California Enacts Major Structured Settlement Transfer Law Changes

 

On October 11, 2009, Governor Schwarzenegger signed into law major changes to the California structured settlement transfer, or "factoring", statute.  Senate Bill 510, co-sponsored by the Chair of the Senate Judiciary (Senator Corbett, a Democrat) and Assemblyman Tran (a Republican), becomes law on January 1, 2010.

Federal law (IRC 5891) mandates that all transfers of structured settlement payment rights be approved by a state court, or face a stiff punitive excise tax.  California and 46 other states have laws that regulate structured settlement factoring.  California first passed a structured settlement transfer law in 1999.

In addition to many minor "clean up" provisions, these revisions to California's transfer law also add for the first time certain factors that the court must consider when determining whether a transfer should be approved.  These 15 factors include the "reasonable preference and desire" of the seller, any existing child support obligations, whether the future payments were intended for medical care, and whether there have been previous sales or attempted sales.

Another nuance of the revised California transfer law is the requirement under certain circumstances to notify the seller's former personal injury lawyer that they are trying to sell payments.  This requirement only applies to fairly recent settlements in California.  The former attorney is invited to contact the seller if desired, but is not required to do so.  Of course, the seller can elect not to speak with his or her former counsel as well. 

Politically this bill was a compromise between various interest groups, including the Consumer Attorneys of California (CAOC, formerly known as the California Trial Lawyers) and the National Association of Structured Settlement Purchasers (NASP).  As one of the participants in this process on behalf of my company and NASP, I am grateful to the CAOC for their work on this bill and for the collegial atmosphere that prevailed.

For more information, watch the below video interview I did with Scott Drake of the Legal Broadcast Network.  The text of SB 510 is here. 

By Matt Bracy, General Counsel, Settlement Capital Corporation.  We welcome your comments and questions on this article or any topic related to structured settlements.  You may post comments here, or email them to me directly at mbracy@setcap.com.   

Federal Court Limits Use of Arbitration and Rights of First Refusal In Structured Settlement Factoring

In an opinion issued on July 28th, Judge Rosenthal of the United States District Court for the Southern District of Texas (Houston) has enjoined factoring company Rapid Settlements, Ltd. from using contractual arbitration clauses or rights of first refusal to circumvent the state structured settlement protection laws. 

This injunction, which is still subject to a motion for clarification and possible appeal, would effectively end Rapid's unusual and controversial business practices.  As alleged in the injunction order, Rapid has used arbitration clauses in its contracts with sellers as a means to effectively complete a transfer, even if a court has denied the transfer under the state structured settlement protection laws.  Further, the order prohibits Rapid from continuing to use "rights of first refusal" in its contracts to encumber future payments, when the grant of such first refusal rights had not been approved by a court. 

The injunction was obtained by the National Association of Settlement Purchasers (NASP), the trade association for the secondary or factoring industry.  Rapid Settlements is not a member of NASP.

A copy of the injunction order is here. 

For more information on this injunction, watch the Legal Broadcast Network's Scott Drake interview Matt Bracy, General Counsel of Settlement Capital Corporation. 

I welcome your comments on this article or any other structured settlement factoring issue.  You may leave a comment here, or email me at mbracy@setcap.com. 

The Dissipation Myth

Law student Jeremy Babener has written an interesting article questioning the basis for the oft-“cited” statistics concerning personal injury plaintiffs “squandering” settlements. As Mr. Babener points out, for a very long time proponents have justified structured settlement’s tax subsidy, and opposed structured settlement factoring, by pointing to the statistic that “90% of personal injury claimants spend their entire payment within 5 years of receipt.” However, it turns out that there is no demonstrable foundation for this “statistic”. It appears to have been just made up. Indeed, as Mark Twain noted, “There are three kinds of lies: lies, damned lies, and statistics."

Structured settlement commentators Patrick Hindert and John Darer have recently commented on Mr. Babener's piece, and I commend their articles to you.  I have a different perspective. 

