Beyond Structured Settlements

Structured Settlements in 2011 - 2

In a prior blog post, S2KM highlighted the historic significance of the ELNY liquidation as the dominant 2011 structured settlement industry development. This blog post offers a strategic perspective of the industry's status in 2011 focusing in part on the industry's three national associations and also providing a broader perspective for ELNY.

Strategic Overview - Primary Market

The National Structured Settlement Trade Association (NSSTA) celebrated its 25th anniversary in 2011. Among its 2011 accomplishments, NSSTA noticeably improved its marketing and educational programs while focusing substantial resources to help minimize problems related to the ELNY liquidation. NSSTA has attempted to balance the need to inform its members (not the public) about ELNY's status with the need to promote the strength of its life insurance markets and the state guaranty fund system.

Speaking at NSSTA's 2011 Annual Meeting, Thomas Ronce, Chairman of NOLHGA, described the current life and health guaranty system in the United States as experienced, well-financed and armed with a multitude of optional legal and financial tools. Applied to ELNY, this state guaranty system will substantially improve the recovery for many ELNY structured settlement recipients. The state guaranty system, however, will not make whole every ELNY structured settlement recipient. Unfortunately, even with guaranty fund payments and additional enhancements, many ELNY structured settlement recipients are expected to experience shortfalls.

NSSTA's 2011 Annual Meeting and Fall Educational Conference also showcased the current strength of the structured settlement market and its product providers.

• Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, accentuated the current financial strength of U.S. life insurance companies generally and explained why structured settlement annuities represent an excellent strategic product for life companies. Confirming Morris' assessment, three new product providers (Mutual of Omaha, National Indemnity and Hartford) entered (or re-entered) the structured settlement marketplace during 2011.
• William T. Robinson III, President of the American Bar Association (ABA) strongly endorsed structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Robinson also suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.
• American General Life President Mary Jane Fortin described AIG, a structured settlement product provider that received more than $180 billion of loans and investments from the United States government in 2008, as "a strong, stable and resilient company dedicated to keeping our promises". Fortin also dispelled several "myths" about AIG, summarized AIG's recovery from the 2008 financial crisis and expressed optimism about the future of life insurance industry and structured settlements.

Despite these positive assurances, however, primary market structured settlement annuity sales have continued to trend downward for the past three years, arguably because of the 2008 financial crisis and historically low interest rates which many experts predict will continue for the foreseeable future. What has been missing from NSSTA's leadership during 2011 has been a positive vision for NSSTA's own future and the future of structured settlements.

David Ringler, NSSTA's first President, spoke during the NSSTA 2011 Annual Meeting. Ringler stated the most important reason for creating NSSTA was "having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs."  Sometime during the past 25 years, NSSTA lost sight of this original vision and now generally excludes industry voices and perspectives that challenge traditional structured settlement business models and practices.

As one result, two additional professional associations have formed with alternative structured settlement perspectives:

• The Society of Settlement Planners (SSP) - SSP espouses the claimant's right to select his or her own structured settlement adviser and funding company. SSP promotes structured settlement annuities as a core product for special needs settlement planning and favors greater utilization of IRC 468B Qualified Settlement Funds (QSFs).
• The National Association of Settlement Purchasers (NASP) - NASP promotes the right of structured settlement recipients, in compliance with federal and state laws, to sell their payment rights provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents.

To its credit, NSSTA expanded the scope of its educational programs in 2011 to discuss QSFs and to provide its members with more detailed information about structured settlement secondary market. The perspective for these NSSTA discussions, however, remains defensive and protective without any attempt to envision or discuss new business opportunities or product improvements.

By comparison, SSP's vision for the the future of structured settlements is defined and supported by its "Standards of Professional Conduct". SSP views structured settlements as a core product for personal injury settlement planning. SSP's vision agrees with and encompasses the business model Joseph DiGangi introduced to NSSTA in 2009 as "Settlement Consulting" which he characterized as "a wake up call for the industry." SSP's educational conferences continue to push structured settlement industry thinking beyond its historic boundaries and the inevitability of its path dependence.

In addition to SSP, three national legal associations are developing special needs business practices and models that expand the framework and opportunities for structured settlements:

• Academy of Special Needs Planners (ASNP)
• National Academy of Elder Law Attorneys (NAELA)
• Special Needs Alliance (SNA).

Faced with the ELNY crisis, declining annuity sales and the continuing prospect of low interest rates, some primary market structured settlement stakeholders now recognize that business practices and models that made sense in the past may have survived despite the eclipse of their earlier justification.  S2KM believes more primary market stakeholders should expand their strategic perspectives and re-think structured settlements in the context of the changing legal and financial landscape.

For example, here are four 2010 developments with important consequences for structured settlement stakeholders that have heretofore received inadequate primary market educational attention:

• Patient Protection and Affordability Care Act - how does health care reform impact injury victims and what opportunities does it create for structured settlements?
• Dodd-Frank Wall Street Reform and Consumer Protection Act - how will the Consumer Financial Protection Bureau (CFPB) address structured settlement complaints?
• NAIC Suitability in Annuity Transactions Model Regulation - what does "suitability" mean for structured settlement annuities and how does "suitability" differ from the "best interest" standard applicable to trustees, investment advisers and structured settlement transfers?
• Spencer v. Hartford class action settlement - what are the lessons learned and resulting new best practices for structured settlements?

Strategic Overview - Secondary Market

The ELNY liquidation is also having a negative impact on the secondary structured settlement market. Some industry experts have estimated that as many as 1000 of ELNY structured settlement annuities (out of the 4168 total) have undergone transfers of some or all payment rights. Investors who have purchased ELNY annuity payment rights may not be eligible to receive contributions from state guaranty funds which historically protect "consumers". The NYLB's December 7, 2011 letters warned ELNY payees "if you have transferred any part of your right to receive ELNY SSA benefits to a third party, you may not be eligible to receive benefits from CABC related to the benefits you transferred."

