Beyond Structured Settlements

SSP 2015 Annual Conference - 1

The U.S. structured settlement industry consists of three national professional associations - the National Structured Settlement Trade Association (NSSTA), the Society of Settlement Planners (SSP) and the National Association of Settlement Purchasers (NASP) - whose political differences frequently obscure their shared existential interests and, until recently, have restricted their opportunities for mutually-beneficial collaborative education.

NSSTA's 2014 Fall Educational Conference highlighted the issues of "generational change and challenges" and served as a precursor for improved association relationships by featuring SSP President Neil Johnson and NASP President Patricia LaBorde as guest speakers.

The SSP 2015 Annual Conference, to be held March 29-31 in Las Vegas will substantially expand this new educational chapter of industry dialogue by hosting an unprecedented number of association leaders as speakers. Among the highlights will be a repeat engagement of NSSTA's 2014 "Presidents' Panel" featuring current NSSTA President Kevin Silo and SSP President Johnson. Titled "Collaboration for the Greater Good", and moderated by Patrick Hindert, this panel promises to "doubledown" on solutions for achieving industry unity.

Additional association leaders scheduled to speak at the SSP Conference:

• Eric Vaughn - NSSTA's Executive Director is expected to emphasize the shared interests of all structured settlement professionals including plaintiff and defense representatives as well primary and secondary market participants. These shared interests being the protection and preservation of IRC sections 104(a)(2) and 130 plus the future growth of the primary market.
• Earl Nesbitt - NASP's Executive Director will be joined by Rhonda Bentzen, SSP 2015 Conference Chairperson and secondary market expert, to follow-up SSP's groundbreaking 2014 secondary market panel which first opened educational dialogue between primary and secondary structured settlement professional associations.
• Jack Kelly - NASP's lobbyist, who also spoke at last year's SSP conference, will provide his perspective on political changes taking place in Washington D.C. and how they might impact structured settlements.
• Kevin Urbatsch - The National Director of the Academy of Special Needs Planners (ASNP) recently introduced and helped organize ASNP 12-part "Settlement Planning" webinar series. In Las Vegas, Urbatsch will address recent attacks by the Social Security Administration on litigation-generated special needs trusts.
• Wendie Howland - Editor of the American Association of Nurse Life Care Planning (AANLCP) Journal, Ms. Howland will discuss settlement planning from a life care planning perspective. She will highlight the increasing role of life care planners in allocating damages for Medicare set-asides (MSAs) and as a result of the Affordable Care Act. In addition, she will advise structured settlement consultants and settlement planners how to better utilize life care plans to improve their own work product.

Additional SSP speakers and topics:

• Joseph Dehner - A prominent international attorney and co-author of the legal textbook "Structured Settlements and Periodic Payments", Dehner will discuss "Off-Shore Funding Companies" and their increasing role in the structured settlement market.
• Joseph DiGangi, Shannon Fitzgerald and Phillip Kruse - this panel of experts, moderated by Patrick Hindert, will analyze the application of "fiduciary standards" to settlement planning and settlement planners. Their presentation will feature a case study, review SSP's Standards of Practice, discuss NAIC Model Regulations, consider the 2006 Saltzburg/Chemerinsky memos, and suggest best practices.
• Edward Stone - A legal representative for many Executive Life of New York short-fall victims who continues to seek restitution for his clients, Stone will offer his opinion as to whether some settlement planners remain at risk in the ongoing ELNY litigation.
• Joseph Tombs - A lawyer, certified financial planner and former SSP President who helped organize SSP's Registered Settlement Planner (RSP) certification program, Tombs will outline his recommended process for developing a settlement plan.
• Jack Meligan - Also a former SSP President as well as a recognized settlement planning expert, Meligan will provide an MSA update with his perspective on how MSAs fit into settlement planning.
• Jeremy Babener - A prodigious structured settlement author and industry tax expert who also serves as Chairman of SSP's Legal Committee, Babener will introduce SSP's new website and discuss new SSP Legal Committee initiatives.
• Bryn Poland - A leading Qualified Settlement Fund (QSF) expert, who has served as attorney, trustee and/or administrator for numerous QSFs, Ms Poland will explain how and why the multi-claimant QSF market is growing rapidly despite the single claimant pullback within the structured settlement market.

For S2KM's reporting about prior structured settlement and settlement planning professional conferences, see the structured settlement wiki.

Structured Settlements 2014 - Primary Market

The United States structured settlement primary market has continued to slowly recover from its 2012 nadir during 2014 with first nine months annuity sales of approximately $3.9 billion resulting from 19,778 cases (as reported by Melissa Evola) a premium increase of 3% compared to $3.73 billion for the same period in 2013.

Total projected 2014 annual premium of $5.28 billion, however, is expected to fall substantially short of the historic 12 month industry apogee ($6.2 billion in 2008) after consistently averaging close to $6 billion annually from 2001-2007. For estimated annual structured settlement annuity sales since 1976, see the structured settlement wiki.

Adding these 2014 third quarter results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru September 30, 2014:

• Total annuity premium: $143 billion.
• Total structured settlement cases: 822,000
• Average annuity premium: $174,000.

Nine month 2014 sales results for individual structured settlement annuity providers (per Evola's report) which are members of the National Structured Settlement Trade Association (NSSTA) plus the rounded increase (+) or decrease (-) from comparable 2013 results:

• Berkshire Hathaway - $1.113 billion (+ $79 million)
• MetLife - $678 million (+ $114 million)
• Pacific Life - $553 million (- $47 million)
• Prudential Life - $463 million (+ $90 million)
• Liberty Life - $430 million (+ $21 million)
• Amgen/USL - $378 million (- $57 million)
• New York Life - $206 million (+ $14 million)
• Mutual of Omaha - $40 million (- $10 million)

Notes

• Allstate and John Hancock, which have departed the structured settlement market, sold a combined $79 million of structured settlement annuities during the first nine months of 2013.
• To better understand their clients' "perceptions, utilization and understanding of the value of structured settlement consultants" (and presumably to improve industry sales), NSSTA has retained CLM Advisors to conduct separate marketing surveys of property & casualty 1) senior claims executives and 2) claims adjustors as well as 3) plaintiff attorneys. The results of Phases 1 and 2 were presented at NSSTA 2014 educational conferences.

