Beyond Structured Settlements

S2P2J Releases 43 and 44

ALM has published and distributed Release 43 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert, S2P2J is a legal textbook first published in 1986 and updated semi-annually.

S2P2J Release 43 topics:

• Executive Life of New York (ELNY)
• Non-qualified structured settlements
• Single claimant 468B
• Factoring
  • Arbitration cases; and
  • DOJ's sovereign immunity defenses.
• Macomber v. Travelers
• Ohio 2007 laws for suitability and disclosure of annuities
• Constitutional findings on periodic payment statutes

Release 44 is a work-in-progress. Here are some of the highlights:

• Market growth - S2P2J Chapter 1 addresses the history and expanding use of structured settlements and periodic payments. For the past several years, the structured settlement industry has reported flat annual annuity sales of approximately $6 billion. Structured settlement legal developments, however, have continued to expand at an accelerating pace. S2KM's blog has reported recent market surveys sponsored by NSSTA and AIG. These studies, plus the growth of non-qualified assignments, will be addressed in Release 44.
• Settlement Trusts - S2P2J Release 44 will include a new Chapter 3 section titled "Settlement Trusts". This new section will organize and expand existing S2P2J coverage of settlement trusts which already includes detailed reporting about many types of settlement trusts and issues including the SBU and Stanwich debacles. The expanding markets for settlement planning and special needs planning highlight the increasingly important interaction of structured settlement annuities and settlement trusts including: government bond trusts; reversionary grantor trusts; settlement preservation trusts; special needs trusts; Medicare set-aside trusts; and IRC section 468B trusts. As settlement trusts continue to proliferate, criteria for selecting a settlement trustee becomes increasingly important and will be addressed in Release 44.
• Roles and Responsibilities - The NSSTA and AIG structured settlement market surveys each spotlight plaintiff attorneys (and presumably plaintiff structure settlement advisers) as important for future market growth. Release 44 will take a closer look at the structured settlement roles and responsibilities of plaintiff attorneys (in Chapter 5) and plaintiff structured settlement consultants (in Chapter 6). Release 44 will feature an expanded analysis of how the ABA Model Rules of Professional Conduct and SSP Standards of Professional Conduct impact key structured settlement stakeholders.
• Government Benefits - Release 44 will continue to expand and improve S2P2J Chapter 15 (Government Benefits and Structured Settlements). Featured topics will include the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) as well as the continuing problems for structured settlements created by the Deficit Reduction Act of 2005 (DRA). Release 44 will highlight the need for more specific structured settlement legal authority related to Social Security, Medicare and Medicaid.
• Structured Settlement Transfers - The secondary annuity market represents a strategic challenge for the primary structured settlement market. S2P2J Chapter 16 continues to track and analyze secondary market developments. Release 44 will update state structured settlement protection legislation in West Virginia and Rhode Island. Release 44 also will continue to track business conduct of factoring companies including the Fresno County, California cases (Cox and Caldwell) and the Rapid Settlements arbitration cases.

Pullman & Comley's Structured Settlement Insights-2

Pullman & Comley's Summer 2008 edition of its "Structured Settlement Insights" summarizes three recent and significant developments impacting the structured settlement secondary market:

• Two Fresno County, California Superior Court decisions finding violations of the California Structured Settlement Protection Act (SSPA) by factoring companies involving more than 100 cases;
• West Virginia's Amendments to its SSPA;
• Rhode Island's new judicial rules for settlement transfers.

S2KM has previously reported about the West Virginia and Rhode Island developments.

The Fresno County, California cases (In Re Derrick Cox and In Re Richard Shawn Caldwell) will likely become two of the most controversial cases in the history of the structured settlement industry. The results, as summarized by Pullman & Comley:

• "In two separate rulings that address more than 100 transactions involving transfers of structured settlement payment rights, courts in Fresno County, California have found that factoring companies have repeatedly failed to meet the requirements of the California Structured Settlement Protection Act - and that the defects according to these courts would render void those prior court-approved transfers.
• "The courts criticized the practices of the factoring companies and their attorneys, and indicated that the defects also meant that the factoring companies had violated other California statutes, including that state's consumer protection statute".
• "The Cox and Caldwell cases are still pending" - as of the distribution date of the Pullman & Comley newsletter.