Although the financial crisis of 2008 had a devastating short term impact on the structured settlement secondary market, the market has experienced robust sales in 2011 as institutional investors continue to be attracted to the relatively high rates of returns generated by restructured (post transfer) payment right obligations. More individual investors, including personal injury claimants and their attorneys, have also begun purchasing restructured payment rights although some industry experts caution against potential tax and securities law uncertainties.

The structured settlement secondary market changed dramatically in 2011 with the announced merger of  J.G. Wentworth and Peachtree Settlement Funding. The merger combined the two largest purchasers of structured settlement payment rights with an estimated 80-85 percent of the market.

The merger highlights a remarkable turnaround for Wentworth whose shareholders control the majority of the combined companies. In 2009, Wentworth and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market". Wentworth laid off 120 of its 200 employees and closed its office in Las Vegas. Its general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar. Less than six months later, Wentworth emerged from bankruptcy with an announcement that JLL Partners (Wentworth's owners) had invested an additional $100 million in the firm.

In a significant case (Symetra v. Rapid Settlements) highlighting controversial business practices which were opposed by NASP as well as structured settlement annuity providers, a Texas court issued injunctions during 2011 prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.

Check the structured settlement wiki for additional S2KM structured settlement reporting:

• ELNY liquidation
• Annual industry reports
• Professional association meetings

ADDENDUM (12/12/2011) - S2KM's report above omits at least one important 2011 strategic structured settlement development. NSSTA and its product provider members launched the first-ever industry metrics study during 2011. For more information about metrics, see S2KM's "Structured Settlement Metrics" series featured on the structured settlement wiki.

NASP 2011 Annual Meeting

Highlighting a year during which the secondary structured settlement market is exceeding previous annual transfer totals, the National Association of Settlement Purchasers (NASP) cautiously celebrated its seventh Annual Meeting November 9-11, 2011 in Las Vegas with record conference attendance including member company representatives, affiliate attorneys and invited guests.

Recognizing its legislative successes, NASP honored its Executive Director Earl Nesbitt for his past lobbying efforts by awarding him with NASP's 2011 Alexander Hamilton Award. Nesbitt represented NASP in helping to enact Internal Revenue Code section 5891 and the Model State Structured Settlement Protection Act upon which are based most of the related state structured settlement protection statutes.

NASP President Matthew Bracy additionally praised NASP's founders stating: "Through their vision, guts and determination, we have not only persevered but flourished. Today NASP celebrates the fact that structured settlement recipients, in compliance with federal and state laws, have the right to sell their asset when needed."

NASP Educational Program

Maintaining its tradition of inviting judges representing different states to speak, NASP's 2011 educational program featured a panel discussion of judges from New York (Honorable Judith McMahon), Texas (Honorable Alexandra Smoots-Hogan) and Mississippi (Honorable Denise Owens) moderated by Patricia LaBorde. Among other issues, the judges discussed how they interpret the "best interest" standard as well as their expectations for transfer company counsel, transfer documentation, disclosure of prior transfers and levels of proof in transfer cases.

Another highlight of NASP's 2011 educational program was NASP's decision to organize smaller breakout group discussions consisting primarily of NASP member general counsel and affiliate NASP member attorneys to discuss:

• Issues in Obtaining Court Approval of the Transaction; and
• Issues in Underwriting Structured Settlement Transactions.

Other Speaker and Topics

Robin Shapiro - Shapiro, Chairman of NASP's Legal Committee, summarized historical and 2011 secondary structured settlement legislative and case law developments. Among the specific cases and issues:

• Symetra v. Rapid - This ongoing litigation appears likely to be completed in 2011 with injunctions prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.
• Conflicts between "incumbents" and "insurgents" in the secondary structured settlement market with a substantial portion of new transfers including individual investors not just institutional investors.
• Confusion between transfers of structured settlement payment rights and "settlement liquidity" businesses involving other asset classes such as the increasing sale of veterans' benefits.
• At least one (unnamed) annuity provider that refuses to release guaranteed payments to investors when a payee dies resulting in delays and legal costs for transfer companies.

Leonard Bernstein - Bernstein, a financial services regulatory attorney, presented separate discussions about how 1) Dodd-Frank and 2) advertising laws impact structured settlements. Although both discussions were directed toward a secondary market audience, each also contained valuable information for primary market participants.

• Dodd-Frank - Bernstein's Dodd-Frank update focused on the Consumer Financial Protection Bureau (CFPB), a new federal agency . CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....." Among its core functions are to take consumer complaints and to restrict unfair, deceptive or abusive acts or practices under the Federal consumer financial laws. Dodd-Frank provides CFPB with authorities that go beyond the existing consumer protection statutes. CFPB has broad authority to ask questions and demand information including consumer complaints. Dodd-Frank also establishes the Federal Insurance Office (FIO) with the authority to monitor all aspects of the insurance industry.
• Advertising - Bernstein's advertising discussion referenced sections of the Better Business Bureau's Code of Advertising that could impact structured settlement purchasing transactions (or primary market transactions) by prohibiting advertisements which are untrue, misleading, deceptive, fraudulent, falsely disparaging of competitiors, or insincere offers including deception through omission. As one strategy to protect against false advertising, Bernstein recommended using disclaimers whose effectiveness depends upon their prominence and location.

Elizabeth Yingling - Yingling, a securities attorney, discussed how federal and state securities laws can impact structured settlements. In defining what constitutes a "security", Yingling focused on the meaning of an "investment contract" as that term was defined in SEC v. Howey, a 1946 U.S. Supreme Court decision. Yingling offered several practical tips for transfer companies to avoid the mine fields of the securities laws when marketing to individual investors and also emphasized the serious risks involved when dealing with unsophisticated investors.

