THE SALE OF STRUCTURED SETTLEMENTS · Chapter 1 - Article 44B Article 44B. Structured Settlement Protection Act. § 1-543.10.Title. This Article may be cited as the North Carolina

NORTH CAROLINA SUPERIOR COURT JUDGES

2008 SUMMER CONFERENCE

THE SALE OF STRUCTURED SETTLEMENTS

ALSO KNOWN AS

DEAL . . . . . . . OR NO DEAL?

PRESENTED BY:

JUDGE RON SPIVEY, RESIDENT JUDGE FORSYTH COUNTY

Chapter 1 - Article 44B

Article 44B.

Structured Settlement Protection Act.

§ 1-543.10. Title.This Article may be cited as the North Carolina Structured Settlement Protection Act. (1999-367, s. 1.)

§ 1-543.11. Definitions.For purposes of this Article:

(1) "Annuity issuer" means an insurer that has issued an annuity or insurance contract used to fund periodic payments under a structured settlement;(2) "Discounted present value" means the fair present value of future payments, as determined by discounting such payments to the present utilizing the tables adopted in Article 5 of Chapter 8 of the General Statutes;(3) "Independent professional advice" means advice of an attorney, certified public accountant, actuary, or other licensed or registered professional or financial adviser:

a. Who is engaged by a payee to render advice concerning the legal, tax, and financial implications of a transfer of structured settlement payment rights;b. Who is not in any manner affiliated with or compensated by the transferee of such transfer; andc. Whose compensation for rendering such advice is not affected by whether a transfer occurs or does not occur;

(4) "Interested parties" means, with respect to any structured settlement, the payee, any beneficiary designated under the annuity contract to receive payments following the payee's death, the annuity issuer, the structured settlement obligor, and any other party that has continuing rights or obligations under the terms of the structured settlement;(5) "Payee" means an individual who is receiving tax-free damage payments under a structured settlement and proposes to make a transfer of payment rights thereunder;(6) "Qualified assignment agreement" means an agreement providing for a qualified assignment within the meaning of section 130 of the Internal Revenue Code, United States Code Title 26, as amended from time to time;(7) "Responsible administrative authority" means, with respect to a structured settlement, any government authority vested by law with exclusive jurisdiction over the settled claim resolved by such structured settlement;(8) "Settled claim" means the original tort claim resolved by a structured settlement;(9) "Structured settlement" means an arrangement for periodic payment of damages for personal injuries established by settlement or judgment in resolution of a tort claim;(10) "Structured settlement agreement" means the agreement, judgment, stipulation, or release embodying the terms of a structured settlement, including the rights of the payee to receive periodic payments;(11) "Structured settlement obligor" means, with respect to any structured settlement, the party that has the continuing periodic payment obligation to the payee under a structured settlement agreement or a qualified assignment agreement;(12) "Structured settlement payment rights" means rights to receive periodic payments (including lump-sum payments) under a structured settlement, whether from the

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settlement obligor or the annuity issuer, where:a. The payee is domiciled in this State;b. The structured settlement agreement was approved by a court or responsible administrative authority in this State; orc. The settled claim was pending before the courts of this State when the parties entered into the structured settlement agreement;

(13) "Terms of the structured settlement" include, with respect to any structured settlement, the terms of the structured settlement agreement, the annuity contract, any qualified assignment agreement, and any order or approval of any court or responsible administrative authority or other government authority authorizing or approving such structured settlement; and(14) "Transfer" means any sale, assignment, pledge, hypothecation, or other form of alienation or encumbrance made by a payee for consideration;(15) "Transfer agreement" means the agreement providing for transfer of structured settlement payment rights from a payee to a transferee. (1999-367, s. 1.)

§ 1-543.12. Structured settlement payment rights.

No direct or indirect transfer of structured settlement payment rights shall be effective, and no structured settlement obligor or annuity issuer shall be required to make any payment directly or indirectly to any transferee of structured settlement payment rights unless the transfer has been authorized in advance in a final order of a court of competent jurisdiction or a responsible administrative authority based on express findings by such court or responsible administrative authority that:

(1) The transfer complies with the requirements of this Article [of] law;(2) Not less than 10 days prior to the date on which the payee first incurred any obligation with respect to the transfer, the transferee has provided to the payee a disclosure statement in bold type, no smaller than 14 point setting forth:

a. The amounts and due dates of the structured settlement payments to be transferred;b. The aggregate amount of such payments;c. The discounted present value of such payments;d. The gross amount payable to the payee in exchange for such payments;e. An itemized listing of all brokers' commissions, service charges, application fees, processing fees, closing costs, filing fees, administrative fees, legal fees, notary fees and other commissions, fees, costs, expenses, and charges payable by the payee or deductible from the gross amount otherwise payable to the payee;f. The net amount payable to the payee after deduction of all commissions, fees, costs, expenses, and charges described in sub-subdivision e. of this subdivision;g. The quotient (expressed as a percentage) obtained by dividing the net payment amount by the discounted present value of the payments;h. The discount rate used by the transferee to determine the net amount payable to the payee for the structured settlement payments to be transferred; andi. The amount of any penalty and the aggregate amount of any liquidated damages (inclusive of penalties) payable by the payee in the event of any breach of



the transfer agreement by the payee;(3) The transfer is in the best interest of the payee;(4) The payee has received independent professional advice regarding the legal, tax, and financial implications of the transfer;(5) The transferee has given written notice of the transferee's name, address, and taxpayer identification number to the annuity issuer and the structured settlement obligor and has filed a copy of such notice with the court or responsible administrative authority;(6) The discount rate used in determining the net amount payable to the payee, as provided in subdivision (2) of this section, does not exceed an annual percentage rate of prime plus five percentage points calculated as if the net amount payable to the payee, as provided in sub-subdivision (2)f. of this section, was the principal of a consumer loan made by the transferee to the payee, and if the structured settlement payments to be transferred to the transferee were the payee's payments of principal plus interest on such loan. For purposes of this subdivision, the prime rate shall be as reported by the Federal Reserve Statistical Release H.15 on the first Monday of the month in which the transfer agreement is signed by both the payee and the transferee, except when the transfer agreement is signed prior to the first Monday of that month then the prime rate shall be as reported by the Federal Reserve Statistical Release H.15 on the first Monday of the preceding month;(7) Any brokers' commissions, service charges, application fees, processing fees, closing costs, filing fees, administrative fees, notary fees and other commissions, fees, costs, expenses, and charges payable by the payee or deductible from the gross amount otherwise payable to the payee do not exceed two percent (2%) of the net amount payable to the payee;(8) The transfer of structured settlement payment rights is fair and reasonable; and(9) Notwithstanding a provision of the structured settlement agreement prohibiting an assignment by the payee, the court may order a transfer of periodic payment rights provided that the court finds that the provisions of this Article are satisfied.

If the court or responsible administrative authority authorizes the transfer pursuant to this section, the court or responsible administrative authority shall order the structured settlement obligor to execute an acknowledgment of assignment letter on behalf of the transferee for the amount of the structured settlement payment rights to be transferred; provided, however, structured settlement payment rights arising from a claim pursuant to Chapter 97 shall not be authorized. (1999-367, s. 1; 1999-456, s. 67.)

§ 1-543.13. Jurisdiction.(a) Where the structured settlement agreement was entered into after commencement of litigation or administrative proceedings in this State, the court or administrative agency where the action was pending shall have exclusive jurisdiction over any application for authorization under this Article of a transfer of structured settlement payment rights.(b) Where the structured settlement agreement was entered into prior to the commencement of litigation or administrative proceedings, or after the commencement of litigation outside this State, the Superior Court Division of the General Court of Justice shall have nonexclusive original jurisdiction over any application for authorization under this Article of a transfer of structured settlement payment rights. (1999-367, s. 1.)



§ 1-543.14. Procedure for approval of transfers.