I find it significant that a fictional statistic has been used for so long by so many. To what end? The clear purpose is to bolster the image of the personal injury claimant as incompetent, unable to care for himself, and obviously unable to make “sophisticated” financial decisions. Therefore, the argument goes, the perfect financial solution is a periodic stream of payments that they cannot alter. This is the rhetoric used to sell structured settlements for years. The argument also highlights why the primary structured settlement brokers are so viscerally opposed to factoring -- it’s really about marketing. If the structured settlement brokers were selling their product to the personal injury claimants, they would embrace the factoring world as the “after market” solution allowing some flexibility in an otherwise inflexible product (much akin to a consumer having the means to resell a car down the road). But, the predominant real market for structured settlement brokers is insurance companies and trial lawyers. To that market, the concept of the incompetent claimant plays well.

The logic of the dissipation myth, at least as a sales tool for structured settlements, is likewise flawed. If a payee is disposed to blow through all his money, does it really matter if it comes in monthly amounts or a factored purchase price? Moreover, many if not most of the structured settlements that I have seen in my 10 years in the business have included lump sum payments. In other words, the structured settlement itself may be set up to pay large lump sums annually, or once every 5 years, etc. These lumps may be in addition to monthly payments, or not. How does that interplay with the dissipation propaganda? Does the check from the insurance company have magical “anti-dissipation” properties that the factoring company check does not?

Structured settlements are a wonderful tool to settle claims. In most cases the payment stream works just fine, particularly when talking about the catastrophically injured (the factoring industry unscientific estimate is that only about 5% of structured settlement recipients ever factor).  However, structures are not spend-thrift trusts, they are not guardianships. Overselling them as such has led to problems and logical inconsistencies.

Do some people get a lump sum of money, either at settlement or via factoring future structured settlement payments, and “blow it”? Sure, just as some people get a paycheck on Friday and it’s gone on Monday.  Its the "solution" to this problem, if there is one, that can lead down an unattractive path.  Paternalism is a dangerous thing, and a difficult genie to put back in the bottle.

By Matt Bracy, General Counsel, Settlement Capital Corporation.  I welcome your comments or questions about this article or structured settlement factoring in general.  You may post comments here, or contact me at mbracy@setcap.com. 

US Government Structured Settlements - Part 2

The Legal Broadcast Network interviewed me in a follow-up to my June 17th article, concerning the unfair treatment of structured settlement payees who were injured at the hands of the United States government.  Click below to watch this short interview by Scott Drake.  As always, I welcome your comments.  Thank you, Matt Bracy, General Counsel, Settlement Capital Corporation.   mbracy@setcap.com

Unequal Rights for Those Injured by the US Government

In the absence of justice, what is sovereignty but organized robbery? ~ St. Augustine

You are driving through an intersection, and you have the green light. Half-way through a car runs the corresponding red light and plows into you, causing severe and life-long injuries. The driver who hit you is working at the time, meaning that his company will be responsible for your damages.

The good news: You survive and are able to settle with the other driver’s employer for a fair amount to compensate you for your injuries. Wisely, you choose a structured settlement and will now have all the wonderful advantages that brings: Predictable and secure payments over time that are tax free. The driver’s employer buys an annuity to make the payments over time.

The bad news: The driver who hit you was a US Postal Worker driving a mail truck. Therefore, you will not have the same rights to your future structured settlement payments as you would have if, for instance, he had instead been employed by Fedex.

How could this possibly be?

The US Department of Justice decided several years ago that it does not like structured settlement factoring, and will not “allow” structured settlements it owns to be factored. Exactly who made that decision, and why, has been hidden behind the “executive privilege”. In resisting attempts to factor payments, the Department of Justice invokes the ancient concept of “sovereign immunity” – the sovereign, or in our case, the US government, cannot be sued unless it has consented to be sued.

