Update on Transfer Issues

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Update on Transfer Issues

NSSTA Annual Meeting

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Factoring of Structured Settlement Annuities:

Transfer Petition Volume

  Prior to the economic downturn of 2008, transfer petition volume was at an all

time high.

  While there had been a significant downturn in volume due to those economic

conditions, insurers have seen a recent increase in transfer petition volume.

  With this growth, there has been an increase in defects in petitions including:

• improper service under the SSPA’s;

• lack of timely notice;

• failure to provide proper disclosures to claimants;

• refusal to seek approval for transfers from courts that had

previously approved settlements (e.g., minors’ cases);

• attempt to factor workers’ compensation settlements, including

those arising under the federal Longshore & Harbor Workers’ Compensation Act; and

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Factoring of Structured Settlement Annuities:

Transfer Petition Analysis

• 

Large number of issues that can arise on any given transaction,

including:

• Is the payee’s name correct?

• Has the factoring company designated the correct structured settlement obligor and annuity issuer?

• Has the petition been filed in the correct venue?

• Is the first payment at issue due within the next 30 days?

• Did the factoring company comply with the transfer act statutes?

• Were all interested parties served with a copy of the petition?

• Is the payee a minor?

• Is there an order approving the settlement agreement or a minor’s order that contains language prohibiting assignment?

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Factoring of Structured Settlement Annuities:

Transfer Petition Analysis (cont’d)

• 

Large number of issues that can arise on any given transaction

including:

• Is the factoring company assigning its interest in the payments to a third

party assignee?

• Are the payments being garnished by a child support order?

• Are there any bankruptcy issues?

• Does the proposed transfer involve a payment split?

• Does the transfer involve guaranteed payments and/or life-contingent

payments?

• Is the payee competent to enter into the factoring transaction?

• Who is the current beneficiary under the annuity?

• Do the payments provided in the annuity schedule match the payments due

under the underlying settlement agreement and release?

• Did the payee complete a prior factoring transaction(s)?

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Factoring of Structured Settlement Annuities:

Transfer Petition Oppositions



With the rise in volume, there has been a resulting rise in

oppositions.

o 

Oppositions can be based on any number of arguments, including

those previously mentioned, but commonly include violations the

SSPA’s, anti-assignment provisions, and best interests of the

payee.



Oppositions have been successful in a majority of cases.



Reasons for denials: anti-assignment language; best

interests; contravenes court order; forum shopping;

approval would require splitting payments; violation of

workers compensation law.

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Anti-assignment language

● Courts are especially inclined to deny transfer based on anti-assignment language stating that the payee does not have the power to assign

payments rather than just the right to assign.

● Of the 19 recent cases where court gave a reason for denial, 6 were based at least in part on anti-assignment language

● “Having considered the evidence presented and the argument of counsel, the court can find nothing in the Missouri Structured

Settlement Act §407.1 060 R.S.Mo. et seq. or any other provisions of Missouri law that would abrogate the anti-assignment clause contained in the applicable settlement agreement . . . . Accordingly, the

Application for Court Approval of a Transfer of Structured Settlement Payment Rights is denied.” – from decision in In Re: Michael Dee

Allcorn, No. 11AF-CC00067 (Mo. Cir. Ct. 2011)

Factoring of Structured Settlement Annuities:

Transfer Petition Oppositions (cont’d)

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Best Interest of the Payee

●

Most common reason for denial in recent cases: cited in 9 of 19 recent denials

● Usually cited in connection with higher discount rates – some up to

40%! However, best interests was cited in one case where discount rate was only 11.08%. See In re Linda Gibbs, No. 11SL-CC001281 (Mo. Cir. Ct. 2011)

● Best interests is often based on the particular facts involved in the payee’s situation

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Factoring of Structured Settlement Annuities:

Best Interest of the Payee

●

Among reasons cited for denial based on best

interests:

▪ ability to get a loan at a better interest rate than under the proposed factoring deal

▪ ability to make money to cover expenses through employment

▪ inability to meet dependents’ expenses without periodic payment income

▪ lack of a showing of hardship

▪ exorbitant discount rate

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Best Interest of the Payee: Quotes from Orders

● “After listening to Kaitlyn’s testimony and observing her, we find that she has made unwise decisions in the past. We further find that permitting this transfer of the

structured settlement would be another unwise decision and would not be in the best

interests of Kaitlyn. . . . She testified that she and her boyfriend and son moved to Monroe County for ‘a better life,’ but life has not been better for Kaitlyn since she arrived.” – In re

Espada, No. 105 O.C. 2011 (Monroe (Pa.) Com Pl., Aug. 10, 2011)

● “Additionally, I find and conclude that this transfer is not in the best interests of Ms.

