Beyond Structured Settlements

NASP 2014 Annual Conference

The National Association of Settlement Purchasers (NASP) celebrated its 10th annual conference November 5-6, 2014 in San Antonio, Texas with record attendance, recognition of past accomplishments and a clear existential message from its president Patricia LaBorde: "NASP exists to insure there will be a secondary structured settlement market for at least the NEXT 10 years".

NASP's 2014 educational conference followed by one week an historic NSSTA conference, which featured, for the first time, the presidents of NASP (LaBorde) and SSP (Neil Johnson) as speakers. LaBorde acknowledged this development in her opening NASP remarks stating: "we want to hear NSSTA's criticism and for the first time, they appear to want to hear ours." She expressed surprise and concern, however, about how little NSSTA members appear to understand about the secondary market including several basic misconceptions.

To underscore both NASP's "survival" theme and the need for improved education about the secondary market, LaBorde added: "there are some forces working against us right now and we need to remain diligent so our customers (structured settlement recipients who sell payment rights to NASP member companies) continue to have access to liquidity."

NASP lobbyist Jack Kelly and Executive Director Earl Nesbitt addressed some of NASP's challenges in their presentations providing legislative and case law updates respectively.

Legislative Update

Kelly reviewed structured settlement protection statute activities in Florida, Wisconsin, Minnesota, Louisiana, and Mississippi and declared NASP's 2014 state legislative lobbying a success. Kelly highlighted Florida and Wisconsin as states where NASP and NSSTA could collaborate to improve existing legislation. At the federal level, Kelly addressed H.R. 3897 and the July 23, 2014 "Consumer Protection for People with Disabilities" Congressional symposium which included a panel discussion about "factoring structured settlements".

Echoing LaBorde's comments about NSSTA, Kelly expressed his concern about "fact vs fiction" as to what happens and what benefits transfers provide for structured settlement recipients who experience unexpected or unaddressed financial needs. Emphasizing "no secondary market transaction can occur without a primary market transaction", Kelly criticized any development or activity that causes Congress to relook at IRC 130 and 104(a)(2). Speaking the morning after the 2014 election, Kelly labeled the Republican victory a political "tsunami" and the odds on new tax legislation in 2015 as a "toss up".

Case Law Update

For the uninitiated, Nesbitt prefaced his secondary market case law summary with several applicable "lessons": if you don't pay a seller the agreed amount, you will have trouble; courts take the "best interest" standard seriously; sometimes the prudent action is to dismiss a proposed transfer and move on; if you don't get what you want, don't move to another court or arbitration; words in a contract matter and words in a court order matter more; although rare in Texas, sometimes it rains (it did in San Antonio) and sometimes RSL Funding (formerly Rapid Settlements) wins cases.

Washington Square v. RSL

Among several significant cases, Nesbitt gave top billing to Washington Square v. RSL Funding wherein transfer company Washington Square (aka Imperial) sued transfer company RSL Funding in Texas for tortious interference with a transfer agreement that had not yet been approved in a final court order. The Court of Appeals of Texas, Fourteenth District, held:

• RSL was “justified” in interfering with Imperial’s proposed transfer agreement prior to court approval because obtaining a better price was in the seller's "best interest".
• Transfer agreements that have not received court approval are not enforceable on public policy grounds and therefore cannot justify legal actions for tortious interference with existing contracts.

Acknowledging this case represents a "big win" for RSL, Nesbitt also predicted "chaos" for the secondary market as rival transfer companies increasingly search court records and seek to outbid other transfer companies who are awaiting court approvals. Subsequent NASP panels of transfer attorneys and judges, as well as sidebar discussions with angry representatives of companies outbid by competitors, confirmed Nesbitt prediction and suggested a strategic marketing shift is already occurring among transfer companies.