Earl Nesbitt - Nesbitt discussed the concepts of "discount rate" and "discounted present value" both of which play an important role in court hearings to evaluate structured settlement transfer proposals. The Model State Structured Settlement Protection Act defines "discounted present value" to mean: "the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service." In addition to identifying many factors that can determine the discount rate for a specific case, Nesbitt summarized the results of a recent survey he conducted of the discount rates approved by judges in Harris County Texas. Results:

• The average discount rate: 15.8 percent;
• The weighted average (i.e. taking into consideration the relative case size): 12.96 percent;
• The lowest discount rate: 7.4 percent; and
• The highest discount rate ($3494 paid for $7282 due in less than one year): 61.3 percent.

Patrick Hindert - Hindert (author of S2KM's blog "Beyond Structured Settlements") provided a "Primary Market Report" addressing current industry challenges and issues. In addition to explaining why primary market annuity premium could fall below $5 billion for 2011, Hindert summarized the historical background and current status of Executive Life of New York (ELNY). The impact of the secondary structured settlement market on the ELNY liquidation has been underestimated in most ELNY reporting by primary market sources. According to reliable secondary market sources, however, payment rights from as many as 1000 of ELNY's remaining structured settlements are currently owned by secondary market companies and/or investors.

Joe Feltes - Feltes, an attorney whose clients include health care providers and whose legal expertise includes social media, e-mail and Internet use, spoke about privacy issues in structured settlement transactions. Based upon his research, Feltes expressed surprised at the paucity of information available about structured settlements and privacy issues. As one example, Feltes pointed out the Model State Structured Settlement Protection Act does not address privacy. Before seeking and transmitting private medical information about structured settlement candidates and/or recipients, Feltes recommended obtaining purpose-specific written authorization including a waiver and release. In addition to HIPAA, Feltes discussed the privacy provisions contain in Graham Leach Bliley.

Congratulations to NASP for continuing its high educational standards with an outstanding 2011 Annual Meeting. Conference Chairperson Patricia LaBorde prepared helpful and related handout summaries for several of the presentations.

For S2KM reporting about prior NASP annual meetings plus additional analysis about the ELNY liquidation, see the structured settlement wiki.

Business Standards and Practices - 1

For the structured settlement industry to achieve its public policy and revenue potential, business standards and practices must improve. This blog post, which begins a new S2KM series, highlights historical developments which help define the business standards and practices of the current structured settlement industry.

Periodic Payment Settlement Act of 1982 - This Federal legislation amended IRC section 104(a)(2) (clarifying an exclusion for "periodic payments") and added IRC section 130 (introducing and defining "qualified assignments" and "qualified funding assets").

NSSTA (1985) - A pioneering group of structured settlement agents and life companies formed the National Structured Settlement Trade Association (NSSTA) which became the first, and remains the largest, structured settlement professional association.

First Settlement Transfer (1986) - James Lokey completed the first transfer of structured settlement payment rights thereby launching the structured settlement secondary market. A number of companies subsequently responded to this market development to create a "gray market" allowing and encouraging structured settlement recipients to liquidate part or all of their future payment rights.

Revenue Procedure 93-34 (1993) - Regulations issued by the U.S. Treasury became effective defining a new type of IRC 468B fund ("Qualified Settlement Fund") providing an efficient dispute resolution technique for defendants and a safe harbor for plaintiffs who need time to resolve their own settlement planning issues prior to deciding upon any specific form of distribution including structured settlements.

NSSTA CSSC Program (1994) - NSSTA originated a training and certification program at the University of Notre Dame leading to a designation for qualifying persons as Certified Structured Settlement Consultants (CSSC).

Weil Settlement (1996) - The plaintiff in this lawsuit argued that, as a result of an anti-competitive conspiracy among certain structured settlement agents, annuity providers and NSSTA, structured settlement annuity providers marketed exclusively through agents who represented defendants and refused to appoint agents who represented plaintiffs or their attorneys. The confidential settlement of the Weil lawsuit coincided with a change in industry business practices whereby structured settlement annuity providers began to appoint agents representing plaintiffs and allowing agents representing defendants and plaintiffs to share commissions.

NASP (1996) - A group of companies specializing in structured settlement transfers created the National Association of Settlement Purchasers (NASP) which became the first and only trade association specializing in the structured settlement secondary market.

Structured Settlement Protection Statutes (1997-present) - Beginning with Illinois in 1997, nearly all states have enacted some form of structured settlement protection statute with many such statutes, since 2000, based upon the Model State Structured Settlement Protection Act which was also adopted by the National Conference of Insurance Legislators in 2004. These state laws require structured settlement transfers to receive advanced state court approval.

NSSTA Code of Ethics (1997) - NSSTA adopted and published its Statement of Ethics and Professional Responsibility "to provide guiding principles to its members and member organizations". Implicit in the acceptance of this Statement, according to NSSTA, "is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services".

NY Attorney General Investigation (1999) - The New York Attorney General launched an investigation of J.G. Wentworth, a leading structured settlement transfer company, and entered into a settlement in 1999 limiting discounts on J.G. Wentworth's New York transactions to no more than 25%.

Victims of Terrorism Tax Relief Act of 2001 - Among other provisions, this legislation added IRC section 5891 ("Structured Settlement Factoring Transactions") to Subtitle E of the Internal Revenue Code and resulted from a political compromise between NSSTA and NASP.

SSP (2001) - Dissatisfied with what they considered NSSTA's continuing defense bias, a group of structured settlement agents formed the Society of Settlement Planners (SSP), a national non-profit education and public policy association for structured settlement professionals who advocate "the injury victim's right to choose settlement planning advisers and financial and guarantee providers".

Grillo case (2001) - A Texas district court entered a $1,600,000 judgment against plaintiff attorneys based upon allegations by their prior clients that a medical malpractice case settlement "contained no language which required at least one defendant or its liability insurer to promise a fixed and determinable periodic payment which would be tax free to the claimant".

California Attorney General's Study (2004) - Prepared for the California legislature, this study surveyed hundreds of California transfers between 2000 and 2003. For a summary of the results, see "Transfers of Structured Settlement Payment Rights - What Judges Should Know about Structured Settlement Protection Acts", by Daniel Hindert and Craig Ulman.