Low Interest Rates

Many structured settlement industry participants attribute decreased sales to low interest rates. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981. Here are several historic average annual rates for 30 year Treasury securities (source: U.S. Department of the Treasury):

• 2014 (as of December 5) - 2.97%
• 2013 - 3.96%
• 2012 - 2.95%
• 2011 - 3.91%
• 2010 - 4.25%
• 2009 - 4.08%
• 2008 - 4.28%
• 2007 - 4.84%
• 2000 - 5.94%
• 1990 - 8.61%
• 1980 - 11.27%

Submarkets - Two noteworthy submarkets are incorporated within the structured settlement annuity production numbers set forth above:

• Non-Qualified Assignments
  • Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC section 130.
  • Unlike qualified assignees, U.S.-based, non-qualified assignees are subject to income tax on the amount they receive from whatever entity assigns (or more accurately "delegates") periodic payment obligations for claimants who do not qualify for tax exclusions under IRC section 104(a)(1) or (2) - such as employment discrimination cases or deferred attorney fees.
  • Despite the promise of a large potential "non-qualified assignment" market, reported sales on non-qualified structured settlement annuities by NSSTA members have declined since 2012.
  • Reported nine month 2014 non-qualified structured settlement sales totaled $113.2 million compared with $124.3 million in 2013.
• Medicare Set-Asides
• A Medicare set-aside (MSA) is an administrative and funding mechanism utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute.
• Although Federal law does not define MSAs, or mandate specific types of MSA funding mechanisms, CMS (the responsible federal agency) has established certain basic requirements for workers compensation MSAs (WCMSAs).
• No similar rules exist for liability MSAs. In October 2014, CMS withdrew a Notice of Proposed Rulemaking (NPRM) which was expected to address liability MSAs.
• Under current CMS rules, structured settlement annuities have an inherent cost advantage over lump sum alternatives for funding WCMSAs resulting from the method CMS prescribes for calculating present values.
• Based upon industry sources, S2KM has previously estimated that eight (8%) percent of 2013 structured settlement premium and 24 percent of 2013 structured settlement annuities were attributable to WCMSAs. Under current CMS rules, these numbers could increase in 2014.

Product Developments - Significant structured settlement product developments occurred during 2014 including:

• Equity-indexed Annuity Rider - Pacific Life has obtained a Private Letter Ruling (PLR-143928-13) from the IRS approving favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the performance of the Standard & Poors 500 Index. Although life insurance companies first offered equity-indexed annuities during the mid-1990's to compete with indexed mutual funds, Pacific Life's ILAAPR represents the first U.S. equity-indexed structured settlement option. To achieve market success, structured settlement consultants must convince settlement recipients that potentially higher long-term ILAAPR payouts (based upon S&P 500 performance) will offset lower starting payments compared with traditional structured settlement annuities.
• Hardship Conversion Feature - PLR-143928-13 also approves favorable tax treatment for a structured settlement annuity with a commutation pursuant to a Notice of Hardship Conversion which the PLR describes as follows: "The Notice of Hardship Conversion provides that the Assignee will consider a request from Claimant to convert future guaranteed structured settlement payments to an immediate lump sum payment, in certain qualifying hardship circumstances, if the request is approved by a court or applicable administrative authority pursuant to a qualified order under § 5891(b)(2). The qualifying hardship circumstances are financial hardship due to medical expenses, expenses related to a terminal illness, home improvement expenses for handicap accessibility, job loss, loss of home, and the same type of expense for the payee’s dependents. Assignee expressly represents that it reserves the right to decline any hardship conversion request and that it will consider each hardship conversion request on a case-by-case basis. In addition, Assignee represents that it will not allow any hardship conversion in the first year after a qualified assignment."
• Periodic Payment Reinsurance - Although first offered in 1982, Berkshire Hathaway re-introduced its periodic payment reinsurance product during 2014.  Issued by National Indemnity Company, a Berkshire property and casualty company, this product is available for both tax-free periodic payments [under IRC 104(a)(1) and/or (2)] and non-IRC 130 tax-deferred periodic payments. In many respects analogous to traditional structured settlements, Berkshire asserts multiple advantages for its reinsurance product. These include greater financial strength than other structured settlement product providers plus higher interest rates because, unlike life insurers, National Indemnity's investments are not concentrated in bonds. Unlike traditional structured settlements, however, periodic payment reinsurance does not qualify for guarantee fund coverage and cannot be used by self-insureds. For more detailed analysis of periodic payment reinsurance as well as other structured settlement financing alternatives, see Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Primary Market Challenges - Reporting on NSSTA's 2014 Fall Educational Conference, S2KM summarized the following challenges currently facing the structured settlement primary market:

• Generational transition
• Stagnant growth
• Polarized and complex overlapping market(s)
• Alternative business models
• Increasing competition
• Changing success factors

In subsequent blog posts, S2KM will address 2014 structured settlement developments related to the secondary market, personal injury settlement planning and the ELNY liquidation. For prior S2KM annual reporting, see the structured settlement wiki.

Potential "Game Changing" S2 PLR

The Internal Revenue Service (IRS) has issued a Private Letter Ruling (PLR-143928-13) dated August 29, 2014 approving favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the performance of the Standard & Poors 500 Index which also includes the possibility of a commutation by the Claimant pursuant to a Notice of Hardship Conversion. A copy of the PLR is posted on the structured settlement wiki.

Although PLRs do not identify requesting taxpayers, knowledgeable industry sources have identified Pacific Life as the product provider. A PLR is directed only to the taxpayer requesting it and may not be used or cited as precedent.

Pacific Life previously announced its Index-Linked Structured Settlement Adjustment Rider and has published a product brochure describing its features and benefits. The PLR describes the following three step formula by which Pacific Life adjusts applicable periodic payments on each annual payment anniversary:

• "Step 1 determines the index return, which equals the ending S&P 500 Index Price minus the starting S&P 500 Index Price divided by the starting S&P 500 Index Price.
• "Step 2 determines the adjustment, which is the lesser of the Index Return or [a percentage cap]. If the Index Return is less than or equal to zero, the adjustment will be zero.
• "Step 3 determines the annuity payment amount."

As to the Index-Linked feature, the PLR concludes:

• The periodic payments "are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of the S&P 500 Index"; and
• The structured settlement indexed annuity "will not fail to qualify as a qualified funding asset under § 130(d) solely by reason of annuity’s variable payments."

For additional information about equity-indexed annuities and the Pacific Life Index-Linked Adjustment Rider, see this prior S2KM blog post.

Hardship Conversion Feature

The Hardship Conversion feature potentially represents a structured settlement industry "game changing" development. With the exception of Allstate and Symetra, each of which has exited the structured settlement primary market, no annuity provider, to S2KM's knowledge, offers its structured settlement annuitants a secondary market option.

Correction (9/3/2014) - S2KM has confirmed, subsequent to publication of this blog post, that Berkshire Hathaway does on occasion "accelerate" periodic payments under a court order upon request by Berkshire Hathaway structured settlement payees.

Although Pacific Life has not previously announced or offered a structured settlement Hardship Conversion, industry sources have informed S2KM they anticipate Pacific Life will begin offering a Hardship Conversion for all of its structured settlement annuities beginning in 2015.

The PLR describes the Hardship Conversion feature as follows:

"The Notice of Hardship Conversion provides that the Assignee will consider a request from Claimant to convert future guaranteed structured settlement payments to an immediate lump sum payment, in certain qualifying hardship circumstances, if the request is approved by a court or applicable administrative authority pursuant to a qualified order under § 5891(b)(2). The qualifying hardship circumstances are financial hardship due to medical expenses, expenses related to a terminal illness, home improvement expenses for handicap accessibility, job loss, loss of home, and the same type of expense for the payee’s dependents. Assignee expressly represents that it reserves the right to decline any hardship conversion request and that it will consider each hardship conversion request on a case-by-case basis. In addition, Assignee represents that it will not allow any hardship conversion in the first year after a qualified assignment."

As to the Hardship Conversion feature, the PLR concludes:

• "The possibility of a commutation by Claimant pursuant to the Notice of Hardship Conversion will not affect whether the structured settlement assignment satisfies the requirements of a qualified assignment under § 130(c);" and
• "The annuity purchased by Assignee will not fail to be a qualified funding asset under § 130(d) by reason of the Notice of Hardship Conversion."

ADDENDUM (added 9/3/2014): Following publication of this blog post, multiple readers have asked S2KM to further explain why PLR-143928-13 might prove to be a structured settlement "game changing" development. 

• As to the equity indexed-linked feature, see S2KM's prior blog post titled "Equity-Indexed Structured Settlements" which concludes: "The moribund U.S. structured settlement primary market needs a jump-start. Pacific Life's new equity-indexed structured settlement rider represents a welcome innovation and hopefully will become one catalyst for future market growth."
• As to the "Hardship Conversion" feature, see:
• Robert Wood's 2006 article: "Structured Settlements: Factor vs. Commute?" which helps to explain why most structured settlement annuity providers, prior to PLR-143928-13, have not offered factoring or commutation products and services. 
• S2KM's review of Robert Wood's article.

Settlement Annuities

The introduction of two non-traditional "structured settlement" products underscores the expanding role of annuities in personal injury settlement planning (settlement planning) but also raises fundamental questions about suitability, due diligence and industry education.

Pacific Life recently announced a new structured settlement product called an "Index-Linked Annuity Payment Adjustment" (ILAPA). Investment performance and annuity payments will be linked to the Standard & Poor's 500 Composite Stock Price Index, according to structured settlement brokers who participated in Pacific Life's online product introduction. Although Pacific Life hopes to launch its new product by April 1, 2014, the launch date depends on whether and when Pacific Life receives a favorable IRS Private Letter Ruling.

Havelet Assignment Company (Havelet), an independently owned company based in Barbados, is now offering non-qualified (under IRC 130) product plans for claimants or contingent fee attorneys to defer receipt of their settlement award or fee on a pre-tax basis. The plans are funded with investment portfolios, selected by the claimants or attorneys, which Havelet "wraps" with variable annuities. Havelet must issue a private placement memorandum to each prospective client. Investment performance is not guaranteed. Minimum investment funding is $500,000.

Outside of the settlement planning market, equity-indexed and variable annuities represent increasingly popular investments. A March 12, 2014 New York Times article titled "Annuities Not for Everyone, but They Have a Place" cites the following LIMRA statistics: "Variable and indexed annuities accounted for 80.8 percent of the $688.2 billion of annuities sold in the three years through 2013, compared with 74 percent in the previous seven years."

By comparison, estimated structured settlement annuity premium totaled $5.13 billion in 2013 (of which $164.9 million represented non-qualified structured settlement annuity premium) and $139.5 billion from 1975 through 2013.

Based upon the most recent Towers Watson Annual Study of United States Tort Cost Trends, and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates more than $160 billion per year of United States tort costs have represented payments to personal injury victims and their attorneys since 2006.

Pacific Life and Havelet's new product offerings add to the growing list of settlement planning products which S2KM noted in its blog report about the AAJ 2014 Winter Meeting. Additional marketing feedback S2KM received from structured settlement brokers who exhibited at the AAJ meeting:

• Structured settlement annuities are one of several product offerings (including single premium immediate annuities (SPIAS), fixed-indexed annuities and managed money) some leading structured settlement brokers are already selling.
• At least one leading structured settlement brokerage company sold more SPIAs and fixed-indexed annuities combined during 2013 than structured settlement annuities - and uses SPIAS almost exclusively to fund Medicare Set-Aside Arrangements (MSAs).

S2KM's AAJ blog report highlights fundamental questions about these expanding product offerings, the resulting "blended products" and emerging business models.

The Pacific Life and Havelet products raise additional issues which S2KM will address in subsequent blog posts:

• Are equity-indexed and off-shore variable annuity products suitable for personal injury victims?
• What product suitability standards should apply?
• What qualifications are needed to sell these products - and/or to perform due diligence on behalf of personal injury claimants and plaintiff attorneys?
• Are structured settlement and settlement planning professional associations providing their members with appropriate educational programs to understand settlement annuities and address related suitability and due diligence issues?

Primary Market Update

Structured settlement primary market annuity sales increased approximately seven (7%) percent to $5.134,380,855 in 2013 (compared with $4,819,124,617 in 2012) according to industry estimates compiled and recently published by Melissa Evola. Total 2013 structured settlement cases also increased to 26,533 from 25,038 a year earlier for an average case premium of $193,495.

The 2013 annual premium totals, however, still fall substantially short of the historic 12 month industry high ($6,226,578,725 in 2008) after consistently averaging close to $6 billion annually from 2001-2007.

Adding these 2013 results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru 2013:

• Total annuity premium: $139.5 billion.
• Total structured settlement cases: 802,000
• Average annuity premium: $174,000.

Berkshire Hathaway, which re-entered the structured settlement market in 2011 following a multi-year hiatus, assumed primary market leadership by generating $1,424,306,831 of structured settlement annuity premium (28% of the industry total) during 2013.

With announced departures of Allstate and John Hancock during 2013, the U.S. structured settlement market now consists of eight annuity providers. 2013 sales results for other structured settlement annuity providers (per Evola's report) plus the rounded increase (+) or decrease (-) from comparable 2012 results:

• Pacific Life - $848,725,000 (+ $11.7 million)
• MetLife - $726,000,000 (+ $62 million)
• Amgen/USL - $587,367,753 (+ $61.3 million)
• Liberty Life - $558,106,000 (+ $147.3 million)
• Prudential Life - $548,700,000 (- $86.7 million)
• New York Life - $275,253,601 (- $47.5 million)
• Mutual of Omaha - $86,598,027 (+ $29 million)

Evola's 2013 compilation also reports an annual decrease in annuity premium for non-qualified structured settlement assignments (from $170.1 million in 2012 to $164.9 million in 2013) as a portion of the overall structured settlement numbers.

Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC sections 130 and 104(a)(1) or (2) including deferred attorney fees. Despite earlier industry projections of a large and growing market, only two structured settlement annuity providers (AmGen and Liberty) currently offer non-qualified assignments.

Independent industry sources further report a substantial shift in recent structured settlement premium with increasing sales to fund workers compensation Medicare set-aside arrangements (WCMSAs). For S2KM's most recent analysis of structured settlements and WCMSAs, see this prior blog post.

Many industry observers continue to view the United States structured settlement primary market as a strategic, underperforming segment of the larger personal injury settlement planning market. S2KM looked at some of the related issues in a three-part 2013 blog series titled "Growing the Primary Market"

• Part 1 - Daniel Durbin's survey of primary market leaders.
• Part 2 - NSSTA and NASP 2013 Fall Conferences.
• Part 3 - NSSTA's marketing boot camp - "What business are we in?"

Anti-Assignment Restrictions

Structured settlement transfers require that payment rights be assignable. Otherwise, transfer (factoring) companies have no direct right against the structured settlement obligor or annuity issuer.

Prior to enactment of IRC 5891 and the state protection acts, the validity and enforceability of structured settlement transfers typically depended upon three basic issues:

• Did the structured settlement documentation clearly forbid assignments?
• If yes did state law override the anti-assignment provision?
• Or, did the parties to the structured settlement waive the anti-assignment provision?

Although IRC 5891 and state structured settlement protection acts set forth procedures and conditions allowing transfers of structured settlement payment rights, courts continue to enforce anti-assignment restrictions when parties to the original structured settlement object.

Most transfer courts, however, have held that the anti-assignment restrictions are not self-executing and have granted transfers when no one objects. Objections to transfers by obligors and annuity issuers have become increasingly rare since the enactment of IRC 5891 and the state protection acts.

The Brenston Case

Settlement Funding v. Cathy Brenston represents a high profile and controversial case where an Illinois Appellate Court overruled prior state court approval of structured settlement transfers based upon anti-assignment restrictions - even though the parties to the original structured settlement waived the anti-assignment provisions. The case currently is subject to a petition for review by the Illinois Supreme Court.

In the Brenston case, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, determined Brenston’s settlement agreement contained an enforceable anti-assignment provision. As a result, the panel decided the state court, which had previously approved requested transfers, had a duty to enforce the anti-assignment provision and “it had no authority under the Act to approve” the transfer petitions.

In other words, despite the existence of the Illinois transfer statute, the Appellate panel declared court orders approving assignments to be "void ab initio", as a matter of Illinois law, whenever structured settlement documentation purports to limit assignability.

If the Illinois Supreme Court upholds the Brenston appellate decision, or decides not to review it, the case would render the Illinois transfer statute "a practical nullity", according to an Amicus curiae brief filed by the National Association of Settlement Purchasers (NASP).

"Without the certainty and finality of a court order, there is no viable secondary market," the NASP brief states. "Because every structured settlement contains boilerplate language that purports to limit or restrict assignability, every Illinois court approved transfer could be subject to challenge at any time."

Public Policy

The validity of assignments, including structured settlement transfers, depends in part on public policy issues. Transfers arguably undermine the fundamental purpose of structured settlements - to provide spendthrift protection for injury victims and their dependents.

