Beyond Structured Settlements

S2P2J Release 57 Highlights

The United States structured settlement market has been in existence for more than 35 years and continues to expand its scope, complexity and importance within the context of personal injury settlement planning.

Since it was first published in 1986, "Structured Settlements and Periodic Payment Judgments" (S2P2J), has provided structured settlement stakeholders with an authoritative reference guide, consisting of 16 chapters with extensive footnotes and Appendix documents, to help them understand issues and fashion settlements and judgments utilizing periodic payments. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs.

Co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert, S2P2J now features an online version as well as the traditional hardcopy. Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

Publisher Law Journal Press anticipates a March 2015 distribution date for hardcopy supplements for S2P2J Release 57 with online S2P2J subcribers receiving their update simultaneously with no additional subscription charge. Competent professionals confronted by structured settlement issues should have access to an up-to-date copy (or the online version) of this indispensable source book.

Release 57 Highlights - Release 57 will feature new, updated and/or expanded sections addressing the following structured settlement topics:

• WCMSAs - Release 57 re-positions and expands S2P2J's extensive summary of the new CMS rules for workers compensation Medicare set-asides, the fastest growing segment of the structured settlement primary market. Regulatory rules for liability MSAs remain essentially unchanged following the withdrawl by CMS on August 8, 2014 of it the liability MSA-related NPRM it had earlier submitted to the Office of Management and Budget.
• Indexed Annuities - PLR 143928-13 highlights the potential importance of indexed annuities and annuity riders as structured settlement funding alternatives. Release 57 features a new section explaining indexed annuities, differentiating variable annuities and summarizing the related PLR.
• Commutation Riders - PLR 143928-13 also provided favorable tax treatment for a commutation rider pursuant to a Notice of Hardship Conversion as a potential alternative to factoring transactions. This PLR justified an expansion in Release 57 of S2P2J's current section discussing commutations.
• Non-qualified Assignments - Most non-qualified assignments depend upon off-shore assignment companies which raise tax and security issues for participants. Release 57 expands S2P2P's analysis of non-qualified assignments to address these issues.
• CLM Advisors Surveys - Release 57 summarizes results from two surveys commissioned by NSSTA to determine the value claims executives and adjustors place on structured settlements and structured settlement consultants. The results and related metrics are generally favorable and arguably provide a valuable marketing blueprint for defense brokers.
• ABLE Accounts - Release 57 features a new section describing ABLE Accounts, a tax-preferenced funding option authorized by the Achieving a Better Life Experience Act (ABLE Act) of 2014. Although some structured settlement consultants view ABLE Accounts as a competitive product, others see opportunities to fund ABLE accounts using structured settlements.
• Insurance Regulation - States historically have regulated insurance in the United States. As a result of the 2008 global financial crisis, however, new federal and international insurance regulatory agencies now exist which are targeting some of the largest structured settlement annuity providers among other financial and insurance companies. Release 57 adds a new section to introduce and explain these new regulatory developments and entities.
• ELNY and Reliance - The recent ELNY and Reliance liquidations have each impacted thousands of structured settlement recipients. Although judicial solutions have been fashioned, litigation continues - as least involving some ELNY shortfall payees. Release 57 updates S2P2J's extensive coverage of the ELNY and Reliance liquidations.
• Role of Plaintiff Attorneys - As structure settlements and personal injury settlement planning have become more complex, and plaintiff attorneys increasingly require the services of other settlement planning professionals, plaintiff attorneys should continue to perform certain essential structured settlement and settlement planning roles. Release 57 identifies and discusses those roles and provides additional related advice for plaintiff attorneys.
• Secondary Market Update - The continuing expansion of the secondary market has generated controversy and litigation as well as legislative reform and changing business practices. S2P2J continues to track these developments in expanding chapter 16 titled "Transfers of Structured Settlement Payment Rights". Release 57 highlights include "anti-assignment" issues in Illinois originating with the Brenston case and the market "chaos" some secondary market participant see occurring as the result of the Washington Square v. RSL Funding case.
• IRC 104(a)(2) Treasury Regulations - Recent U.S. Treasury Regulations for IRC 104(a)(2) relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness make two primary changes to the current regulations which Release 57 summarizes in the context of S2P2J more extensive analysis in Chapter 2 of "Taxation of Damages Received by the Claimant".

For related S2KM blog reporting about structured settlement 2014 developments, see:

• Primary market
• Secondary market
• Settlement planning
• ELNY and Reliance

 

Structured Settlements 2014 - Secondary Market

Is the bloom finally off the rose for structured settlement secondary market leader JGWPT Holdings, Inc. (JGWPT) whose subsidiaries include J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree)?