Brenston Case

In a separate presentation, Nesbitt reviewed the Peachtree Settlement Funding v. Brenston case and its case law "progeny". In the Brenston case, the Illinois Supreme Court in December 2013 denied Peachtree's petition for review of an Illinois Appellate Court decision which found multiple Peachtree-Brenston transfer orders, which Illinois Circuit Courts had approved in accordance with the Illinois transfer statute, to be void ab initio because:

• Peachtree did not file all settlement documents with the transfer court.
• Peachtree concealed "by omission" the existence of anti-assignment provisions which the Appellate Court found "material".
• The conduct of Peachtree and it's attorney amounted to an "affirmative falsehood and a fraud upon the trial court".

An Amicus curiae brief filed by NASP with the Illinois Supreme Court stated: "Without the certainty and finality of a court order, there is no viable secondary market.... 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."

As NASP predicted, the denial of Peachtree's petition for review was quickly followed by Sanders v. JGWPT Holdings, a class action lawsuit, accusing JGWPT Holdings, Inc., several affiliate companies including J.G. Wentworth and Peachtree Settlement Funding, and Illinois attorney Brian Mack, of violating the Illinois Consumer Fraud and Deceptive Business Practice Act (ICFA). The case has since been removed to the Federal Court in the Southern District of Illinois with that court expected to rule on various motions and petitions in February 2015.

As a result of Brenston, according to Nesbitt:

• Many Illinois structured settlement recipients lack liquidity options because many transfer companies are avoiding the state.
• Some transfers continue to be completed in Illinois when all interested parties agree to waive existing anti-assignment language.
• Some annuity providers, however, will not waive anti-assignment provisions in Illinois cases while others evaluate them on a case-by-case basis.
• Attorneys for some annuity providers are citing Brenston to challenge transfers in other states.

Discounted PV and Applicable Federal Rate

The NCOIL State Structured Settlement Protection Model Act, which NSSTA and NASP have agreed to support, contains a definition for "discounted present value" linked to "the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service." This rate is generally higher than, and unrelated to, the discount rate actually incorporated into most structured settlement transfers. Nesbitt concluded his conference presentations with a detailed critique of NCOIL's discounted PV definition and explained why NASP believes this definition confuses rather than informs state judges.

Additional Presentations

NASP's conference featured two additional individual presentations.

Former NSSTA Deputy Executive Director Peter Arnold predicted future integration of the primary and secondary structured settlement markets. To support his prediction, Arnold reviewed NSSTA's historic attitude toward "factoring transactions." Arnold also highlighted NSSTA membership qualifications which currently prohibit members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements."

Pery Krinsky, an ethics-based defense attorney who serves as Chairman of the Committee on Professional Discipline of the N.Y. County Lawyers' Association, spoke about legal ethics issues. He did not mention Paris & Chaiken, a New York law firm accused of falsifying court orders approving structured settlement transfers, which has reportedly retained Krinsky as outside ethics counsel for assistance with these cases.

Panel Discussions and Breakout Sessions

NASP's 2014 conference included four panel discussions and four breakout sessions (see listings below). Panel highlights and issues addressed:

• Drafting Transfer Agreements - Assigned payments vs. assigned payment rights; clients vs. sellers or annuitants relating to transfer company fiduciary responsibilities; representations and warranties; holdbacks and deductions; limited powers of attorney; testamentary agreements; arbitration provisions.
• Primary Market - NSSTA Fall conference; MSA market; primary market surveys; impact of Affordable Care Act; ELNY update; PLR-143928-13 and "hardship conversions"; settlement planning developments; re-cycled structured settlements; Bipartisan Budget Act of 2013; provider company departures; primary/secondary cooperation opportunities; best and worst business practices; annuity provider issues with transfer companies.
• Responding to Insurer Transfer Objections - Confirming his company's "good relationship" with transfer companies, Madis Smit of State Farm highlighted several insurer issues: unanticipated costs of reviewing 15 to 20 transfers per week; inadequate notice (need at least seven days); difficulty in locating some requested settlement documents; split payment problems resulting from insurer technology limitations; "three touches" constitute an insurer ideal (petition; order; notice of approval). Additional issues discussed: proposed documents from insurers that do not meet state-specific requirements; protecting public information in case filings.
• Judicial Panel - "Best interest" considerations; multiple transactions; common mistakes by petitioners; privacy issues; discount rates; independent professional advisors. The judges also were encouraged to identify questions for the audience - and did so. All three judges expressed a need and interest for additional education about the secondary market.