Stewart's three dependent children. In twenty-two months, Ms. Stewart will be receiving a guaranteed payment of $13,464. Receiving the full value of that payment in January, 2013, will put Ms. Stewart in a much better position to care for her dependent children, and potentially place her in a financial position to regain full custody of them.” – In re

Stewart, 2011-CP-46-0877 (York (S.C.) Com. Pl., June 1, 2011)

● “Stephen is a competent adult who has no dependents. . . . Clearly, tuition and debt are rational reasons for Stephen’s request, but he has other options. He is under no hardship;

Factoring of Structured Settlement Annuities:

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Other reasons cited for denial

● Transfer would contravene order of court that approved the settlement agreement

● Payee testified that she no longer wished to proceed with transfer

● Payee and factoring company had engaged in forum shopping by filing in one state after previous denial in another state

● Transfer was precluded by Longshore and Harbor Workers’ Compensation Act

● Res judicata, based on previous denial

● Structured settlement protection act provision precluding splitting of payments between two or more entities

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Factoring of Structured Settlement Annuities:

Forum Shopping

● In re Joseph Surmanek, No. CL11-237 (Va. Cir. Ct. May 18, 2011) – Court ruled that it would violate public policy to allow a factoring company to engage in forum shopping by initially filing a petition for transfer of

structured settlement payment rights in North Carolina state court, and then withdrawing that petition and filing in Virginia state court.

● In re Keshon Moore, No. CL11-1670 (Va. Cir. Ct. July 18, 2011) – “A prior application for the approval of a similar transfer of payment rights was sought in the State of New York. Said application was deemed against the transferor’s best interests and denied by the New York State Supreme Court of Bronx County on April 12, 2011. It would be against the public policy of

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Emerging Trends:

Individual Investments in Factored Structured Settlements



Refactoring: the Sale of Previously Factored

Structured Settlements

 

Factoring company buys structured settlement payments

rights, then sells them to an individual investor (presumably

for a higher amount than it paid the structured settlement

payee).

 

Factoring company can offer relatively attractive rates and still

make a profit.

 

Refactoring has been around for several years, but has become

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Emerging Trends:

Factoring company makes a deal to buy structured settlement rights from Annuitant. The settlement offers payments of $1,000 per month for 20 years, for a total of $240,000. After the entry of a qualified

court order, Annuitant is paid $59,000, representing a discount rate of approximately 20%. Just before or just after court approval, the

factoring company contracts with an investor to buy the rights to the income stream for $129,000, providing an annual return to the

investor of 7%. The factoring company, promoters and sales people then pocket the $70,000 in profit.

Factoring

Investor

Annuitant

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Emerging Trends:



Why are they popular?

 

Higher rates of return

  The slow economy has greatly reduced interest rates, including rates

offered on annuities.

  Factored transactions are based on annuities issued when rates were

higher, so the return is that much greater at a time when rates are low.

 

Factoring companies are able to offer investors attractive rates

(generally 4.5-7.0%) while still making a sizable profit.

 

However, these deals are not for casual investors:

  Typical deal involves investment of at least $25,000;

  Average purchase costs $50,000-$100,000; and

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Emerging Trends:



Questions Raised by Individual Placements

 

How are these transactions analyzed under 26 U.S.C. § 5891

and the SSPAs?

  Both are arguably satisfied since this is still essentially a factoring

transaction and since there is still a qualified court order.

  There are some potential questions, including the identity of the

transferee.

  Does the transaction involve two separate transfer petitions, or one

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Emerging Trends:

 

Questions Raised by Individual Placements (cont’d)

 

For the structured settlement claimant:

  Is the claimant aware of the amount being paid by the investor?

  In other words, does the payee realize that he is likely receiving substantially

less than the investor is paying?

 

For the investor:

  Is the investor relying on the solvency of the factoring company or the life

company?

  Are these investments liquid?

  Is the transfer potentially invalid due to a previous transfer of the same

payments?

  How are income taxes on these computed?

  Who is the transferee (the factoring company or the investor) for the purpose

of the applicable SSPA or Section 5891?

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Emerging Trends:



Risks for the Investor

  Relying on the factoring company’s solvency;

  The investor may believe he is relying on the solvency of the life

company, but in reality he may also be relying on the solvency of the factoring company;

  This will likely depend on the language of the agreement between the investor and the factoring company; and

  Are payments being made to the investor by the factoring company or the life company?

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Emerging Trends:

•

Risks for the Investor

(cont’d)

  Liquidity – Investor may be unable to sell the contract easily if he needs money quickly.

  Validity – Sale could be deemed invalid if the payee had previously sold the same payments.

  Flexibility – Investor must choose from the structures available and will not be able to tailor the annuity payments as he would choose.

  Indemnity – Once payments have been sold, there may be no

guaranty fund coverage if the life company were to become insolvent.

  Taxes – Deals are generally not tax-free so the higher yields may be misleading to new claimants.

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Emerging Trends:



Risks for the Investor (cont’d)

 

Buyer beware

  One ad seen recently was selling payment rights for an annuity

issued by Executive Life Insurance Company of New York.

  Ad made no mention of ELNY’s pending insolvency and the

possibility that the investor might lose money under the proposed ELNY restructuring agreement.

  Other ads offer MetLife annuities. Are those possibly ELNY

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Emerging Trends:



Risks for the Investor (cont’d)

 

Reversal of Fortune

  If the economy were to rebound, the returns on factored structured

settlements might not keep up with inflation.

  Many investors would be locked in long-term based on payments

under the structure they purchased.

  However, economy shows no signs of becoming inflationary any

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