Beyond Structured Settlements

Structured Settlements 2013 - ELNY and Reliance

Structured settlements are supposed to provide economic security for people with serious injuries and disabilities - to help them rebuild their lives and, in many cases, to achieve special lifetime accomplishments. Instead of an all-cash personal injury settlement, structured settlement recipients accept a promise of future periodic payments.

What happens, if and when, that promise is broken? What happens when a structured settlement funding company, and the regulators and guaranty system responsible for protecting the structured settlement recipients, fail to make and/or insure full payment?

ELNY Liquidation

These questions are highlighted by the Executive Life of New York (ELNY) liquidation - the dominant structured settlement story of 2012 and 2013 and one of the most important developments in the history of the United States structured settlement industry.

The story of ELNY, as well as its affiliate Executive Life of California (ELIC), and their parent company, First Capital Corporation (FEC), is long and complex. For background of events prior to ELNY's 1991 receivership, S2KM recommends Gary Schulte's 1992 book "The Fall of First Executive".  For an Executive Life timeline, see the structured settlement wiki.

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent.

Following 22 years of "Rehabilitation" supervised by various New York State Superintendents of Insurance and Financial Services, as Receivers, ELNY was officially liquidated August 8, 2013 pursuant to an Order of Liquidation signed by Nassau County New York State Supreme Court Judge John M. Galasso on April 16, 2012.

As part of his Liquidation Order, Judge Galasso also approved a Restructuring Agreement, as proposed by ELNY's Receiver and NOLHGA, whereby ELNY's remaining assets and ongoing liabilities have now been transferred to a successor company, Guaranty Associations Benefit Company (GABC), a not-for-profit Washington D.C.-based captive insurance company.

ELNY Shortfall Payees

GABC published two versions of a final Schedule 1.15 on its website in November 2013. Among the significant details:

• Thirty-seven (37%) percent of all remaining ELNY (now GABC) structured settlement annuities (SSAs) will experience shortfalls.
• SSAs represent ninety-eight (98%) percent of total ELNY shortfall annuities.
• The total percentage of each ELNY SSA contract value "protected" by ELNY's remaining assets, state guaranty fund payments plus additional enhancements varies from 31% to 100% depending upon the individual contract.

In a 2013 blog post titled "An ELNY Nightmare", S2KM profiled Glenn Arensdorf, one of the ELNY structured settlement victims. For profiles of five additional ELNY structured settlement shortfall payees, see "The Complete ELNY Saga - 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", the lead article in a comprehensive ELNY analysis published in 2012 by LifeHealthPro.

Faced with significant payment reductions resulting from ELNY's liquidation and restructuring agreement, ELNLY's structured settlement shortfall payees were left with three options:

1. Accept their payment reductions under the ELNY Restructuring Agreement and do nothing; or,
2. Appeal Judge Galasso's Order and ask the Appellate Court to send ELNY's Receiver back to drawing board; or,
3. Bring a separate legal action against the Receiver personally for bad faith conduct, breach of fiduciary duty and fraudulent concealment or waste.

Several ELNY structured settlement shortfall payees chose Options 2 and 3.

Option 2 failed. The Appellate Division of the Supreme Court of the State of New York, Second Department denied the ELNY shortfall payees' appeal of Judge Galasso's Order on February 6, 2013. New York State Court of Appeals denied a subsequent motion by ELNY shortfall payees for Leave to Appeal the Second Department decision on May 3, 2013.

Option 3 remains unresolved.

• Class Action Lawsuit - Several ELNY structured settlement shortfall payees pursued Option 3 by filing a federal class action lawsuit November 8, 2012 in the U.S. District Court for the Southern District of New York against the ELNY Receiver (New York Superintendent of Financial Services Benjamin Lawsky) in his personal capacity.
• Receiver's Response - In response, the Receiver filed a motion December 7, 2012 asking the Liquidation Court (Judge Galasso) to find the shortfall payees in contempt for violating the injunction provision of the ELNY Liquidation Order.
• Contempt Order - Judge Galasso issued a Contempt Order on January 25, 2013. He also imposed a $5000 fine and threatened additional fines plus imprisonment of legal counsel if the ELNY structured settlement shortfall payees did not dismiss their Federal action which they did (without prejudice) on February 7, 2013.
• Bottom Line - So long as Judge Galasso's Contempt Order and continuing threat of additional fines and imprisonment of legal counsel remain in effect, ELNY structured settlement shortfall payees are effectively barred from pursuing Federal legal action against ELNY's Receiver for alleged mismanagement of ELNY's assets during ELNY's 22 year Rehabilitation.
• Shortfall Payee's Appeal - ELNY's shortfall payees are currently pursuing an appeal challenging "each and every part" of Judge Galasso's January 25, 2013 Contempt Order as a necessary step before re-filing their Federal action against the Receiver and his agents.
• Appellate Issues - The appellate brief filed on behalf of the ELNY shortfall payees addresses three legal issues:
  • Did the ELNY Liquidation Court exceed it subject matter jurisdiction or otherwise err by interfering with shortfall payees' constitutional right to bring suit against the Receiver in Federal court?
  • Did the ELNY Liquidation Court err in holding the shortfall payees in contempt for violating its injunctive Order when the order does not clearly and unequivocally bar personal capacity suits against the Receiver?
  • Did the ELNY Liquidation Court err in holding that the shortfall payees conceded the Order barred personal capacity lawsuits by appealing the order and using this alleged concession as the basis to hold the shortfall payees in contempt?

