Beyond Structured Settlements

Structured Settlements in 2012 - 4

Executive Life of New York

At one time or another, each of us may have become acquainted with individuals who have overcome personal injuries and successfully transformed their disabilities and special needs into special lifetime accomplishments. Kyle Walsh, profiled in a 2012 S2KM blog post, is one such individual. The late Randy Snow, featured in a 2008 S2KM blog series, was another.

Structured settlements are supposed to provide economic security for people with serious injuries and disabilities - to help them rebuild their lives and, in many cases, to achieve special lifetime accomplishments. Instead of an all-cash personal injury settlement, structured settlement recipients accept a promise of future periodic payments.

What happens, if and when, that promise is broken? What happens when a structured settlement funding company, and the regulators and guaranty system responsible for protecting the structured settlement recipients, fail to make and/or insure full payment?

These questions are highlighted by the Executive Life of New York (ELNY) liquidation - the dominant structured settlement story of 2012 and one of the most important developments in the history of the United States structured settlement industry.

The story of ELNY, as well as its affiliate Executive Life of California (ELIC), and their parent company, First Capital Corporation (FEC), is long and complex. For background of events prior to ELNY's 1991 receivership, S2KM recommends Gary Schulte's 1992 book "The Fall of First Executive".

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. When then New York's Insurance Commissioner Salvatore Curiale seized control of ELNY on April 16, 1991 and placed it in receivership, he stated: "The company is currently neither in an insolvent or impaired condition. . . . I have not petitioned the Court to make a finding of insolvency. ELNY is a company well able to meet its current obligations."

Exactly twenty-one years later, on April 16, 2012, following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso approved an Order of Liquidation and a Restructuring Agreement for ELNY as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, and the National Organization of Life and Health Guaranty Funds (NOLHGA).

The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to more than 1400 ELNY payees out of a total of approximately 9700 current ELNY payees. The remaining ELNY payees expect to receive 100 percent of their promised future payments. The average individual shortfall is estimated to exceed $600,000 present value. Although an ELNY Hardship Fund has been created, it has not yet been funded.

An appeal was filed May 30, 2012, on behalf of 18 ELNY structured settlement shortfall payees, challenging the ELNY liquidation order and restructuring agreement on the basis of due process. The appeal also alleges that immunities and injunctions granted under the liquidation order are improper. Oral arguments occurred on November 15, 2012 in Brooklyn before the Appellate Division of the Supreme Court of the State of New York, Second Department. No decision has been announced.

Another legal challenge to the ELNY liquidation order occurred June 14, 2012 when attorneys for several liability insurers filed a Motion asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. The motion indirectly raises the issue of whether qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation? Judge Galasso denied the Motion without further explanation. 

In a subsequent development, somewhat related to the liability insurers' motion, the ELNY website announced an ELNY Facilitation Plan to assist owners of ELNY structured settlement annuities (SSAs) make supplemental payments to ELNY SSA payees and to coordinate those payments with the ELNY benefit payments scheduled to be made by the Guaranty Association Benefits Company (GABC) under the ELNY Restructuring Plan approved by Judge Galasso on April 16, 2012 as part of the ELNY liquidation order.

The same attorneys who filed the ELNY appeal, Edward Stone and representatives of the Christensen & Jensen law firm, filed a class action lawsuit November 8, 2012, on behalf of ELNY shortfall victims, against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, and his predecessor ELNY Rehabilitators, as well as MetLife and Credit Suisse. The class action allegations provide a critical litany of mismanagment and non-disclosure during the 21 years ELNY's estate was being supervised by these defendants.

In response, attorneys representing Benjamin M. Lawsky, in his capacity as ELNY's Receiver, filed a Notice of a Motion with the Nassau County New York State Supreme Court requesting oral argument on January 4, 2013 at 9:30 a.m. or as soon thereafter as the parties may be heard:

• to enjoin three ELNY structured settlement shortfall payees and their legal counsel from proceeding with a class action lawsuit in the United States District Court Southern District of New York;
• to hold in contempt of court the shortfall payees' legal counsel; and
• to require their payment of the related costs and attorney's fees incurred by the Superintendent.

Although the ELNY liquidation has so far received limited coverage in the mainstream media, specialty insurance experts and analysts have not been silent. Examples:

• Peter Bickford - In his article titled "The Elephant in the Court Room" (summarized here by S2KM), Bickford argues New York’s receivership system has failed ELNY, its policyholders and beneficiaries, as well as the insurance industry and its customers due to a lack of basic accountability standards. Although the ELNY restructuring plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), Bickford maintains it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. Bickford's article also provides succinct summaries of objections raised by ELNY shortfall victims and ELNY legal issues which he states "could linger in the courts for years"
• LifeHealthPro - In an article titled "The Complete ELNY Saga: 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", (summarized here by S2KM), the authors assign primary blame for ELNY insolvency to the NYLB which they describe as "a rogue agency known for its codes of secrecy and characterized by many who spoke for this story as ineffective and mismanaged at best, and a snake pit of corruption at worst". In a companion article (reviewed here by S2KM), writer Warren Hersch asks: "is the structured settlement process in need of reform"?  In a follow-up oped article titled "Governor Cuomo I'm Calling You Out", (summarized here by S2KM), Bill Coffin, LifeHealthPro's Group Editor, charges New York Governor Andrew Cuomo with personal responsibility to clean up the "ELNY debacle".

The final results of the ELNY liquidation will depend upon the outcome of the continuing litigation highlighted in this article. It also remains to be seen what reforms, if any, will result from the failed ELNY receivership process.