This public policy perspective is captured in the statutory history of the structured settlement tax exclusion. To qualify, IRC 130 provides in part "periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments"

Over time, many structured settlement documents have expanded this IRC 130 prohibition to include "transferred, assigned, mortgaged or encumbered" or words to that effect. (emphasis added). Although anti-assignment provisions are incorporated into many state workers compensation statutes, they are not specifically required by IRC 130, I04(a)(1) or 104(a)(2).

Factoring advocates offer competing public policy arguments to support structured settlement transfers. Unanticipated needs or poorly constructed settlement plans may necessitate immediate cash and outweigh other public policy considerations. Factoring advocates also criticize the "paternalistic" viewpoint of factoring opponents. They argue the structured settlement recipient, as owner of payment rights, should have the right to decide whether to transfer or assign those rights.

Many other statutes either permit or favor assignment of payments rights. These statutes include the 48 state structured settlement protection acts, IRC 5891, and recent revisions to UCC Article 9 as well as the Restatement (Second) of Contracts. Unfortunately, the authors of revised UCC Article 9 did not carefully consider the impact of their revisions on structured settlement transfers which has resulted in conflicting statutory language and interpretations among various states.

Best Practices

The National Structured Settlement Trade Association (NSSTA) amended its Model Qualified Assignment and Release Agreement following the enactment of IRC 5891 and the Model State Structured Settlement Protection Act. Paragraph 7, titled "Acceleration, Transfer of Payment Rights", now provides:

"None of the Periodic Payments and no rights to or interest in any of the Periodic Payments (all of the foregoing being hereinafter collectively referred to as “Payment Rights”) can be

i. Accelerated, deferred, increased or decreased by any recipient of any of the Periodic Payments; or

ii. Sold, assigned, pledged, hypothecated or otherwise transferred or encumbered, either directly or indirectly, unless such sale, assignment, pledge, hypothecation or other transfer or encumbrance (any such transaction being hereinafter referred to as a “Transfer”) has been approved in advance in a “Qualified Order” as defined in Section 5891(b)(2) of the Code (a “Qualified Order”) and otherwise complies with applicable state law, including without limitation any applicable state structured settlement protection statute.

No Claimant or Successor Payee shall have the power to effect any Transfer of Payment Rights except as provided in sub-paragraph (ii) above, and any other purported Transfer of Payment Rights shall be wholly void. If Payment Rights under this Agreement become the subject of a Transfer approved in accordance with sub-paragraph (ii) above the rights of any direct or indirect transferee of such Transfer shall be subject to the terms of this Agreement and any defense or claim in recoupment arising hereunder." (NSSTA's emphasis).

Brenston Status

Peachtree Settlement Funding, the transfer company involved in the Brenston case, has filed a petition for review with the Illinois Supreme Court. The Illinois Supreme Court will likely act on Peachtree's petition by December, although a decision whether to review could be delayed until February, according to NASP Executive Director Earl Nesbitt who reported on the case during the NASP 2013 Annual Conference. Assuming the petition for review is granted, Nesbitt stated a final decision is not expected for nine to 12 months.

Brenston Issues

NASP President Patricia LaBorde characterized the Brenston case as "troubling" for several reasons during a recent S2KM interview:

• The Appellate Court decision challenges the finality of transfer orders. "No one wants litigation over closed cases."

• The only issue on appeal was timeliness. The Appellate Court expanded the issues to discuss anti-assignment restrictions.

• The case had settled before the appeal. Both Brenston and Settlement Funding filed motions to stay the appeal which the Appellate Court ignored.
• The trial judges who approved the transfers were experienced with structured settlement transfers and aware of existing anti-assignment clauses. They never mentioned or suggested they were defrauded.
• The Appellate Court ignored waiver language and references to IRC 5891 which appeared in some of the original structured settlement documents.
• All of the relevant parties had waived the anti-assignment provisions.
• Unlike Brenston, all of the cases cited by the Appellate Court supporting enforcement of anti-assignment restrictions involved objections by structured settlement obligors or annuity providers.
• Brenston had other potential remedies against Settlement Funding including a separate cause of action for fraud.
• The Brenston Appellate Court decision probably puts a hold on transfers in Illinois until the case is appealed or the Illinois transfer statute is amended.

Additional Resources

• For more detailed analysis concerning anti-assignment restrictions, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• For the results of prior California transfer cases involving anti-assignment and finality of judgment issues, see - Fresno County Factoring Cases:
  • Report 1
  • Report 2
  • Report 3

NASP 2012 Annual Conference - 2

Celebrating the 10th Anniversary of the enactment of IRC 5891, the National Association of Settlement Purchasers (NASP) hosted its 2012 Annual Conference last week in New Orleans.

The conference featured an ambitious and successful educational program highlighting prior NASP accomplishments and focusing on emerging issues that impact both the primary and secondary structured settlement markets. For the first time in NASP's history, conference attendance was open to primary market participants.

S2KM previously published an introductory blog post identifying NASP 2012 conference speakers and topics and providing links to S2KM reports from previous NASP conferences. Subsequent S2KM blog posts will recap speaker presentations.

This blog post offers S2KM's general observations and impressions of some of the broader structured settlement industry issues based upon NASP's 2012 conference.

Why Has Factoring Flourished?

Compared with the primary structured settlement market, both NASP and the secondary market appear to be flourishing. What explains this paradoxical success?

The groundwork for secondary structured settlement market success began in 1997 when NASP launched a strategic lobbying initiative resulting in the enactment of IRC 5891 and NCOIL's Model State Structured Settlement Protection Act (Model Act).

Although neither legislative development would have been possible without support from the National Structured Settlement Trade Association (NSSTA), the lobbying agendas of the two associations were markedly different. Ultimately NASP prevailed on several critical issues including:

• "Best interest" standard vs. NSSTA's preferred "financial hardship" standard.
• Denying annuity owners and providers the right to veto proposed transfers.
• Eliminating maximum discount rates.