Reliance Liquidation

Reliance Insurance Company was declared insolvent in 2001 and the Pennsylvania Insurance Commissioner was appointed as Liquidator. The Reliance Estate, however, remains open and its assets, until November 4, 2013, included approximately 3,400 structured settlements of which approximately 3093 involve annuities issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter signed an Order on November 4, 2013 approving a Transfer and Assumption Agreement whereby Reliance will transfer all Reliance-owned structured settlement annuity contracts and corresponding payment obligations issued by Genworth Life Insurance Company to a new corporation, the Genworth Annuity Service Corporation.

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

For additional S2KM 2013 annual reports, see:

• Part 1 - Primary market.
• Part 2 - Settlement planning.
• Part 3 - Secondary market.

GABC Publishes Final ELNY Schedule 1.15

The Guaranty Association Benefits Company (GABC), successor to liquidated Executive Life Insurance Company of New York (ELNY), has published two versions of a final liquidation date Schedule 1.15 on its website.

Among the significant details:

• Thirty-seven (37%) percent of all remaining ELNY (now GABC) structured settlement annuities (SSAs) will experience shortfalls; and
• SSAs represent ninety-eight (98%) percent of total ELNY shortfall annuities.

Prior to ELNY's liquidation, the New York Superintendent of Financial Services filed a preliminary Schedule 1.15 for the proposed ELNY Restructuring Agreement with the Supreme Court of Nassau County New York on November 7, 2011.

Judge John M. Galasso issued a Memorandum Decision April 16, 2012 declaring ELNY to be insolvent and signed a separate order: 1) approving the ELNY restructuring plan as proposed by the Superintendent and the National Organization of Life & Health Guaranty Associations (NOLHGA); 2) converting the ELNY proceeding from rehabilitation to liquidation; and 3) appointing the Superintendent as ELNY's liquidator.

Under the ELNY restructuring plan, participating state life and health guaranty associations (PGAs) and certain life insurance companies formed GABC, a new special purpose not-for-profit captive insurance company under the laws of the District of Columbia to replace ELNY once it was liquidated on August 8, 2013. The PGAs agreed to supplement the ELNY benefit payments for annuity contracts eligible for state guaranty association coverage up to the maximum allowable by their state guaranty association laws. The various participating life companies agreed to provide additional enhancements and have set up an ELNY Hardship Fund.

The final Schedule 1.15 lists all of ELNY's current annuities, with the names of the annuity owners and payees redacted. Schedule 1.15 includes additional information such as individual contract identification numbers, the proposed "uncovered amount" (shortfall) and "total percentage of contract protected" assuming contributions from state life and health insurance guaranty associations and certain supplemental enhancements.

All PGA coverage is applied on a present value basis, according to the Schedule 1.15 footnotes, which also indicate that present values were calculated as of August 8, 2013 by Towers Watson using a 4.25% discount rate. The final Schedule 1.15 provides separate annuitant IDs, beginning with an "F", when evidence exists that some or all of the payment rights under an annuity have been transferred to a factoring company.

Final Schedule 1.15 Highlights

• Schedule 1.15 lists extensive information for 9241 ELNY annuities of which:
  • 4057 (44%) are structured settlement annuities (SSAs).
  • 466 (5%) are single premium immediate annuities (SPIAs).
  • 4718 (51%) are pension annuities.
• Schedule1.15 indicates shortfalls ("uncovered amounts") will occur for 1541 current ELNY annuities - even assuming state guaranty association contributions and enhancements:
  • 1504 SSAs - Note: this number represents 98% of 1504 ELNY shortfall annuities and indicates 37% of all 4057 ELNY SSAs will experience shortfalls.
  • 29 SPIAs.
  • 8 pension annuities.
• For the 1504 Schedule 1.15 SSAs with shortfalls:
  • Factoring transactions - Part or all of 407 SSA payment rights (27% of 1504) are estimated to have been transferred in factoring transactions. Note: reliable industry sources have informed S2KM the actual number of current ELNY SSAs previously factored is considerably higher.
  • $100,000 + - 1090 SSAs (72% of 1504) have "uncovered amounts" in excess of $100,000 each on a present value (PV) basis including
  • $1,000,000 + - 249 SSAs (17% of 1504) which have "uncovered amounts" in excess of $1,000,000 PV each including
  • $5,000,000 + - 21 SSAs which have "uncovered amounts" in excess of $5,000,000 PV each.
  • The largest ELNY SSA has an "uncovered amount" of $27,463,417 PV.
• The total percentage of each ELNY SSA contract value "protected" by ELNY's remaining assets, state guaranty fund payments plus additional enhancements varies from 31% to 100% depending upon the individual contract.

These final Schedule 1.15 numbers differ from the previously published Schedule 1.15 as reported by S2KM. Possible explanations:

• More factoring transactions (407 vs.156) are included as separate line items in the final Schedule 1.15.
• Some ELNY annuity payees may have died since ELNY's August 8, 2013 liquidation date.

• Present value categories may have shifted from covered to uncovered and vice versa based on interim payouts.

• GABC's actual and/or projected investment returns and expenses (which have been reported) may be different than previously projected.

For S2KM's complete and continuing coverage of the ELNY liquidation, see the structured settlement wiki.

NASP 2013 Annual Conference - 2

Primary market representatives attending their first National Association of Settlement Purchasers (NASP) Annual Conference are typically surprised - both by the exceptional quality of the educational experience and NASP's encouragement of diverse perspectives on controversial issues which have historically divided the primary and secondary structured settlement markets.

