Beyond Structured Settlements

SSP and NSSTA 2011 Annual Meetings - 5

One of three fundamental transitions reshaping the structured settlement industry is the change from a singular, illiquid and non-assignable product to multiple products with greater flexibility to address changing needs and circumstances of injury victims. This transition includes the potential of greater product liquidity for traditional structured settlements provided by IRC section 5891 and the state protection statutes.

During their 2011 annual meetings and educational conferences, both the Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) addressed this structured settlement industry transition.

NSSTA's Legal Committee organized two educational programs featuring secondary market structured settlement issues:

• Peter Vodola, Katherine Scanlon and Amy Ravitz - "Legal Committee Update on Developments in the Law"; and
• Judge Edward Burke and Judge Steven Denton (moderated by Vodola) - "Judicial Perspective" (on structured settlements).

The Legal Committee Update approached "factoring" from the perspective of "what is it and why should we [NSSTA] care?" Their "what is it" segment:

• Introduced NSSTA members to IRC section 5891;
• Highlighted the "best interest" test and disclosure requirements of state protection statutes; and
• Summarized the Ceron v. Henderson case which S2KM previously reported as part of S2KM's "business standards and practices" series.

NSSTA's "why should we care" (about factoring) comments focused upon:

• How factoring companies are "adversely defining" the term "structured settlement" with aggressive television and internet advertising;
• How structured settlement factoring cases have inundated many state court dockets; and
• How NSSTA members should respond to plaintiff attorneys and judges who resist structured settlements because of proliferating factoring transactions.

The theme of NSSTA's "Judicial Perspective", as stated by participating Judge Denton, might have been: "don't presume that judges understand structured settlements". Previously a plaintiff attorney, Judge Denton claimed a familiarity with structured settlements but acknowledged he had never been asked to approve a structured settlement transfer application. Conversely, Judge Burke stated that his structured settlement experience was limited to reviewing and approving transfer applications.

Among his NSSTA comments, Judge Burke identified his "heroes" to include the superior court judges involved in the California Fresno County factoring cases. Judge Burke's judicial praise is both noteworthy and difficult to understand. In Henderson v. Scieteco (one of the Fresno County factoring cases) , a California appellate court subsequently reversed the entire consolidated order from the Fresno County Superior Court because of "multiple prejudicial errors in making its factual findings and in reaching legal conclusions" (emphasis added).

Also in Henderson v. Scieteco, the California appellate court held that public policy supports state court approved structured factoring transactions (emphasis added). NSSTA's Legal Committee representatives failed to mention this case when they discussed "public policy" and factoring during their structured settlement legal update.

Some judges not only understand structured settlements, but also have experience with both primary and secondary market structured settlement cases and publish local court rules for structured settlements. See, for example, Rule 68.2 and Rule 68.3 of the Local Rules for the Hamilton County, Ohio Probate Court.

SSP offered three presentations about non-traditional structured settlement products as part of its educational program segment titled "Practice Improvement: Marketing and New Products",

• Anthony Prieto and Tim Denehy - "The Use of Structured Settlement Annuity Payment Rights";
• Brian Michaels - "Expanded Use of Non-Qualified Assignments"; and
• Rick Miller - "Equity Indexed Annuities and Settlement Planning".

Prieto and Denehy introduced a product called "The Settlement Asset Management Trust (SAM trust) with Enhanced Structured Income (ESI)" which is essentially an irrevocable spendthrift trust generating level monthly income payments for durations of 10-30 years plus access to discretionary distributions.

The ESI component, according to Prieto and Denehy, consists of payment rights previously sold (i.e., transferred or factored) by a structured settlement recipient to a third party purchaser (factoring company) with an approved court order pursuant to a state protection statute. The SAM trust product managers purchase the payment rights from one or more factoring companies and transfer the payment rights to the SAM trust.

According to Prieto and Denehy, the resulting SAM trust can produce a taxable interest rate that is "typically three (3%) percent higher than comparable fixed products with similar guarantees and safety." Their explanation for the enhanced interest rate: the ESI does not have the same high internal costs as a typical annuity during the first few years of the annuity policy.

Although the flow of structured settlement payment rights purchased from various factoring companies is typically uneven, Prieto and Denehy maintain the SAM trustee can consolidate selected payment rights to create an even payment flow to the SAM trust beneficiary who might be an injury victim or a plaintiff attorney.

In addition to an interest rate risk, Prieto and Denehy acknowledge the ESI has an insurance company insolvency risk similar to a traditional structured settlement. According to Prieto and Denehy, however, a typical SAM trust will include between two and ten separate payment rights purchases thereby diversifying the insolvency risk.

Although some secondary market brokers and factoring companies have previously sold "re-cycled" structured settlement payment rights to individuals, Prieto and Denehy believe their product is different because the SAM trust integrates multiple streams of separate payment rights and also includes a cash allocation permitting discretionary distributions.

For additional S2KM reporting about the SSP and NSSTA 2011 Annual Meetings, see the structured settlement wiki.