NAIC Compensation Disclosure (2004) - The National Association of Insurance Commissioners (NAIC) adopted a Compensation Disclosure Amendment to its Producer Licensing Model Act. The Disclosure Amendment neither mentions nor excludes structured settlements.

Saltzburg and Chemerinsky Opinion Letters (2006) - First presented at the ATLA 2006 Winter Meeting, two legal opinion letters written by law professors Stephen Saltzburg and Erwin Chemerinsky reach similar conclusions:

• Experts, including structured settlement experts, have a fiduciary duty to their clients.
• Plaintiff experts have a conflict of interest if they are paid by someone other than the plaintiff without disclosure to and consent by the plaintiff.
• Plaintiff attorneys have a duty to disclose this conflict of interest by structured settlement experts to their clients.

Macomber v. Travelers (2007) - Settled on undisclosed terms, this class action lawsuit alleged that Travelers lowered the cost of structured settlements by 2% without informing plaintiffs (shortchanging) by paying its approved structured settlement agents a 2% commission and retaining a 2% commission for itself (rebating). Coincidental with this settlement, Travelers changed its structured settlement business practices and its affiliated life company stopped selling structured settlement annuities.

SSP RSP program (2007) - SSP launched a Registered Settlement Planner (RSP) professional certification program in affiliation with Texas Tech University including an educational component; submission and review of a comprehensive personal injury settlement plan; experience requirements; continuing education; and a code of ethics.

NSSTA Broker Relations Initiative (2007) - Consultant Lynn Courier introduced the first draft of a proposed "Standards of Professional Conduct" for structured settlement consultants developed by the NSSTA-sponsored Broker Relations Initiative (BRI) during the NSSTA 2007 Fall Meeting. To date, NSSTA has not adopted any additional standards of professional conduct beyond its 1997 Code of Ethics.

Rapid Settlements (2007) - Rapid Settlements, a Texas factoring company, failed in a series of transfer cases to successfully utilize arbitration clauses in its attempt to bypass state structured settlement protection statutes.

Fresno County Factoring Cases (2009) - In Henderson v. Scioteco, a California appellate court ruled favorably for 321 Henderson Receivables, a J.G. Wentworth affiliate, reversing earlier opinions of a California superior court in 11 factoring cases consolidated for appeal. The appellate court ruling allowed Henderson to amend the transfer petitions at issue to correct any errors prior to any new hearing on the petitions and additionally held that public policy supports state court approved structured factoring transactions.

Suitability in Annuity Transactions Model Regulation (2010) - The NAIC adopted this Model Regulation "to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transaction involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed." Significantly for structured settlements, exemptions from the Model Regulation include: "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process."

Spencer v. Hartford (2010) - A U.S. district judge in Connecticut approved a $72.5 million class action settlement resulting from plaintiff allegations (denied by Hartford) that Hartford and its attorneys, brokers and agents violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and committed common law fraud in structuring its settlements. Hartford's affiliated life company stopped selling structured settlement annuities in 2009.

For more detailed information about these structured settlement business standards and practices developments, see "Structured Settlements and Periodic Payment Judgments" co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert.

Structured Settlements in 2009 - 2

This S2KM post follows "Structured Settlements in 2009 - 1" and features topical links to S2KM 2009 blog reports.

For 2010 industry updates, please continue to visit S2KM's blog as well as S2KM's structured settlement wiki.

Prior S2KM annual industry reports:

• Structured settlements in 2008
• Structured settlements in 2007
• Structured settlements in 2006

Professional Association Meetings

• NSSTA - National Structured Settlement Trade Association
  • Winter meeting
  • Annual meeting
  • Fall meeting
• SSP - Society of Settlement Planners
  • Preview
  • Annual meeting
• NASP - National Association of Settlement Purchasers
  • Part 1
  • Part 2
  • Part 3
• ASNP - Academy of Special Needs Planners
  • Annual meeting
  • Tim Nay interview

Settlement Consulting

• Part 1
• Part 2
• Part 3
• Part 4

Spencer v. Hartford

• Report 1
• Report 2
• Report 3
• Report 4

IRC 468B Qualified Settlement Funds

• Single Claimant 468B QSF Update
• IRC 468B and 5891
• Robert Wood's QSF Book
  • Summary and Review
  • Robert Wood Interview
• Jeremy Babener's QSF Paper
  • Summary
    
  • Review
    • Part 1
    • Part 2
  • Jeremy Babener Interview
• US Treasury Priority Guidance Plan 2009-2010

Dissipation Studies

• Introduction
• Jeremy Babener's Dissipation Paper
  • Summary and Review
  • Jeremy Babener Interview
  • Jeremy Babener Responds

Structured Settlement Credo

• Part 1
• Part 2
• Part 3
• Part 4
• Part 5

Rapid Settlements

• Pacific Life v. Rapid Settlements
• Allstate v. Rapid Settlements

Fresno County Factoring Cases

• Report 1
• Report 2
• Report 3

Additional S2KM Analysis

• Re-Thinking Structured Settlements
• Structured Settlement 2009 Mid-Year Update
• Structured Settlement 2009 Strategic Analysis
• Structured Settlements and Government Benefits
• Settlement Trust Due Diligence

Additional Primary Market Developments

• Forge Purchases TSSG
• Richard Halpern

Additional Secondary Market Developments

• S&P Withdraws JG Wentworth Credit Ratings
• Structured Settlement Securitizations

"Structured Settlements and Periodic Payment Judgments"

• S2P2J Release 45
• S2P2J Release 46

NASP 2009 Annual Meeting - 3

This blog post continues S2KM's summary and analysis of the NASP 2009 Annual Meeting. Prior S2KM blog posts about NASP are accessible on S2KM's structured settlement wiki.

NASP's 2009 strategic educational analysis occurred primarily during a two-hour panel discussion titled "Re-thinking Structured Settlements". S2KM assisted NASP in organizing this panel discussion. Jeremy Babener's NASP presentation titled "Factoring and the Structured Settlement Tax Subsidy" preceded and contributed to NASP's strategic discussions.