NASP President Patricia LaBorde's keynote remarks at NASP's 2013 Annual Conference last week in Las Vegas re-inforced NASP's policy of politically unobstructed learning. "We want to hear from all structured settlement stakeholders - even if they disagree with us or don't like who we are," LaBorde stated. "We are here to listen. We are here to improve."

Consistent with these educational objectives, previous NASP speakers have included critics from the primary market such as John Darer and Jack Meligan as well as attorneys who represent annuity providers in transfer hearings such as Stephen Harris and Peter Vodola. Regular NASP educational program features also include both a Primary Market Panel and a Judicial Panel.

In addition to other speakers who highlighted and criticized specific secondary market business practices during this year's NASP conference, former NASP President Robin Shapiro provided the most comprehensive and unanticipated assessment. Shapiro's unannounced critique, which preceded, but was unrelated to, his introduction of NASP's 2013 Hamilton Award recipient Jack Kelly, will be summarized and discussed in subsequent S2KM blog posts.

NASP 2013 Speakers and Topics

• Jack Kelly - State and Federal Legislative and Regulatory Developments.
• Earl Nesbitt - Litigation Update and the Impacts of Unethical Conduct.
• Rajiv Goel - Capacity Issues in Structured Settlement Transactions.
• Boris Ziser - Financing Structured Settlement Transactions.
• Break Out Sessions
  • Avoiding Pitfalls with the Problem Payees.
  • Non-Traditional Financing of Secondary Market Transactions.
  • Maximizing Results in Front of a Tough Judge.
  • Marketing: Reaching Your Audience Without Breaking Ethical or Legal Standards.
• Edward Stone - The ELNY Saga.
• Brian Robinson and Erik Friedman - Issues in Life Contingent Transactions.
• Patrick Hindert (Moderator) and Daniel Hindert, Anthony Prieto, Jr., William Schemmel - Primary Market Panel.
• Matthew Bracy (Moderator) and Judges Nancy Allf, Carter Bise, James McCarthy - Judicial Panel.

S2KM Comments and Observations

• Sponsors - NASP conferences invariably attract more sponsors than any other conferences S2KM attends. NASP sponsors this year included Google and NBC.
• Legislation and Regulation - Secondary market legislative and regulatory developments have decreased considerably during the past couple of years. 48 states have now enacted protection acts with Oregon amending its statute during 2013.
• Case Law - Several cases decided in 2013 have the potential to significantly impact secondary market business standards and practices. "Structured Settlements and Periodic Payment Judgments" (S2P2J) will report on the following cases discussed during the NASP conference in upcoming Release 55:
  • Settlement Funding v. Cathy Brenston
  • Symetra v. Rapid Settlements
  • Hartford Life v. Estate of Solomon
  • In re: Porter
  • J.G. Wentworth Originations v. Mobley
• Brenston Case - S2KM will discuss the Brenston case, which is currently subject to a petition for review by the Illinois Supreme Court, in subsequent blog posts. A 5th District panel, sitting for the 4th District Illinois Court of Appeals, previously held that because Brenston’s settlement agreement contained an enforceable anti-assignment provision, the transfer court had a duty to enforce that provision and “it had no authority under the Act to approve” the transfer petitions.
• Special Needs Attorneys - Rajiv Goel, addressing capacity issues, was the first special needs attorney to speak at a NASP conference. At prior special needs conferences S2KM has attended, attorneys frequently criticize primary market consultants for "over structuring" and for opposing single claimant qualified settlement funds. In addition, several state Medicaid agencies are attempting to disqualify structured settlement funded special needs trusts because of the potential liquidity (resources) available via the secondary market. Primary and secondary structured settlement market participants appear to have shared interests in improving their special needs public relations and lobbying strategy.
• Marketing Restrictions - In addition to promoting the Better Business Bureau Code of Advertising, NASP's Marketing Break Out discussions highlighted compliance requirements for:
  • New Telephone Consumer Protection Act.
  • The CAN-SPAM Act.
  • Truth in Caller ID Act.
  • Section 43(A) of the Lanham Act.
• Financing Transactions - Boris Ziser's overview of secondary market financing transactions explained: 1) the changing landscape of capital markets; 2) why lenders and investors like structured settlements; 3) what is needed for a successful transaction; 4) current lender challenges; and 5) various types of lending facilities - among other topics.
• Expanding Market Segments - Separate presentations about 1) life contingent transfers and 2) the sale of structured settlement payment rights to individual investors including personal injury victims indicate both market segments are growing.
• ELNY Saga - Among ongoing ELNY developments reported by Edward Stone:
  • Although a final Schedule 1.15 has not yet been published, benefit reductions for ELNY structured settlement recipients may be 3-4% greater than originally predicted.
  • Guarantee Association Benefit Company (GABC), ELNY's D.C.- based successor insurer under NOLHGA's control, has not yet disclosed any information about the expenses association with ELNY's liquidation or the investment performance of ELNY's assets during and/or following ELNY's liquidation.
  • Despite shortfalls experienced by more than 1400 ELNY structured settlement recipients, none of the participating state Guarantee Associations paid out their full coverage amounts.
  • GABC is flagging factoring transactions which are not receiving supplemental benefits.
  • The ELNY class action lawsuit remains on hold while the appeal of Judge Galasso's contempt order is pending.
• Judicial Panel - NASP's Judicial Panel provided opportunities for both the judges and conference attendees to ask each other questions and to communicate problems they have experienced during transfer proceedings. Speaking for the panelists, Judge Bise, who attended the entire conference, stated "I have learned a lot. We would appreciate NASP continuing to educate us on transfer issues."
• Primary Market Panel - Panelist William Schemmel, legal counsel for the Western & Southern Financial Group, which owns Integrity Life among other affiliates, was one of two representatives of former primary market annuity providers attending the NASP conference. Similar to the judicial panel, Schemmel's discussion of transfer issues and problems was practical and productive without the political invective which frequently and unfortunately characterizes transfer discussions at primary market conferences.
• METLife's New Transfer Policies - Despite IRC 5891 and state protections acts, structured settlement annuity providers retain the ability to prevent payment right transfers by enforcing anti-assignment clauses in applicable settlement documents. Generally, however, for the cost of an administrative fee, structured settlement annuity providers have cooperated with factoring companies and payee/transferors since 2002 to enable court-approved transfers. During his case law update, NASP Executive Director Earl Nesbitt reported METLife has now reversed course and has begun challenging this cooperative spirit with new transfer policies prohibiting two previously existing industry standards: 1) transfers of partial payments; and 2) factoring companies assuming administrative responsibility for post-transfer payments.