See "Structured Settlements and Periodic Payment Judgments" (S2P2J) for additional information about:

• Non-qualified (under IRC section 130) assignments and products - Section 3.08A; and
• Judicial review of transfer applications - Section 16.05

SSP and NSSTA 2011 Annual Meetings - 1

This blog post begins S2KM's reporting and outlines results from the 2011 annual meetings of the Society of Settlement Planners (SSP - May 15-17) and the National Structured Settlement Trade Association (NSSTA - May 18-20).

Elections

• NSSTA
  • President - Dan Finn
  • New Directors - Tom Donahue; Christine Logan; Kevin Silo; Mike Wostoupal
• SSP
  • President - Jack Meligan
  • New Directors - Tony Alfieri; Tim Denehy; Charles Schell; Michelle Whitmore.

Honors - NSSTA

• President's Award - Betty Gregware
• Leadership Award - Toni Warbington
• CSSC Designation Certificates
• NSSTA Past Presidents - honoring NSSTA's 25th Anniversary

Educational Programs - speakers by topic with recommended related resources from "Structured Settlements and Periodic Payment Judgments" (S2P2J), S2KM wikis and prior S2KM blog posts.

Legislative Update

• NSSTA - Eric Vaughn: Washington Update
  
• SSP - Roy Franco: HR 1063
  

Government Benefits

• NSSTA
  • MSA Panel -Toni Warbington; Doug Brand; David Korch; David Hayes
  • Special Needs Trusts - Jay Sangerman
• SSP
  • Liability MSAs - Jason Lazarus; Roy Franco; Mark Pololizio; Doug Shaw
  • Liens Panel - Roy Franco; Tevra Johnson
• Recommended resources
  • S2P2J Chapter 15 - "Government Benefits and Structured Settlements"
  • S2 wiki - "Government Benefits"

Taxation

• NSSTA: 468B QSF Funds - Martin Jacobson
• SSP
  • 468B QSF Funds - Robert Wood
  • Taxation of Damages - Robert Wood
  • Medical Expense and Estate Tax Issues - Jeremy Babener
• Recommended resources
  • S2P2J Chapter 2 - "Taxation of Damages"
  • S2P2J Section 3.08B - "Section 468B Settlement Funds"
  • S2 public policy wiki pages featuring: Robert Wood and Jeremy Babener

Stakeholder Perspectives

• NSSTA
  • Attorneys - William Robinson lll, President-Elect of the American Bar Association
  • Legal Committee Update (including secondary market) - Peter Vodola; Amy Ravitz; Kathy Scanlon
  • Financial Planners - Laura Tarbox
  • Judges - Peter Vodola, Edward Burke, Stephen Denton
  • Unions - Michael Rott
• SSP
  • Special Needs Attorneys - Kevin Urbatsch; Michele Fuller
  • Plaintiff Attorneys - Jay Fisher
• Recommended resources
  • S2P2J Chapter 4 - "Defense Counsel"
  • S2P2J Chapter 5 - "Plaintiff Counsel"
  • S2P2J Chapter 6 - "Case Preparation"
  • S2P2J Section 16.05 - "Judicial Review of Transfer Applications"
  • S2 wiki - "Secondary Market"
  • S2KM blog - "Ceron v. Henderson"

Marketing

• NSSTA: Business Communications - LuAnn Reeb
• SSP
  • Marketing to Personal Injury Attorneys - Joe Didier
  • Electronic Media and Social Networking - Mark Wahlstrom
• Recommended resources
  • S2 wiki - "S2 and KM"
  • Web 2.0 for Lawyers wiki

Practice Improvement and New Products

• NSSTA: CSSC Continuing Education Online - Karen Meyers; Kathy Moghadas
• SSP
  • Dissecting a Settlement Plan - Jack Meligan; Joseph Tombs
  • Non-qualified Assignments - Brian Michael
  • Indexed Annuities - Rick Miller
  • Re-cycling Structured Settlement Payment Rights - Anthony Prieto; Tim Denehy
• Recommended resources
  • S2P2J Section 3.06A - "Non-Qualified Assignments"
  • S2 wiki - "Re-thinking Structured Settlements"
  • S2 wiki - "Settlement Consulting"
  • S2 wiki - "Business Standards and Practices"
  • S2 wiki - "Spencer v. Hartford"
  • S2KM blog - "Online S2P2J" 

Strength of Life Companies

• NSSTA
  • Strength of Life Insurance Companies - Jim Morris, Chairman, President and CEO of Pacific Life Insurance Company
  • State Guarantee Associations - Tom Ronce; Craig Ulman
  • ELNY Update - Len Blonder; Randy Dyer; Dan Finn; Craig Ulman

• Recommended resources
  • S2P2J Section 3.05[9] - "Life Insurance Guaranty Associations"
  • S2P2J Section 3.05[10] - "Executive Life Insolvency"
  • S2KM blog - "Executive Life of New York"

For S2KM reporting and analysis of prior SSP and NSSTA meetings, see S2KM's structured settlement wiki.

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.