NASP Panel Discussion: "Re-thinking Structured Settlements".

Moderator: Earl Nesbitt, Executive Director of NASP.

Panelists: Jeremy Babener; Matthew Bracy; Daniel Hindert; Richard Risk; Andrew Savysky; Robin Shapiro; Michael Upchurch.

Format: S2KM identified and submitted to NASP a preliminary list of strategic structured settlement questions. NASP encouraged the panelists to identify and address S2KM questions that most interested them. NASP allocated time for audience questions and participation.

Primary S2KM questions addressed by the NASP panel:

• Which 2009 events and developments (legal; financial; political) will most significantly impact the future of structured settlements?
• What are the best and worst structured settlement business practices?
• Are factoring transactions good or bad for structured settlements?
• Does public policy support state court ordered structured settlement factoring transactions?
• How has the financial crisis changed the structured settlement market? Note: although NASP's strategic panel acknowledged the importance of this issue, the panel also recognized the related comprehensive discussion by the NASP "Capital Markets" panel.

2009 structured settlement developments - as sequentially identified and discussed by the NASP panel:

• Financial and credit crisis - addressing both primary and secondary market consequences;
• Election of President Obama - highlighting anticipated legislation including health care reform and tax reform;
• J.G. Wentworth bankruptcy - what it means for traditional secondary market business models;
• Primary market departures - why leading structured settlement annuity providers continue to leave the market;
• Diminishing annuity sales - why structured settlement annuity sales are down when fixed annuity sales generally are way up;
• Spencer v. Hartford - how the recent United States Second Circuit Court decision (denying Hartford's appeal) impacts the Hartford class action lawsuit and which other structured settlement programs are now at risk for potential RICO class action lawsuits?
• Revised California protection statute - viewed by the panel as a legislative victory for the structured settlement industry and featuring specific "best interest" criteria for state judges to consider in California settlement transfer cases.
• Fresno County cases - viewed by the panel as a judicial victory for the structured settlement industry with an appellate court ruling that public policy supports state court approved structured settlement factoring transactions.
• Rapid Settlement cases - viewed by the panel as a victory for the structured settlement industry with continuing judicial denial of arbitration alternatives to state court approved transfers pursuant to IRC 5891 and state structured settlement protection statutes.
• Scott Rothstein ponzi scheme - identified as a legal and public relations reminder that all participants in settlements featuring periodic payments with potential subsequent payment transfers would benefit from applicable legislation (protection statutes) and required state court approvals.

Best and worst business standards and practices - as identified and discussed by the NASP panel:

• Primary market
  • Best practices
    • SSP's "Standards of Professional Conduct for Settlement Planners" - including Rule 9 titled "Factoring Structured Settlements";
    • IRC 468B qualified settlement funds;
    • Full market quoting surveys;
    • Multiple (blended) product offerings, licensing and expertise.
  • Worst practices
    • Alleged RICO violations in the Spencer v. Hartford class action lawsuit;
    • Over-structuring the wrong cases and with the wrong periodic payments;
    • Lack of disclosure to injury victims - about compensation sharing; conflicts of interest; IRC 5891; and state protection statutes;
    • No applicable "best interest" legislation or standards;
    • Mischaracterization by and of "agents" (loyal to annuity providers) as "brokers" (loyal to injury victims);
    • Defendant "approved lists" of agents and funding companies;
    • Affiliated company funding programs;
    • "Pay for play" endorsements by professional associations.
• Secondary market
  • Best practices
    • Business practices required by IRC 5891 and NCOIL's model state structured settlement protection statute - including judicial approval; best interest standard; disclosure; notification;
    • Standards and business practices endorsed by NASP;
    • Competitive bidding fostered by the Internet.
  • Worst practices
    • "Cash now" advertising;
    • Non-competitive bidding fostered by television advertising;
    • Failure to fund (or delayed funding) of court ordered settlement transfers.

Is the secondary market good or bad for structured settlements? This question was discussed in detail during the NASP 2008 Annual Meeting with Jack Meligan and Michael Upchurch providing a primary market critique of the secondary market. NASP's 2009 Annual Meeting featured two published critics of secondary market business behavior: Judge Edward Burke of Arizona and attorney Daniel Hindert of Utah. In addition, Michael Upchurch participated on the NASP strategic analysis panel. If the NASP program reached any conclusion for this issue, it was: the secondary structured settlement market is a reality. Whether the secondary market is good or bad for structured settlements depends upon business behavior and business results in both the primary and secondary markets.

Does public policy support state court ordered structured settlement factoring transactions? Jeremy Babener discussed the public policy arguments for and against factoring transactions. Babener concluded that more information is needed to make a comprehensive public policy declaration. The recent California appellate court decision in Henderson v. Scioteco holds that public policy supports state court approved factoring transactions. Babener, acknowledged the importance of the decision, but disagreed with the California court's characterization of IRC 5891 as an "express sanction" of factoring. Richard Risk agreed with Babener that IRC 5891 does not contain a clear statement of public policy about factoring. Risk, however, pointed to examples of IRC 5891 legislative history that contradict any claim that public policy is against structured settlement factoring. As one example, Risk cited the Joint Committee on Taxation’s report released on March 18, 1999, “Tax Treatment of Structured Settlement Arrangements,” which Risk interprets as public policy support that structured settlements can co-exist with factoring.

S2KM applauds NASP for:

• Focusing much of its 2009 educational program on strategic structured settlement industry issues; and also for
• Inviting and featuring  structured settlement industry experts with diverse viewpoints and opinions.

NASP 2009 Annual Meeting - 2

The purpose of this S2KM blog post is to summarize educational discussions which occurred at the NASP 2009 Annual Meeting. In a prior post (NASP 2009 Annual Meeting-1), S2KM listed the discussion topics, moderators, speakers and panelists and also identified Van Tran as the winner of the NASP 2009 Alexander Hamilton award. In subsequent blog posts, S2KM will provide analysis and feature interviews with selected NASP educational program participants.