Despite strong sales since 2010, punctuated by the November 25, 2014 announcement that it had issued $207,501,000 of Fixed Rate Asset Backed Notes collateralized primarily by payment rights rights arising under court ordered structured settlement payment purchase contracts, JGWPT's NYSE per share price closed at $8.65 on December 12, 2014, down drastically from its 2014 high of $19.88 on March 4.

When JGWPT's Holdings IPO occurred November 8, 2013, with an initial offering price of $14.00 per share, one analyst opined the stock was worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

After JGW consolidated its 2011 merger with Peachtree, various industry experts estimated the combined combined company's structured settlement secondary market share totaled somewhere between 50% and 75%, and its share of industry profits exceeded 80%.

What happened?

Zacks Investment Research published two reports earlier this month on December 2 ("JG Wentworth - Bear of the Day") and December 9 ("What Falling Estimates & Price Mean for J.G. Wentworth").

Zacks' conclusion: "A key reason for this [downward stock price] move has been the negative trend in earnings estimate revisions. For the full year, we have seen four estimates moving down in the past 30 days, compared with no upward revision. This trend has caused the consensus estimate to trend lower, going from $1.71 a share a month ago to its current level of $1.45."

What has caused JGW's negative trend in earnings estimates?

As summarized in S2KM's 2013 annual report about the structured settlement secondary market, JGWPT faced a multitude of problems and controversies prior to 2014. New and/or expanded problems have occurred during the past 12 months - in particular:

• Brenston case law "progeny"; and
• Washington Square v. RSL.

Brenston 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, previously 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".

The denial of Peachtree's petition for review has substantially reduced the secondary structured settlement market in Illinois according to industry sources. Some annuity providers reportedly have refused to waive anti-assignment provisions in Illinois cases while others evaluate them on a case-by-case basis. In addition, some annuity providers are citing Brenston to challenge transfers in other states.

The Brenston case was also quickly followed by Sanders v. JGWPT Holdings, a class action lawsuit, accusing JGWPT Holdings, Inc., several affiliate companies including JGW and Peachtree, 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.

Washington Square v. RSL

In this case, 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.

As a result of this case, a strategic marketing shift appears to be occurring within the structured settlement secondary market as rival transfer companies increasingly search court records and seek to outbid other transfer companies who are awaiting court approvals. This marketing shift may provide lower discount rates for some structured settlement recipients when they sell their payment rights. The impact on the secondary market, however, will be "chaos", according to some participants, including extra "informational" demands on the judicial system responsible for administering the state protection acts.

For JGW and Peachtree, who have invested millions of dollars to build their TV and Internet brands, this strategic marketing shift promises new, much less-well financed competitors. Like pilot fish, these competitors can be expected to offer competitive bids based upon public court filings of not-yet-approved transfers proposed by JGW and Peachtree (as well as other established transfer companies) rather than based upon their own independent marketing. Assuming this occurs, the likely per case results for JGW and Peachtree will be lower success ratios and higher costs.

ADDENDUM (added December 15, 2014) - JGWPT's September 10, 2014 Form S-1/A filing with the SEC identifies multiple "Risk Factors" at least two of which could impact other structured settlement stakeholders:

• "[T]he insolvency or downgrade of a material number of structured settlement issuers." S2KM will discuss these rating downgrades, which include Genworth, Hartford and Aviva, in a subsequent 2014 annual report about ELNY and Reliance.

• "[T]he impact of the March 2014 Consumer Financial Protection Bureau inquiry and any findings or regulations it issues as related to us, our industries, our products or in general." (emphasis added)

Change of Directions for JGWPT?

One apparent result of JGWPT's continuing problems and controversies has been a change of CEOs with Stewart Stockdale replacing David Miller in July 2014. Another result appears to be a more diversified strategy away from structured settlements.

In a November 13, 2014 press release, Stockdale stated: "We are in the early stages of transforming J.G. Wentworth and are excited about the groundwork we have laid to achieve the three key strategic pillars -- Grow the Core, Become an Information-Based Company, and Diversify." To date, this proposed transformation does not appear to have impressed investment analysts or positively impacted JGWPT's common stock.