Congratulations to NASP - especially NASP President Patricia LaBorde, conference chairman Ken Barnett, conference administrators Susan Barnes and Leslie Wren, and conference speakers - for continuing and upgrading the quality of NASP's annual educational conference.

For S2KM reporting about prior NASP conferences, see the structured settlement wiki.

Brief Filed in ELNY Contempt Order Appeal - 1

"People should know when they are conquered." - Quintus in "Gladiator"

"It ain't over till it's over." - Yogi Berra

Following 22 years of "Rehabilitation" supervised by various New York State Superintendents of Insurance and Financial Services, as Receivers, Executive Life Insurance Company of New York (ELNY) was officially liquidated August 8, 2013 pursuant to an Order of Liquidation signed by Nassau County New York State Supreme Court Judge John M. Galasso on April 16, 2012.

As part of his Liquidation Order, Judge Galasso also approved a Restructuring Agreement, as proposed by ELNY's Receiver and NOLHGA, whereby ELNY's remaining assets and ongoing liabilities have now been transferred to a successor company, Guaranty Associations Benefit Company (GABC), a not-for-profit Washington D.C.-based captive insurance company.

As a result of ELNY's liquidation and restructuring, approximately 1456 structured settlement payees will experience payment shortfalls totaling approximately $920 million (present value) following contributions from state life and health insurance guaranty associations and various life insurance companies.

ELNY Receivers' Responsibilities 

Significantly, ELNY's 1991 Rehabilitation Order did not result because of ELNY's insolvency. Instead, then New York Insurance Superintendent Salvatore Curiale's stated concern was a "run" on ELNY assets by policyholders.

Beginning with ELNY's 1991 Rehabilitation Order and continuing to ELNY's August 8, 2013 liquidation date, Superintendent Curiale and his successor New York Superintendents of Insurance and Financial Services managed ELNY's Rehabilitation (in their capacity as Receivers not regulators) with day-to-day management responsibilities assigned to their agent, the New York Liquidation Bureau (NYLB).

As ELNY's Receiver, these Superintendents undertook fiduciary responsibilities toward ELNY's policyholders and payees. Their duties, pursuant to Article 74 of New York's Insurance law, included: conducting ELNY's business, safeguarding ELNY's assets, and removing the causes and conditions that made ELNY's rehabilitation necessary.

Until December 17, 2010, however, when Judge Galasso issued an ex parte Order to Show Cause seeking an ELNY liquidation plan, ELNY's Receivers had not filed a single report with the court or made any efforts to inform policyholder or payees about ELNY's declining financial position. As of December 31, 2010, ELNY's audited financial statements show ELNY had assets of $905,945,200 compared with liabilities of $2,474,317,342, resulting in a negative surplus of $1,568,372,142.

During ELNY's March 2012 Liquidation Hearing, Judge Galasso ruled against ELNY shortfall payees' attempts to determine how and why ELNY had suffered such losses reasoning such issues were beyond the scope of the hearing. To further protect the Receiver, Judge Galasso's April 16, 2012 ELNY Liquidation Order contained immunity and injunction provisions proposed by ELNY's Receiver.

Although the Receiver represented these provisions did not immunize him from liability outside his Article 74 duties, structured settlement shortfall payees expressed concern the broad language of the immunity and injunction provisions could insulate the Receiver from liability beyond the scope of Article 74. They also believed, contrary to the Receiver's representations, that Article 74 prohibits not just bad faith conduct but also conduct without appropriate care and prudence.

ELNY Shortfall Payees' Options 

Faced with significant payment reductions resulting from ELNY's liquidation and restructuring agreement, ELNLY's structured settlement shortfall payees were left with three options:

1. Accept their payment reductions under the ELNY Restructuring Agreement and do nothing; or,
2. Appeal Judge Galasso's Order and ask the Appellate Court to send ELNY's Receiver back to drawing board; or,
3. Bring a separate legal action against the Receiver personally for bad faith conduct, breach of fiduciary duty and fraudulent concealment or waste.

The ELNY structured settlement shortfall payees chose options 2 and 3.

Option 2 failed. The Appellate Division of the Supreme Court of the State of New York, Second Department denied the ELNY shortfall payees' appeal of Judge Galasso's Order on February 6, 2013. New York State Court of Appeals denied a subsequent motion by ELNY shortfall payees for Leave to Appeal the Second Department decision on May 3, 2013.

Option 3 faces a significant judicial roadblock - a Contempt Order with the threat of fines plus imprisonment of legal counsel.