In conclusion, it should also be noted that ELIC-related litigation continued in 2012 (Garamendi v. Altus Finance S.A.) when a federal jury in Los Angeles rejected a claim by California's Insurance Commissioner that, but for a conspiracy by French investor group Artemis S.A.:

• ELIC's original conservator (then California insurance commissioner John Garamendi) would have accepted an alternative bid in 1991 by state insurance guaranty associations; and
• The alternative bid would have retained profits from ELIC's junk bond portfolio for the benefit of policyholders including ELIC structured settlement recipients.

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

This blog post completes S2KM's series "Structured Settlements in 2012":

• Part 1 - Primary market
• Part 2 - Settlement planning
• Part 3 - Secondary market
• Part 4 - Executive Life of New York

ELNY Appeal - Due Process 2

Eighteen Executive Life of New York (ELNY) structured settlement shortfall payees (shortfall payees), as Objectors and Appellants, have challenged the Order of Liquidation and Approval of the ELNY Restructuring Agreement, approved by Judge John M. Galasso on April 16, 2012, by filing an appeal with the Appellate Division of the Supreme Court of the State of New York, Second Department,

Status of Appeal:

• The ELNY shortfall payees served and filed their brief and the record on appeal on Friday, August 17, 2012. For S2KM's summary, see: ELNY Appeal - Objectors' Brief.
• The Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY Receiver and Respondent, served and filed his brief on Friday, September 7, 2012.
• The National Association of Life and Health Guaranty Associations (NOLHGA), as a non-party respondent, also served and filed a supporting brief on September 7, 2012.
• The ELNY shortfall payees served and filed a reply brief on Friday September 14, 2012.
• The Appellate Court is expected to schedule oral argument "as soon as practicable".

In prior blog posts, S2KM:

• Summarized the ELNY shortfall payees':
  • Due process allegations (ELNY Appeal - Due Process 1)
  • Arguments against granting judicial immunity to the Superintendent (ELNY Appeal - Immunity 1)
  • Arguments against granting judicial injunctive protection to the Superintendent (ELNY Appeal - Injunction 1)
• Provided additional due process analysis (ELNY Due Process Issue)
• Reported on the ELNY Immunity Issue featuring analysis by New York attorney Peter Bickford.

This blog post summarizes the due process arguments presented in the appellate briefs filed by the Superintendent and NOLHGA as well as the due process responses included in the reply brief filed by the ELNY shortfall payees. A subsequent S2KM blog post will summarize and compare the immunity and injunction arguments.

Superintendent

• The Court-ordered notice for the ELNY liquidation hearing satisfied due process requirements.
• Not only was the notice constitutionally adequate, it far exceeded the notice usually provided in insurer liquidation cases.
• A longer notice period would not have had any relevant impact upon the Court’s approval of the liquidation and restructuring plan.
• The Court properly exercised its broad discretion in:
  • Denying objecting shortfall payees' motion to compel discovery.
  • Sealing objections containing personal information.
  • Denying the shortfall payees' mid-hearing request to call newly disclosed witnesses.
• Conclusions - the Court:
  • Correctly held that the notice provided complied with the insurance law and due process.
  • Properly exercised its discretion in ruling on discovery and case management issues.

ELNY Shortfall Payees' Response

• The notice was inadequate in numerous respects. For examples:
  • The Court required payees to disclose all of their supporting documentation without discovery requests. Until the hearing, the payees had no reason to suspect that this obligation would be one-sided.
  • The Court-approved notice did not tell the payees that they would be required to file formal discovery requests or how to do so.
  • Although the Superintendent says he sent notices to the last known address in "ELNY's" records, the Superintendent had been managing ELNY for 20 years. The records, therefore, were his records and he had responsibility for keeping the addresses current.
• The lack of fair process prejudiced the payees.
  • The Superintendent's brief does not refute most of the payees' facts on this issue.
  • The Superintendent argues that any constitutional deprivation did not prejudice the payees.
  • However, an undisputed inability to challenge an opponent's evidence, resulting in a one-sided presentation, is patently prejudicial.
  • The inability to obtain assistance from an expert on complicated issues to permit a meaningful defense is prejudicial.
  • Findings based upon improperly one-sided evidence are inherently defective.
  • The Superintendent's "no prejudice" argument ignores the very purpose of due process - to allow people a true day in court.
  • Due process does not require ELNY shortfall payees to prove in advance that they would have procured a different outcome if they had been granted a fair hearing.

NOLHGA

• NOLHGA submitted its brief on appeal "to address a core, foundational error in Appellants’ argument": their "subtle but pervasive claim" that NOLHGA's early involvement in developing the ELNY restructuring plan denied the ELNY shortfall payees their due process rights because the shortfall payees were not afforded an equivalent role.
• The insurance laws of New York and other states grant state guaranty funds, operating through NOLHGA, a central and special role in life insurer insolvency proceedings.
• The state guaranty associations had no "conflict of interest" that implicated the due process rights of the objecting ELNY shortfall payees.
• Because the New York Superintendent serves as the statutorily mandated receiver “to protect the interests of policyholders in the liquidation proceeding", there generally is no need for policyholders to speak on their own behalf as a matter of due process.
• Therefore, the pre-liquidation consultations between the Superintendent and the state guaranty associations does not evidence any denial of due process rights for the ELNY shortfall payees.

ELNY Shortfall Payees' Response

• Most significantly, NOLHGA's arguments do not address issues on appeal.
• With respect to insurance industry involvement, the ELNY shortfall payees' chief complaint is one of fairness. While excluding ELNY policyholders, the Court permitted NOLHGA and others access, notice, disclosure and participation. No one has argued otherwise.
• Concerning conflicts of interest, NOLHGA objects to this statement by the ELNY shortfall payees: "[t]he [guaranty] associations' interest was in limiting their contributions, and the payees' interest was in maximizing them."
• In support of their statement, the objecting ELNY shortfall payees cite former New York Superintendent Michael Corcoran who stated the following in 2002 when he testified before Congress about ELNY: "The whole thrust [of state guaranty funds] is to try to pay as little as possible".