Other 2014 Secondary Market Developments

• Educational Dialogue - For the first time, educational programs sponsored by the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) featured representatives of the National Association of Settlement Planners (NASP) as participants in secondary market panel discussions. For the ninth consecutive year, NASP featured primary market representatives speaking about primary market issues at their annual educational conference. For summaries of these conferences, see the structured settlement wiki.
• Case Law - In addition to the Washington Square and Brenston-related cases summarized above, noteworthy 2014 case law developments occurred in Texas and New York related to split payments and servicing arrangements. Two Texas cases required JGW to continue servicing arrangements under prior court approved orders and also to service subsequent assignments by the same payees to another transfer company. Multiple New York judges expressed their concerns about servicing arrangements while approving structured settlement transfers. At least 27 state structured settlement protection acts prohibit partial transfers. During 2013, MetLife began actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers 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.
• State Legislation - Although structured settlement protection act (SSPA) activities occurred in Florida, Wisconsin, Minnesota, Louisiana, and Mississippi during 2014, only Minnesota enacted a legislative amendment. Minnesota amended its SSPA to require notice of the date and judicial district of any prior application for transfer filed by the transferee relating to a prior proposed transfer with the payee including whether the proposed transfer was approved or denied. If granted, such notice must provide the amount and due dates of transferred structured settlement payments, the aggregate amount, the discounted present value and the gross amount payable to the payee.
• PLR-143928-13 - Issued by the Internal Revenue Service in August, this two-part private letter ruling approves favorable tax treatment for a structured settlement annuity which includes the possibility of a commutation by the recipient pursuant to a Notice of Hardship Conversion. In a prior blog post, S2KM described this PLR as potentially "game changing" because it overcomes an industry concern (enunciated in a 2006 Robert Wood article) that commutations do not qualify for favorable tax treatment afforded third party factoring transactions under IRC 5891.
• Re-cycled payment rights - Representing a small fraction of secondary market sales, the resale to personal injury victims and their attorneys of payment rights previously acquired in a structured settlement factoring transaction (sometimes misleadingly referred to as "recycled structured settlements") continues to cause serious concern among most primary market participants. NSSTA considers engaging in or promoting the marketing or distribution of re-cycled payment rights to be risky, confusing and unregulated investment activity and inconsistent with its Mission.
• Discount rates - Discount rates for structured settlement transfers vary widely depending upon multiple factors including: single vs. multiple bids; fixed vs. life contingent payments; size of payments purchased; length of payment deferral; perceived financial strength of the annuity provider; and/or state law (eg. North Carolina rate cap). The NCOIL State Structured Settlement Protection Model Act, which NSSTA and NASP have agreed to support, contains a definition for "discounted present value" which is generally higher than, and unrelated to, the discount rate actually incorporated into most structured settlement transfers. Regardless of discount rates, judges continue to deny proposed transfers that do not otherwise satisfy the "best interest" test. Reasons include: funds from prior transfer(s) were not used for stated purposes; stated purposes do not justify approval.
• Secondary market sales
  • Based on interviews with industry experts in 2012, S2KM estimated 2012 structured settlement activity to be:
    • 12,000 secondary market transfers - with less than 120 contested by annuity owners and/or providers.
    • $360 million of total secondary market purchases (money paid to transferors).
    • $30,000 average individual transfer.
  • Opinions differ as to secondary market sales growth during 2013 and 2014 ranging from no growth to 7% growth per year.

S2KM will address 2014 developments related to personal injury settlement planning and the ELNY liquidation in subsequent blog posts,

For additional related S2KM reporting, see:

• NASP 2014 Annual Conference.
• Primary Market 2014 Report
• Prior Year Annual Reports

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.

S2P2J Release 55

Publisher Law Journal Press anticipates a Spring 2014 distribution date for hard copy supplements for Release 55 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) with online S2P2J subscribers receiving their update automatically and simultaneously. Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

First published in 1986 and updated semi-annually, S2P2J is co-authored by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert (S2KM's Managing Director). Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs.

Release 55 Highlights - Release 55 will feature new, updated and/or expanded sections for the following topics:

• Risks of using off-shore companies and re-cycled structured settlements to fund qualified assignments.
• Meeting professional responsibilities for product disclosures.
• Subrogation rights impacting structured settlements.
• Choice of law provisions for attorney compensation.
• Medicaid liens and the 2013 Bipartisan Budget Act.
• How the Brenston case impacts transfer applications.
• Document drafting and anti-assignment restrictions.
• Vermont's structured settlement protection act amendments.

Meta Structured Settlement Themes

Reviewing S2P2J Release 55 and other recent S2P2J highlights, S2KM notes two related structured settlement meta themes:

• Transformational market developments.
• Changing roles, responsibilities and work product.

Transformational Market Developments

A growing dichotomy exists between stagnant primary market sales and multiple, ongoing transformational developments impacting the structured settlement market - the most significant of which are addressed in S2P2J Chapter 15 ("Government Benefits and Structured Settlements") and Chapter 16 ("Transfers of Structured Settlement Payment Rights").