(a) Where the structured settlement agreement was entered into after the commencement of litigation or administrative proceedings in this State, the application for authorization of a transfer of structured settlement rights shall be filed with the court or administrative agency where the settled claim was pending as a motion in the cause.(b) Where the structured settlement agreement was entered into prior to the commencement of litigation or administrative proceedings, or after the commencement of litigation or administrative proceedings outside this State, the application for authorization of a transfer of structured settlement payment rights shall be filed in the superior court with proper venue pursuant to Article 7 of this Chapter. The nature of the action shall be a special proceeding governed by the provisions of Article 33 of this Chapter.(c) Not less than 30 days prior to the scheduled hearing on any application for authorization of a transfer of structured settlement payment rights under this Article, the transferee shall file with the proper court or responsible administrative authority and serve on any other government authority which previously approved the structured settlement, on all interested parties as defined in G.S. 1-543.11(4), and on the Attorney General, a notice of the proposed transfer and the application for its authorization, including in such notice:

(1) A copy of the transferee's application;(2) A copy of the transfer agreement;(3) A copy of the disclosure statement required under G.S. 1-543.12(a)(2);(4) Notification that any interested party is entitled to support, oppose, or otherwise respond to the transferee's application, either in person or by counsel, by submitting written comments to the court or responsible administrative authority or by participating in the hearing; and(5) Notification of the time and place of the hearing and notification of the manner in which and the time by which written responses to the application must be filed in order to be considered by the court or responsible administrative authority.

(d) The Attorney General shall have standing to raise, appear, and be heard on any matter relating to an application for authorization of a transfer of structured settlement payment rights under this Article. (1999-367, s. 1.)

§ 1-543.15. No waiver; penalties.(a) The provisions of this Article may not be waived.(b) Any payee who has transferred structured settlement payment rights to a transferee without complying with this Article may bring an action against the transferee to recover actual monetary loss or for damages up to five thousand dollars ($5,000) for the violation by the transferee, or bring actions for both. The payee is entitled to attorneys' fees and costs incurred to enforce this Article. In addition, all unpaid structured settlement payment rights transferred in violation of this Article by any transferee shall be reconveyed to the payee.(c) No payee who proposes to make a transfer of structured settlement payment rights shall incur any penalty, forfeit any application fee or other payment, or otherwise incur any liability to the proposed transferee based on any failure of such transfer to satisfy the conditions of this Article. (1999-367, s. 1.)


HYPOTHETICALS SEEKING THE TRANSFER OF A STRUCTURED SETTLEMENT

1. In 1997, Eva Gooch (then nine years old, now 20) received the benefit of a structured settlement arising out of a wreck in which she was injured. The minor settlement was approved late on a Friday afternoon by Judge Clifton W. Everett, who agreed to hear the matter then so that Eva could come to court and not miss school. After payment of her medical bills, she received $15,000 which was used to purchase an annuity, which gave her a monthly benefit after she turned age 18 and two lump sum payments. At the time of this motion, Eva wants to sell to 321 Henderson her remaining 83 monthly payments of $265.51 per month, one lump sum payment of $5000 on July 25th, 2014, and a final lump sum payment of $19,553 on July 25, 2015. The aggregate of all of these payments would be $46,590.33. The discounted present value of that amount today is $36,350.44. Eva wants to sell it today for a payment of $23,928.30. $23,928.30 represents 65.80% of the estimated present value of her settlement. Eva states that she wishes to sell her structured settlement to have money for a down payment on a home. Her mother and father are both deceased, she just moved to town last year and is working at Acme Industries making $21 per hour plus benefits. She states that she is presently renting an apartment, but if she had the money for a down payment her mortgage payment would be about the same as her rental payment. She is a high school graduate with two years of technical education, and is taking night classes at the community college. A small portion of the money may be used for this purpose. She states that she sought the advice C.P.A. David Lee who told her that it would seem to make better financial sense to get a 95% loan

and keep getting this tax free monthly income stream from the structured settlement. He further stated he wished he could buy it from her at this kind of rate. She says she’d rather have the down payment now and a lower monthly payment in the future. She thinks having a mortgage interest deduction on her income tax would be a good thing in the coming years. C.P.A. Lee did not write a letter for the court file, but she says she did pay him $200 for the office visit. She appears to understand the facts and figures of her potential arrangement. She has no ongoing medical care and no permanent injuries. She has no other sources of income other than her salary and this structured settlement. The Attorney General takes no position. 2. Kim Knotts, who is almost 21 today, was injured in a car accident with her parents at age 5. A minor settlement was approved by Judge Ben Alford, who was assigned to this session of civil court in lieu of the Honorable Judge Narley Cashwell, who was in a holdover session in Wake County. That settlement provided for the payment of her medical bills, and 240 monthly payments that will commence when Kim reaches age 21, and her monthly payment will increase 2% every twelve months. At the time of this request, Kim wants to sell all of her 240 payments (which will start at $500 per month) to 321 Henderson. The aggregate of all these payments would be $145,784.16. The discounted present value of that amount today is $93,442.00. (The discounted present value uses the applicable federal rate of 4.5%) Kim wants to sell it today for a payment of $48,700.00. The $48,700.00 represents 52.10% of the estimated present value based upon the discounted value using the applicable federal rate.

To get a feel for the complex nature of these transactions, an important portion of the agreement reads as follows: The net amount payable to the seller (you) is $48,700.00. No other expenses are incurred by you. The discounted present value of payments shall be calculated as follows: The applicable federal rate used in calculating the discounted present value is 4.50%. The effective annual discount rate for this transaction is 13.25%. The cash payment you receive in this transaction from us was determined by applying the specified effective annual discount rate, compounded monthly to the total amount of future payments to be received by us, less the total amount of commissions, fees, costs, expenses and charges payable by you. The net amount that you will receive from us in exchange for your future structured settlement payments represents 52.10% of the estimated current value of the payments based upon the discounted value using the applicable federal rate. The quotient obtained by dividing the net payment by the discounted present value is 52.10%. Based on the net amount that you will receive from us and the amounts and timing of the structured settlement payments that you are turning over to us, you will, in effect, be paying interest to us at a rate of 13.25% per year. The net amount paid to you (the payee) by us (the transferee) represents an estimate of the fair market value of the future periodic payments transferred under the structured settlement agreement.

Kim tells you in support of her motion that she needs the money for medical treatment of one of her two small children, who has a condition that requires a corrective procedure. The condition is not life threatening, but the procedure would improve the child’s quality of life. Kim works at Walmart making minimum wage and the father of the child doesn’t provide any financial support. She has no other means to get this procedure for her child, stating that she’s sought government help but they won’t help because it’s not life threatening. Kim presently has no ongoing medical treatment of her own, but she does still suffer from permanent injuries that cause her to limp and she’s often stiff at the end of each day. She consulted a local attorney who lives nearby, Jack Thompson, Esquire, who told her that it probably wasn’t a good financial deal, but it was a life choice that she’d have to make. Thompson did not charge her for the advice and did not produce a letter for the court. The Attorney General takes no position. 3. Joe was injured in a car accident at age 25 and was the beneficiary of a settlement that resulted in the purchase of an annuity for him. The settlement provided for the payment of his medical bills, with the remainder being placed into an annuity. The settlement was approved by Senior Resident Judge W. Allen Cobb, who thoroughly and thoughtfully reviewed the settlement provisions and never

imagined that a Judge may come along several years later and undo what he had so skillfully approved. That settlement provided that Joe would receive eight annual lump sum payments beginning on August 1, 2007. Joe is attempting to sell to Symetra only 2 of his future payments, those being payments scheduled for August 1, 2009 and 2010. The aggregate of these payments would be $37,535.00. The discounted present value of that amount today is $33,862.97. Joe wants to sell these two payments today for $29,633.87. The $29,633.87 represents 87.5% of the estimated present value based upon the discounted value using the applicable federal rate. In this case Joe has consulted legal counsel in Greensboro, Catherine Eagles, Esquire, and is satisfied that he should go forward with this request. There is a letter in the file from his counsel who states this is probably the best one of these arrangements she’s ever seen. Joe says he needs this money to purchase a trailer for his pregnant bride and her two kids, who will be moving in after a shotgun wedding ceremony scheduled in early September – due date late September. He presently rents an apartment and just started working 40 hours a week at Baptist Hospital in the laundry for minimum wage. The Attorney General takes no position. Joe states that he made a previous motion to the court when he sold his 2007 annual payment in order to have a down payment on a trailer, but when he got the money he actually used it to pay off credit cards and get out of arrears in child support for his other two kids.