Leaving aside whether sovereign immunity itself is out-dated, worn out, and has no proper place in modern society, what is it about structured settlement factoring that gives rise to the doctrine to begin with? After all, no one in the court ordered factoring process is “suing” anyone, let alone the owner of the annuity (in this case, the US). The government has contended in lawsuits over this issue that a factoring approval order impacts its rights as the owner of the annuity, by directing to whom the payments will go. That’s it. The government technically owns the annuity, but has no rights to the payments (they belong to the former plaintiff). Courts reviewing this, sadly, have decided that this thin thread of ownership over the annuity itself is sufficient to implicate the sovereign immunity doctrine. Being thus implicated, and there being no law wherein the United States has expressly consented to be “sued” in this way, sovereign immunity bars any such factoring transaction.

John Darer calls this “the great thing about structured settlements from the US Department of Justice.”  (Mr. Darer's May 21, 2009 article is here). Great for whom? Not great for the structured settlement recipient who wanted to sell payments to pay for his daughter’s wedding, but couldn’t because he had been run over by a National Guard truck, instead of by a bus. Not great for the widow of a man who had been hit by a Postal truck instead of a Fedex truck, and was therefore told she could not sell future payments when she needed. Just who is this “great” for? These are real examples of real people who have been treated differently in trying to conduct a commercial transaction – the sale of some future payments to which they are entitled – exclusively because of who had caused their injuries, how ever many years ago.

You cannot choose your tortfeasor. In contract and business disputes, you choose to do business with a certain person or entity, the federal or state government for instance, and limits on your ability to sue and recover in the case of a breach come into the category of caveat emptor (not exactly, but close). Not so in personal injury cases. Moreover, the fact that this unselected defendant injured you or your family member years ago, and because of the mere identify of that defendant you are now precluded from enjoying the same rights to factor payments if and when needed (with court approval, etc.), is ludicrous. Why should these former tort victims and their families be discriminated against?

And the big question: Why does the government care? Transfers of payment rights have absolutely no impact on the government. It’s not their money, and such transfers require them to do absolutely nothing. Why is the Department of Justice so opposed, and why is this a “great thing”? I think it is an outrage.

As always, we appreciate your comments or questions about this article, or structured settlement factoring in general.  You may post comments here, or contact the author, Matt Bracy, General Counsel for Settlement Capital Corporation at mbracy@setcap.com. 

Suze Orman (and the NSSTA) on Factoring

“Partial truths or half-truths are often more insidious than total falsehoods.”

Samuel P. Huntington

Several weeks ago reknown financial advisor Suze Orman wrote a short article for Oprah Winfrey's magazine, wherein she offered advice to a structured settlement recipient on factoring.  The NSSTA (the predominant trade group for structured settlement brokers and insurance companies) immediately seized on some of Ms. Orman's comments and issued a press release.  The press release focused on this statement by Ms. Orman:

“In many states, you can sell your rights to periodic payments to a company that will pay you a lump sum today. Doing so, I realize, is tempting, but it's typically not smart.”
   

There it was.  The esteemed financial advisor backed by Oprah had spoken and condemned structured settlement factoring. 

Or had she really? 

Watch this video interview with Matt Bracy, General Counsel of Settlement Capital Corporation, to get the full story.

As always, we welcome your comments or questions about this article or structured settlement factoring in general.  You can reach me at mbracy@setcap.com.

Court Of Appeals: Public Policy Favors Court Approved Transfers

The California Court of Appeals in Fresno issued a surprising opinion this week on a group of 11 JG Wentworth factoring cases. In 321 Henderson Receivables Origination v. Sioteco, the court reversed the much publicized trial court decisions that had sent shock waves through the factoring and structured settlement worlds. Among the issues addressed by the court was the effect of contractual anti-assignment provisions on structured settlement factoring. In countermanding the trial court, which had decided that such anti-assignment clauses would render factoring transfers void even if not raised by the insurers, the unanimous panel of appellate judges found that such provision could be waived, and in fact that California public policy is against such provisions and is in fact in favor of court approved factoring.

The Sioteco decision is here. 

For more on the most significant case in structured settlement factoring in recent memory, click below to watch Scott Drake of the Legal Broadcast Network interview Matt Bracy, General Counsel of Settlement Capital Corporation.