Supplemental resources - structured settlement market developments:

• Recent and upcoming structured settlement, settlement planning and special needs educational conferences.
• S2KM's 2013 structured settlement industry reports:
  • Part 1 - Primary market
  • Part 2 - Settlement planning
  • Part 3 - Secondary market
  • Part 4 - ELNY and Reliance
• S2KM's 2014 structured settlement market updates:
  • Primary market
  • Secondary market

Changing Roles, Responsibilities and Work Product

The transformational market developments outlined above are causing and requiring significant changes to structured settlement roles, responsibilities and work product.

These changes feature more prominent roles for new professional stakeholders (settlement planners, special needs planners, settlement trustees, lien resolution specialists, damage allocators, factoring companies, secondary market brokers and attorneys) as well as adjustments for traditional professional stakeholders (defense and plaintiff attorneys, defendants and liability insurers, structured settlement consultants and annuity providers, judges, mediators, and guardians).

Defense and Plaintiff Attorneys

The original S2P2J publication (1986) included comprehensive chapters detailing respectively the roles and responsibilities of defense attorneys (Chapter 4) and plaintiff attorneys (Chapter 5) in structured settlements. These chapters continue to be updated reflecting new legislative and regulatory developments as well as changing business models and practices.

Release 54, for example, substantially expanded and re-organized S2P2J's coverage of defendant structured settlement disclosure issues. Release 55 enumerates a list of "best practices" for defense attorneys and includes a new structured settlement Appendix document to disclose material information about the costs, commissions and other elements of case specific funding. Release 55 also identifies and summarizes new structured settlement case law related to plaintiff attorney settlement planning, compensation and document drafting responsibilities.

Structured Settlement Consultants

Release 54 expanded and updated S2P2J's existing coverage (Section 6.02) of structured settlement consultants to address: consultant selection criteria; structured settlement product suitability; and consultant business practice issues including laws and regulations, industry standards, commission disputes, privacy rules, and disclosure and representation requirements.

Release 55 adds, as a new Appendix document, the SSP "Standards of Professional Conduct for Settlement Planners" which SSP describes as "rules of reason ... intended to impose high standards on professional settlement planners" including structured settlement consultants.

S2KM's recent summary of the AAJ 2014 Winter Meeting highlighted continuing concerns about structured settlement business standards and practices including:

• Questions about product suitability, disclosure standards and informed consent in the context of expanding structured settlement product and service offerings.
• Misrepresentations in structured settlement sales materials plus a general failure of these same sales materials to provide any information about the transfer issues.

Judges Reviewing Transfer Applications

The recent Settlement Planning v. Brenston and Sanders v. JGWPT Holdings cases highlight changing standards for judicial review of anti-assignment restrictions. S2P2J Chapter 16 ("Transfers of Structured Settlement Payment Rights") already includes an entire section discussing "Judicial Review of Transfer Applications" plus detailed analysis of structured settlement anti-assignment restrictions (Sections 16.02[2][c] and [d] and 16.05[4][c]).

Release 55 expands S2P2J's anti-assignment analysis concluding that recent court decisions "should cause judges reviewing transfer petitions to require the full text of structured settlement documentation to see if an anti-assignment provision is present. Without such information, transfer approvals are subject to being found to be void ab initio and thus open to invalidation at any time."

S2P2J also features, as an Appendix document, NSSTA's Annotated and Non-annotated Model Qualified Assignment and Release Agreement. NSSTA's Model Agreement includes recommended language (Paragraph 7 - "Acceleration, Transfer of Payment Rights") for addressing anti-assignment issues in the context of IRC Section 5891 and the state structured settlement protection acts.

Sanders v. JGWPT Holdings

A new Class Action lawsuit has escalated the legal battle in Illinois concerning the impact of "anti-assignment" restrictions on transfers of structured settlement payment rights.

In the lawsuit, Plaintiff Valerio Sanders seeks to represent the following class: "Those individuals who sold part or all of their structured settlement annuities under the provisions of the Illinois [Structured] Settlement Protection Act, where the original structured settlement contract contained a valid and enforceable anti-assignment clause."

Filed February 11, 2014 in the Twentieth Judicial Circuit Court St. Clair County, Illinois, the Class Action Complaint accuses Defendants JGWPT Holdings, Inc., several affiliate companies including J.G. Wentworth and Peachtree Settlement Funding (JGWPT entities), and Illinois attorney Brian P. Mack of violating the Illinois Consumer Fraud and Deceptive Business Practice Act (ICFA).