For S2KM's complete and continuing ELNY reporting, and copies of the shortfall payees' appellate briefs, see the structured settlement wiki.

ELNY Appeal - Due Process 1

In a prior blog post, S2KM summarized the appellate brief filed August 17, 2012 on behalf of 18 structured settlement shortfall payees (objector/appellants) who are appealing the Executive Life Insurance Company of New York (ELNY) liquidation plan and restructuring agreement approved by New York Supreme Court Judge John M. Galasso on April 16, 2012.

This blog post provides a more detailed summary of due process allegations contained in the objectors' appellate brief. For additional related background information, see also "The ELNY Due Process Issue".

Due process, according to authorities cited in the objectors' appellate brief, requires:

• At a minimum, notice and an opportunity to be heard before a person is deprived of a property interest; and
• Balancing (1) the interests of the parties to the dispute; (2) the adequacy of the contested procedures to protect those interests; and (3) the government’s stake in the outcome.

The objecting ELNY shortfall payees allege they were denied due process because the procedures afforded the ELNY shortfall payees were unfair and prejudicial. More specifically they allege:

• The notices sent to the ELNY shortfall payees were inadequate and misleading.
  • Although the ELNY shortfall victims had a substantial interest in the ELNY liquidation hearing, they were not parties to the proceeding. They were never served with any petitions, orders, or filings.
  • Instead, Supreme Court Judge John M. Galasso permitted the New York Superintendent of Financial Services (Superintendent), as Receiver (Receiver), to send a single letter of notification.
    • The letters were sent from a Minnesota address and had an outward appearance of junk mail.
    • Hundreds of notices were returned undelivered presumably because the Receiver's records were outdated.
    • Many ELNY shortfall payees received their notices during the December holidays.
    • The notice was difficult for non-lawyers to understand and many shortfall payees experienced difficulty finding qualified legal counsel on such short notice.
  • The notice was misleading because it reassured shortfall victims that a $100 million ELNY hardship fund had been created without fully disclosing limitations related to the hardship fund.
  • The objectors were not given adequate time to object to the proposed ELNY liquidation plan ("three weeks for some recipients").
  • The notice stated ELNY shortfall payees waived their right to object after a January 16, 2012 deadline and therefore served to dissuade potential objectors who concluded they could not comply within the deadline.
  • Having imposed these court-endorsed impediments to the objection process, however, the Superintendent, as ELNY's Receiver, subsequently cited the low number of objections received (130 objections out of 1,456 affected shortfall payees) as evidence that the proposed ELNY liquidation and restructuring plan was fair.
• The time allowed for ELNY shortfall payees to prepare for the ELNY liquidation hearing, and their lack of access to information, were unreasonable.
  • S2KM Note: for perspective, here are excerpts from the Executive Life timeline available on the structured settlement wiki:
    • 1991 - ELNY enters rehabilitation and its plan for rehabilitation is subsequently court approved in 1992. Neither the 1991 ELNY rehabilitation order nor the 1992 order approving the ELNY rehabilitation plan declared ELNY to be insolvent. The Superintendent and his agent, the New York Liquidation Bureau (NYLB), as ELNY's Receiver, have managed ELNY's business continuously from 1991 to the present.
    • 2002 - ELNY's unpublished and unaudited financial statements, obtained by attorney Peter Bickford as a result of Freedom of Information Law requests, show that ELNY's surplus turned into a deficit in 2002.
    • 2007 - New York Governor Eliot Spitzer announces an "agreement in principle" for ELNY designed to continue paying all ELNY annuitants 100% of their benefits. The announced plan, however, whereby various insurers and guarantee associations agree to pay $650 to $750 million to fund approximately $2 billion of future ELNY payments, never materializes.
    • 2009 - Audited financial statements indicate ELNY has a deficit in excess of $1.5 billion. The National Organization of Life and Health Guaranty Associations (NOLHGA) estimates the majority of ELNY's guaranty association costs (e.g. 66-75%) will likely be borne by New York's two life insurance guaranty associations and that 20-30 state guaranty associations may eventually participate in a final ELNY liquidation plan.
    • 2010 - A New York State Supreme Court Judge orders the Superintendent to present the Court with a proposed order and plan of liquidation for ELNY which the Superintendent eventually files with the court on September 1, 2011.
    • December 7, 2011 - The NYLB, acting as the Superintendent's agent, mails letters to individual ELNY annuity payees notifying them for the first time about the proposed ELNY liquidation and Restructuring Agreement and alerting them of anticipated shortfalls for specific ELNY annuity contracts.
    • January 16, 2012 - deadline for ELNY liquidation Answering Papers (objections) to be served on the Superintendent in response to the petition.
    • March 15-30, 2012 - hearing before Judge Galasso of the New York State Supreme Court to consider the Superintendent's Petition for an Order of Liquidation and Approval of a Restructuring Agreement for ELNY.
  • Although the Superintendent (and his agents), as Receiver, spent years preparing for the ELNY liquidation and restructuring plan, the Superintendent provided ELNY shortfall payees with inadequate time to: 1) review and comprehend their complicated legal dilemma and proposed ELNY restructuring plan; 2) find an attorney qualified and willing to represent their interests; and 3) prepare a response.
  • Had the ELNY shortfall payees been given adequate notice (at least as early as 2010), they could have begun taking steps to protect themselves. For example: they could have: 1) sought counsel; 2) pooled resources to hire consultants; 3) exercised their rights as annuity payees; 4) made appropriate demands on the Receiver; and 5) offered a meaningful response at the Order to Show Cause hearing.
  • Despite requests and objections, the Superintendent, as Receiver, withheld material information from the shortfall payees and their attorneys. Without these documents, attorneys for the shortfall payees were not able to verify and/or effectively question the assumptions or conclusions of the Receiver’s expert.
  • Conversely, years prior to the ELNY liquidation hearing, the Superintendent not only notified NOLHGA and various insurance companies about the pending ELNY liquidation, he also shared documents with them and invited and accepted their input into the drafting of the proposed ELNY liquidation plan.
  • However, when attorneys for the shortfall payees sought to submit their own alternative liquidation and restructuring plan for comparison, both the Receiver and Judge Galasso refused their input - with the Receiver repeatedly citing the absence of an alternative plan as evidence that his plan was viable and fair.
• Judge Galasso selectively applied procedural rules to the detriment of the ELNY shortfall payees.
  • Despite objections, Judge Galasso permitted the Superintendent, as Receiver, to establish critical components of its case through hearsay and speculative testimony.
  • As one example, Judge Galasso characterized as a "gun to my head" repeated threats by attorneys representing the Superintendent, as Receiver, and NOLHGA that voluntary contributions from insurance companies for an ELNY hardship fund would "go out the door" if Judge Galasso refused to approve the Superintendent's plan. This threat, however, was completely unsupported by admissible evidence and one of the Superintendent's own witnesses admitted such predictions were speculative.
  • In addition, Judge Galasso permitted the Superintendent's attorneys to admit into evidence binders of exhibits never served on the payees as well as a revised version of the Superintendent's restructuring plan not filed until March 6, 2012, less than 10 days before the hearing and more than six weeks after the objection period had ended.
  • By comparison, Judge Galasso repeatedly denied requests by attorneys for the ELNY shortfall payees for documents which the Superintendent had shared with NOLHGA and various insurance companies and their counsel.
  • There was no justification for Judge Galasso to allow the Superintendent and his attorneys to play "hide the ball" - refusing to share documents with shortfall payees to whom the Superintendent, as Receiver, owed an affirmative duty of disclosure while sharing those same documents with other parties including NOLHGA, various insurance companies and their attorneys.