Alexander Hamilton Award

NASP honored James Lokey as the 2014 recipient of its Alexander Hamilton Award. Lokey completed the first transfer of structured settlement payment rights in 1986 thereby launching the secondary market. NASP has bestowed its Alexander Hamilton Award seven times "to distinguished individuals who have supported and defended the right to free alienability of property rights." NASP considers this right to be its own cornerstone and the foundation of the structured settlement factoring business.

Topics and Speakers

• Welcome Remarks - Patricia LaBorde.
• Legislative and Regulatory Developments - Jack Kelly.
• Legislative Update - Earl Nesbitt.
• Drafting Transfer Agreements - Jason Sutherland and Brian Mack.
• Hamilton Award - James Lokey.
• Integration of Primary and Secondary Markets - Peter Arnold.
• Primary Market Panel - Patrick Hindert (Moderator), Daniel Durbin, Medora Marisseau, Mark Wahlstrom.
• Ethics Issues - Pery Krinsky.
• Responding to Insurer Transfer Objections - Michael Damore (Moderator), John Shafai, John Mott, Michael Green, Steven Mastrantonio, Madis Smit.
• Break Out Sessions
  • Preparing vs.Coaching a Problem Payee - Laryssa Korduba and Elyse Strickland.
  • Addressing Judicial Concerns - Roger Dunaway and Andrew Hillman.
  • Life Contingent Issues - Michael Fasano and Dan Bonner.
  • Bankruptcy Issues - Michael Damore and Adam Zoldessy.
• Illinois Litigation and Discounted Present Value - Earl Nesbitt.
• Judicial Panel - Matthew Bracy (Moderator), Judges Lynne Parker, Patricia Summe, Travis Francis.

For S2KM reports of additional 2014 educational conferences plus eight of the nine prior NASP conferences, see the structured settlement wiki.

Secondary Market Update

This structured settlement secondary market report updates S2KM's most recent secondary market reporting:

• Structured Settlements 2013 - Secondary Market
• Asta Funding Acquires CBC Settlement Funding

Falsified New York Transfer Orders

S2KM previously reported that a New York law firm had falsified court orders approving structured settlement transfers in as many as 100 cases - and possibly more. Industry sources have identified the responsible law firm as Paris & Chaikin where a former non-lawyer employee, apparently created the fraudulent, court-related documents. The primary transfer companies represented by Paris & Chaikin in these transactions were J.G. Wentworth, and its affiliate Peachtree Financial Solutions, as well as Stone Street Capital.

Paris & Chaikin has retained Pery D. Krinsky , according to industry sources, as outside ethics counsel for assistance with these cases. An online 2013 Speaker Biography states in part: "Pery’s ethics-based defense litigation practice focuses on: attorney ethics matters, representing judges before the Commission on Judicial Conduct, criminal defense matters, art law ethics & litigation matters, and representing law school students before the Committees on Character & Fitness. Pery serves as the Chair of the Ethics Committee of the Entertainment, Arts & Sports Law Section of the N.Y. State Bar Association. Pery also serves as Chair of the Committee on Professional Discipline of the N.Y. County Lawyers’ Association."

Ongoing investigations of these fraudulent transfers are being conducted by the New York State Courts and the New York County District Attorney's Office. Primary and secondary market representatives with whom S2KM has discussed these fraudulent transfers disagree on how they are impacting judicial attitudes toward structured settlement factoring transactions and factoring companies in New York.

Proposed Amendment to IRC 5891

Representative Matthew Cartwright (D-Pa) has introduced H.R. 3897, a bill which, if enacted into law, would amend IRC 5891 and impose standards and procedures which are substantially different than currently provided by the Model State Structured Settlement Protection Act (Model Act) and almost all of the 48 related state statutes.