The Class Action Complaint alleges "the JGWPT entities ... intentionally failed to inform potential sellers that a valid and enforceable anti-assignment clause prohibited the sale of deferred payment annuities because the JGWPT entity intended to defraud the seller and the Illinois courts by filing false pleadings under the Illinois [Structured] Settlement Protection Act in order to obtain large amounts of deferred cash payments for discounted present lump sum amounts and reap the tax benefits of the same in violation of federal law."

Section 2 of the ICFA provides in part: "[U]nfair or deceptive acts or practices, including but not limited to the use or employment of any deception, fraud, false pretense, false promise, misrepresentation, or the concealment, suppression of omission of any material fact .... in the conduct of any trade or commerce are hereby declared unlawful ..."

The Class Action Complaint alleges Defendants used their advertising and solicitations to cause Plaintiff Valerio Sanders and other sellers to believe they could obtain cash for their structured settlement payment rights, "but intentionally failed to inform the potential sellers that if there was a valid and enforceable anti-assignment clause in the settlement contract, no lump sum payment could be received in exchange for the seller assignment the deferred payments because any such "order" issued by an Illinois court approving such a transfer would be void. Moreover, the legal proceeding would violate federal law."

The Class Action Complaint further alleges:

• When a potential seller had a valid and enforceable anti-assignment clause, the JGWPT entities would routinely hire Brian P. Mack to obtain a "Qualified Order" pursuant to the Illinois Structured Settlement Protection Act so that the deferred payments could be purchased at a deeply discounted rate, and without any tax consequences.
• Attorney Mack "would personally counsel the seller ... on how to create Illinois jurisdiction and venue, how to find a 'friendly court', how to avoid appearing in court, how to obtain the services of 'independent counsel', ..... or inform them they could waive the right, and how to finalize the details to obtain the lump sum payment."
• Valerio Sanders' "Settlement Agreement and Release" included an anti-assignment clause which provided: "The periodic payments to be received by the Payee(s) pursuant to paragraphs 2B are not subject in any manner to anticipation, alienation, sale or transfer, assignment, pledge or encumbrance by Payee(s)."
• The Petition filed by Mack claimed: "That the assignment does not contravene any federal or state statutes or the order of any court or responsible administrative authority."
• "Mack knew that this allegation was false and misleading as Plaintiff's settlement contract had a valid and enforceable anti-assignment clause."
• "....[F]ailure to inform Plaintiff that the order obtained from the court was in violation of Illinois and federal law was fraudulent and a material omission under the ICFA and a violation of the ICFA."
• In a subsequent transfer involving Plaintiff Sanders and the Defendants, Mack's representation that jurisdiction and venue were proper was also a fraudulent misrepresentation because the action was filed in Madison County and the Plaintiff never lived in Madison County and the underlying action did not accrue there.
• Plaintiff and putative class members relied on materials misrepresentations made by JGWPT entities and attorney Mack and sold payment rights under circumstances where the sale was contrary to Illinois law as well as the laws of various other states, "thus rendering the alleged transfers void, and were a fraud on the Internal Revenue Service of the United States government under 26 U.S. Code section 130."

The Complaint requests the court for an Order awarding both Plaintiff Sanders and the Class compensatory and punitive damages plus injunctive relief against Defendants to prohibit them from continuing to defraud the Class and the courts of Illinois plus attorney fees and costs.

Brenston Case

To support their legal arguments in the Sanders Class Action, Plaintiff attorneys: Cates Mahoney, LLC and Brad L. Badgley, P.C. cite six Illinois Appellate Court decisions (including Settlement Funding v. Cathy Brenston) upholding the enforceability of an anti-assignment clause in a structured settlement contract. The Complaint alleges Mack was attorney of record in Brenston plus three of the additional cited cases.

In Brenston, 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"

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 recent developments impacting the structured settlement secondary market, see:

• Structured Settlements 2013 - Secondary Market
• Secondary Market Update

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.

Structured Settlements 2013 - Secondary Market

While Berkshire Hathaway quietly assumed leadership among primary market structured settlement annuity providers during 2013, J.G. Wentworth (JGW) continued to consolidate its control of the secondary market with the same "subtlety" and ubiquitousness that have characterized its late-night television advertisements.

Various industry experts estimate JGW's secondary structured settlement market share, following its 2012 merger with Peachtree Financial Solutions (Peachtree), now totals somewhere between 50% and 75%, and the combined JGW/Peachtree's share of industry profits now exceeds 80%.

JGWPT Holdings Inc. IPO

JGW's 2013 apogee occurred November 8 when JGWPT Holdings Inc.'s IPO produced what is currently the only publicly traded structured settlement company. The IPO 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.