 September 7, 2012 is the deadline for the Superintendent (Respondent), as Receiver, to serve and file his appellate brief. NOLHGA has requested and is expected to file its own appellate brief. For S2KM's complete and continuing ELNY liquidation reporting, see the structured settlement wiki.

ELNY Update - 1

Judge John M. Galasso issued his Executive Life of New York (ELNY) Memorandum Decision and signed the Order of Liquidation and Approval of the ELNY Restructuring Agreement on April 16, 2012.  As of today:

• The ELNY Restructuring Agreement has not been finalized or funded.
• The ELNY Hardship Fund has not been funded.
• A group of ELNY structured settlement shortfall victims has filed a Notice of Appeal challenging the ELNY Liquidation Order and Restructuring Agreement.
• Several liability insurers who previously purchased ELNY structured settlement annuities have filed a Motion asking Judge John Galasso to "clarify and/or correct" his Memorandum Decision concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities.
• The future funding status of the New York life and health insurance guaranty fund is undecided and awaits state legislative action.
• Many legal issues, as identified by Peter Bickford in his article "The Elephant in the Court Room" could linger in the courts for years:
  • Due process issues including a denial of any right for ELNY shortfall victims to opt out of the restructuring plan;
  • The judicial grant of immunity for the Superintendent of the New York State Department of Financial Services, as ELNY's Receiver, and his agents, including the New York Liquidation Bureau (NYLB), and their potential scope of responsibilities for the failed ELNY rehabilition.
  • The up front netting of the state guaranty funds’ subrogation rights so that no guaranty fund will actually pay its full cap on any ELNY claim.
  • Whether the ELNY restructuring plan results in an improper sub-class of claimants under New York insurance law — the ELNY shortfall annuitants.
  • Potential claims of structured settlement shortfall payees against policy owners, structured settlement brokers, attorneys or others involved in the original settlements.
  • The role, rights and obligations of factoring companies that previously acquired payment rights from ELNY structured settlement payees.
  • Whether, and to what degree, the Superintendent, as receiver, and his agents are responsible.as fiduciaries for the failed ELNY rehabilitation.

Notice of Appeal

Attorney Edward Stone filed a Notice of Appeal May 30, 2012 with the Appellate Division of the Supreme Court of the State of New York, Second Department, on behalf of 18 ELNY structured settlement shortfall victims, as Objectors and Appellants, challenging the Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge Galasso on April 16, 2012. For additional information about this Notice of Appeal, see this prior S2KM blog post.

Attorneys representing the Superintendent, as Rehabilitator of ELNY and Respondent, and attorney Stone, representing the 18 structured settlement shortfall victims, have jointly agreed and requested calendar preference and an accelerated briefing schedule for this Appeal as follows:

• Appellants' brief and the record on appeal to be served and filed on or before Friday, August 17, 2012;
• Respondent's brief to be served and filed on or before Friday, September 7 ,2012; and
• Appellants' reply brief, if any, to be served and filed on or before Monday, September 14, 2012, with oral argument to be set by the Court as soon as practicable thereafter.

Motion to Clarify and/or Correct

Attorneys representing several liability insurers who previously purchased ELNY structured settlement annuities filed a Motion June 14, 2012 asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities.

Attorney Stone, on behalf of two structured settlement shortfall victims, filed an Affirmation in Opposition on July 9, 2012. Attorneys for the liability insurers in turn filed a Reply in Support of the Motions on July 13, 2012. Judge Galasso is scheduled to consider the Motion on July 16, 2012.

For additional background about the Motion, see this prior S2KM blog post.  For copies of the Motion, Affirmation in Opposition and Reply in Support, see the structured settlement wiki.

