Factoring Structured Settlement Annuities
The effectiveness of a statute to serve the best interests of the public is no better and no worse than the ability of the judges to apply it.
Structured settlements are settlements of tort claims involving physical injuries. The settlement proceeds are paid in periodic payments. They are generally funded by a single premium annuity contract under which a 3rd party, typically an insurance company, is contractually obligated to make future payments. Under the Internal Revenue Code, (26 U.S.C. Section 104(a) (2) tax concessions are provided to recipients, i.e., payments and the amounts attributable to earnings are excludable from the recipient's income and therefore not taxable. The rationale behind passage of this law is the public policy purpose of providing income over the long term for an impaired class of citizens who might otherwise face indigency, leaving them to fall back on public assistance, but who, by virtue of this legislation are provided with the stability of long term financial security. In order to secure these benefits, structured settlement agreements typically provide that the recipient's rights to receive future payments may not be assigned or otherwise transferred.
Unfortunately, to the detriment of those individuals this legislation was designed to protect, an active secondary market in these payment rights has developed. Called 'factoring', these companies through aggressive prime time television advertising, phone calls and letters (J. G. Wentworth, Peachtree, Imperial, etc.) persuade recipients to trade their future payments for an immediate, deeply discounted cash payment thereby frustrating the legislative purpose but, more importantly, taking advantage of individuals who, for a variety of reasons, need the protection of a structured settlement annuity. These are individuals who are most susceptible to this type of aggressive promotion and who need the continued protection of attorneys and judges. A current Minnesota case illustrates the problem quite well. Tasheeka Griffin, a childhood victim of lead poisoning was supposed to have a lifelong income. A $786,000 settlement was to pay her $1,255 a month for life, plus periodic lump sum payments of $70,000. However, once she turned 18 this woman, who is legally a vulnerable adult, lost almost her entire structured settlement to a pair of factoring companies. She sold $352,000 of her settlement for just $77,000 and was trying to sell most of the remaining balance of $299,000 for $19,000 when an alert judge stopped the transaction and appointed a guardian to investigate. One of the factoring companies is suing Ms. Griffin to enforce its agreement with her.
Responding to what is perceived to be a crisis, forty six states, including Texas (Section 141.001-141.007 Tex.Rev.Civ.Stat.Ann.), have adopted Structured Settlement Protection Statutes which make transfers of payment rights under structured settlements ineffective unless advance court approval is obtained. In Texas, the payee must receive disclosure information from the payor which includes the aggregate amount of the payments, the discounted value of the payments to be transferred, the gross advance amount and notice of the right to cancel within three days. More importantly, the court must expressly find the following: 1) The transfer is in the best interest of the payee taking into account the welfare and support of payee's dependents; 2) The payee has been advised in writing to seek independent professional advice regarding the transfer and has either received the advice or knowingly waived the advice in writing; and 3) the transfer does not contravene any applicable statute or an order of any court or other governmental entity. It is suggested, given the deeply discounted amounts paid by factoring companies, the public policy reason for the existence of structured settlements and the susceptibility of individuals who do not have financial sophistication to fully appreciate the long term consequences of selling their security, that courts should look closely at such transfers, thoroughly examining the circumstances, needs and motives of the structured settlement recipient. There really is no substitute for rigorous application of the statute by the judiciary.
There are currently cases in litigation, some brought by attorney generals of various states against factoring companies taking advantage of vulnerable adults. While there are legitimate reasons for factoring for an individual in need, protection of a structured settlement recipient should be the ultimate goal of attorneys and the courts. Toward that end, it is suggested that the following additional language be included in settlement agreements and releases (SAR), especially in the case of minors and confidential settlements:
"Plaintiff shall have no power to assign, sell, mortgage, encumber, pledge, hypothecate, transfer or anticipate by assignment or otherwise, any interest in periodic payments; any such assignment, sale, mortgage, encumbrance, pledge, hypothecation, transfer or anticipation by assignment shall be void and unenforceable. The periodic payments referenced herein cannot be accelerated, deferred, increased or decreased, sold, mortgaged, assigned, pledged, hypothecated, or otherwise transferred or encumbered, either directly or indirectly, by Plaintiff , unless such sale, assignment, pledge, hypothecation, or other transfer or encumbrance has been approved in advance by a "qualified order" as outlined in Section 5891(b)(2) of the Internal Revenue Code of 1986, as amended (a "Qualified Order"), and as approved by a court of competent jurisdiction and otherwise complies with applicable state law, including without limitation any and all applicable state structured settlement protection statutes. In the event Plaintiff should attempt to seek such a "qualified order," it is hereby agreed and consented to by the parties that timely, written legal notice of any such Motion or Petition for such a "qualified order" will be served upon all parties to this Settlement Agreement and Release and their counsel, including Plaintiff's counsel, the minor's Guardian ad Litem in this cause of action, as well as Defendant(s), Defendants' counsel and Defendants' Insurer/Assignor. It is further agreed by the parties hereto that all such parties duly-notified as required herein shall be provided an opportunity to be heard at the hearing before the court considering such Motion or Petition for a Qualified Order. It is further agreed by the parties that, at such hearing on a Motion or Petition for Qualified Order, that the court shall make appropriate conclusions of law as necessitated by Internal Revenue Code Section 5891 upon appropriate findings of fact based on actual evidence of record and witness testimony made under oath. The legal standard upon which the court makes its aforementioned conclusions of law must be by "clear and convincing" evidence of record."
The life company issuing the structure settlement annuity should be notified that the language in the SAR was agreed to by all parties and therefore should be "red flagged" in the event the life company is contacted about a factoring transaction. These additional safeguards coupled with current law and a vigilant bench and bar can go a long way toward alleviating the current problem.
For those interested in the history of structured settlements, the factoring phenomenon, the legislative and industry response to factoring, statistical data regarding same and suggestions for judges confronted with deciding applications of this type, there is an excellent article by attorneys Daniel W. Hindert and Craig H. Ulman, two of the most knowledgeable individuals in this expanding field of insurance law at the link below.
John H. Davis, Attorney at law
Carola M. Davis, CFS
DAVIS SETTLEMENT PARTNERS