Prior to this Contempt Order, several ELNY structured settlement shortfall payees pursued Option 3 by filing a federal class action lawsuit November 8, 2012 in the U.S. District Court for the Southern District of New York against the ELNY Receiver (New York Superintendent of Financial Services Benjamin Lawsky) in his personal capacity. In response, the Receiver filed a motion December 7, 2012 asking the Liquidation Court (Judge Galasso) to find the shortfall payees in contempt for violating the injunction provision of the ELNY Liquidation Order.

Judge Galasso issued a Contempt Order on January 25, 2013. He also imposed a $5000 fine and threatened additional fines plus imprisonment of legal counsel if the ELNY structured settlement shortfall payees did not dismiss their Federal action which they did (without prejudice) on February 7, 2013. 

Bottom line: so long as Judge Galasso's Contempt Order and continuing threat of additional fines and imprisonment of legal counsel remain in effect, ELNY structured settlement shortfall payees are effectively barred from pursuing Federal legal action against ELNY's Receiver for alleged mismanagement of ELNY's assets during ELNY's 22 year Rehabilitation. 

Appeal of Contempt Order

As a result, ELNY's shortfall payees are currently pursuing an appeal challenging "each and every part" of Judge Galasso's January 25, 2013 Contempt Order as a necessary step before re-filing their Federal action against the Receiver and his agents.

On August 9, 2013, Attorney Edward Stone filed a preliminary brief with the New York Supreme Court, Appellate Division, Second Department on behalf of ELNY structured settlement shortfall payees Jeanice Dolan, Keith Vincent, Daniel Malin and their attorneys.

The appellate brief filed on behalf of the ELNY shortfall payees addresses three legal issues:

• Did the ELNY Liquidation Court exceed it subject matter jurisdiction or otherwise err by interfering with shortfall payees' constitutional right to bring suit against the Receiver in Federal court?
• Did the ELNY Liquidation Court err in holding the shortfall payees in contempt for violating its injunctive Order when the order does not clearly and unequivocally bar personal capacity suits against the Receiver?
• Did the ELNY Liquidation Court err in holding that the shortfall payees conceded the Order barred personal capacity lawsuits by appealing the order and using this alleged concession as the basis to hold the shortfall payees in contempt?

S2KM will summarize the ELNY shortfall payees' arguments for each of these issues in a subsequent blog post. For S2KM's complete ELNY reporting, see the structured settlement wiki.

Structured Settlements in 2012 - 4

Executive Life of New York

At one time or another, each of us may have become acquainted with individuals who have overcome personal injuries and successfully transformed their disabilities and special needs into special lifetime accomplishments. Kyle Walsh, profiled in a 2012 S2KM blog post, is one such individual. The late Randy Snow, featured in a 2008 S2KM blog series, was another.

Structured settlements are supposed to provide economic security for people with serious injuries and disabilities - to help them rebuild their lives and, in many cases, to achieve special lifetime accomplishments. Instead of an all-cash personal injury settlement, structured settlement recipients accept a promise of future periodic payments.

What happens, if and when, that promise is broken? What happens when a structured settlement funding company, and the regulators and guaranty system responsible for protecting the structured settlement recipients, fail to make and/or insure full payment?

These questions are highlighted by the Executive Life of New York (ELNY) liquidation - the dominant structured settlement story of 2012 and one of the most important developments in the history of the United States structured settlement industry.

The story of ELNY, as well as its affiliate Executive Life of California (ELIC), and their parent company, First Capital Corporation (FEC), is long and complex. For background of events prior to ELNY's 1991 receivership, S2KM recommends Gary Schulte's 1992 book "The Fall of First Executive".

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. When then New York's Insurance Commissioner Salvatore Curiale seized control of ELNY on April 16, 1991 and placed it in receivership, he stated: "The company is currently neither in an insolvent or impaired condition. . . . I have not petitioned the Court to make a finding of insolvency. ELNY is a company well able to meet its current obligations."

Exactly twenty-one years later, on April 16, 2012, following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso approved an Order of Liquidation and a Restructuring Agreement for ELNY as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, and the National Organization of Life and Health Guaranty Funds (NOLHGA).

The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to more than 1400 ELNY payees out of a total of approximately 9700 current ELNY payees. The remaining ELNY payees expect to receive 100 percent of their promised future payments. The average individual shortfall is estimated to exceed $600,000 present value. Although an ELNY Hardship Fund has been created, it has not yet been funded.

An appeal was filed May 30, 2012, on behalf of 18 ELNY structured settlement shortfall payees, challenging the ELNY liquidation order and restructuring agreement on the basis of due process. The appeal also alleges that immunities and injunctions granted under the liquidation order are improper. Oral arguments occurred on November 15, 2012 in Brooklyn before the Appellate Division of the Supreme Court of the State of New York, Second Department. No decision has been announced.

Another legal challenge to the ELNY liquidation order occurred June 14, 2012 when attorneys for several liability insurers filed a Motion asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. The motion indirectly raises the issue of whether qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation? Judge Galasso denied the Motion without further explanation. 

In a subsequent development, somewhat related to the liability insurers' motion, the ELNY website 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 Galasso on April 16, 2012 as part of the ELNY liquidation order.

The same attorneys who filed the ELNY appeal, Edward Stone and representatives of the Christensen & Jensen law firm, filed a class action lawsuit November 8, 2012, on behalf of ELNY shortfall victims, against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, and his predecessor ELNY Rehabilitators, as well as MetLife and Credit Suisse. The class action allegations provide a critical litany of mismanagment and non-disclosure during the 21 years ELNY's estate was being supervised by these defendants.