Elephant in the ELNY Court Room

Due to a lack of basic accountability standards, New York’s receivership system has failed Executive Life of New York (ELNY), its policyholders and beneficiaries, as well as the insurance industry and its customers, according to New York attorney Peter Bickford in a new article titled "The Elephant in the Court Room".

Bickford, whose legal specialties include insurance and reinsurance operational, regulatory and solvency issues, has written previously about the "flawed receivership process" in New York that he maintains has resulted in ELNY's liquidation and restructuring. See, for example, "The Trouble with ELNY".

Bickford's newest article expands this critique and provides a valuable summary analysis of the ELNY failed rehabilitation and subsequent liquidation hearing.

Bickford observes that the 1992 ELNY rehabilitation plan, "like the Titanic, was doomed the moment it left port". For reasons never satisfactorily explained, the ELNY rehabilitation plan differentiated between ELNY's traditional life and annuity business and its single premium annuities individual annuities (SPIAs) including all ELNY structured settlement annuities.

Pursuant to its rehabilitation plan, ELNY's traditional business was transferred to Metropolitan Life, along with ELNY's strongest statutory reserve assets, and these policyholders "received an equivilent (sic) policy from Met Life and suffered no material financial consequences." Although administered by Met Life, the structured settlement annuities and other SPIAs were left in ELNY along with its weakest ("junk bond") assets.

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. According to annual reports of the New York Liquidation Bureau (NYLB), which Bickford obtained through Freedom of Information Law requests, ELNY's cash flow went negative in 2002 - ten years following court approval of its Rehabilitation Plan and ten years before its Liquidation Order and Restructuring Plan were approved by New York State Supreme Court Judge John Galasso.

Bickford points out that even before ELNY's first external audit in 2006 (resulting in a substantial increase in reserves), the NYLB acknowledged that the reserve standard used in its annual statements “substantially understate[d] reserves when compared to reserves that would be required to satisfy regulatory requirements for a going concern insurance carrier.”

Bickford asks: "why weren’t proper accounting and reserve levels required or maintained, particularly for an entity that was solvent at the time it was taken into rehabilitation to protect it and its policyholders?"

The explanation, according to Bickford, results from fundamental flaws in New York's life insurance receivership process. "Counter intuitively" Bickford states, "when a company is placed in rehabilitation in New York the company ceases to be regulated":

• "The rigorous statutory requirements for filings, reports or certifications imposed on other licensed companies are no longer imposed on estates in rehabilitation;"
• "[T]here are no periodic regulatory reviews, examinations or communications;"
• "[T]here is no regulatory oversight of the operations, assets or finances; and"
• "[T]here is no mechanism for regulatory oversight of financial condition or compliance with the insurance law or regulations."

If ELNY had not been in rehabilitation, Bickford maintains "it is highly unlikely that the regulators would have allowed it to get to the point where the estate is today." Assuming ELNY had become insolvent outside of rehabilitation, Bickford asserts "the company’s officers and directors, its independent auditors, actuaries and other agents, could all potentially — and probably would — have been held accountable for their actions or inactions contributing to its failure."

Although New York Insurance Law, according to Bickford, does not provide immunity for the Superintendent or his agents in his separate, non-regulatory role as receiver, Judge Galasso granted judicial immunity, as requested by the Superintendent, in the ELNY Liquidation Order. In addition, Judge Galasso accepted the totality of the Superintendent's arguments and approved the ELNY Restructuring Agreement as proposed by the Superintendent and NOLHGA.

The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to approximately 1550 ELNY payees (including all structured settlement payees) out of a total of approximately 9700 current ELNY payees. The remaining, approximately 8150 current ELNY payees expect to receive 100 percent of their promised future payments.

To what extent will defendants and liability insurers supplement the ELNY structured settlement shortfalls? The answer is uncertain and depends, in part, on an issue S2KM addressed in a prior blog post: do qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation?

Bickford's article provides a succinct summary of objections raised by ELNY shortfall victims and their attorneys to the ELNY liquidation proceedings and ELNY restructuring plan:

• "Given the complexity and consequence of the proposed plan, the notice provided to payees was inadequate and untimely;
• "The plan will be administered and overseen by the very people that caused the shortfall — the rehabilitator and his agents;
• "The people most affected by the plan, the shortfall payees, were not consulted in the development of the plan and have not been given any reasonable opportunity to consider and propose an alternative plan;
• "The requested judicial immunity for the rehabilitator and everyone connected with the plan and its implementation is unprecedented and unwarranted given the failed history of the rehabilitation;
• "By placing the full burden of the shortfall on a small percentage of the payees, the plan is neither fair nor equitable, and creates an improper subclass of claimants; and
• "Collectively these objections, including a denial of any right to opt out of the plan, constitute an unconstitutional taking of property without due process." Note: for a summary of the due process issue, see this prior S2KM blog post.

Bickford's article further highlights the following legal issues which he states "could linger in the courts for years":

• "The propriety of the court including the rehabilitator’s request for judicial immunity for himself and his agents in the signed liquidation order;
• "Whether the up front netting of the guaranty funds’ subrogation rights (so that no guaranty fund actually pays its full cap on any claim) contradicts the legislative intent of the caps;
• "Whether the plan results in an improper sub-class of claimants — the shortfall annuitants;
• "The scope of claim-over rights of shortfall annuitants against policy owners, insurance brokers, attorneys or others involved in the original settlements;
• "The role and rights of factors that acquired claim payments from annuitants; and
• "The scope of responsibility of the rehabilitator and his agents as fiduciaries for all ELNY policyholders and payees for the failed rehabilitation."

Bickford's article concludes with a critical observation: although the ELNY Restructuring Plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system.

For additional articles by Peter Bickford, see his website. For S2KM's complete and continuing ELNY reporting, see the structured settlement wiki.