In addition to NASP's lobbying success, NASP's members have achieved considerable, and controversial, marketing success utilizing aggressive television advertizing and sophisticated Internet techniques. As one measure of this marketing success, the primary market now claims the secondary market has "stolen the structured settlement brand".

Both the primary and the secondary structured settlement markets were devastated by the 2008 financial crisis which:

• Temporarily shut down asset-backed securities markets including securities backed by structured settlement payment rights.
• Created an industry liquidity crisis which resulted in:
  • J.G. Wentworth, the largest secondary market company, entering bankruptcy in 2009.
  • AIG, the largest primary market company, receiving a financial bailout from the U.S. government in 2008 and 2009.
  • Both Wentworth and AIG have subsequently recovered and regained their respective market leadership roles.
• Reduced interest rates to historic low levels causing a substantial reduction in primary market sales beginning in 2009.

As of the 2012 second calendar quarter, the secondary structured settlement market appears to have fully recovered from the 2008 financial crisis. The primary market has not yet recovered. Part of the reason is that interest rates, whether high or low, affect the primary and secondary structured settlement markets differently.

Other reasons, however, also help explain the growing success of the secondary structured settlement market.

• Structured settlement transfers improve the structured settlement product by addressing a critical need for many structured settlement recipients - a liquidity need that was not properly addressed in the original settlement plan or, alternatively, resulted from unanticipated developments.
• Continuing strong demand exists among some institutional and individual investors for recycled structured settlement payment rights.

Linked Markets - Same Customers

Having failed politically to end structured settlement factoring, NSSTA, and many annuity providers, have adopted alternative strategies which appear to be misguided attempts to create obstacles and impede the growth of the secondary structured settlement market.

NSSTA's 2006 bylaw amendments represent one such example. As NSSTA explained to its members: "because [the secondary market] activities [prohibited by the amendments] are inconsistent with the membership qualifications, engaging in those activities can lead to suspension or expulsion from membership and to denial of new membership applications." (emphasis added).

The increasing "administrative fees" annuity providers charge factoring companies, either as a condition to avoid "opposed transfers" or to allow transfers of life contingent payment rights, represents another example. Ultimately, the structured settlement recipients who transfer payment rights pay for those administrative fees which, for some annuity providers, now represent a new profit center.

How do these types of actions help the structured settlement customer or improve the structured settlement industry?

Both NSSTA and NASP, and their members, share a common existential interest in IRC 104(a)(2) and 130. Both NSSTA and NASP recognize the anticipated re-writing of the U.S. tax code expected to begin following the 2012 Presidential election represents a threat to those tax sections.

Arguably, the existence of IRC 5891, which not only links to IRC 104(a)(2) and 130, but also to the 48 state structured settlement protection statutes, has both expanded and strengthened the U.S. structured settlement legislative framework.

Having collaborated to help enact IRC 5891 and the NCOIL Model Act, shouldn't NSSTA and NASP also collaborate to defend and maintain IRC 104(a)(2) and 130 - and to identify additional shared interests for structured settlement industry improvement and growth?

Improving Industry Education

In his opening comments at the NASP 2012 conference, outgoing NASP President Matthew Bracy challenged attendees to make the structured settlement transfer business better: "better in the marketplace, better in the courts, and above all better for the customers who so need the service this industry provides."

One way NASP "walks the walk" of secondary market improvement is by inviting its critics to speak at NASP conferences. NASP challenges these critics not only to address secondary market problems but also to recommend improvements.

Critics who have spoken at past NASP conferences include: Jack Meligan, Stephen Harris, Peter Vodola, John Darer, and Richard Risk. Other critics, including NSSTA leaders, have been invited but have declined to participate.

Jan Schlichtmann, keynote speaker for the 2012 NASP conference, began by stating: "I don't like your advertizing". He then praised NASP for inviting and encouraging criticism to better itself and the secondary structured settlement market.

NSSTA also has permitted criticism as part of its educational programs. Examples include: Joseph DiGangi (see: "Settlement Consulting") and Dan Clark (see: "SSP and NSSTA 2010 Annual Meetings"). Whenever NSSTA has addressed strategically important and/or controversial issues (egs. IRC 468B and IRC 5891), however, NSSTA members generally hear only "politically correct" speakers and perspectives.

Because of the importance of issues such as qualified settlement funds (QSFs) and the secondary market for the future of structured settlements, NSSTA members increasingly must rely upon non-NSSTA educational programs and educational resources to interact with the people and ideas challenging and changing the structured settlement industry.

During 2012, these educational programs have included: the SSP conference, the ASNP conference, the Risk settlement planning practicum and the QSF symposium.

Fortunately for NSSTA members, as well as members of the Society of Settlement Planners (SSP), NASP has now opened an entirely new educational forum to challenge and expand their understanding of structured settlements.

ELNY Periodic Payment Obligations

More than 1400 structured settlement annuity payees are expected to suffer payment shortfalls under the Executive Life of New York (ELNY) Liquidation Plan approved by New York State Supreme Court Judge John Galasso on April 16, 2012. The average individual shortfall is estimated to exceed $600,000 present value.

Under what circumstances, if any, will defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?

Recent Motion

This issue was highlighted in a recent Motion by liability insurers asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. Judge Galasso denied the Motion on July 23, 2012.

The Motion attempted to distinguish two types of structured settlement funding alternatives ("buy and hold" vs. qualified assignments). "Buy and hold" annuities, according to the Motion, "are those whereby the underlying insurer retained, or held the liability for future payments, and funded that liability through its ownership of a qualified funding asset, or annuity."

In contrast, the Motion states, "where a structured settlement includes a qualified assignment, the defendant and its liability insurer are fully released from future liability - which liability is assumed by the assignee, here, First Executive Corporation." (emphasis added). Of course, one of the problems for all ELNY stakeholders is that First Executive Corporation ceased to exist in 1991.

As S2KM has previously written, those "suggestions" and/or "assumptions" are not necessarily or universally true. Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.

Three Funding Choices

As more fully explained in Section 3.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J): with a structured settlement, each defendant and/or liability insurer has three choices regarding its obligation to fund future periodic payment obligations to the claimant (1) to have no obligation; (2) to assume or share the obligation; or (3) to assume and then transfer the obligation without recourse. In general:

• "No obligation" means either a claim is paid on a lump sum basis or a structured settlement occurs and all parties agree that the particular defendant or liability insurer shall have no duty to make any future periodic payments.
• “Assume the obligation” means that a particular defendant or liability insurer ("obligor") assumes a legal obligation to pay future periodic payments. This obligor may be solely, jointly, or jointly and severally liable for the payments and, by assuming the obligation, accepts certain risks. One such risk is the potential insolvency of the financing company (e.g. ELNY).
• "Transfer the obligation" means "novation" as defined in Section 280 of the Restatement (Second) of Contracts (Restatement): "A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty." Comments to Section 280 further provide:
  • "Effect of novation. A novation discharges the original duty, just as any other substituted contract does, so that breach of the new duty gives no right of action on the old duty.
  • "Consideration. A novation is subject to the same requirements as any other contract, including that of consideration.... [C]onsideration to support the discharge of the original duty can usually be found in the promise to undertake a new duty….Assent of the obligee of the original duty and of the obligor of the new duty is always necessary."
  • "Substitution of obligor. ….[A] mere promise by a third party to assume the obligor’s duty, not offered in substitution for that duty, does not result in a novation, and the new duty that the third party may owe to the obligee as an intended beneficiary is in addition to and not in substitution for the obligor’s original duty."
  • Illustration: "A owes B $1000. B promises C that he will discharge the debt immediately if C will promise to pay him $1000. Intending to benefit A, C so promises. There is a novation under which B’s and C’s promises are consideration for each other, and A’s duty to pay B is discharged. A is the intended beneficiary of B’s promise …and can by disclaimer render the transaction, including the discharge, inoperative from the beginning."

Qualified Assignment

The most common method for transferring a structured settlement obligation is a "qualified assignment" as defined in IRC Section 130(c). For purposes of understanding "transfer of obligation" in the context of structured settlements, however, the Section 130 definition of "qualified assignment" presents two significant problems:

• IRC section 130 does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• Section 130 incorrectly uses the term "assignment" when it should have utilized the term "delegation".

Restatement of Contracts

Comments to Section 316 of the Restatement explain both the difference and the significance of these two terms:

• "Assignment and delegation. In this Chapter rights are said to be 'assigned'; duties are said to be 'delegated' ….. 'Assignment' is the transfer of a right by the owner (the obligee or assignor) to another person (the assignee)."
• "Comparing delegation to assignment. A person subject to a duty (the obligor) does not ordinarily have such a power to substitute another in his place without the consent of the obligee; that is what is meant when it is said that duties cannot be assigned. 'Delegation' of performance may be effective to empower a substitute to perform on behalf of the obligor, but the obligor remains subject to the duty until it has been discharged by performance or otherwise."

Comments to Section 318 of the Restatement further differentiate "delegation" and "novation" as follows: "An obligor is discharged by the substitution of a new obligor only if the contract so provides or if the obligee makes a binding manifestation of assent, forming a novation….Otherwise the obligee retains his original right against the obligor, even though the obligor manifests an intention to substitute another obligor in his place and the other purports to assume the duty. The obligee may, however, have rights against the other as an intended beneficiary of the promise to assume the duty."

NSSTA Model Agreements

After ELNY entered rehabilitation in 1991, the National Structured Settlement Trade Association (NSSTA) published Model Qualified Assignment Agreements (with and without a Release) which documents were updated following the enactment of IRC 5891 in 2001. Both versions of NSSTA's current Model Qualified Assignment Agreements reference IRC section 130 and utilize "assignment" to describe what the Restatement more properly characterizes as a "delegation".

Here is the relevant comparative language from current paragraphs 1 of the NSSTA Model Agreements:

• With Release - "Assignment and Assumption; Release of Assignor. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments. Each Claimant hereby accepts and consents to such assignment by Assignor and assumption by Assignee. Effective on the Effective Date, each Claimant hereby releases and discharges Assignor from all liability to make the Periodic Payments."
• Without Release - "Assignment and Assumption. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments."

Impact for Defendants and ELNY Victims

How does this discussion impact whether defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?

• NSSTA's Model Qualified Assignment Agreements did not exist during the time period (1985-1990) when ELNY was selling structured settlement annuities.
• Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.
• Whatever language parties used to describe and/or label their transactions (e.g. annuity financing; buy and hold; qualified assignment; novation; transfer; etc.) is not by itself determinative of the rights and responsibilities set forth in the actual language of the settlement documentation.
• Some common industry practices, at least during the 1985-1990 time period, could create problems for defendant/liability insurers.
• For example, in the paper he delivered at the Society of Settlement Planners (SSP) 2012 Annual Meeting, attorney David Higgins pointed out how some defendants and liability insurers have attempted "to collapse the creation of the liability with the assignment of the liability to the assignee."
• Higgins, who drafted the text of the 1982 structured settlement law introduced in the House and the Senate, warned that "such a collapse is to be avoided if the definition [of a qualified assignment] is to be met."
• Under U.S. common law, whether a novation has occurred is a question of fact, and the burden of proving it is generally upon the party asserting it.
• The Restatement identifies potential defenses for ELNY structured settlement shortfall victims who attempt to void a novation including misrepresentation (Sections 159-162) and disclaimer (Section 306).
• All ELNY structured settlement shortfall payees, as well as defendants and/or liability insurers who purchased the related ELNY structured settlement annuities, should retain qualified legal counsel to review their settlement documentation.