QUESTIONS THAT YOU MAY WANT TO ASK THE PAYEE

State your full name and age. Are you married? Do you have children or other dependents? What is your educational background and work experience? Do you have sources of income, other than this structured settlement? What happened to you that resulted in this structured settlement? Is there a beneficiary listed in the structured settlement agreement in the event of your death? Do you presently want to sell part of or all of your structured settlement proceeds to this company? Initially, did you contact them, or did they contact you? What are you attempting to sell to them? Did you receive “independent professional advice” from a licensed professional about these arrangements? Do you have a letter from that “independent professional” verifying this consultation? Did you go out and find this “independent professional” or was this person recommended to you by the company? Who paid their fees? Did you specifically talk about the tax ramifications of selling your future payments to this company? Do you understand that the attorney for the company represents “the company” that is buying your structured settlement for a discounted amount, they do not represent you or your interests? Do you understand the total amount of the payments that you would receive over time that you are now asking to transfer to this company? What is that amount? Do you understand the present value of the payments that you are asking to transfer, according to the company’s computations? What is that amount? Do you understand how much you would be receiving as a lump sum if I approve this request? What is that amount? Do you know what percent of the present value this lump sum represents? What is that percentage? What fees are you paying to the company for this transfer?

Are you presently involved in a bankruptcy proceeding? Are you presently subject to a separation agreement or a divorce decree? Have you made a motion to the court before to transfer all of or part of your structured settlement? If so, what was the stated reason at that time that was the basis of your motion? If granted, did you use the proceeds for that purpose? Do you recognize Exhibit #1, the disclosure statement, which sets out all of the terms of this transfer arrangement? How long ago did you first see this? Did you read the entire exhibit? Are familiar with it? Is this your signature on the last page of the exhibit? What were your injuries that originally resulted in this structured settlement? How old were you when that happened? Do you still receive medical treatment or do you have permanent injuries from that accident? Why do you want to transfer your structured settlement to this company for an amount which is (much) less than you would otherwise receive over time? What will you do with the money if the court were to approve this transfer? Do you realize that if I approve this, you can’t come back later and get your money back or change your mind? Do you understand that you would receive $__________ if I approve this transfer today? Do you understand that if you didn’t transfer your structured settlement, that you would receive $__________ over the life of the settlement as it presently exists? Do you understand that you’re only getting _____ % of the present value as calculated by the company? Considering all the things I’ve asked you about, do you wish to have additional time to think about the advisability of your request? Do you realize that if I approve this request it would end your payments pursuant to the structured settlement from this day forward (if payee is selling all payments)? Are there any interested parties here who wish to be heard?

Number 2 • Volume 44 • Spring 2005 • American Bar Association • The Judges Journal • 19“Transfers of Structured Settlement Payment Rights: What Judges Should Know About Structured Settlement Protection Acts” by Daniel W. Hindertand Craig H. Ulman, published in The Judges Journal, Volume 44, No.2, Spring 2005 © 2005 by the American Bar Association. Reproduced by permis-sion. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Structured settlements have enjoyedwidespread acceptance and havebecome an established part of our

legal landscape over the past twenty-five years. More than $6 billion is nowpaid each year to fund new structuredsettlements in the United States, and anestimated $100 billion or more has beenpaid in the aggregate to fund structuredsettlements that are in force today. Littlecontroversy attended the developmentof structured settlements. Much contro-versy has accompanied the developmentof a secondary market, in which struc-tured settlement “factoring” companiesacquire from settlement recipients theirrights to receive future payments.

Since 1997, the controversy sur-rounding structured settlement factor-ing has led thirty-eight states to enactstatutes that make transfers of paymentrights under structured settlementsineffective unless those transfersreceive advance court approval. Since2002, the Internal Revenue Code (IRC)has reinforced the state statutes byimposing a 40 percent federal excisetax if a transfer of structured settlementpayment rights does not receive therequired court approval.

Because of this unusual combina-tion of state law requirements andfederal tax sanctions, state courtsthroughout the country are beingasked to rule on growing numbers ofapplications for approval of transfersof payment rights under state struc-tured settlement protection acts(SSPAs). This article explains the

Authors’ Note: The authors wouldlike to acknowledge the participation of Jared C. Fields, an associate with Parsons Behle & Latimer, who provided researchassistance on this article.

SSPAs and their relationship to theIRC and discusses some of the keyquestions that courts need to addressin ruling on SSPA applications.

Structured Settlements and the Rise of FactoringStructured settlements are settlementsof tort claims involving physicalinjuries or physical sickness, andworkers’ compensation claims, underwhich settlement proceeds take theform of periodic payments, includingscheduled lump sum payments.Structured settlements generally arefunded by single-premium annuitycontracts held by the party that iscontractually obligated to make thefuture settlement payments.1 Underfederal tax rules designed to encour-age the use of structured settlements,the full amount of each periodic pay-ment, including the amount attributa-ble to earnings under the annuity con-tract, is excludable from the settle-ment recipient’s income under IRCsection 104(a)(1) or (2). Congress hasendorsed use of structured settlementsas a means of assuring continuingincome to injury victims and mini-mizing the risk that lump sum recov-eries will be dissipated, leaving vic-tims of disabling injuries to fall backon public assistance.

Consistent with the congressionalpolicy favoring use of structured set-tlements, and for reasons linked totheir tax treatment, structured settle-ment agreements typically providethat a settlement recipient’s rights toreceive future payments may not beassigned or otherwise transferred. Insome cases, transfers of paymentrights are also restricted or prohibitedunder applicable statutes or courtorders. Notwithstanding these restric-

tions, an active secondary market instructured settlement payment rightsdeveloped in the early 1990s.Through aggressive advertising, spe-cialized finance companies—nowcommonly referred to as structuredsettlement factoring companies—began persuading structured settle-ment recipients (referred to herein as“payees”) to trade future paymentsfor present cash.

To circumvent the restrictions onassignment of payment rights, factor-ing companies arranged for payees toredirect their payments to factoringcompany addresses. The factoringcompanies would then collect thepayments (endorsing checks in thepayees’ names, using powers of attor-ney and signature stamps) withoutinforming insurers that paymentrights had been assigned.

Many payees who dealt with factor-ing companies were exploited. By fashioning transactions as purchases of future payment rights or as loansoriginated in states with generoususury laws, factoring companies oftencharged sharp discounts to payees who were ill equipped to appreciatethe value of their future payments or to understand the onerous terms of factoring agreements. In some cases,factoring companies charged discountsequivalent to annual interest rates ashigh as 70 percent.2 Payees whodefaulted often were sued in remoteforums specified in the factoring com-panies’ form contracts. In many cases,these actions commenced with entry ofconfessed judgments against payees.Insurers responsible for making osten-sibly nonassignable settlement pay-ments became embroiled in collectionactions brought by factoring compa-nies. Insurers also faced uncertain taxconsequences and risks of multiple

Transfers of Structured Settlement Payment Rights: What Judges Should Know About Structured SettlementProtection ActsBy Daniel W. Hindert and Craig H. Ulman


liability when assigned settlement payments became subject to competing claims.

Enactment of State SSPAsBeginning in Illinois in 1997, statelegislatures recognized the need toprotect structured settlements againstthe abuses of factoring. As explainedby legislators in New Jersey:

Structured settlements providestrong public policy benefits. Theyprovide long-term protection forinjury victims and their families.They provide against the loss ordissipation of lump sum recoveries.Factoring companies, commonlyusing phone banks, advertising andhigh-pressure sales to “buy” a set-tlement for a small lump-sum,undermine these benefits and mayexploit an injured person at a timewhen they need cash.3

The legislatures in New Jersey andat least thirty-seven other states haveresponded by enacting SSPAs. As thisarticle was going to press, SSPA legis-lation was nearing enactment in fouradditional states: Arkansas (House Bill2614), Kansas (House Bill 2160),Montana (Senate Bill 122), and NewMexico (House Bill 495). SSPA billswere also pending in Alabama (HouseBill 91) and Oregon (Senate Bill 645).

Although they are not uniform, allof the SSPAs are derived from thesame model legislation,4 and they allreflect the same basic legislativescheme. Under each of the SSPAs:

• The transferee—that is, the fac-toring company—is required to makea series of disclosures designed tohighlight the value of transferred pay-ments and to contrast that value withthe net amount that a payee stands toreceive in exchange for the transferredpayments. In most states, the transfereeis required to disclose the discountedpresent value of the transferred pay-ments, as determined by using the“Applicable Federal Rate” mostrecently published by the InternalRevenue Service for purposes of valuing annuities.5

in the courts of that state.12 Thesesame acts also prohibit or restricttransfer agreement provisions author-izing a factoring company to confessjudgment against a payee.