In response, attorneys representing Benjamin M. Lawsky, in his capacity as ELNY's Receiver, filed a Notice of a Motion with the Nassau County New York State Supreme Court requesting oral argument on January 4, 2013 at 9:30 a.m. or as soon thereafter as the parties may be heard:

• to enjoin three ELNY structured settlement shortfall payees and their legal counsel from proceeding with a class action lawsuit in the United States District Court Southern District of New York;
• to hold in contempt of court the shortfall payees' legal counsel; and
• to require their payment of the related costs and attorney's fees incurred by the Superintendent.

Although the ELNY liquidation has so far received limited coverage in the mainstream media, specialty insurance experts and analysts have not been silent. Examples:

• Peter Bickford - In his article titled "The Elephant in the Court Room" (summarized here by S2KM), Bickford argues New York’s receivership system has failed ELNY, its policyholders and beneficiaries, as well as the insurance industry and its customers due to a lack of basic accountability standards. Although the ELNY restructuring plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), Bickford maintains it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. Bickford's article also provides succinct summaries of objections raised by ELNY shortfall victims and ELNY legal issues which he states "could linger in the courts for years"
• LifeHealthPro - In an article titled "The Complete ELNY Saga: 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", (summarized here by S2KM), the authors assign primary blame for ELNY insolvency to the NYLB which they describe as "a rogue agency known for its codes of secrecy and characterized by many who spoke for this story as ineffective and mismanaged at best, and a snake pit of corruption at worst". In a companion article (reviewed here by S2KM), writer Warren Hersch asks: "is the structured settlement process in need of reform"?  In a follow-up oped article titled "Governor Cuomo I'm Calling You Out", (summarized here by S2KM), Bill Coffin, LifeHealthPro's Group Editor, charges New York Governor Andrew Cuomo with personal responsibility to clean up the "ELNY debacle".

The final results of the ELNY liquidation will depend upon the outcome of the continuing litigation highlighted in this article. It also remains to be seen what reforms, if any, will result from the failed ELNY receivership process.

In conclusion, it should also be noted that ELIC-related litigation continued in 2012 (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.

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

This blog post completes S2KM's series "Structured Settlements in 2012":

• Part 1 - Primary market
• Part 2 - Settlement planning
• Part 3 - Secondary market
• Part 4 - Executive Life of New York

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 Liquidation Order

S2KM's summary of Judge John M. Galasso's Memorandum Decision for Executive Life of New York (ELNY) left open the question of whether Judge Galasso had granted judicial immunity to the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver.

Immunity Issue

The corresponding Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge on April 16, 2012 confirms the grant of immunity as follows:

"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 ..."

A copy of both Judge Galasso's ELNY Decision and the ELNY Liquidation Order are posted on the structured settlement wiki.

Although expected, this judicial grant of immunity is controversial because, according to some legal experts:

• New York insurance laws do not specifically grant legal immunity to the Superintendent, as Receiver.
• ELNY was not judicially determined to be insolvent until Judge Galasso signed the April 16, 2012 Order.
• The Superintendent and its agents, including the NYLB, have "managed" ELNY since it first entered Rehabilitation in 1991.

For background about the immunity issue, see "The Trouble with ELNY", S2KM's review of an article by Peter Bickford.

Factoring Companies

Neither the ELNY Memorandum Decision nor the Liquidation Order address another controversial ELNY issue: whether participating state guaranty associations (PGAs) will provide coverage for ELNY structured settlement annuities where payment rights have been transferred to factoring companies and subsequently sold to investors as securities.

One result of protecting factoring companies and ELNY structured settlement payment right investors could be a reduction in funds available to other ELNY shortfall victims. Some industry experts have estimated that payment rights from as many as 1000 of ELNY's 4168 structured settlement annuities (SSAs) have been transferred to factoring companies and their investors.

According to Schedule 1.15 of the ELNY Restructuring Agreement, 1459 SSAs will experience shortfalls ("uncovered amounts") as a result of ELNY's liquidation and restructuring even assuming state guaranty association contributions and enhancements.

No Closing Date Set

Neither the ELNY Memorandum Decision nor the Liquidation Order identify a closing date for the ELNY Restructuring Agreement. Until that date, the Receiver is directed to continue full payment of all benefits for all ELNY contracts. The Court will retain subject matter jurisdiction over the Restructuring Agreement and ELNY successor company, Guaranty Association Benefits Company (GABC).

The ELNY Liquidation Order requires that all claims against ELNY must be presented to the Receiver within four months of ELNY's Liquidation Date. However, all ELNY policyholders and "holders of Claim-Overs" who appear on ELNY's books and records as of Liquidation Date are deemed to have satisfied this requirement.

The ELNY Liquidation Order requires the Receiver to provide notice of the Order to all ELNY creditors, policyholders and other interested parties and provides a Notice Form as an Exhibit.

The ELNY Due Process Issue

Assuming presiding Judge John M. Galasso signs the Order of Liquidation and Approval of a Restructuring Agreement for Executive Life of New York (ELNY) as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, a critical issue arises:

Will the ELNY structured settlement shortfall payees have been afforded "due process" before being deprived of a percentage of their payment rights?

The Fifth and Fourteenth Amendments to the United States Constitution provide in part:

• Fifth Amendment - "No person shall be ... deprived of life, liberty, or property, without due process of law;"
• Fourteenth Amendment Section 1 - "No State shall ... deprive any person of life, liberty, or property, without due process of law."