ADDENDUM (July 4, 2012): Bickford's article adds one additional observation that should be highlighted. ELNY's liquidation will apparently exhaust the New York life insurance guaranty fund. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. For additional information about the role of state guaranty funds in the life insurer liquidation process, see this prior S2KM blog post.

ELNY Losses by State

The anticipated shortfalls resulting from the liquidation of Executive Life of New York (ELNY) are expected to total $920,641,977 on a present value basis - assuming promised state guarantee association payments and enhancements but prior to any possible payments from the ELNY Hardship Fund and/or from structured settlement defendants who negotiated and promised to pay future periodic payments funded with ELNY annuities.

To make matters worse for anticipated ELNY shortfall payees, most of whom are personal injury victims, the entire anticipated $920,641,977 shortfall will be allocated among approximately 15 percent of the ELNY annuitants - an average present value loss of more than $600,000 per annuitant. The remaining ELNY annuitants are not expected to experience any reduction in their payments.

How are the anticipated ELNY shortfall distributed by state based upon the current residence of ELNY shortfall payees?

Daniel Hindert, co-author of "Structured Settlements and Periodic Payment Judgments" (S2P2J), provided a state-specific analysis of total anticipated ELNY shortfall losses as part of his presentation ("How the ELNY Liquidation Impacts Settlement Planners") at the Society of Settlement Planners (SSP) 2012 Annual Meeting. Hindert based his SSP comments on a spreadsheet analysis of Schedule 1.15, now posted on the structured settlement wiki, which was compiled by attorney Edward Stone and his audit team.

According to Stone's spreadsheet analysis, here are the 10 states whose residents will suffer the largest cumulative ELNY losses:

1. California

• $343,098,363 - Annuity present value
• $173,929,372 - Benefits cut
• 51% - Percentage cut

2. New York

• $217,671,882 - Annuity present value
• $94,996,566 - Benefits cut
• 44% - Percentage cut

3. Michigan

• $191,758,830 - Annuity present value
• $91,966,861 - Benefits cut
• 48% - Percentage cut

4. Florida

• $176,892,255 - Annuity present value
• $89,379,868 - Benefits cut
• 51% - Percentage cut

5. New Jersey

• $157,708,648 - Annuity present value
• $69,892,957 - Benefits cut
• 44% - Percentage cut

6. Texas

• $107,503,620 - Annuity present value
• $44,750,691 - Benefits cut
• 42% - Percentage cut

7. Pennsylvania

• $76,571,781 - Annuity present value
• $32,737,043 - Benefits cut
• 43% - Percentage cut

8. Ohio

• $74,494,174 - Annuity present value
• $34,796,854 - Benefits cut
• 47% - Percentage cut

9. Washington

• $53,108,488 - Annuity present value
• $26,861,644 - Benefits cut
• 51% - Percentage cut

10. Georgia

• $44,179,076 - Annuity present value
• $20,097,401 - Benefits cut
• 45% - Percentage cut

Mixed ELNY Reactions

In an article titled "Loss for Policyholders", written by James Campbell and published April 17, 2012 in the Wall Street Journal (WSJ), Executive Life of New York (ELNY) stakeholders expressed contrasting reactions to Judge John M. Galasso's decisions to:

• Approve the ELNY Restructuring Agreement proposed by the Superintendent of the New York State Department of Financial Services (Superintendent); and
• Grant judicial immunity to the Superintendent, as ELNY's Receiver, and the New York Liquidation Bureau (NYLB) "for any action or omission by any one or more of them when acting in good faith, in accordance with this Order, or in the performance of their duties pursuant to Insurance Law Article 74 ..."

Shortfall Payee

Eric Rabinowitz, a 43-year-old Manhattan man, who received an ELNY-funded structured settlement in 1983 after being blinded in his right eye during a cataract operation, told the WSJ: "They hung us out to dry and they knew for years that this thing didn't get properly protected and yet they gave us a few weeks to lawyer-up in holiday season."

Shortfall Payee Attorney

Connecticut attorney Edward Stone represents 12 payees whose combined ELNY benefits, according to the WSJ article, will be cut by $20 million under the approved plan. The article quotes Stone as saying: "Their benefits are being cut by more than 50%. One of my clients is being cut by 58%. This will mean major changes, and it may impact their ability to get medical care. One of my clients will have to file bankruptcy because the guarantees they were promised are not really guarantees at all."

According to Schedule 1.15 of the ELNY Restructuring Agreement, 1459 structured settlement payees will experience shortfalls ("uncovered amounts") as a result of ELNY's liquidation and restructuring even after state guaranty association contributions and voluntary enhancements by life insurance companies.

Stone also informed the WSJ: "the judge rejected his bid to call a number of witnesses to probe the [NYLB's] management of the company, including a former ELNY president, an actuary, a forensic accountant and a fraud expert."

Spokesman for Superintendent

David Neustadt, a spokesman for the Superintendent, disagreed with Stone's suggestion that the Superintendent and the NYLB might be guilty of mismanaging ELNY during the 20 plus years they supervised ELNY's Rehabilitation. "This is an absurd and baseless suggestion from a small-group of self-interested plaintiff's lawyers seeking to enrich themselves," Neustadt said.

Structured Settlement Industry Spokesman

Eric Vaughn, Executive Director of the National Structured Settlement Trade Association (NSSTA) "defended the structured-settlement industry, amid the failure of the ELNY rehabilitation" according to the WSJ article. Vaughn stated: "The Executive Life insolvency remains the only instance where any insurer of structured-settlement annuity has not made all payments in full and on time." In addition, according to Vaughn, "several hundred of the structured-settlement recipients might be able 'to recover shortfalls from the original insurers and other parties that have continuing responsibility under settlement agreements.'"