Nineteen SSPAs provide that struc-tured settlement obligors and annuityissuers cannot be required to dividepayments between multiple recipientsand/or provide that life-contingent pay-ments may not be transferred in theabsence of appropriate, agreed-uponmechanisms for confirming the payee’ssurvival (or notifying the structured set-tlement obligor and annuity issuer inthe event of the payee’s death).13

Enactment of IRC Section 5891The abuses associated with structuredsettlement factoring drew attentionnot only from state legislators but alsofrom the U.S. Treasury Departmentand Congress. Beginning in the feder-al budget for fiscal year 1999, theTreasury Department proposed thatCongress impose a punitive federalexcise tax on transfers of structuredsettlement payment rights, except incases in which courts find that “theextraordinary and unanticipated needsof the original intended recipient”make these transfers desirable.14 Thisproposal was incorporated in a seriesof bills sponsored in the U.S. House ofRepresentatives by Rep. E. Clay Shaw,Jr. (R-Fla.) and Rep. Fortney (Pete)Stark (D-Cal.) and in the U.S. Senateby Sen. John Chafee (R-R.I.) and, fol-lowing Sen. Chafee’s death, by Sen.Max Baucus (D-Mont.). The legisla-tion ultimately was enacted as part ofthe Victims of Terrorism Tax ReliefAct of 200115 and is now codified asIRC section 5891.

Section 5891 recognizes and rein-forces the SSPAs.16 Section 5891(a)imposes a 40 percent excise tax on anyparty that acquires payment rights in a“structured settlement factoring trans-action,” a term whose definition in sec-tion 5891(c)(3) closely resembles thedefinition of “transfer” in the SSPAs.Section 5891(b) excepts from the 40

• The effectiveness of any transfer of structured settlement paymentrights is conditioned on advance court approval of the transfer,6 basedon findings that the transfer (1) willserve the best interests of the payeeand the payee’s dependents and/or isnecessary to enable them to avoidhardships, and (2) will not contravene“applicable law” or, more specifically,applicable statutes or orders.7 TenSSPAs expressly require an affirma-tive finding regarding the fairness andreasonableness of a proposed transfer,a finding that generally should beimplicit in any finding that a transferwill serve the best interests of a payeeand his or her dependents.8 FourteenSSPAs expressly require a finding thata proposed transfer complies withthose SSPAs.9 Thirty-three SSPAsalso require either a finding that thepayee has received “independent pro-fessional advice” concerning the pro-posed transfer or, alternatively, a find-ing that the payee has been advised toseek independent professional adviceand has either received it or knowing-ly waived that advice.10

• At least some aspects of the proce-dure for seeking approval of proposedtransfers are spelled out. For example,the statutes identify the categories of“interested parties” that are entitled toreceive notice of a proposed transfer,the contents of the notice, and the mini-mum notice period that must elapsebefore an application can be heard.

• Key terms—e.g., “structured settlement,” “structured settlementpayment rights,” and “transfer”11—are defined.

To this basic menu of statutoryprovisions, many SSPAs add supple-mental protections for payees andtheir dependents and/or for structuredsettlement obligors and annuityissuers. For example, twenty-fiveSSPAs mandate that the transferagreement between a payee and a fac-toring company be governed by thelaw of the payee’s home state and/orthat any disputes between the payeeand the factoring company be heard


percent excise tax “a structured settle-ment factoring transaction in which thetransfer of structured settlement pay-ment rights is approved in advance in aqualified order.” A “qualified order” isdefined as “a final order, judgment ordecree” that is issued “under theauthority of an applicable State statute17

by an applicable State court”18 andfinds that the proposed transfer“(i) does not contravene any Federal orState statute or the order of any courtor responsible administrative authority,and (ii) is in the best interest of thepayee, taking into account the welfareand support of the payee’s depend-ents.”19 Thus, the conditions for exemp-tion from the 40 percent federal excisetax coincide with the two primary con-ditions for an effective transfer of pay-ment rights under the SSPAs.

Section 5891(d) clarifies that inany case in which applicable taxrequirements were satisfied at thetime a structured settlement wasentered into, “the subsequent occur-rence of a structured settlement fac-toring transaction” will not adverselyaffect the tax treatment of the partiesto the settlement.

In the context of proceedings forapproval of proposed transfers of payment rights under the SSPAs, section 5891 is important primarilyfor two reasons:

1. the threat of the 40 percentexcise tax means that no informedparty that is subject to the taxingauthority of the United States willseek to acquire structured settlementpayment rights without obtainingapproval of the transaction under theappropriate SSPA; and

2. by specifying the applicable Statecourt from which a qualified ordermust be obtained, section 5891 effec-tively dictates the choice of forum formost proceedings under the SSPAs.

Reviewing and Ruling onApplications Under SSPAsIn any case in which a payee propos-ing to transfer payment rights residesin a state that has enacted an SSPA,

State Structured Settlement Protection Statutes

State StatuteAlaska ALASKA STAT. §§ 09.68.200–09.68.230

Arizona ARIZ. REV. STAT. ANN. §§ 12-2901–12-2904

California CAL. INS. CODE §§ 10134–10139.5

Colorado COLO. REV. STAT. §§ 13-23-101 to 13-23-108

Connecticut CONN. GEN. STAT. § 52-225g–52-225l

Delaware DEL. CODE ANN. tit. 10, §§ 6601–6604

Florida FLA. STAT. ANN. § 626.99296

Georgia GA. CODE ANN. § 51-12-70-72, §§ 51-12-70-76 to 51-12-70-77

Idaho IDAHO CODE § 28-9-109

Illinois 215 ILL. COMP. STAT. §§ 153/1–153/35

Indiana IND. CODE ANN. §§ 34-50-2-1 to 34-50-2-11

Iowa IOWA CODE ANN. §§ 682.1–682.7

Kentucky KY. REV. STAT. ANN. §§ 454.430–454.435

Louisiana LA. REV. STAT. ANN. § 9:2715

Maine ME. REV. STAT. ANN. tit. 24A §§ 601.25, 2241–2246

Maryland MD. CODE ANN. CTS. & JUD. PROC. §§ 5-1101–5-1105Massachusetts MASS. GEN. LAWS ANN. ch. 231C, § 1–5

Michigan MICH. COMP. LAWS. ANN. §§ 691.1191–691.1197

Minnesota MINN. STAT. §§ 549.30–549.34

Mississippi MISS. CODE ANN. §§ 11-57-1–11-57-15

Missouri MO. REV. STAT. §§ 407.1060–407.1068

Nebraska NEB. REV. STAT. §§ 25-3101–25-3107

Nevada NEV. REV. STAT. § 42.030

New Jersey N.J. STAT. ANN. §§ 2A:16-63–2A:16-69

New York N.Y. GEN. OBLIG. LAW §§ 5-1701–5-1709

North Carolina N.C. GEN. STAT. art. 44B §§ 1-543.10–1-543.15; art. 33 § 1-394.1

Ohio OHIO REV. CODE ANN. §§ 2323.58–2323.587

Oklahoma OKLA. STAT. ANN. tit. 12 §§ 3238–3245

Pennsylvania 40 PA. CONS. STAT. ANN. §§ 4001–4009

Rhode Island R.I. GEN. LAWS ANN. §§ 27-9.3-1 to 27-9.3-7

South Carolina S.C. CODE ANN. §§ 15-50-10–15-50-70

South Dakota S.D. CODIFIED LAWS §§ 21-3B-1–21-3B-12

Tennessee TENN. CODE ANN. tit. 47, ch. 18 §§ 1–7

Texas TEX. REV. CIV. STAT. ANN. §§ 141.001–141.007

Utah UTAH CODE ANN. §§ 78-59-101–78-59-108

Virginia VA. CODE ANN. §§ 59.1-475–59.1-477

Washington WASH. REV. CODE ANN. §§ 19.205.010–19.205.060, § 19.205.900

West Virginia W. VA. CODE §§ 46A-6H-1–46A-6H-8


fer, they will often be included in atransfer application because it is sim-pler for factoring companies to prepareand submit common denominatorapplications that meet the documenta-tion requirements of many SSPA(s)rather than tailor their applications tosatisfy the more limited requirementsthat may apply in some cases.