2009 Legislative Developments - Matthew Bracy summarized California Senate Bill 510 which Governor Arnold Swarzenegger signed into law October 11, 2009 and which becomes effective January 1, 2010. Among changes to the California structured settlement protection statute, SB 510 adds factors for the court to consider when determining whether a proposed transfer is fair, reasonable and in the payee's best interest. These factors now include the reasonable preference of the payee considering age and mental capacity. Bracy also summarized the new North Dakota structured settlement protection statute which generally follows the NCOIL Model Act. North Dakota becomes the 47th state to enact structured settlement protection legislation.

Legal Case Update - Tricia Laborde's legal case update focused primarily on the Fresno County cases and Rapid Settlement cases. Among other holdings in Scioteco v. Henderson, a California appellate court ruled that public policy supports state court approved structured settlement factoring transactions. In Allstate v. Rapid Settlements, which denied Rapid's appeal, U.S. Third Circuit Judge Joseph F. Weis, Jr. noted: "We are one of the many courts to face Rapid Settlements' transparent attempt to use this arbitration scheme to evade the legislatures' intentions to protect the recipients of structured settlement payments".

What Happened in California? - A panel of legal and political experts provided background and analysis of SB 510 and the Fresno County cases. NASP lobbyist Carl London summarized the collaboration between NASP and Consumer Attorneys of California (formerly the California Trial Lawyers), plus the role of California legislator Van Tran, in securing enactment of SB 510. Linda Morris, General Counsel for J.G. Wentworth, provided background information and strategic commentary about appellate decisions for the Fresno County cases which she characterized as an important victory for the structured settlement industry.

Transactional Structured Settlement Issues - A panel of attorneys discussed practical problems in securing judicial approval for proposed structured settlement transfers. Some of the issues discussed: difficulties in determining the domicile of transient payees; privacy issues including the impact of Pennsylvania Rule 229.2; difficulties in finding independent professional advisers; and what happens when judges attempt to re-negotiate agreed upon transfers.

Structured Settlement Capital Markets - A panel of factoring company executives discussed how the 2008-2009 capital market upheaval has changed the secondary structured settlement market.
The changes:

• The cost of funds today for factoring companies (8 to 9%) equals the best discount rates offered for transfers two years ago;
• Bundling purchases of individual payment rights into a security is financially less efficient and/or available today;
• Marketing and court costs for factoring companies remain high;
• Perceived financial risks for potential insurer failure have increased;
• The impact of a potential ELNY liquidation remains uncertain.

Structured Settlement Court Practices and Issues - Judges Edward Burke of Arizona and Christopher Marshall of Oregon joined a panel of attorneys in discussing settlement transfer court practices and issues including: prior transfers by the same payee; the roles of transfer attorneys and independent professional advisers; privacy concerns for transferring payees; the advantages of utilizing a single state judge for all transfer requests; plus other problems which cause continuing judicial concerns about factoring and factoring companies.

Factoring and the Structured Settlement Tax Subsidy - Jeremy Babener addressed the important role IRC 130 and 104 tax subsidies have played in the growth of structured settlements. He summarized the political and public policy attacks against, and defenses for, structured settlement factoring transactions and questioned whether:

• The tax subsidy prevents dissipation?
• The tax subsidy discourages factoring?
• Factoring undermines the tax subsidy?

Babener challenged NASP to develop better information about who actually sells structured settlement payment rights and why.

Structured Settlement Bankruptcies - Bruce Akerly summarized his recent paper titled "The Impact of an Annuity Servicer's Bankruptcy on the Annuitant and Structured Settlement Purchaser". Akerly's conclusions:

• "The annuity payments received by a structured settlement servicing company, as well as the servicing agreement itself, become property of the bankrupt estate"; and
• "It may be possible to draft provisions in the servicing agreement to anticipate some of the consequences of the servicing company entering bankruptcy and perhaps lessen the impact on all parties."

Re-thinking Structured Settlements - a multi-disciplinary panel of industry experts addressed strategic structured settlement issues:

• What developments in 2009 will most impact the future of structured settlements?
• What are the best (and worst) structured settlement standards and business practices?
• Which structured settlement myths are most out-of-line with reality?
• How will commutations change the structured settlement market?
• What knowledge and skill sets are most important for future success in the structured settlement industry?

For S2KM reports about prior NASP meetings, see the structured settlement wiki.

All State v. Rapid Settlements

Less than one month after the Second Circuit Court of Appeals rejected Rapid Settlements' claim that the Federal Arbitration Act supersedes the New York Structured Settlement Protection Act in Pacific Life v. Rapid Settlements, the Third Circuit has reached a similar result for Pennsylvania's Protection Act in All State v. Rapid Settlements.

In its All State v. Rapid decision, the Third Circuit unanimously affirmed a decision of the United States District Court for the Eastern District of Pennsylvania which criticized Rapid's business practices and entered declaratory and injunctive relief against Rapid. Similar to the Second Circuit case involving New York's Protection Act, Rapid attempted to avoid the Pennsylvania Structured Settlement Act in the All State case by obtaining an arbitration award and court order (subsequently vacated) in Texas purporting to approve a transfer agreement.

All State refused to comply with the arbitration order and subsequently filed a complaint in Pennsylvania, where the structured settlement recipient resides, seeking declaratory and injunctive relief against Rapid.

All State argued that it was not bound to honor any such arbitration award without court approval as provided by an applicable state protection statute. The Pennsylvania District Court ruled in All State's favor and also determined that Rapid's attempt to use arbitration, and a court order confirming the arbitration award, violated the Pennsylvania Structured Settlement Protection Act.