For S2KM's complete and continuing reporting about the ELNY liquidation, see the structured settlement wiki - and more specifically related to this blog post:

• The ELNY Due Process Issue - have anticipated shortfall victims received due process?
• The ELNY Immunity Issue - including and featuring Peter Bickford's analysis.
• ELNY Objections and Replies - summarizing arguments in the Superintendent's Reply Memorandum.

ELNY Liquidation Order

S2KM's summary of Judge John M. Galasso's Memorandum Decision for Executive Life of New York (ELNY) left open the question of whether Judge Galasso had granted judicial immunity to the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver.

Immunity Issue

The corresponding Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge on April 16, 2012 confirms the grant of immunity as follows:

"Judicial immunity is extended to the Receiver and his successors in office, the New York Liquidation Bureau, and their respective attorneys, agents and employees, and such immunity is extended to them for any cause of action of any nature against them, individually or jointly, for any action or omission by any one or more of them when acting in good faith, in accordance with this Order, or in the performance of their duties pursuant to Insurance Law Article 74 ..."

A copy of both Judge Galasso's ELNY Decision and the ELNY Liquidation Order are posted on the structured settlement wiki.

Although expected, this judicial grant of immunity is controversial because, according to some legal experts:

• New York insurance laws do not specifically grant legal immunity to the Superintendent, as Receiver.
• ELNY was not judicially determined to be insolvent until Judge Galasso signed the April 16, 2012 Order.
• The Superintendent and its agents, including the NYLB, have "managed" ELNY since it first entered Rehabilitation in 1991.

For background about the immunity issue, see "The Trouble with ELNY", S2KM's review of an article by Peter Bickford.

Factoring Companies

Neither the ELNY Memorandum Decision nor the Liquidation Order address another controversial ELNY issue: whether participating state guaranty associations (PGAs) will provide coverage for ELNY structured settlement annuities where payment rights have been transferred to factoring companies and subsequently sold to investors as securities.

One result of protecting factoring companies and ELNY structured settlement payment right investors could be a reduction in funds available to other ELNY shortfall victims. Some industry experts have estimated that payment rights from as many as 1000 of ELNY's 4168 structured settlement annuities (SSAs) have been transferred to factoring companies and their investors.

According to Schedule 1.15 of the ELNY Restructuring Agreement, 1459 SSAs will experience shortfalls ("uncovered amounts") as a result of ELNY's liquidation and restructuring even assuming state guaranty association contributions and enhancements.

No Closing Date Set

Neither the ELNY Memorandum Decision nor the Liquidation Order identify a closing date for the ELNY Restructuring Agreement. Until that date, the Receiver is directed to continue full payment of all benefits for all ELNY contracts. The Court will retain subject matter jurisdiction over the Restructuring Agreement and ELNY successor company, Guaranty Association Benefits Company (GABC).

The ELNY Liquidation Order requires that all claims against ELNY must be presented to the Receiver within four months of ELNY's Liquidation Date. However, all ELNY policyholders and "holders of Claim-Overs" who appear on ELNY's books and records as of Liquidation Date are deemed to have satisfied this requirement.

The ELNY Liquidation Order requires the Receiver to provide notice of the Order to all ELNY creditors, policyholders and other interested parties and provides a Notice Form as an Exhibit.

The ELNY Due Process Issue

Assuming presiding Judge John M. Galasso signs the Order of Liquidation and Approval of a Restructuring Agreement for Executive Life of New York (ELNY) as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, a critical issue arises:

Will the ELNY structured settlement shortfall payees have been afforded "due process" before being deprived of a percentage of their payment rights?

The Fifth and Fourteenth Amendments to the United States Constitution provide in part:

• Fifth Amendment - "No person shall be ... deprived of life, liberty, or property, without due process of law;"
• Fourteenth Amendment Section 1 - "No State shall ... deprive any person of life, liberty, or property, without due process of law."

The United States Supreme Court has interpreted these clauses as creating two doctrines: substantive due process and procedural due process.

Substantive Due Process

Substantive due process addresses whether the government has an adequate reason for taking away a person's life, liberty or property. The most obvious, and presumably adequate, reason why the ELNY liquidation hearing could result in some persons (shortfall payees) being deprived of property (percentage of their annuity payments) is that ELNY is insolvent.

ELNY does not have sufficient assets to meet all of its future payment liabilities. Because of variations in state guaranty association laws (primarily coverage caps) as well as individual ELNY contracts (size of annuities), approximately 15 percent of ELNY's annuity payees (mostly structured settlement payees) anticipate shortfalls while the other 85 percent expect to receive 100 percent of their promised future payments from ELNY's successor company, Guaranty Association Benefits Company (GABC).

Alternative Legal Recourse

Some of the structured settlement shortfall payees should have recourse against defendants and/or liability insurers who funded their structured settlement using a "buy and hold" methodology. Other structured settlement payees, whose structured settlements were funded with qualified assignments, likely would not have similar secondary payment options because First Executive Corporation (FEC), the purchaser and owner of their annuities, declared bankruptcy in 1991 and no longer exists. For an explanation of the difference between "buy and hold" funding and qualified assignments, see this prior S2KM blog post.

Although ELNY shortfall victims (including both policyholders and payees) might have a legal claim against the Superintendent, as Receiver, and his agents, including the New York Liquidation Bureau (NYLB), the Superientent's proposed Liquidation Order includes an immunity clause intended to protect the Superintendent and his agents from any legal claims that they mismanaged the ELNY Rehabilitation and are responsible for ELNY's insolvency. For additional information about the ELNY immunity issue, see this prior S2KM blog post.

Procedural Due Process

Procedural due process addresses whether the government has followed adequate procedures in taking away a person's life, liberty or property. A denial of procedural due process occurs only when there is a denial of life, liberty or property without adequate procedures. For many ELNY structured settlement payees, the probable result of the ELNY Liquidation Order and Restructuring Agreement will be to deny them of a portion of their future structured settlement payment rights. The key question for purposes of procedural due process is whether the procedures that could result in this loss of property have been "adequate".

Structured settlement payees who anticipate shortfalls and their attorneys have argued "no" - the procedures have not been adequate and therefore they anticipate suffering an unconstitutional taking of their property because of:

• Inadequate notice - ELNY's financial records indicate ELNY became insolvent as early as 2002. Former New York Governor Eliot Spitzer held a press conference in 2007 announcing "an agreement in principle" that all future ELNY payments would be paid in full and on time. The NYLB mailed letters to individual ELNY annuity payees on December 7, 2011: 1)  notifying them about the proposed ELNY Liquidation and Restructuring Agreement; and 2) alerting them of anticipated shortfalls for specific ELNY annuity contracts and a January 16, 2012 deadline for filing written objections. Responding to objections of inadequate notice, the Superintendent has argued the ELNY notice and briefing schedule balanced the need for a prompt resolution of ELNY’s deepening insolvency against the ability of affected parties to review and object to the proposed liquidation and Restructuring Agreement.
• Denial of information - ELNY shortfall victims and their attorneys claim they have received inadequate information to properly evaluate the proposed Restructuring Agreement in order to propose possible improvements and/or alternatives. The Superintendent's response: this objection does not constitute grounds for rejecting the Restructuring Agreement because the information sought has been provided or is premature and unnecessary for the Court’s consideration and approval of the Restructuring Agreement. The Superintendent further points out the objectors have not offered a competing plan. During the ELNY hearing, Judge John Galasso denied a motion by attorneys for the structured settlement shortfall victims to gain access to source materials utilized by Jack Gibson, the Superintendent's expert, who testified: 1) GABC is "financially viable"; 2) the Superintendent's proposed plan was "the best plan"; and 3) all ELNY shortfall victims will be better off under the proposed Restructuring Agreement than under a straight liquidation.
• Denial of witnesses - Judge Galasso refused to allow attorneys for ELNY shortfall payees to introduce several expert witnesses stating "they wouldn't help". Among the witnesses not permitted to testify:
  • A former Chief Executive Officer of ELNY.
  • Two expert actuaries.
  • Two forensic accountants one of whom is also an insurance fraud investigator.

In an article published in the Touro Law Review (Vol 16 page 871), titled "Procedural Due Process Claims", constitutional legal expert Erwin Chemerinsky highlights the following three-part balancing test the United States Supreme Court articulated in Mathews v. Eldridge (1976) to determine whether an individual has been denied procedural due process:

• The more important the interest to the individual, the more procedural protections the reviewing court is going to require.
• The reviewing court must balance the ability of additional procedures to increase the accuracy of the fact finding; how likely is it that the additional procedures will reduce the risk of erroneous deprivation?
• Whether the government's interest in administrative efficiency is such that the more expensive the procedures would be, the less likely it would be that the reviewing court would require them.

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

New York Liquidation Hearing - 9

Following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso is deciding whether to sign an Order of Liquidation and Approval of a Restructuring Agreement for Executive Life of New York (ELNY) as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver.

The ELNY hearings have raised a variety of issues not all of which Judge Galasso will be expected or required to address:

• Will Judge Galasso approve the ELNY Liquidation Order and Restructuring Agreement as proposed by the Superintendent? 
• Does Judge Galasso have any other options?
• Why wouldn't Judge Galasso appoint a "Special Master" to consider objections and/or alternatives to the proposed ELNY Restructuring Agreement?
• Would his denial of the proposed Order necessarily result in a "statutory liquidation" under New York law?
• What would a statutory liquidation mean for: 1) ELNY annuity policyholders and payees; 2) NOLHGA and the participating Guaranty Associations (PGAs); 3) New York Governor Andrew Cuomo and Superintendent Benjamin Lawsky; 4) the structured settlement industry?
• Would any of the ELNY structured settlement shortfall payees be better off under a statutory liquidation?

Assuming Judge Galasso does approve the proposed Order:

• Will the Liquidation Order grant legal immunity to the Superintendent, as ELNY Receiver, and his agents, including the New York Liquidation Bureau (NYLB), for their acts and omissions in managing ELNY's Rehabilitation since 1991?
• What is the legal justification for any such grant of immunity?
• Did Judge Galasso commit reversible errors when he denied various motions by attorneys representing ELNY structured settlement payees who expect to experience shortfalls under the proposed Restructuring Agreement?
• Would attorneys for the ELNY shortfall payees appeal the result?
• What would be the basis for their appeal?
• Assuming an appeal bond is required, how much would it cost?
• Assuming the ELNY shortfall payees won an appeal, what would they hope/expect to accomplish with a new hearing?
• Besides an appeal, what other options, if any, exist for ELNY structured settlement shortfall payees?

Additional issues raised, but not definitively resolved, during the ELNY hearing:

• When did ELNY become insolvent?
• Who was responsible for ELNY's insolvency?
• How many of the ELNY structured settlement shortfall annuities are funded with Qualified Assignments as opposed to "Buy and Hold" funding?
• Who are the defendants, liability insurers and/or brokers who purchased or funded ELNY annuities with anticipated shortfalls?
• Which PGAs will contribute to specific ELNY contracts?
• Which life insurance companies have offered to make voluntary contributions and/or enhancements to Guaranty Association Benefits Company (GABC)?
• Why would they contribute anything? And, why won't they contribute more?
• How much additional money would be required to make all ELNY structured settlement payees whole?
• What impact, if any, will the ELNY Liquidation have upon:
  • The structured settlement industry?
  • The existing state insurance regulatory system?
  • The insurance liquidation process in New York?

For additional S2KM reporting about the ELNY liquidation, see the structured settlement wiki.