Conduct of proceedings. Must acourt conduct a hearing on an applica-tion for approval of a transfer of struc-tured settlement payment rights, even ifthe application is unopposed? MostSSPAs provide for a hearing and affordinterested parties the opportunity to beheard, with or without filing any writtenresponse. If a hearing is not required tobe scheduled under the applicableSSPA(s), or if a hearing is scheduledbut no interested party registers anyopposition to a proposed transfer, canthe court appropriately dispense with ahearing if the applicant submits an affi-davit from the payee indicating that theapplicable statutory conditions will befulfilled? While some courts are pre-pared to rule on transfer applications onthe basis of a paper record alone or, atany rate, without hearing testimonyfrom the payee, other courts have foundthat a thorough evaluation of a payee’sbest interest, as required under theSSPAs and IRC section 5891, requiresthat a court hear directly from, and beable to question, the payee.21

However it receives evidenceregarding a payee’s best interest, acourt should expect to hear from andquestion an applicant’s counsel con-cerning the statutory requirement thata proposed transfer not contraveneapplicable statutes and court orders(or, under some SSPAs, “applicablelaw”). A court should not be expectedto make an affirmative finding on thissubject based solely on conclusoryallegations in an application, norshould it be the responsibility of acourt to identify and review potential-ly conflicting statutes, court orders, or other sources of applicable law.

Whether or not an application isthe subject of a formal hearing, and

however the court receives evidenceconcerning the payee’s best interest, itis clear that the applicant (normally,but not always, the factoring compa-ny) has the burden of establishing thatthe applicable statutory requirementsare met.22

Courts must address the payee’sbest interest. To qualify for exemp-tion from the excise tax imposedunder IRC section 5891, a structuredsettlement factoring transaction mustbe found to be in the “best interest ofthe payee taking into account the wel-fare and support of the payee’sdependents.”23 To be effective underthe applicable SSPA(s), a transfermust be found to satisfy that sametest or a similar test plus, in ten states,the separate requirement that thetransfer be found to be “fair and rea-sonable.” All of these tests arereferred to collectively in this articleas the “best interest” test.

While it is commonly recognizedthat “[t]he heart of the SSPA’s protec-tion lies in the courts’ independentdiscretionary determination”24

whether a proposed transfer satisfiesthe best interest test, courts haveapplied differing approaches in mak-ing that determination. Some courtshave required a showing of “anunforeseeable change in circum-stances”25 or a “compelling and rea-sonably informed necessity”26 as abasis for best interest findings. Othercourts have adopted a more flexibleapproach. For example, the Court ofAppeals of Minnesota has explained:

We believe that the best interestsdetermination involves a moreglobal consideration of the facts,circumstances, and means of sup-port available to the payee and hisor her dependents. These considera-tions would include, among othercase specific factors, the reasonablepreference of the payee, in light ofthe payee’s age, mental capacity,maturity level, and stated purposefor the transfer. . . .

The factors for considerationshould also include whether the peri-

the transaction is almost certain to besubmitted for court approval in thepayee’s home state, often in thepayee’s home county. Thus, growingnumbers of state courts are beingcalled upon to review and rule ontransfer applications, and the trendwill only continue as additional statesenact SSPAs.

What should courts expect to seewhen they receive transfer applications?How should courts handle those appli-cations, most of which will be unop-posed? What issues must a court expectto rule on in every case? What otherissues should a court be prepared toconsider? The following sections of thisarticle address these questions, takinginto account the express requirementsand the legislative objectives of theSSPAs, together with recent case lawapplying them.

Contents of a transfer applica-tion. Under most SSPAs, a transferapplication is made in the name of the transferee, i.e., the factoring com-pany,20 and includes the following:

• a formal application describingthe proposed transfer, alleging com-pliance with applicable statutoryrequirements and requesting entry ofan order approving the proposedtransfer and including the findingsrequired (1) under the applicableSSPA(s) and (2) for a qualified orderunder IRC section 5891(b);

• a copy of the transfer agreementbetween the payee and the factoringcompany;

• a copy of the disclosure state-ment(s) given to the payee under theapplicable SSPA(s);

• a copy of the notice provided tointerested parties to inform them ofthe proposed transfer and their oppor-tunity to oppose, support, or otherwiserespond; and

• if not included in the transferapplication itself, a listing of thenames and ages of the payee’sdependents, if any.

Even when some of the aboveitems are not required under theSSPA(s) applicable to a specific trans-


odic payments of the structured set-tlement were intended to cover futureincome loss or future medicalexpenses. If so, the district courtshould inquire whether the payee hasmeans of support aside from thestructured settlement to meet theseobligations. . . . The district courtshould also consider whether theoffered discount rate is in line withthe market rate for similar transfers. . . . Finally, the district court shouldconsider whether the transfer is inthe best interests of the payee’sdependents; we believe this mayinvolve an assessment of whether thepayee can meet the financial needs ofand obligations to the payee’sdependents if the transfer is allowedto proceed.27

A New York trial court opinion hasoffered the following synthesis:

Although the [New York] statute doesnot define the best interests of thePayee, developing case law and theintent of the statute suggest the Courtshould consider: (1) the Payee’s age,mental capacity, physical capacity,maturity level, independent income,and ability to support dependents; (2)purpose of the intended use of thefunds; (3) potential need for futuremedical treatment; (4) the financialacumen of the Payee; (5) whether thePayee is in a hardship situation to theextent that he or she is in “direstraits”; (6) the ability of the payee toappreciate financial consequencesbased on independent legal and finan-cial advice; [and] (7) the timing ofthe application.28

Courts have also recognized thatthe evaluation of a payee’s best inter-est contemplated by the SSPAs isanalogous to best interest determina-tions provided for in the context offamily law, probate, and guardianshipproceedings,29 as well as proceedingsfor approval of commutation of work-ers’ compensation benefits.30

In evaluating the terms of a pro-posed transfer, either as part of a gen-eral best interest analysis or for pur-poses of making a specific findingregarding the fairness and reasonable-ness of the transfer, courts haveunderstandably been troubled by the

discount rates commonly charged infactoring transactions. Those rateshave been characterized as “punish-ingly high,”31 “exorbitant,”32 and“unconscionable and overreaching.”33

Some courts have imposed de factocaps on allowable discount rates.34

Most courts have adopted a less rigidapproach, recognizing that “[t]hemore pressing the need, the more rea-sonable it may be for a payee toobtain immediate cash at a steep dis-count rate.”35

Courts routinely require that appli-cants prove that proposed discountrates are reasonable.36 In evaluatingthe reasonableness of proposed rates,courts may consider evidence of the“market” rates commonly charged instructured settlement factoring trans-actions, but they tend to view that evi-dence skeptically. A recent New Yorkruling explained that

while petitioner asserts that the struc-tured settlement market is “competi-tive,” with price quotes being givenfreely to interested sellers by differentfunding companies . . . , the Legis-lature’s imposition of a requirementfor court approval provides a strongindication of its conviction that mar-ket factors alone are not sufficient toensure the fairness of such transac-tions, or to prevent abusive or preda-tory practices which may pervade theindustry. This may be a consequenceof the fact that individuals desiring tosell their payments often have noother means of obtaining cash, andare therefore, to a certain extent, “atthe mercy” of firms that are in thebusiness of purchasing such pay-ments, creating an inherent inequalityin bargaining power. Under these cir-cumstances, the mere fact that apayee is free to “shop around” amongfirms to obtain the best price offereddoes not necessarily mean that theterms of the resulting contract will be“fair” or “reasonable.”37

Neither the SSPAs themselves norcases provide—or can be expected toprovide—any precise formula forapplying the best interest test, but thecases suggest, and experience con-firms, that a court should:

• Recognize that under both theSSPAs and IRC section 5891 a court isexpected to make its own assessmentof a payee’s best interest, not simply toaccept conclusory assertions by thepayee or the factoring company.

• Insist that the payee appear inperson, if possible, because evaluationof a payee’s best interest is “a taskthat does not lend itself to long dis-tance litigation.”38 If a personalappearance is not possible, the courtshould consider at least interviewingthe payee by telephone.

• Be prepared to question thepayee and any other witnesses testify-ing in support of an application,whether or not there is any opposi-tion. The direct testimony of a payeeproffered by a factoring company insupport of its application for approvalof a transfer of payment rights oftenis formulaic, shedding limited light onthe needs of the payee and the payee’sdependents. Even when someoneopposes an application, the opponentis not likely to be well situated toelicit critical information.39 Unless thecourt is prepared to ask probing ques-tions, it may receive little more thanthe fragmentary information that typi-cally appears in affidavits submittedin support of transfer applications.