Rapid argued unsuccessfully that Pennsylvania's Protection Act does not apply because the arbitrator did not order a "transfer" which the Pennsylvania Protection Act defines as: "Any direct or indirect sale, assignment, pledge, hypothecation or other form of alienation, redirection or encumbrance made by a payee for consideration". The Third Circuit rejected Rapid's argument as well as these additional Rapid arguments:

• The Federal Arbitration Act preempts the state statute;
• The District Court's decision was impermissibly broad; and
• The District Court's decision violated the federal full faith and credit statute.

In his written opinion denying Rapid's appeal, U.S. Third Circuit Judge Joseph F. Weis, Jr. noted: "We are one of the many courts to face Rapid Settlements' transparent attempt to use this arbitration scheme to evade the legislatures' intentions to protect the recipients of structured settlement payments".

All State's attorney, Stephen R. Harris, refused to comment about the Third Circuit decision or the future status of Rapid's arbitration business model. Other industry experts, however, point to a pending Fifth Circuit case (Symetra v. Rapid Settlements) as Rapid's next (and possibly final) legal challenge to the state structured settlement protection statutes.

For prior S2KM reporting about Rapid Settlements, see:

• Pacific Life v. Rapid Settlements
• Rapid v. Symetra
• CNA v. Rapid Settlements

For information about structured settlement transfers and state protection statutes, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Pacific Life v. Rapid Settlements

The Second Circuit Court of Appeals yesterday rejected Rapid Settlement's claim that the Federal Arbitration Act supersedes the New York Structured Settlement Protection Act.

In the case titled "Pacific Life Insurance Company v. Rapid Settlements, Ltd.", Confederation Life Insurance and Annuity Company joined Pacific Life as a Plaintiff-Appellee. Joyce Allen was the structured structured settlement recipient who attempted to transfer payment rights.

The Summary Order from three Second Circuit judges unanimously affirmed a January 5, 2007 order of the United States District Court for the Western District of New York:

• Declaring "void and unenforceable" a purported assignment to Rapid of structured settlement payment rights;
• Declaring "void and unenforceable" an arbitration award purporting to effectuate the assignment;
• Enjoining Rapid from taking any further legal action "in any forum" to recover the structured settlement annuity payments.

In its appeal, Rapid argued:

• Rapid's earlier arbitration award in Texas was valid and enforceable under the Federal Arbitration Act; and
• The Full Faith and Credit Clause in Article IV of the United States Constitution required the New York District Court "to give preclusive effect to a Texas state court judgment confirming the arbitration award".

The Second Circuit Court of Appeals rejected Rapid's argument "for substantially the reasons stated by the District Court in its order". The Court's Order noted the following as "undisputed" when the purported assignment occurred:

• Allen was a resident of New York; and
• The New York Settlement Protection Act accordingly was applicable.

For a summary of the District Court decision, see Drinker Biddle's September 2007 Structured Settlement Update.

Stephen Harris, the Drinker Biddle law partner who represented Pacific and Confederation in the Second Circuit appeal, predicts the case result will become "important judicial precedent" in other Rapid cases now pending in the Third and Fifth U.S. Circuit Courts of Appeal.

For prior S2KM reporting about Rapid Settlements, see:

• Rapid v. Symetra
• CNA v. Rapid Settlements

For more detailed information about structured settlement transfers, see updated Chapter 16 in Release 45 of "Structured Settlements and Periodic Payment Judgments".

Structured Settlements in 2007

Happy holidays from S2KM Limited. Thank you for reading S2KM's blog during 2007. This final 2007 S2KM blog post highlights some of this year's important structured settlement developments and issues.  For additional background information, see:

• S2KM Mid-2007 Structured Settlement Report
• Structured Settlements in 2006

Industry Growth and Development

• Industry insiders are predicting final 2007 structured settlement annuity sales (qualified and non-qualified) will match or slightly exceed total 2006 production of $6.1 billion.
• Membership growth in 2007 for the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP), the primary structured settlement trade associations, also appears flat. Neither of these associations has articulated a strategy for growing the structured settlement industry.
• NSSTA replaced long-time Executive Director Randy Dyer in 2007 with association management company Smith Bucklin. NSSTA has announced it will continue a business relationship with Dyer. However, NSSTA has not yet announced Dyer's new role or responsibilities.
• Annuity provider Mass Mutual exited the structured settlement industry in 2007 joining other recent industry departures such as Genworth, Travelers and Aegon. No new annuity providers entered the structured settlement market in 2007.
• The secondary life and annuity markets continued to be controversial within the structured settlement industry in 2007. Semetra resigned from NSSTA in 2007 based in part on their disagreement with NSSTA's Bylaw Amendments related to structured settlement factoring. Neither NSSTA nor SSP allows factoring companies to join their associations.
• Although the secondary structured settlement market continues to grow in 2007, the overall pace of its growth appears to have leveled off for many, but not all, participants.
• Preliminary strategic recognition and some consolidation continued during 2007 within these overlapping markets:
  
  • Structured settlements;
  • Personal injury settlement planning;
  • Litigation funding;
  • Special needs planning;
  • Secondary insurance and annuity markets.

Legislation and Regulations    

• New York Governor Eliot Spitzer announced a $750 million "agreement in principle" for Executive Life of New York in 2007. The agreement is designed to continue paying all ELNY annuitants 100% of their benefits. The announcement represents a public relations victory for the structured settlement industry. Many questions about the agreement, however, remain unanswered. For example: the amount of contributions from indemnity (casualty) insurers who own or have assigned structured settlement annuities.
• State Medicaid Agencies are continuing to adopt annuity provisions from the Deficit Reduction Act into their state Medicaid Plans. Interpretations and applications of these new annuity rules remain inconsistent creating process bottlenecks and denials. The impact of the secondary annuity markets on Medicaid qualification remains unclear in 2007. The Social Security Administration (SSA) announced in 2007 that it will draft POMS for annuities in 2008. For additional information about the Deficit Reduction Act, see:
  • Release 41 of "Structured Settlements and Periodic Payment Judgments";
  • Inconvenient Questions; and
  • NAELA Annuity Policy White Paper.
• 48 states have enacted structured settlement protection statutes. Overall, these statutes appear to be accomplishing their purposes and functioning with increasing certainty and efficiency. Pennsylvania's judiciary adopted Pennsyvania Rule 229.2 in 2007 tightening some rules and processes within that state's protection statute.
• The U.S. Treasury has not ruled on single claimant 468B funds in 2007.