The United States Supreme Court has interpreted these clauses as creating two doctrines: substantive due process and procedural due process.

Substantive Due Process

Substantive due process addresses whether the government has an adequate reason for taking away a person's life, liberty or property. The most obvious, and presumably adequate, reason why the ELNY liquidation hearing could result in some persons (shortfall payees) being deprived of property (percentage of their annuity payments) is that ELNY is insolvent.

ELNY does not have sufficient assets to meet all of its future payment liabilities. Because of variations in state guaranty association laws (primarily coverage caps) as well as individual ELNY contracts (size of annuities), approximately 15 percent of ELNY's annuity payees (mostly structured settlement payees) anticipate shortfalls while the other 85 percent expect to receive 100 percent of their promised future payments from ELNY's successor company, Guaranty Association Benefits Company (GABC).

Alternative Legal Recourse

Some of the structured settlement shortfall payees should have recourse against defendants and/or liability insurers who funded their structured settlement using a "buy and hold" methodology. Other structured settlement payees, whose structured settlements were funded with qualified assignments, likely would not have similar secondary payment options because First Executive Corporation (FEC), the purchaser and owner of their annuities, declared bankruptcy in 1991 and no longer exists. For an explanation of the difference between "buy and hold" funding and qualified assignments, see this prior S2KM blog post.

Although ELNY shortfall victims (including both policyholders and payees) might have a legal claim against the Superintendent, as Receiver, and his agents, including the New York Liquidation Bureau (NYLB), the Superientent's proposed Liquidation Order includes an immunity clause intended to protect the Superintendent and his agents from any legal claims that they mismanaged the ELNY Rehabilitation and are responsible for ELNY's insolvency. For additional information about the ELNY immunity issue, see this prior S2KM blog post.

Procedural Due Process

Procedural due process addresses whether the government has followed adequate procedures in taking away a person's life, liberty or property. A denial of procedural due process occurs only when there is a denial of life, liberty or property without adequate procedures. For many ELNY structured settlement payees, the probable result of the ELNY Liquidation Order and Restructuring Agreement will be to deny them of a portion of their future structured settlement payment rights. The key question for purposes of procedural due process is whether the procedures that could result in this loss of property have been "adequate".

Structured settlement payees who anticipate shortfalls and their attorneys have argued "no" - the procedures have not been adequate and therefore they anticipate suffering an unconstitutional taking of their property because of:

• Inadequate notice - ELNY's financial records indicate ELNY became insolvent as early as 2002. Former New York Governor Eliot Spitzer held a press conference in 2007 announcing "an agreement in principle" that all future ELNY payments would be paid in full and on time. The NYLB mailed letters to individual ELNY annuity payees on December 7, 2011: 1)  notifying them about the proposed ELNY Liquidation and Restructuring Agreement; and 2) alerting them of anticipated shortfalls for specific ELNY annuity contracts and a January 16, 2012 deadline for filing written objections. Responding to objections of inadequate notice, the Superintendent has argued the ELNY notice and briefing schedule balanced the need for a prompt resolution of ELNY’s deepening insolvency against the ability of affected parties to review and object to the proposed liquidation and Restructuring Agreement.
• Denial of information - ELNY shortfall victims and their attorneys claim they have received inadequate information to properly evaluate the proposed Restructuring Agreement in order to propose possible improvements and/or alternatives. The Superintendent's response: this objection does not constitute grounds for rejecting the Restructuring Agreement because the information sought has been provided or is premature and unnecessary for the Court’s consideration and approval of the Restructuring Agreement. The Superintendent further points out the objectors have not offered a competing plan. During the ELNY hearing, Judge John Galasso denied a motion by attorneys for the structured settlement shortfall victims to gain access to source materials utilized by Jack Gibson, the Superintendent's expert, who testified: 1) GABC is "financially viable"; 2) the Superintendent's proposed plan was "the best plan"; and 3) all ELNY shortfall victims will be better off under the proposed Restructuring Agreement than under a straight liquidation.
• Denial of witnesses - Judge Galasso refused to allow attorneys for ELNY shortfall payees to introduce several expert witnesses stating "they wouldn't help". Among the witnesses not permitted to testify:
  • A former Chief Executive Officer of ELNY.
  • Two expert actuaries.
  • Two forensic accountants one of whom is also an insurance fraud investigator.

In an article published in the Touro Law Review (Vol 16 page 871), titled "Procedural Due Process Claims", constitutional legal expert Erwin Chemerinsky highlights the following three-part balancing test the United States Supreme Court articulated in Mathews v. Eldridge (1976) to determine whether an individual has been denied procedural due process:

• The more important the interest to the individual, the more procedural protections the reviewing court is going to require.
• The reviewing court must balance the ability of additional procedures to increase the accuracy of the fact finding; how likely is it that the additional procedures will reduce the risk of erroneous deprivation?
• Whether the government's interest in administrative efficiency is such that the more expensive the procedures would be, the less likely it would be that the reviewing court would require them.

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

New York Liquidation Hearing - 9

Following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso is deciding whether to sign an Order of Liquidation and Approval of a Restructuring Agreement for Executive Life of New York (ELNY) as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver.