The most controversial provision of H.R. 3897 appears to be proposed new paragraph (5) under current subsection (b) titled "Transaction Requirements" which would provide in part: "(A)" In General - A transfer of structured settlement payment rights shall be treated as satisfying the requirements of this paragraph only if the transfer meets the following requirements:

• "(1) The annual discount rate of the consideration for the transfer, determined by taking into account charges, fees and other expenses, does not exceed the prime rate plus 5 percentage points.
• "(2) The aggregate amount of the charges, fees and other expenses payable by the payee do not exceed 2 percent of the value of the consideration to the payee (net of such charges, fees and other expenses)."

This H.R. 3897 language is similar to provisions in the North Carolina structured settlement protection act. North Carolina is one of only three states which currently impose statutory ceilings on discount rates. A recent bill to amend the Florida structured settlement protection act likewise proposes a discount ceiling similar to North Carolina.

Note: following years of conflict, the primary market National Structured Settlement Trade Association (NSSTA) and secondary market National Association of Settlement Purchasers (NASP) reached an agreement in 2000 to support a combined federal and state legislative solution for structured settlement transfers which resulted in IRC 5891 and the Model Act. It is S2KM's understanding this agreement remains in effect.

Peachtree Settlement Funding v. Cathy Brenston

In 2013, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, held that an Illinois state court, which had previously approved transfers requested by Brenston:

• Had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and
• Had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions.

The Illinois Supreme Court subsequently denied Peachtree's petition for appeal of this decision leaving both primary and secondary structured settlement market participants uncertain about the case's precedential meaning and scope. In an Amicus curiae brief, NASP asserted the Appellate Court decision could render the Illinois transfer statute "a practical nullity"

S2KM has learned that a companion case involving Peachtree and Brenston remains on appeal in the 3rd District Illinois Court of Appeals and will be argued February 27, 2014. The parties had previously stayed their appeal waiting for the Illinois Supreme Court to rule on the 4th District case.

In a recent Florida case, summarized in this Drinker Biddle Structured Settlement Alert, a Sumter County Circuit Court Judge cited the Brenston case as authority in ruling that an April 2011 transfer order was void ab initio, and that resulting arbitration awards were “impotent and without substance.”

For additional information about structured settlements and anti-assignment provisions, see S2KM's prior blog post "Anti-Assignment Restrictions".

METLife Split Payment Policy

During NASP's 2013 Annual Conference, NASP Executive Director Earl Nesbitt reported that MetLife has begun actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.

Primary market proponents of MetLife's new policy argue that at least 27 state structured settlement protection acts prohibit partial transfers. In addition, they maintain that servicing contracts represents an annuity provider obligation and that post-transfer problems can occur from subsequent, multiple transfers resulting from such occurrences as divorces, child support obligations and improper transfers by trust beneficiaries.

In response, Nesbitt believes this "Hobson's choice", forcing injury victims to sell all or nothing, will cause "deep trouble" for MetLife and other annuity providers who may adopt MetLife's split payment policy. Nesbitt argues that annuity providers are protected by stipulation agreements and administrative fees. He predicts litigation, legislation and attorney general investigations could result.

Stock Market Prices

• JGWPT Holdings, Inc. - JGWPT Holdings IPO, which occurred November 8, 2013, was poorly received with JGWPT Inc. reducing the initial offering price of its common stock from $19-$22 per share to $14.00 which then traded down to the high $12s. Since then, the common stock, which now trades on the New York Stock Exchange (symbol: JGW), reached a high of $18.00 per share and closed Friday January 31 at $16.992 per share.
• Asta Funding Inc. - Asta, a publicly traded company (Nasdaq: ASFI), acquired an 80% ownership interest in CBC Settlement Funding, LLC ("CBC"), a structured settlement factoring company on December 31, 2013. Following announcement of the purchase on January 7, 2014, Asta's stock price closed during regular trading hours at $8.28 per share. The stock closed Friday January 31 at $8.20 per share.

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.