• Take into account a payee’ssophistication, recognizing that inmany cases payees have structuredsettlements precisely because theirattorneys and/or their family membersbelieved, sometimes with the concur-rence of a court, that they needed theprotection and security of a structuredsettlement rather than an all-cash set-tlement with the attendant dissipationrisk. A court should be particularlywary in any case involving a youngpayee whose structured settlement wasentered into before he or she reachedthe age of majority. These payees canbe especially vulnerable to the high-pressure sales tactics sometimesemployed by factoring companies.40

• Recognize the risk that a payeemay enter into (or may already haveentered into) other factoring transac-


• Recognize that the required dis-closure of the discounted presentvalue of transferred payments, as cal-culated using the Applicable FederalRate published by the InternalRevenue Service, provides only a“rough comparison” to the net amountthat a payee stands to receive in a fac-toring transaction.43 A more precisecomparison can be made by obtaininga quote for the premium that a lifeinsurer would charge in issuing a newannuity contract providing for thesame payments that are to be trans-ferred from the payee to the factoringcompany. The New York SSPArequires that such a quote be obtainedand included in the transferee’s dis-closure statement.44

• Appreciate that although theygenerally are documented as purchas-es of payment rights, structured settle-ment factoring transactions can beanalogized to loans secured by trans-ferred payments.45 Accordingly, theinterest rate that is implicit in a fac-toring transaction can be a usefulpoint of reference. In considering theappropriateness of such an implicitinterest rate, however, a court shouldbe aware that the fees charged bysome factoring companies can dra-matically affect a payee’s borrowingcosts. If a factoring company chargesfees that are deducted from the pro-ceeds otherwise available to thepayee, the principal amount of theputative loan is effectively reducedand the interest rate implicit in thetransaction is effectively increased.46

• Compare the discount rate and/or the implicit interest rate in a pro-posed factoring transaction with rates charged in other transactions, including both those that have beenapproved and those that have beendisapproved based on the best interesttest. In making these comparisons,however, a court should recognizethat because of the inherent inequalityin bargaining power between payeesand factoring companies, rates consis-tent with the levels established inother factoring transactions are not

necessarily fair, reasonable, or other-wise in a payee’s best interest.47 If thediscount rate for a proposed transac-tion exceeds those levels, that mayconstitute persuasive evidence that the transaction terms are not in thepayee’s best interest; it does not fol-low, however, that a proposed ratethat corresponds to levels establishedin other factoring transactions is inthe payee’s best interest.

• Consult readily available sourcesof information on comparative dis-count/implied interest rates charged instructured settlement factoring trans-actions. These sources include (1) rateinformation disclosed in the growingnumbers of SSPA rulings addressingthe best interest test, and (2) the datapresented in a March 2004 study prepared by the California AttorneyGeneral’s Office, Impact of PriorCourt Approval on the Transfer ofStructured Settlement Payment Rights.This study, prepared for the Californialegislature, includes a survey of hun-dreds of structured settlement trans-fers involving California payeesbetween 2000 and 2003, includingapproximately 800 transfers that werethe subject of applications for courtapproval under the California SSPA in2002 and 2003. The findings fromthis study regarding discount/interestrates are summarized in the tables atright.48 Because discount rates chargedby factoring companies are not system-atically recorded and published, theCalifornia study is a unique resourcefor information about the terms of alarge number of structured settlementfactoring transactions.

Courts must address noncontra-vention of applicable law and com-pliance with SSPA requirements.For purposes of determining whethera proposed transfer of payment rightscontravenes applicable law or applica-ble statutes and orders, and for pur-poses of specifically determiningwhether the transfer complies with theapplicable SSPA(s), where an expressfinding of such compliance isrequired, a court must consider

tions that, in conjunction with thetransaction that the court is consider-ing, may prove to be extremely detri-mental to the payee’s financial position.The court should ask any payeewhether he or she has been party to anyprior factoring transaction, includingany proposed transaction that may havebeen disapproved by another court.41 Ifthe answer is affirmative, the courtshould insist that the applicant and/orthe payee provide the details of theprior transaction(s), including, in thecase of any prior transaction thatreceived court approval, (1) the antici-pated use of the transaction proceeds,as described to the court that approvedthe prior transaction; and (2) thepayee’s actual use of those proceeds.42

• Find that a proposed transfer sat-isfies the best interest test if the appli-cant has established that, taking all of the relevant circumstances intoaccount, the transfer would be reason-able, i.e., that a fully informed, rea-sonable person whose personal andfamily situation coincided with thoseof the payee would enter into such atransaction. If the applicant has notestablished that the proposed transfermeets this standard, the applicationshould be disapproved.

In considering the appropriatenessof the terms of a proposed transfer, acourt should:

Daniel W. Hindert is a shareholder in the firm of Parsons Behle & Latimer,which has offices in Nevada and Utah.Mr. Hindert specializes in tort and insur-ance-related litigation. He is a coauthorof Structured Settlements and PeriodicPayment Judgments (ALM Properties,Inc., Law Journal Press 2004) (1986).He can be reached at [email protected]. Craig H. Ulman is apartner in the Washington, D.C., officeof Hogan & Hartson L.L.P. As counsel to the National Structured SettlementsTrade Association, he was the principaldrafter of the model legislation onwhich the state structured settlementprotection acts are based. He regularlyadvises insurance company clients onthe application of those acts. He can bereached at [email protected].

whether the transfer satisfies objectiveSSPA requirements. The followingquestions, among others, should beconsidered: Has the payee been giventhe required disclosures? Does thetransfer agreement omit any provi-sions that are mandated under theapplicable SSPA(s)—e.g., choice oflaw and choice of forum provisions?Does the agreement include any pro-visions that are proscribed under theapplicable SSPA(s)—e.g., broad con-fession of judgment clauses? Does thenotice furnished to interested partiesinclude the required documents andinformation? These requirements arestraightforward, and courts generallyhave little difficulty ascertainingwhether they have been satisfied.

Finding that a proposed transferwould not contravene applicable lawor applicable statutes and court orderscan be more difficult. Both the SSPAsand IRC section 5891 provide forsuch findings because in some cases atransfer of payments rights, even if itis approved by a court, would conflictwith preexisting legal restrictions thatneither the state nor the federal legis-lation is intended to disturb. Sourcesof such legal restrictions include:

• Workers’ compensation laws,most of which prohibit or sharplyrestrict assignment of benefits, includ-ing benefits payable through struc-tured settlements.51 Some state legisla-tures have addressed this potentialconflict by making their SSPAs whol-ly inapplicable to transfers of pay-ment rights under workers’ compensa-tion settlements.52

• State tort reform statutes andother statutory compensationschemes, which in some cases prohib-it or restrict assignment of recoveries,including payment rights under struc-tured settlements.53

• Court orders approving settle-ments. Because they are commonlyused to resolve tort claims of minors,as well as adults who have sufferedinjuries that have rendered them legal-ly incompetent, structured settlementsoften are submitted for court approval

Contract Price as a Percent of Present Value49

Mean Median

2000 59.9 59.9

2001 55.1 55.1

2002 54.3 55.3

2003 54.0 55.1

Average Contract Prices as a Percent of Present Value (By Purchaser)

2002 2003

Mean (Median) Mean (Median)

JG Wentworth 52.9 (54.6) NA

321 Henderson Receivables 57.3 (58.0) 57.0 (59.5)

Settlement Funding 52.9 (52.4) 45.8 (46.4)

Settlement Capital Corp. 53.1 (51.1) 47.8 (52.6)

Minimum and Maximum Contract Prices as a Percent of Present Value (By Purchaser)

2002 2003

Min. (Max.) Min. (Max)

JG Wentworth 17.6 (80.0) NA

321 Henderson Receivables 23.5 (90.0) 13.5 (83.6)

Settlement Funding 26.4 (81.5) 14.2 (72.8)

Settlement Capital Corp. 30.0 (84.3) 17.2 (75.8)

Effective-Equivalent Interest Rates Compared to Alternative Sources of Credit50 (As Percents)

2000 2001 2002 2003

Effective-Equivalent Interest Rates:Mean 19.5 20.9 19.8 19.2

Effective-Equivalent Interest Rates:Median 19.8 20.1 19.9 19.3

Prime Rate 9.23 6.91 4.67 4.12

30-Year Conventional Mortgage 8.06 6.97 6.54 5.82

Credit Cards 15 15 12 12


before they are implemented. Thecourt order approving a settlementoften includes antiassignment provi-sions or incorporates the terms of asettlement agreement that containsantiassignment provisions.54 Unlesssuch an order has been appropriatelymodified, a later transfer of paymentrights under the settlement is likely toconflict with the order.