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

Liability Insurers' ELNY Motion Denied

Without further explanation, Judge John Galasso has denied a Motion by liability insurers, including Travelers, Fireman's Fund and Hartford, asking the Judge to "clarify and/or correct" his August 16, 2012 Executive Life of New York (ELNY) Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. (see Addendum below)

The ELNY Memorandum Decision states in relevant part: "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party."

In their June 14, 2012 Motion, attorneys representing those liability insurers, as well as Jefferson Insurance Company, Allianz Global Risks US Insurance Company dba Allianz Global Corporate and Specialty North America, John Hancock Property and Casualty Insurance Company and John Hancock Indemnity Company, asked the Court to "amend its decision to omit what the Court likely intended as an aside, or background, which is not material to the Court's approval" of the ELNY Liquidation Plan.

Their Motion had attempted to distinguish two types of structured settlement funding alternatives: "buy and hold" vs. qualified assignments. The Motion maintained that "at no time" did the liability insurers "undertake liability following qualified assignments - liability was extinguished pursuant to the qualified assignment arrangements."

The Motion further attempted to clarify statements made during the ELNY Liquidation hearings by attorneys representing liability insurers including Fireman's Fund attorney Peter Vodola and Traveler's attorney Craig Ulman. (see Addendum below)

According to the Motion, Vodola's promise on behalf of Fireman's Fund that structured settlement shortfall payees "will receive a hundred percent of their benefits regardless of what happens here" was specifically limited to ELNY annuitants "who are entitled to payments under annuities owned by Fireman's Fund."

Similarly, the Motion sought to clarify Ulman's testimony which provided in part: "l can't speak for any but Travelers but they will in fact be covering the shortfalls under their structured settlements. So that the payees will receive the same number of dollars that they are -- were scheduled to receive eventually." Ulman further stated: "The fact is, their obligations are what they are and they will not be affected by the status of the plan." (see Addendum below)

As S2KM has previously written, the legal rights and responsibilities of ELNY qualified assignments represents a critical issue that may subsequently be litigated by the ELNY structured settlement shortfall victims. The Motion suggested that all qualified assignments release all defendants and liability insurers from future liability for promised periodic payments and that annuity ownership determines liability.

Those "suggestions" and/or "assumptions", however, are not necessarily or universally true. For example:

• IRC section 130, which defines a "qualified assignment", does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• IRC section 130 does include requirements which must be met to successfully create a qualified assignment.
• The Monarch Capital case demonstrates some judges apply "creative" legal analysis to protect structured settlement payees following the bankruptcy of a qualified structured settlement assignee.

In subsequent blog posts, S2KM will review IRC section 130 history and requirements and summarize, in the context of ELNY structured settlement shortfall payments, relevant sections of the Restatement (Second) of Law of Contracts addressing:

• Assignment of Rights
• Delegation of Duties
• Delegation vs. Novation
• Disclaimer by a Beneficiary
• Misrepresentation and Voidable Contracts

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

ADDENDUM (July 29, 2012) - Please note two corrections to the above report:

1. Although Judge Galasso's Memorandum Decision specifically mentions Travelers, Travelers had nothing to do with the Motion "to clarify and/or correct" the Memorandum Decision. Travelers was "not a party to [the Motion] and learned about it only after it was filed" according to Craig Ulman, Travelers' attorney.
   
2. Although Ulman's testimony, as quoted above, appears in the ELNY liquidation hearing transcript, the Motion "to clarify and/or correct" does not mention Ulman's testimony at the hearing.  Instead, Ulman's hearing testimony, as quoted by S2KM above, appears in the "Affirmation of Edward S. Stone in Opposition to Motions to Clarify and/or Correct the Court's Memorandum Decision."

The following related ELNY documents are accessible on the structured settlement wiki:

• Memorandum Decision
• Motion to Clarify and/or Correct
• Affirmation in Opposition
• Reply in Support
• Decision denying the Motion
• Craig Ulman Testimony from the ELNY Liquidation Hearing Transcript

ELNY Qualified Assignments

Do qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the liquidation of Executive Life of New York (ELNY)?

That issue is highlighted by a Motion filed June 14, 2012 on behalf of several liability insurers ("Motion") asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. For additional background, see S2KM's blog post "ELNY Shortfall Payments".

Judge Galasso's ELNY Memorandum Decision states in relevant part: "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party."

The Motion attempts to distinguish two types of structured settlement funding alternatives ("buy and hold" vs. qualified assignments). "Buy and hold" annuities, according to the Motion, "are those whereby the underlying insurer retained, or held the liability for future payments, and funded that liability through its ownership of a qualified funding asset, or annuity."

In contrast, the Motion states, "where a structured settlement includes a qualified assignment, the defendant and its liability insurer are fully released from future liability - which liability is assumed by the assignee, here, First Executive Corporation." (emphasis added). Of course, one of the problems for all ELNY stakeholders is that First Executive Corporation ceased to exist in 1991.

Regardless of whether Judge Galasso grants the liability insurers' motion, the legal rights and responsibilities of ELNY qualified assignments represents a critical issue that may subsequently be litigated. The Motion suggests that all qualified assignments release all defendants and liability insurers from future liability for promised periodic payments and that annuity ownership determines liability.

Those "suggestions" and/or "assumptions" are not necessarily or universally true. Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis for multiple reasons:

• IRC section 130, which defines a "qualified assignment", does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• IRC section 130 does include requirements which must be met to successfully create a qualified assignment.
• The Monarch Capital case demonstrates some judges apply "creative" legal analysis to protect structured settlement payees following the bankruptcy of a qualified structured settlement assignee.

See "Structured Settlements and Periodic Payment Judgments" (S2P2J) Section 3.05[9] for information about life insurance insolvencies including ELNY; Section 3.06 for information about qualified assignments; and Section 5.04 which addresses the risk of non-payment to a structured settlement payee.

See the structured settlement wiki for S2KM's complete and continuing reporting about Executive Life of New York,