In addition, each Court ordered:

• Their clerks to deliver a copy of their order to the Supervising Deputy Attorney General of California and the California Bar Association;
• The factoring companies to file copies of their order with each future transfer petition in Fresno County;
• The factoring company attorneys to serve a copy of their order to each person entitled to service in each case and to provide the Court with proof of service.

The factoring companies involved in these California cases are 321 Henderson (an affiliate of J.G. Wentworth), Novation Capital and Settlement Funding (aka Peachtree Funding).

In denying transfer petitions by 321 Henderson (in Cox) and Novation (in Caldwell), Fresno County Superior Court Judges Alan M. Simpson and Aldolfo M. Corona identified the following defects:

• Failure to provide proper notice to all interested parties - including insurers, counsel for payees and beneficiaries;
• Failure to provide all of the documentation required by the California SSPA - including a complete copy of the annuity contract;
• Failure to provide material information about prior transfers and/or transfer applications;
• Omissions of portions of the annuity contracts including anti-assignment language and names of beneficiaries;
• Existence of anti-assignment language in settlement documentation;
• Transfers not in payee's best interest because of high discount rates;
• In Cox, a failure to itemize expenses to be deducted from the purchase price.

Many of the rulings and issues in Cox and Caldwell are controversial and, according to some legal experts, almost certain to be appealed. Among the issues that may be appealed:

• Prior approved transfers - In addition to denying, with prejudice, the Cox and Caldwell transfer petitions, each court reviewed and declared "void" prior transfer orders. In the Cox case, these prior approved transfer orders number more than 100 and include transfer orders issued by California courts outside of Fresno County. It is unusual, some experts say unheard of, for a trial judge sua sponte to overturn another trial judge in another case. To reach this result, the Cox and Caldwell decisions rely on two unique provisions of the California SSPA:
  • The Superior Court has continuing jurisdiction over a structured settlement transfer even after an order approving transfer;
  • A transfer is "void" unless the transfer complies with all of the requirements of the statute and does not contravene other applicable law.
• Loan vs. sale - Each court analyzed whether the proposed transfers were loans as opposed to sales and concluded:
  • Each proposed transfer, as well as each prior approved transfer reviewed by the courts, can be characterized as a debtor-creditor relationship;
  • The interest rates in each case exceeded the 10 percent maximum permitted by California's usury law;
  • Violation of California's usury law renders each transaction void. 
• Consequences of voiding prior orders
  • Cox Court interpretation - According to the Cox court, "the difference between void and voidable is significant.  A voidable transaction requires an act by a party to have it declared invalid. Where a transaction is void, however, it was never valid. A void contract cannot be ratified by later conduct, nor can one be 'estopped' to deny its invalidity".
  • Rights of interested parties - Having each expressed serious concerns about the rights of interested parties in the Cox and Caldwell cases, neither Judge Simpson nor Judge Corona appear to have given any consideration to the rights of interested parties (including notice) involved in the prior court orders they declared void.
  • Tax consequences - What are the tax consequences for the annuity assignors, assignees, payees and transferees if a previously approved court order is declared void?
  • Payment rights - Although each court refused to allow the factoring company to recover funds paid to original structured settlement payees, neither court expressly ordered a redirection of the periodic payments to the payees.
• Anti-assignment clauses - Each court cited the existence of anti-assignment provisions in the governing contracts as important justifications for voiding proposed transfers and prior court-approved transfers. Significantly, however, neither Judge Simpson nor Judge Corona mentions that anti-assignment clauses are not self-executing. As the California Court of Appeals stated in 2007 in Rapid v. Symetra: courts will enforce a clear and explicit anti-assignment provision in structured settlement agreements provided the interested parties timely object after having been given notice and an opportunity to be heard. (emphasis added) No such objection appears to have occurred in any of the cases reviewed by Judge Simpson or Judge Corona.

For prior S2KM coverage of Pullman & Comley's Summer 2007 "Structured Settlement Insights", see this blog post.

For additional information about the secondary structured settlement market, see:

• S2KM's blog post "Secondary Life and Annuity Markets"; and
• Chapter 16 in "Structured Settlements and Periodic Payment Judgments" co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert.