Beyond Structured Settlements

ASNP 2009 Annual Meeting

The Academy of Special Needs Planners (ASNP) hosted its Third Annual Meeting March 6-7, 2009 at the Rancho Bernardo Inn in San Diego, California. Titled "Special Needs Planning in an Era of Change", the program devoted one day of educational discussions to "special needs settlement planning" (SNSP) which ASNP characterized as a "new opportunity" for special needs attorneys.

The ASNP speakers included leading special needs attorneys and plaintiff structured settlement consultants who provided detailed analyses of the following SNSP topics:

• Anatomy of a SNSP Case - Frank Johns, Kevin Urbatsch and Patrick Hindert;
• Structured Settlement Annuities in SNSP Practice - Jack Meligan and Michele Whitmore;
• IRC 468B Qualified Settlement Funds (QSFs) - Jason Lazarus and Richard Risk;
• Integrating SNSP with an Elder Law Practice - Tim Nay and Sandy Conley;
• Medicare Secondary Payer Compliance - Mark Popolizio;
• Lien Resolution Strategies - William Browning, Mark Popolizio and Sylvius von Saucken;
• Marketing to the Trial Bar - Frank Johns, Jason Lazarus, and Kevin Urbatsch.

The SNSP program highlighted three basic issues:

• What is SNSP?
  
• What changes are impacting SNSP?
• What new opportunities does SNSP create for special needs attorneys?

What is SNSP?

Surprisingly, none of the speakers attempted to specifically define SNSP. Hindert recommended web 2.0 knowledge maps, wikis and folksonomies as a strategy for defining and growing SNSP.

Meligan and Whitmore described the related topic of "settlement planning" as both a profession and a process. According to Meligan and Whitmore: "Settlement planning is a profession that helps recipients of settlement proceeds use their proceeds to achieve their post-loss goals and transition successfully into their post-settlement financial lives". Meligan and Whitmore recommended utilizing settlement planning professionals with: credentials; loyalty to plaintiffs; planning approach; and experience. Meligan and Whitmore also described "settlement planning" as part of a three-part process preceded by litigation and followed by financial planning.

von Saucken also described "settlement planning" as a process or "continuum" subject to changing rules that require adjustments in settlement planning prototypes. von Saucken presented a settlement planning timeline:

• Agreement on settlement amount;
• Lien reimbursement;
• Medicare/Medicaid preservation trust;
• Structured settlement paperwork;
• Disbursement.

By comparison, during his recent presentation at the NSSTA 2009 Winter Meeting, Joseph DiGangi defined "settlement consulting" as a four-stage process:

• Analysis
• Planning
• Implementation
• Monitoring

Most of the ASNP presenters identified and addressed "structured settlements" as an essential component of SNSP. As part of his 468B QSF comments, Risk reviewed several structured settlement definitions including the tax definition in IRC section 5891(c)(1). To S2KM's knowledge, Risk thereby becomes the first structured settlement primary market participant to review the IRC section 5891 tax definition for "structured settlement" during a national conference. By comparison, not a single NSSTA or SSP conference speaker has reviewed the IRC Section 5891 definition for "structured settlement" since IRC 5891 was enacted in 2001. Risk also becomes, to S2KM's knowledge, the first conference speaker to link IRC 468B and 5891 which S2KM views as a strategic SNSP construct.

Several ASNP speakers addressed various types of settlement trusts in the context of SNSP. Browning highlighted settlement trust "due diligence" as an increasingly important SNSP issue. Three settlement trust providers, but not one structured settlement annuity provider, exhibited at the SNSP conference.

What changes are impacting SNSP?

ASNP speakers identified and highlighted the following changes impacting SNSP:

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case;
• 468B qualified settlement funds (QSFs);
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Recent MSA rules promulgated by CMS;
• The structured settlement secondary market;
• State structured settlement protection statutes;
• Transition of knowledge and knowledge work to the Internet.

Additional changes referenced by ASNP speakers which deserve more detailed analysis in future SNSP discussions:

• Transitional SNSP business models:
  • How the claim management SNSP model differs from the 468B QSF SNSP model; and
  • How to develop multi-professional SNSP teams and knowledge networks.
• How the current financial crisis impacts SNSP;
• Proposed and/or needed SNSP legislative and regulatory changes.

What new opportunities does SNSP create for special needs attorneys?

Traditional special needs legal practice and education have focused on special needs trusts, estate planning, government benefits and probate. As the ASNP conference demonstrated, SNSP encompasses traditional special needs expertise, but also new fields of related legal practice.

Four leading SNSP legal treatises (listed alphabetically by title) define these new fields of SNSP legal practice:

• "Negotiating and Settling Tort Cases" - by Matt Garretson and Guy O. Kornblum;
• "Qualified Settlement Funds and Section 468B" - by Robert W. Wood;
• "Structured Settlements and Periodic Payment Judgments" - by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert;
• "Taxation of Damage Awards and Settlement Payments" - by Robert W. Wood.

The ASNP presentation by speakers Johns, Lazarus and Urbatsch titled "Marketing to the Trial Bar" offered valuable advice for special needs attorneys as well as other SNSP stakeholders. S2KM's structured settlement transaction diagram, developed in 2005 with graphic artist Keith Burtoft, may help special needs attorneys identify other potential SNSP clients and roles. In addition, as S2KM's blog post "Structured Settlement Surveys" demonstrates, further market research would be useful to define and grow the SNSP market.

Congratulations to ASAP and SNSP program Chairperson Tim Nay for the timely and educational SNSP program. Prior S2KM blog posts about ASNP:

• 2008 ASNP Conference;
• 2007 ASNP Conference.

For additional information about settlement consulting, see S2KM's four-part blog series "Settlement Consulting".

S2P2J Releases 43 and 44

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

S2P2J Release 43 topics:

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

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

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

West Virginia Update

The West Virginia legislature has amended and reenacted the state's current structured settlement protection statute.  According to Representative Ronald N. Walters, one of the bill's sponsors, West Virginia Governor Joe Manchin is expected to sign House Bill 4613 into law within the next few days.

The reenacted statute is noticeably different than West Virginia House Bill 4380 which S2KM previously summarized. Most significantly, the reenacted statute does not include any maximum discount rate. The original bill contained a maximum discount rate not to exceed "the current annual average percentage rate of interest on twenty year residual mortgages offered in this state, as determined by the banking commissioner." Factoring companies claimed this maximum discount rate would eliminate structured settlement transfers in West Virginia. Walters acknowledged his original intent was to do just that.

If signed into law by Governor Manchin, the amended West Virginia statute (now titled House Bill 4613) will:

• Add some consistency between West Virginia's statute, IRC section 5891 and the Model State Structured Settlement Protection Act (Model Act) by:
  • Broadening application from "an infant or an incompetent person" to anyone with structured settlement payment rights arising from a personal injury or other claim; and
  • Eliminating a $40,000 threshold amount;
• Confirm that a court may appoint a guardian ad litem for any person; and must appoint a guardian ad litem for an infant, an incompetent or a ward of the court;
• The court will award the guardian ad litem reasonable fees for representing the consumer.
• The transfer company will pay for "such attorneys' fees and costs".
• Require the guardian ad litem to:
  • Review the requisite disclosures;
  • Make an independent inquiry to determine whether the proposed transfer:
    • Is fair and reasonable;
    • In the best interests of the consumer and any dependents of the consumer;
    • Has not been attempted or accomplished before.
• Report the results of that inquiry to the court during the hearing;
• Inform the consumer about "possible adverse tax consequence to the consumer" - a responsibility the guardian ad litem and the transfer company will now jointly share in West Virginia;
• Reconfirm the current West Virginia approval standard: the consumer must now "clearly" demonstrate that
  • He or she, or his or her family, is facing a financial hardship that the transfer would alleviate and the transfer would not subject the consumer or the consumer's family to undue hardship; or
  • The transfer is in the best interest of the consumer.

Reaction from the factoring companies to the new West Virginia statute has been generally positive. According to Earl Nesbitt, Executive Director of the National Association of Settlement Purchasers (NASP), the amended West Virginia legislation will have a "minimal impact".

Nesbitt, however, did express concern about NSSTA's conduct (or lack thereof) in West Virginia. In Nesbitt's view, NSSTA's failure to actively lobby for the Model Act in West Virginia violated the spirit, if not the letter, of NSSTA's 2000 agreement with NASP to support the Model Act.

NSSTA representatives have refused to comment about the West Virginia legislation - except to say  "NSSTA supports the Model Act."  According to Walters, NSSTA's General Counsel Craig Ulman did contact Walters early in the process to communicate that "NSSTA supports the Model Act". Other than one telephone communication, however, Walters said he has heard nothing from NSSTA and has received no support from NSSTA. "Craig [Ulman] told me I was on my own".

In Walters' view, "the Model Act does not go far enough". According to Walters, "West Virginia's new law will provide greater protection and greater clarification plus a tougher standard" than the Model Act. Walters said he may introduce additional legislation in 2009 requiring factoring companies to have insurance licenses.  Walters, one of legislative sponsors of West Virginia's House Bills 4380 and 4613, also manages the Charleston, West Virginia office of Structured Financial Associates, Inc. (SFA). SFA is a NSSTA member although Walter individually is not.

Some of the questions NSSTA members should be asking their leaders (and themselves) about settlement transfers:

• What are NSSTA's legislative and educational objectives and strategies for settlement transfers?
• What does NSSTA mean when NSSTA says "we support the Model Act"?
• How did NSSTA support the Model Act in West Virginia?
• Is the new West Virginia statute better or worse than the Model Act:
  • For consumers?
  • For state judges?
  • For transfer companies?
• What should NSSTA members say to their clients and other structured settlement stakeholders about settlement transfers?
• What conduct by NSSTA members represents best professional practices relative to settlement transfer issues and responsibilities?

For additional information:

• West Virginia's Structured Settlement Protection Statute - see this prior S2KM blog post.
• State Structured Settlement Protection Statutes - see Chapter 16 of "Structured Settlements and Periodic Payment Judgments"
• Secondary Life and Annuity Markets - see this prior S2KM blog post.

Structured Settlement Transfers in Rhode Island

During the past three weeks, The Providence Journal has published two articles by Staff Writer Edward Fitzpatrick about structured settlement transfers (aka factoring) in Rhode Island.  The articles feature State Superior Court Judges who express strong negative opinions about factoring companies as well as concerns that existing laws and judicial procedures in Rhode Island may not adequately protect structured settlement recipients.

Under the Rhode Island structured settlement protection statute, enacted in 2001, state judges must determine whether a proposed transfer of the payment rights "is in the best interest of the payee taking into account the welfare and support of the payee's dependents." Judges must also ensure that persons attempting to sell structured settlement payment rights have been advised to speak with a lawyer.

According to The Providence Journal articles, these judicial concerns have already resulted in two changes for transfer transactions in Rhode Island:

• Superior Court Presiding Justice Joseph F. Rodgers, Jr. has announced new court procedures under which Rodgers will personally hear all structured settlement transfer applications to determine the number of transfers and to establish uniform procedures for filing and handling transfers; and
• Rhode Island Attorney General Patrick C. Lynch, responding to a request from Rodgers, has agreed to make available attorneys from the attorney general's consumer protection unit to advise individuals who are seeking to sell structured settlement payment rights to help ensure that people are making informed decisions.

Both of these changes appear to be positive steps for structured settlement recipients. They also highlight and reinforce some important features and safeguards included in most state structured settlement protection acts (SSPAs):

• The requirement of advanced court approval is a cornerstone of each of the SSPAs, as well as IRC section 5891;
• Since 2001, structured settlement transfers are not effective and are subject to a 40 percent excise tax unless approved in advance by a state court.
• Although the SSPAs are not uniform, most are derived from the Model Structured Settlement Protection Act (Model Act);
• Since 2000, the National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP) have jointly promoted the Model Act to state legislatures with considerable success including support from state attorneys general, state bar associations and the National Conference of Insurance Legislators (NCOIL);
• Under each of the SSPAs, factoring companies ("transferees") are required to make written disclosures to structured settlement recipients ("payees");
• These disclosures are designed to highlight the value of the payments to be transferred and to contrast the value with the amount of money the payee will actually receive;
• In most states, the transferee must disclose the "discounted present value" of the payments determined by using the "Applicable Federal Rate" most recently published by the Internal Revenue Service for purposes of valuing annuities;
• At least some aspects of the Model Act's procedural requirements are spelled out under each of the SSPAs;
• Most of the SSPAs include supplemental protections for payees and their dependents as well as for structured settlement obligors and annuity issuers;
• In most states, these supplemental protections include notice requirements for interested parties plus a finding by the court that payees have either received independent professional advice or have knowingly waived their right to receive it;
• Similar to Rhode Island, the standard for judicial approval in most states is the "best interest" test: is the proposed transfer in the best interest of the payee taking into account the welfare and support of the payee's dependents?
• As judges become more experienced and knowledgeable about structured settlement transfers, some states can be expected to set additional requirements under their SSPAs: for example, New Pennsylvania Rule 229.2, a state rule of civil procedure promulgated by the Pennsylvania Supreme Court in 2007.
• According to R. Stanton Wettick, Jr., an Allegheny County Judge who serves as Chairman of the Pennsylvania Civil Procedural Rules Committee: "New Rule 229.2 is intended to provide the additional information necessary for a trial court to determine whether a petition to transfer structured settlement payment rights meets the best interest standard".
• In addition, some states can be expected to propose amendments to their structured settlement protection statutes: for example, West Virginia House Bill 4380, currently under consideration by the West Virginia legislature.

The February 3, 2008 Providence Journal article (headlined "Judge Warns of Financial 'Vultures'") focuses on a single proposed factoring transaction.  The article highlights harsh comments about factoring companies from the reviewing Superior Court Judge Netti C. Vogel and other Rhode Island superior court judges. Their primary complaints about factoring companies include: excessive late night advertising and high discount rates; plus the lack of independent advice for payees. 

The simplicity of the immediate solution for these judicial concerns in Rhode Island is noteworthy:

• Superior Court Judge Vogel determined the proposed transfer in the McNeil case was not in McNeil's "best interest" and therefore denied the transfer.  Under the SSPAs, judges are the gatekeepers. They are assigned the responsibility for protecting payees under state structured settlement protection statutes.   
• With support from Rhode Island Attorney General Lynch, Presiding Superior Court Judge Rodgers has addressed three important issues:
  • Tracking the number of transfer requests;
  • Creating uniform procedures for transfer applications;
  • Making available state consumer protection attorneys "to see how the law is being applied, whether the law needs to change, and to provide people with some measure of representation."

Additional S2KM recommendations:

• Both the primary and secondary structured settlement markets need to improve their educational marketing for judges and other structured settlement stakeholders;
• Primary market professionals who want to improve the secondary market should change their strategy. Instead of merely attacking and complaining about factoring companies, they should: 
  
  • Educate themselves about the secondary markets;   
    
  • Assume a more proactive advisory role about settlement transfers;
  • Re-learn how to sell structured settlements and how to grow the structured settlement market in a changing legal environment.   
    
• All structured settlement participants should encourage the development of "best practices" for secondary market transactions including competitive bidding for all proposed transfers.

For additional information about structured settlement transfers, see:

• Chapter 16 of "Structured Settlements and Periodic Payment Judgments";
• Online resources provided in this S2KM blog post.
  

Addendum (posted February 20, 2008) - More descriptive recommendations for two settlement transfer resources:

• ABA Article – Co-authored by Daniel Hindert and Craig Ulman, the 2005 ABA article titled “Tranfers of Structure Settlement Payments: What Judges Should Know About Structured Settlement Protection Acts” is the definitive analysis for judges as well as for professionals who want to understand the role of judges in settlement transfers.
• “Structured Settlements and Periodic Payment Judgments” – Originally published in 1986, this hardcopy textbook is co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert.  Release 39 originated, and subsequent releases have updated, a new chapter titled “Transfers of Structured Settlement Payment Rights”.

West Virginia House Bill 4380

The 2000 agreement between the National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP) to support the Model Structured Settlement Protection Act (Model Act) appears to be in jeopardy this week in West Virginia.

Since 2000, NSSTA and NASP have jointly promoted the Model Act to state legislatures with considerable success including support from state attorneys general, state bar associations and the National Conference of Insurance Legislators (NCOIL). Forty-eight states have enacted structured settlement protection statutes many of which are patterned after the Model Act.  Recent amendments to these state protection statutes, such as Pennsylvania Rule 229.2, have generally received favorable reviews from both NSSTA and NASP.

NASP representatives, however, are accusing NSSTA of violating their legislative agreement by failing to oppose West Virginia House Bill 4380. Currently under consideration by the West Virginia House Banking and Insurance Committee, House Bill 4380 would amend and reenact Section 46A-6H-3 of the Code of West Virginia titled "Transfers of Right to Receive Future Payments".

The stated purpose of House Bill 4380 is "to increase protection of beneficiaries to structured settlements as they relate to settlement transfers". In its current form, House Bill 4380 contains three controversial provisions not included in the Model Act:

• A requirement for a court to approve a guardian ad litem for the consumer in all transfer cases;
• A "clear and convincing evidence...of financial hardship" standard in addition to the Model Act's "best interest" standard;
• A maximum discount rate not to exceed "the current annual average percentage rate of interest on twenty year residual mortgages offered in this state, as determined by the banking commissioner."

Representatives of NASP, which opposes House Bill 4380, claim the above provisions violate the Model Act and, if enacted, could effectively end structured settlement transfers in West Virginia. NASP representatives have called upon NSSTA to honor its agreement to support the Model Act by opposing House Bill 4380. NASP contends that NSSTA's failure to oppose House Bill 4380 is a de facto violation of their 2000 legislative agreement and threatens future cooperation between the two trade associations. In addition, they point out that Ronald N. Walters, one of legislative sponsors of House Bill 4380, also manages the Charleston, West Virginia office of Structured Financial Associates, Inc. (SFA).  SFA is a NSSTA member.

According to a NSSTA source, however, "NSSTA has had nothing to do with introducing House Bill 4380.  Although NSSTA does not intend to oppose House Bill 4380, NSSTA still approves the Model Act."

For additional information about state protection laws, see Section 16.04 ("Structured Settlement Protection Acts") in "Structured Settlements and Periodic Payment Judgments".