The stated purposes for JGWPT's IPO were to pay down some of JGW's $572 million debt and to provide its pre-IPO equity holders (JLL Partners) an opportunity to earn additional profits. Post-IPO, JLL Partners continues to hold a 39% economic interest and a 63% voting interest in JGWPT while four of its partners sit on the company's Board of Directors.

JGWPT's common stock, however, now trades on the New York Stock Exchange (symbol: JGW) and closed Friday (December 27, 2013) at $17.10 per share. At least one analyst has informed S2KM he believes the stock is currently worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

Problems and Controversies in 2013

As S2KM reported in this prior blog post, JGW, which was founded in 1995, had experienced a tumultuous history prior to 2013 - and problems and controversies continued to plague the company during 2013:

• Abandoned Sale - Bloomberg News reported in January 2013 that JLL Partners had abandoned plans to sell the company after bids failed to meet expectations. Earlier reports had indicated that JLL Partners was seeking a $1 billion purchase price for JGW from private-equity firms.
• Ratings Downgrade - Moody's Investors Service (Moody's) announced in February 2013 a downgrade of its Corporate Family Rating (CFR) for JGW from B3 to Caa1. Under Moody's credit rating scale, "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk." Moody's CFR ratings for JGW are separate and distinct from financial agency ratings applicable to JGW structured settlement securitizations which historically have been rated as high quality and low risk investments.
• Shareholder Distribution - Moody's announcement confirmed "JGW is undergoing a leveraged recapitalization that will result in a tripling of the company's corporate debt as it pays its shareholders a very substantial dividend....Net proceeds from the $425 million Senior Secured Term Loan issuance will be used to finance a $309 million capital distribution to JGW's shareholders as well as to repay an existing $142 million term loan."
• Falsified Court Orders - JGWPT's amended S-1 statement, filed October 28, 2013 in anticipation of its public offering, included the following statement under a section titled "RISKS RELATED TO OUR BUSINESS OPERATIONS: ... there have in the past and may be in the future deficiencies in court orders obtained on our behalf by third parties that result in those court orders being invalid, including as a result of failures to perform according to our requirements and acts of fraud,..." That statement apparently references as many as 100 falsified court orders in New York approving JGW structured settlement transfers.
• Brenston Case - The Illinois Supreme Court denied Peachtree Settlement Funding's petition for appeal of the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Cathy Brenston case. The earlier Court of Appeals decision held the Illinois state court, which had previously approved transfers requested by Brenston 1) had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and 2) 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. In an Amicus curiae brief, the National Association of Settlement Purchasers (NASP) asserted the Appellate Court decision will render the Illinois transfer statute "a practical nullity"
• Competitor Outrage - During NASP's 2013 annual conference, in remarks apparently directed at JGW, former NASP President Robin Shapiro expressed personal outrage about "troubling reports concerning the structured settlement factoring business" including:
  • Falsified transfer orders.
  • Inter-state forum shopping.
  • Short-cutting waiting periods and disclosure requirements.
  • Expediting hearing dates before preferred judges.
  • "Competing bids" from the same company.
• NASP Conference - In addition to Shapiro's comments, NASP's 2013 annual conference focused on controversial issues which have historically divided the primary and secondary structured settlement markets. In her keynote remarks, NASP President Patricia LaBorde encouraged diverse perspectives and re-inforced NASP's policy of politically unobstructed learning. "We want to hear from all structured settlement stakeholders - even if they disagree with us or don't like who we are," LaBorde stated. "We are here to listen. We are here to improve."
• METLife Split Payment Policy - During his NASP presentation, Executive Director Earl Nesbitt reported a controversial new business practice that is troubling JGW and other transfer companies. MetLife apparently is now 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.
• Educational Forums - In addition to the NASP conference, JGW competitor Strategic Capital sponsored an online structured settlement "expert roundtable" which examined secondary market business practices and issues. S2KM Managing Director Patrick Hindert participated in the expert roundtable and also served as moderator for NASP's annual primary market panel discussion.
• Former Executives' Lawsuit - Another 2013 JGW nadir occurred in October when two former JGW executives and directors filed a Complaint in the Court of Chancery of the State of Delaware against current JGW CEO David Miller, three current JGW Directors and multiple JGW affiliate companies seeking to enforce a Tax Receivables Agreement (TRA) under which they claim they are owed approximately $35 million. A copy of the Complaint, which is posted on the structured settlement wiki, highlights JGW's complex organizational history as well as a shareholder focus disconnected from the welfare of its customers.

SEC Addresses Structured Settlement Transfers

Responding in part to concerns about secondary market business practices, the Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy issued an Investor Bulletin in 2013 titled "Pension or Settlement Income Streams: What You Need to Know Before Buying or Selling Them".

