initiated in February 2012 for claims with a total settlement value of $25,000 or less allowing attorneys and/or claimants to receive a final amount owed number from CMS prior to settlements. For additional information see the Medicare Secondary Payer Recovery Contractor (MSPRC) website.

Minors Settlements - Whether a structured settlement annuity that extends beyond the age of majority is "suitable" for, or in the "best interests" of, a minor (especially a minor without a debilitating injury) represents an important industry issue. In his 2009 presentation to the Society of Settlement Planners (SSP) titled "What Judges Look for When Approving a Minor's Settlement", Texas attorney Phillip McCrury surveyed state minors' statutes and concluded many states require judges to consider the "best interest" of a minor even though very few states directly address structured settlement annuities. Two 2011 cases (only one involving a structured settlement) highlight the potential for conflicting judicial interpretations when annuities are part of a proposed minor's settlement.

• Hancock v. Share - A Florida Appellate Court reversed a Florida Trial Court ruling that denied approval of a proposed structured settlement for a minor. Although the trial court had found that the proposed structured settlement was in the "best interests" of the minor, it refused to approve the structured settlement citing a Florida statute that prohibits a guardian "to bind the assets" of a minor beyond the age of majority.
• In the Matter of Sandra McDuffie - A New York trial court ruled against an estate administrator who proposed to purchase an annuity for a minor child of the decedent stating "the Court cannot authorize the administrator to restrict funds due to an infant after the infant has reached the age of [majority]".

Executive Life Insurance Company of California - In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Structured Settlement Annuity Sales - S2KM acknowledges and appreciates receiving market recap reports highlighting quarterly structured settlement annuity sales (Melissa Evola) and weekly financial market data (Richard Nahill).

• Annuity sales - Evola's most recent quarterly compilation of 2011 structured settlement annuity sales (thru September 30) indicates 21,846 cases have been structured for a total premium of $3,633,489,474. These numbers represent a significant decrease from 2010 (also thru September 30) of 23,578 cases and $4,140,704,642 of premium.
• Interest rates - Nahill's most recent 2011 financial market recap (for week ending December 16) shows interest rates of 1.86 percent for 10-year U.S. Treasury bonds compared with 3.30 percent as of December 31, 2010.

For prior S2KM annual reports summaring structured settlement industry developments, see the structured settlement wiki.

Aurora S.A. v. Poizner

In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Background

• After Executive Life Insurance Company of California (ELIC) failed in 1991, then California Insurance Commissioner John Garamendi approved the transfer of ELIC's insurance policies, including approximately 5500 structured settlement annuities, to Aurora, a newly formed company, and agreed to allow Aurora to operate as a life insurance company in California. Aurora was a subsidiary of New California Life Holdings (NCLH) which was controlled by an investment group called Altus S.A./MAAF.
• In 1992, with the approval of Commissioner Garamendi, a joint venture called Artemis S.A. acquired a controlling interest in NCLH. As summarized by the California Court of Appeals: "Artemis S.A. is the parent of Aurora S.A. Aurora S.A. owns a controlling interest in NCLH. NCLH owns 100 percent of Aurora."
• Subsequent to its NCLH purchase, Artemis learned of a conspiracy by Altus/MAAF Group to evade the prohibition under California on foreign entities controlling California insurers. Rather than disclose this conspiracy to the California Insurance Commissioner, Artemis submitted multiple filings that contained false or misleading information about Artemis' own interest in Aurora as well as Altus's secret control of Aurora through its agreement with the MAAF Group.
• In 1999, the California Insurance Commissioner learned from a whistleblower about the Altus S.A./MAAF Group conspiracy and filed lawsuits (conspiracy lawsuits) against multiple defendants including French bank Credit Lyonnais (which allegedly was a secret, indirect buyer of ELIC and controlled Aurora through secret agreements) alleging violations of the Federal Bank Holding Company Act, the California Insurance Code and other California statutes.
• In 2000, Aurora S.A. and one of its investment partners agreed to sell their interests in NCLH to Reassure America Life Insurance Company (REALIC), a wholly-owned subsidiary of Swiss Reinsurance Company for $227,805,874 subject to the approval of the California Insurance Commissioner.
• In 2005, some of the defendants in the conspiracy lawsuits, including Credit Lyonnais, settled for $730,500,000, most of which was distributed to former ELIC policyholders and payees who had earlier "opted out" of the Aurora rehabilitation plan and received the liquidation value of their existing ELIC contracts and to Aurora to supplement payments for policyholders and payees who had "opted in" (i.e. accepted the Aurora rehabilitation plan).
• The conspiracy lawsuits against the two remaining defendants, Artemis S.A. and Francois Pinault (a key participant in the alleged conspiracy), was conducted in Federal Court in 2005. The jurors found Artemis liable for engaging in a conspiracy and awarded $0 in compensatory damages and $700 million in punitive damages. The trial court awarded an additional $241 million in equitable restitution.
• Artemis appealed, moved to stay execution of judgment while the appeal was pending and offered to pledge as security $55 million from its anticipated sale of NCLH to REALIC. The trial court accepted the Artemis offer and agreed to stay execution of judgment. On August 25, 2008, the Ninth Circuit Court of Appeals vacated the damage awards against Artemis and remanded the case for a new trial on the issue of damages.
• On September 18, 2008, after the trial court vacated its earlier order requiring Artemis to pledge $55 million, REALIC filed an application requesting California Insurance Commissioner Steve Poizner to approve REALIC's purchase of Aurora from Aurora S.A.
• On September 23, 2009, following several earlier, acrimonious communications with representatives of REALIC, a representative of the California Insurance Commissioner sent an email stating the Department of Insurance "intends to deny the pending Form A application unless 100% of the Artemis sale proceeds are deposited in an escrow account satisfactory to the Commissioner. It is our understanding that Artemis refuses to agree to place 100% of its sale proceeds into escrow. Therefore, we are in the process of preparing a denial letter."
• On October 14, 2009, Aurora S.A. filed a lawsuit seeking to compel the California Insurance Commissioner to issue a decision on REALIC's application to purchase Aurora. After the Commissioner formally disapproved REALIC's request to purchase Aurora on November 23, 2009, Aurora S.A. amended its lawsuit alleging the Commissioner's disapproval constituted abuse of discretion.
• On July 22, 2010, the trial court ruled the Commissioner did not abuse his discretion and denied Aurora S.A.'s petition. Aurora S.A. appealed.

For S2KM's complete reporting and analysis of the Executive Life Insurance Companies, including an Executive  Life timeline, see the structured settlement wiki.