• Contractual antiassignmentrestrictions. The settlement docu-ments governing structured settle-ments typically prohibit any assign-ment of the payees’ rights to receivefuture settlement payments. Theeffectiveness of these contractual anti-assignment provisions was extensive-ly litigated between factoring compa-nies and insurers in the context offactoring transactions that predatedthe enactment of SSPAs.55 Insofar ascontractual antiassignment provisionswere effective to bar an assignment ofpayment rights prior to enactment ofthe SSPAs, they generally remaineffective for that purpose if an insureror other party that has standing toinvoke the antiassignment provisionsseeks to enforce them.56 Taking intoaccount the protections availableunder the SSPAs and IRC sec-tion 5891, however, insurers now donot generally find it necessary toinsist on enforcement of antiassign-ment provisions. Thus, contraventionof purely contractual antiassignmentprovisions, as distinguished fromantiassignment provisions containedin a statute or a court order, is an issuethat effectively is waived in most cases.

Courts must address independ-ent professional advice. Under all ofthe SSPAs other than the Georgia,Indiana, Kentucky, Tennessee, andWest Virginia statutes, approval of atransfer of payment rights requires afinding that the payee either hasreceived independent professionaladvice or has knowingly waived theright to receive it. Of the SSPAs thatrequire these findings, eleven requirefindings that the payee has actuallyreceived independent professional

advice; waiver is not permitted.57

In any case in which a court isasked to find that a payee has receivedindependent professional advice(whether or not the payee could,under the applicable SSPA(s), havewaived this advice), the court shouldconsider whether the adviser wastruly independent, i.e., disinterested.As courts in several states have recog-nized, payees sometimes are referredto advisers—typically attorneys—byfactoring companies. Sometimes theadvisers are paid by factoring compa-nies from the proceeds of the transac-tions on which they render ostensiblyindependent advice. In someinstances, purportedly independentadvice has been confirmed in printedform letters provided by factoringcompanies.58 Such arrangements aredifficult to reconcile with a findingthat a payee has received professionaladvice that is truly independent.59

A court that is asked to find that apayee has received independent pro-fessional advice may also wish to askwhether the professional adviser rec-ommended for or against the pro-posed transfer of payment rights.Absent evidence that the professionaladviser endorsed the transfer, thecourt may appropriately assume thatthere was no such endorsement.60

When a court is asked to make afinding that a payee has knowinglywaived independent professionaladvice, the court should be preparedto question the payee in order to satis-fy itself that the payee appreciates thereasons for obtaining independentprofessional advice and has neverthe-less made an informed decision toforego that advice.

Identifying the applicableSSPA(s). Each SSPA applies, at leastby implication, to any transfer of pay-ment rights by a payee who is domi-ciled in the enacting state.61 MostSSPAs also apply under other condi-tions, which typically are spelled outin the statutory definition of “struc-tured settlement.” For example, anSSPA may apply if

• the underlying structured settle-ment was approved by a court in theenacting state,

• the structured settlement agree-ment is governed by the laws of theenacting state, or

• the structured settlement obligoror the annuity issuer is domiciled inthe enacting state or has its principalplace of business in that state.62

Because of these multiple triggeringconditions, many proposed transfers ofpayment rights are subject to more thanone SSPA. That does not mean thatthese transfers must receive approvalfrom multiple courts. It means simplythat the court in the forum state inwhich a transfer application is filed,normally the payee’s home state,should be prepared to consider whetherthe proposed transfer complies or failsto comply with the requirements of anyother applicable SSPA, insofar as theymay differ from the requirements of theforum state’s SSPA. Consistent withboth the doctrine of comity and theFull Faith and Credit Clause of theConstitution,63 the courts in any forumstate must take into account applicableSSPAs enacted in other states.

Because the substantive require-ments of the SSPAs are largely thesame, a proposed transfer that meetsthe requirements of the SSPA in thepayee’s home state generally willmeet all or most of the requirementsof any other applicable SSPA. Insome cases, additional requirementswill come to bear. For example, if afactoring company proposes toacquire structured settlement paymentrights from a payee who is domiciledin New Jersey, the transfer will besubject to the New Jersey SSPA, andthe application for approval of thetransfer will be filed in a New Jerseycourt. If, however, the underlyingstructured settlement was approved bya court in Delaware, the transfer willalso be subject to the Delaware SSPA.The substantive requirements of theDelaware and New Jersey SSPAscoincide in most respects. If, however,the transfer would conflict with the



terms of the structured settlement, theDelaware statute, unlike the NewJersey statute, will require that thecourt find that the transfer has been“expressly approved in writing” bycertain interested parties and by thecourt that approved the settlement.64

Thus, in ruling on the transfer appli-cation, the court in New Jerseyshould, in addition to considering theissues that are common to the twostatutes, determine whether the pro-posed transfer has received theapprovals required under theDelaware statute.65

Recognizing that proposed trans-fers of payment may be subject to theSSPA(s) of states other than the forumstate, a court hearing a transfer appli-cation should insist that the appli-cant’s counsel identify all such otherSSPAs and any substantive require-ments of these other SSPAs that differfrom the requirements of the SSPA ofthe forum state.

Notice to interested parties. Withthe exception of the Louisiana statute,every SSPA requires that interestedparties be given notice and an oppor-tunity to oppose (or to support or oth-erwise comment on) applications forapproval of transfers of paymentrights.66 The term “interested parties”typically is defined to include thepayee, certain named beneficiaries,the structured settlement obligor, theannuity issuer, and “any other partythat has continuing rights or obliga-tions” under a structured settlement.As courts have recognized, thesestatutory notice requirements areintended “to insure that due process isafforded to those who may be inter-ested in a proposed transfer.”67

Consistent with their due processfunction, the notice requirements alsoreduce the risk that an approved trans-fer of payment rights will be vulnera-ble to a future challenge by someonewho was a party to the underlyingstructured settlement and did not par-ticipate in the transfer. At a morepractical level, notice affords interest-ed parties, especially structured settle-

ment obligors and annuity issuers, an opportunity to identify potentialproblems affecting a proposed trans-fer and, where possible, to work with the applicants to resolve thoseproblems consensually.

Although factoring companiesderive valuable protection from pro-viding effective notice to interestedparties, notices often are misdirectedor omitted altogether. Accordingly,courts hearing transfer applicationsshould insist that applicants specifi-cally identify all interested parties andsubmit proof that they have been dulynotified. In cases in which noticerequirements may not have been satis-fied, courts should insist that they besatisfied before an application is heard.68

Conflicting interests in paymentrights. A payee who is or has beenthe subject of a bankruptcy proceed-ing may not be able to transfer pay-ment rights without having takenappropriate steps to establish thatthose rights are free of claims of cred-itors. In most cases, those steps willinclude exempting the payment rightsfrom administration as property of thepayee’s bankruptcy estate.69 A payee’sability to transfer payment rights mayalso be limited by a divorce decree orseparation agreement or by applicableproperty laws that afford a payee’s pres-ent or former spouse an interest in pay-ment rights. Circumstances like theseshould be identified and resolved beforea transfer is proposed, let alone submit-ted for court approval. However, if acourt perceives that a payee’s bankrupt-cy trustee or present or former spouse(or anyone else who has not joined inor consented to a proposed transfer)has, or may have, an interest in pay-ment rights that the payee proposes totransfer, the court should insist that thecircumstances be examined, disclosed,and resolved to its satisfaction.

ConclusionBy the time courts are asked to rule onthem, most applications for approvalof transfers of structured settlement

payment rights are unopposed. Theinterested parties that are most likely tohave objections to a proposed trans-fer—the structured settlement obligorand the annuity issuer—typically willhave raised any objections informallyand resolved them consensually withthe factoring company before a courthears the application.

The absence of opposition does notmean, however, that a transfer appli-cation should be granted. Approval ofa proposed transfer under applicableSSPA(s) depends, as does exemptionfrom the 40 percent excise tax underIRC section 5891, on express findingsthat the transfer satisfies the bestinterest test, that the transfer will notcontravene applicable law, and, inmost cases, that the payee either hasreceived or has knowingly waivedindependent professional advice.These findings should be made onlyafter thorough evaluation of eachtransfer application and the support-ing evidence in light of the statutorymandates and the well-recognizedobjectives of the SSPAs.