The Investor Bulletin highlights questions potential sellers and investors should ask before proceeding with proposed structured settlement transfers and includes a number of additional warnings and resource links.

A responding article , written by two industry leaders, characterized the SEC Bulletin as "misleading and in some cases inaccurate concerning the sale of structured settlement payment streams and factored structured settlements as an investment vehicle." The authors assert the SEC Investor Bulletin should have clarified the following features of structured settlement factoring transactions:

• "Always court ordered"
• "No negative tax consequences to the seller"
• "Investors' rights"

Secondary Market Growth

Despite problems and controversies, the U.S. structured settlement secondary market appears to have experienced additional growth during 2013. Based upon various industry sources, and subject to future revisions based upon subsequent information, S2KM estimates the 2013 structured settlement secondary market has increased approximately 7% compared with 2012 resulting from approximately 12,800 transfers and $385 million PV of secondary market purchases.

Adding these 2013 numbers to prior historic estimates, S2KM estimates:

• Approximately 149,000 structured settlement transfers have occurred since 1986;
• Involving approximately 74,000 recipients - many of whom have made multiple transfers;
• With approximately $4.4 billion PV in aggregate sums paid to those recipients.
• For an average of approximately $30,000 per transfer.

For comparison, S2KM estimates the primary market has sold approximately $139 billion PV of structured settlement annuities to approximately 800,000 recipients since 1975 with an average premium of approximately $174,000.

For additional S2KM reporting about the secondary market, see the structured settlement wiki. For additional S2KM 2013 annual reports, see:

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

J.G. Wentworth Update

November was an "interesting" month for JGWPT Holdings Inc. (JGWPT), the leading purchaser of structured settlement payment rights, which markets under the names of J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree).

Significant developments included: 1) falsified transfer orders in New York; 2) an initial public offering (IPO); and 3) a refusal by the Illinois Supreme Court to review the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Brenston case.

Also during November, at the most recent National Association of Settlement Purchasers (NASP) Annual Conference:

• Former NASP President Robin Shapiro expressed his personal outrage about "troubling reports concerning the structured settlement factoring business." At least some of Shapiro's criticism appeared to be directed toward some JGWPT business practices.
• NASP Executive Director Earl Nesbitt reported a controversial new business practice that is troubling JGWPT and other transfer companies. MetLife apparently is now 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.

As S2KM previously reported, JGW, which was founded in 1995, had already experienced a tumultuous recent history prior to November:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• Also in 2011, JGW merged with Peachtree in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• On January 30, 2013, Moody's Investors Service announced a downgrade of its Corporate Family Rating (CFR) for JGW from B3 to Caa1. Moody's also issued the same downgrade for JGW's $425 million senior secured term loan and $20 million senior revolving credit facility issued by Orchard Acquisition Company, a subsidiary of JGW.

Estimates of secondary market experts interviewed by S2KM in late 2012 of the post-merger 2012 market share of the JGW and Peachtree varied from a low of 50% to a high of 75%. These experts also believed JGW/Peachtree's share of the estimated 2012 U.S. secondary structured settlement market profits of $120 million was $100 million, or 83%.

JGWPT Holdings Inc.'s Amended Form S-1 Registration Statement, filed October 28, 2013 prior to its November 8, 2013 public offering of common stock, provides more recent financial and marketing information about JGW's holding company. Selected data:

• JGWPT's 2012 revenue sources included: structured settlements (89% of revenues), lotteries (6%), presettlement funding (3%), and non-structured settlement annuities (2%).
• For the year ended December 31, 2012 and the six months ended June 30, 2013, JGWPT:
  • Generated revenue from structured settlement purchases totalling $416 million and $222 million.
  • Generated cash from the net financing activities of its warehouse financing and permanent securitization financing facilities totalling $314.8 and $131.3 million, not counting $29.9 million generated from its most recent July 2013 securitization.
  • Used cash of $225.7 million and $163.3 million in its operating activities.
• During 2013 prior to it IPO, JGWPT distributed $459.6 million to its "common interest holders" resulting in members' capital of $38.4 million and negative tangible equity of ($96.2 million) as of June 30, 2013.
• Since 1995, JGWPT has
  • Spent approximately $585 million in marketing through multiple media outlets including $216 million during the past three years.
  • Purchased more than $9.1 billion of structured settlement payments. Its average customer has completed two separate transactions.
• During an average four week period, JGWPT generates more than 510 million advertising impressions which result in 80% of its target audience viewing its advertisements five or more times during that four week period.
• Kantar Media estimates that JGW and Peachtree have each spent approximately five-times more than their nearest competitor on television advertising since 2008 and together have spent over 80% of the total amount spent by all participants in the U.S. secondary structured settlement market.
• JGWPT's customer databases included more than 121,000 current or prospective structured settlement recipients as of July 31, 2013 entitled to approximately $31 billion of unpurchased structured settlement payments.
• JGWPT's nationwide attorney network covers over 3,000 counties. Approximately 95% of the proposed structured settlement purchases JGW and Peachtree present to a judge have been approved.