The ELNY hearings have raised a variety of issues not all of which Judge Galasso will be expected or required to address:

• Will Judge Galasso approve the ELNY Liquidation Order and Restructuring Agreement as proposed by the Superintendent? 
• Does Judge Galasso have any other options?
• Why wouldn't Judge Galasso appoint a "Special Master" to consider objections and/or alternatives to the proposed ELNY Restructuring Agreement?
• Would his denial of the proposed Order necessarily result in a "statutory liquidation" under New York law?
• What would a statutory liquidation mean for: 1) ELNY annuity policyholders and payees; 2) NOLHGA and the participating Guaranty Associations (PGAs); 3) New York Governor Andrew Cuomo and Superintendent Benjamin Lawsky; 4) the structured settlement industry?
• Would any of the ELNY structured settlement shortfall payees be better off under a statutory liquidation?

Assuming Judge Galasso does approve the proposed Order:

• Will the Liquidation Order grant legal immunity to the Superintendent, as ELNY Receiver, and his agents, including the New York Liquidation Bureau (NYLB), for their acts and omissions in managing ELNY's Rehabilitation since 1991?
• What is the legal justification for any such grant of immunity?
• Did Judge Galasso commit reversible errors when he denied various motions by attorneys representing ELNY structured settlement payees who expect to experience shortfalls under the proposed Restructuring Agreement?
• Would attorneys for the ELNY shortfall payees appeal the result?
• What would be the basis for their appeal?
• Assuming an appeal bond is required, how much would it cost?
• Assuming the ELNY shortfall payees won an appeal, what would they hope/expect to accomplish with a new hearing?
• Besides an appeal, what other options, if any, exist for ELNY structured settlement shortfall payees?

Additional issues raised, but not definitively resolved, during the ELNY hearing:

• When did ELNY become insolvent?
• Who was responsible for ELNY's insolvency?
• How many of the ELNY structured settlement shortfall annuities are funded with Qualified Assignments as opposed to "Buy and Hold" funding?
• Who are the defendants, liability insurers and/or brokers who purchased or funded ELNY annuities with anticipated shortfalls?
• Which PGAs will contribute to specific ELNY contracts?
• Which life insurance companies have offered to make voluntary contributions and/or enhancements to Guaranty Association Benefits Company (GABC)?
• Why would they contribute anything? And, why won't they contribute more?
• How much additional money would be required to make all ELNY structured settlement payees whole?
• What impact, if any, will the ELNY Liquidation have upon:
  • The structured settlement industry?
  • The existing state insurance regulatory system?
  • The insurance liquidation process in New York?

For additional S2KM reporting about the ELNY liquidation, see the structured settlement wiki.

ELNY Liquidation Hearing - 5

Attorney Edward Stone ignited a firestorm of objections yesterday from Sidley Austin attorneys representing the Superintendent of the New York State Department of Financial Services (Superintendent), as Receiver for Executive Life of New York (ELNY), when he introduced Douglas A. Hartz as an expert witness on behalf of ELNY structured settlement shortfall victims.

Hartz, a consultant, federal receiver and special deputy receiver, is the principal member of Insurance Regulatory Consulting Group (IRCG) which "focuses on insurance regulation, and the transactions and issues involving troubled or insolvent insurance companies."

According to his Curriculum Vitae, which Stone entered an an exhibit, Hartz has administered or assisted in the receivership proceedings of numerous insurers and directed the closure of estates with long-tail claims. He has also developed:

• Procedures for internal audit and accounting analysis (including reinsurance) leading to the recovery of millions of dollars in estate assets.
• A system of insurer liquidation accounting that has, in large part, served as the model for the NAIC Global Receivership Information Database financial reporting requirements.
• Claims and reinsurance tracking systems that meet fiduciary, statutory and guaranty fund requirements

Although Sidley Austin attorneys objected vociferously on the basis of both procedure (lack of notice) and substance (lack of New York liquidation expertise), presiding Judge John M. Gallaso overruled the objections and allowed Hartz to testify. Stone's direct examination of Hartz, and Sidley Austin's related objections, consumed the entire ELNY court hearing on Monday.

Stone's examination of Hartz focused on the methodology Hartz would utilize and the source materials he would require if Hartz were asked to develop an alternative restructuring plan for ELNY. Although the Sidley Austin attorneys objected, arguing lack of relevance, Judge Galasso also permitted Stone to introduce ELNY financial statements from 1989 which showed that ELNY contributed $40 million to capital and surplus and had cash and other liquid assets of close to $600 million in 1989.

Strategic Objective

Following yesterday's hearing, Stone provided S2KM with this exclusive statement:

"My strategic objective is to get our expert (Hartz) to convince the judge to consider whether an alternative restructuring plan for ELNY is feasible and whether such a plan is more fair and equitable than the Superintendent's proposed plan. The Superintendent's attorneys keep saying 'it can't be done'. But they refuse to show us the existing (ELNY) payment schedules or the proposed (GABC) payment schedules. To propose an alternative plan on behalf of the shortfall victims, my experts and I need to see those payout schedules and related source materials.

"After reviewing those payment schedules and source materials, we want the opportunity to propose an alternative plan that considers some combination of the following: 1) converting (discounting) large deferred lump sum payments to up front cash; 2) converting life contingent payments to period certain payments; 3) introducing a third party company or liquidation trustee to purchase and/or manage ELNY. The best way to restructure ELNY is to make all payments finite - and get rid of the perpetual ELNY machine.

"We object to any judicial grant of immunity for the Superintendent, in his role as ELNY's Receiver, or to his agents including the New York Liquidation Bureau (NYLB). ELNY was solvent when the Superintendent and the NYLB assumed management responsibilities for ELNY in 1991. We want an independent third party to be able to pursue causes of action on behalf of the ELNY estate. We intend to submit an expanded witness list with affidavits on Tuesday."

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