Case Law - some of the significant 2007 cases:    

• DOJ Sovereign Immunity Defense - see "Drinker Biddle's Structured Settlement Update" for analysis of two DOJ sovereign immunity cases: Transamerica v. Settlement Capital and Continental Casualty v. United States.
• Primary Market Disclosure Case - "Pullman & Comley's Structured Settlement Insights" provided the first Internet analysis of Joseph v. The City of New York which Pullman & Comley characterizes as ""the first court opinion to analyze the requirements in structured settlement protection acts that disclosures be made when negotiating a structured settlement."
• Rapid Settlements cases challenging secondary market laws and business practices including:
  
  • Rapid v. Symetra; and
  • CNA v. Rapid Settlements

• Murphy v. IRS - Eleven months after ruling that taxing damage awards for nonphysical compensatory damages violated the United States Constitution, the United States Court of Appeals for the District of Columbia Circuit has reversed itself in Murphy v. IRS by holding that the United States can tax awards for emotional distress and injury to reputation.
• Macomber v. Travelers - the parties agreed to a confidential settlement in 2007.  It is unclear what legal precedents, if any, the earlier Connecticut State Supreme Court rulings in this case will hold for current or future structured settlement litigation.
  

Educational Programs and Resources

• Both NSSTA and SSP offered certification programs in 2007.    
• S2KM attended educational programs for the following trade associations in 2007 and wrote blog posts (see links) evaluating their structured settlement educational programs:          
  
  • National Structured Settlement Trade Association (NSSTA).          
  • Society of Settlement Planners (SSP)          
  • American Association for Justice (AAJ)          
  • National Academy of Elder Law Attorneys (NAELA)          
  • Academy of Special Needs Planners (ASNP)          
  • National Association of Settlement Purchasers (NASP)    
• The structured settlement industry continued to offer various additional educational resources in 2007:          
  
  • Blogs, podcasts, wikis and concept maps;          
    
  • Digital and hardcopy newsletters;          
    
  • Hardcopy legal textbooks.

Business Standards and Practices

• 2007 developments
  
  • Broker Relations Initiative - status report provided in this S2KM blog post.
  • SSP Ethics Project - status report provided in this S2KM blog post.
• 2007 issues:
  
  • Structured settlement public policy
  • Claim management vs. settlement planning
  • Consumer and investor protection including:
    
    • Compensation disclosure;
    • Informed consent;
    • Single claimant 468B funds;
    • Unfair claim practice legislation;
    • Fiduciary responsibilities for professional advisors.

• Additional compensation issues:
  • Rebating
  • Affinity programs
  • Secondary market transactions
• Unauthorized practice of law.

Deal Flow Media Webinar

Deal Flow Media publishes reports, and also sponsors webinars and conferences, about specialized financial markets.

Deal Flow Media's markets include:

• Life Settlements
• Private Investments in Public Equity (PIPEs)
• Special Purpose Acquisition Companies (SPACs)
• Reverse Mortgages
• Distressed Debt

On November 29, 2007, Deal Flow Media will enter the structured settlement market by sponsoring its first structured settlement webinar.  Please note the Postcript at the end of this post. Deal Flow Media will be rescheduling and expanding this structured settlement webinar.

In addition to Brett Goetschius, Karen Meyers and Dan Finn, this author will be one of the featured speakers. My topic will be "The Structured Settlement Secondary Market".  Some of the questions my presentation will address:

• What is a structured settlement?   
• What is a structured settlement factoring transaction?
• What are structured settlement payment rights?
• What is the secondary structured settlement market?
• How do the primary and secondary markets interact?
• Why do payees sell structured settlement payment rights?
• What definitions and legal rules apply to this secondary market?
• How large is the structured settlement secondary market?
• Who are the leading secondary market participants - and why are they successful?
• What does an investor in structured settlement payment rights actually purchase?
• What are the business and investment risks?

Additional S2KM online resources about the structured settlement primary and secondary markets:

• Structured Settlements
  • Overview of the Structured Settlement Market
  • History of Structured Settlements
  • Future of Structured Settlements
  • Structured Settlement Transaction Diagram
  • Structured Settlement Public Policy Wiki
  • Structured Settlements and Government Benefits
  • Blog posts featuring Robert Wood's podcasts
    • Structured Attorney Fees
    • Single Claimant 468B Funds
• Structured Settlement Secondary Market
  • Structured Settlement Transfers
  • Settlement Transfer Update
  • Settlement Transfers - Release 39
  • How the Primary Market Views Factoring
  • NSSTA Bylaw Amendments
  • J.G. Wentworth v. Peachtree Settlement Funding
  • Settlement Transfers: Wentworth and Symetra
  • Rapid v. Symetra
  • Review of Robert Wood's article: "Structured Settlements: Factor vs.Commute".
• National Association of Settlement Purchasers (NASP)
  
  • 2007 Annual Meeting
  • 2006 Annual Meeting
  • NASP Wiki

Postcript - added November 28, 2007

• Deal Flow Media has decided to reschedule and expand its structured structured webinar.  Deal Flow Media will announce new dates and details for its expanded webinar on Deal Flow Media's website.   This author will appear as a participant in Deal Flow Media's structured settlement webinars- and will also provide continuing S2KM blog coverage of Deal Flow Media's structured settlement publications.
• S2KM has added corrected links for the following concept maps developed by Dr. Barbara Bowen of Sound Knowledge Strategies.  Each concept map includes embedded submaps and links.
  • Overview of Structured Settlement Markets
• How the Primary Market Views Factoring

For additional information about S2KM's collaboration with Barbara Bowen, see "Web 2.0 for Lawyers Concept Map".