The stated purposes for JGWPT's IPO were to pay down some of its $572 million debt and to provide its pre-IPO equity holders (JLL Partners) an opportunity to earn additional profits. Post-IPO, JLL Partners continues to hold a 39% economic interest and a 63% voting interest in JGWPT while four of its partners sit on the company's Board of Directors.

JGWPT originally anticipated raising $300 million by selling 12.2 million Class A shares at a price between $19 and $22 each. When demand didn't materialize, the IPO opened at $13 per share and fewer shares were offered.

JGWPT's stock trades on the New York Stock Exchange (symbol: JGW) and closed today (December 2, 2013) at $16.45 per share. At least one financial analyst with whom S2KM has spoken believes JGWPT's stock remains substantially undervalued and is worth at least $20 per share.

For additional S2KM reporting about J.G. Wentworth and the structured settlement secondary market, see the structured settlement wiki.

Brenston Appeal Denied

The Illinois Supreme Court has denied Peachtree Settlement Funding's petition for appeal of the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Cathy Brenston case.

The earlier Court of Appeals decision held the 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
• “[The transfer court] had no authority under the Act to approve” the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions.

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

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

Case Background

• Cathy Brenston resolved a medical malpractice case against the University of Illinois Board of Trustees in 2003 with a structured settlement.
• Subsequent to her settlement, Brenston completed multiple factoring transactions with Peachtree Settlement Funding (Peachtree) all of which were approved by Illinois Circuit Courts (Sangamon and Peoria Counties) in accordance with the Illinois transfer statute.
• All transactions were closed and funded. Brenston was paid. The structured settlement obligors and annuity issuers acknowledged and implemented the court orders.
• Brenston filed lawsuits in Cook County in 2011 to void the prior transfer orders arguing anti-assignment clauses in the settlement agreement and the qualified assignment agreements prevented the transfer courts from exercising jurisdiction. The defendants included:
  • Peachtree
  • Peachtree's transfer lawyer
  • Brenston's transfer counsel
  • The structured settlement obligors and annuity issuers
  • The defendant in the original lawsuit
• After Peachtree invoked an arbitration clause, Brenston re-filed the lawsuits in Sangamon and Peoria Counties where Peachtree moved to dismiss the petitions on the grounds that:
  • The transfer courts had subject matter jurisdiction to enter the orders;
  • Brenston has already received the financial benefits of the orders;
  • Brenston provided no reason to vacate said orders; and
  • The statute of limitations had expired.
• The trial court granted Peachtree's motions to dismiss and denied Brenston's motions to reconsider and motions for leave to file an amended petition.
• Brenston appealed arguing the Sangamon and Peoria County courts erred in dismissing her petitions where the pleadings sufficiently showed that the orders approving the transfers were obtained by fraud, and therefore void ab initio and subject to challenge at any time.
• An Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, agreed with Brenston's argument and issued its decision - even though Peachtree and Brenston had:
  • Settled the case prior to the Appellate Court's decision; and
  • Filed motions to stay the Appeal.

Appellate Court Holdings

• Brenston's underlying settlement agreement contained an unambiguous, enforceable anti-assignment restriction.
• The transfer court had a duty to enforce that provision and "had no authority" under the Illinois transfer statute to approve the proposed transfers.
• The proposed transfers were improperly filed in Sangamon and Peoria Counties instead of Cook County where Brenston resided.
• Brenston's transfer orders are "void ab initio" because:
  • Peachtree did not file all settlement documents with the transfer court.
  • Peachtree concealed "by omission" the existence of the anti-assignment provision which "omission was material".
  • The conduct of Peachtree and it's attorney amounted to an "affirmative falsehood and a fraud upon the trial court".

Impact of Brenston

• An Amicus curiae brief filed by the National Association of Settlement Purchasers (NASP) states that the Appellate Court decision will render the Illinois transfer statute "a practical nullity".
• "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."

S2KM thanks NASP Executive Director Earl Nesbitt and NASP President Patricia LaBorde for their insights concerning the Brenston case and for granting S2KM permission to utilize materials from Nesbitt's 2013 NASP Annual Conference Litigation Update.

S2KM will continue reporting Brenston case developments including whether and how NASP and the National Structured Settlement Trade Association (NSSTA) will respond.

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

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