Endnotes1. The party contractually obligated to make

future settlement payments, referred to in mostSSPAs as the “structured settlement obligor,”normally is either (1) a property and casualty orworkers’ compensation insurer (or a self-insuredentity), or (2) an “assignment company,” typical-ly an affiliate of the annuity issuer, whichassumes the direct contractual obligation tomake future settlement payments through a“qualified assignment” under IRC § 130.

2. See, e.g., J.G. Wentworth S.S.C. v.Jones, Jefferson Cty., Ky. Cir. Ct. No.97CI5285, July 20, 1998 Op. and Order at 2,aff’d, 28 S.W.3d 309, 315 (Ky. Ct. App. 2000)(“[i]n the four cases here the rate of return toWentworth varied between 36 and 68 percentper year”); Windsor-Thomas Group, Inc. v.Parker, 782 S.2d 478, 480 (Fla. Dist. Ct. App.2001) (finding that “from a functional view-point” a factoring company’s “Fund AcquisitionAgreement” with a payee was “a secured prom-issory note with an annual interest rate ofapproximately 100 percent”); Press Release,N.Y. Attorney General’s Office, SpitzerAnnounces First-of-Its-Kind Agreement toProtect Consumers Who Win, and Then Sell,Personal Injury Settlements (July 29, 1999) (“ina substantial number of transactions [J.G.

Wentworth] effectively received an annual rateof more than 25% of the amount paid to theconsumer, and in some cases the rate was ashigh as 70%”).

3. Sponsor’s Statement to N.J. AssemblyBill 2146, subsequently enacted as the NewJersey SSPA, quoted in In re Transfer ofStructured Settlement Rights by JosephSpinelli, 803 A.2d 172, 175 (N.J. Super. Ct.2002). See also 2002 Sess. Law News of N.Y.,Legis. Mem. ch. 537 (McKinney’s) (AssemblyMem. in Support of A6936A, subsequentlyenacted as the New York SSPA).

4. Each of the current SSPAs is derivedfrom one of several versions of the ModelStructured Settlement Protection Act developedby the National Structured Settlements TradeAssociation and promoted by that associationand other insurance industry associations, oftenin cooperation with state attorneys general,state bar organizations, and others concernedabout protecting structured settlements. InSeptember 2000, the National StructuredSettlements Trade Association and prominentfactoring companies, together with the factor-ing companies’ trade association, the NationalAssociation of Settlement Purchasers, agreedon a combined state and federal legislativepackage, including a version of the ModelStructured Settlement Protection Act that bothgroups agreed to support. Most of the SSPAsenacted since September 2000 have been close-ly patterned after that agreed-upon model. InFebruary 2004, that model was adopted by theNational Conference of Insurance Legislatorsas its Model State Structured SettlementProtection Act, replacing a Model StructuredSettlement Transfers Protection Act, alsoderived from the National StructuredSettlements Trade Association model legislationand adopted by the National Conference ofInsurance Legislators in July 2000.

5. Pursuant to IRC § 7520, the InternalRevenue Service publishes the “ApplicableFederal Rate” (also referred to as the “Section7520 rate” monthly in the Internal RevenueService Bulletin. See Treas. Reg. § 1.7520-1. Incases in which transferred payments resemblemonthly (or other regular periodic) paymentson a loan (i.e., a loan equal in principal amountto the lump sum that the payee receives fromthe factoring company), factoring transactionscan appropriately be analogized to securedloans, and disclosure of effective interest ratesmay be more informative than disclosure of thepresent value of the future payments to betransferred. Where the transferred paymentsinclude lump sums, however, or where the firsttransferred payment is not scheduled to bemade until long in the future (so that there is, ineffect, a prolonged period of negative amortiza-tion), disclosure of implied interest rates is lessinformative, because the transactions bear littleresemblance to home mortgage loans or revolv-ing credit arrangements with which payees are

likely to be familiar. The SSPAs in four statesrequire disclosure of implied interest rates inaddition to disclosure of the discounted presentvalue of transferred payments. See CAL. INS.CODE § 10136(a)(7); LA. REV. STAT. ANN. §9:2715(B)(2)(g); MASS. GEN. LAWS ANN. ch.231C § 2(a)(2)(vii); NEB. REV. STAT. § 25-3104(b)(viii).

6. Some SSPAs provide for approval of atransfer of structured settlement payment rightseither by a court or, if applicable, by an admin-istrative authority that had exclusive jurisdic-tion over the settled claim. In practice, suchadministrative authorities are encountered veryrarely. Accordingly, this article refers only toconsideration of transfers of payment rights bycourts.

7. The SSPAs in four states do not explicit-ly require findings that transfers will not con-travene applicable law or applicable statutesand orders. However, each of those SSPAsincludes a provision recognizing that the statutedoes not authorize any transfer that would con-travene applicable law. See IND. CODE ANN. §34-50-2-9(c)(1); LA. REV. STAT. ANN. §2715(G); MD. CODE ANN. CTS. & JUD. PROC. §5-1105(b); W. VA. CODE § 46A-6H-4.

8. The SSPAs that require express findingsregarding the fairness and reasonableness ofproposed transfers are those enacted in CA,DE, FL, MD, MA, NE, NY, NC, OH, and TN.

9. The SSPAS in the following statesinclude this requirement: AK, AZ, DE, FL, GA,ME, MA, MI, MN, MO, NE, NY, OH, and TN.The West Virginia SSPA requires an expressfinding of compliance with the disclosurerequirements of the act. See W. VA. CODE §46A-6H3(f)(2).

10. The five states whose SSPAs do notrequire any findings concerning independent pro-fessional advice are GA, IN, KY, TN, and WV.

11. The term “transfer” typically is defined tomean a “sale, assignment, pledge, hypothecationor other alienation or encumbrance of structuredsettlement payment rights made by a payee forconsideration.” Thus, a “transfer” entails bothalienation of existing payment rights and receiptof consideration by the payee. If future structuredsettlement payments are rescheduled pursuant tothe underlying settlement documents (as original-ly written or as amended by agreement among thepayee, the structured settlement obligor and theannuity issuer) there is no “transfer” within theSSPA definition.

12. The SSPAs of the following statesinclude one or both of these requirements: AK,AZ, CA, CO, CT, FL, ID, IL, IA, LA, MA,MN, MS, MO, NE, NJ, NY, OK, RI, SC, SD,TX, UT, VA, and WA.

13. The SSPAs of the following statesinclude one or both of these provisions: AZ,CA, CO, CT, ID, IL, IA, MS, NJ, NY, OK, RI,SC, SD, TN, TX, UT, VA, and WA.

14. See, e.g., FISCAL YEAR 1999 BUDGET OF

THE U.S. GOVERNMENT, GENERAL

EXPLANATIONS OF THE ADMINISTRATION’S

REVENUE PROPOSALS at 122 (Feb. 1998). 15. See § 115 of H.R. 2884, enacted as

Pub. L. No. 107-134, 115 Stat. §§ 2427 et seq.Section 115 of H.R. 2884 was taken verbatimfrom H.R. 1514, 107th Cong., 1st Sess., whichwas the 107th Congress’s version of correspon-ding bills introduced by the same sponsors inthe 106th and 105th Congresses. See S. 1045,106th Cong., 1st Sess. (proposing enactment ofIRC § 5891, imposing an excise tax on struc-tured settlement factoring transactions); H.R.263, 106th Cong., 1st Sess. (same); S. 2543,105th Cong., 2d Sess. (same); H.R.4314, 105thCong., 2d Sess. (same).

16. By December 2001, when H.R. 2884passed, SSPAs had been enacted in thirtystates. (Several of those SSPAs have since beenamended or reenacted to conform more closelyto the model legislation.)

17. “Applicable State statute” is defined forthis purpose as a statute that provides for entryof the appropriate order, judgment, or decreeand has been enacted by:

(A) The State in which the payee of thestructured settlement is domiciled, or

(B) If there is no statute described insubparagraph (A), the State in whicheither the party to the structured settle-ment [i.e., the structured settlement oblig-or] . . . or the person issuing the fundingasset [i.e., the annuity issuer] for thestructured settlement is domiciled or hasits principal place of business.

IRC § 5891(b)(3).18. “Applicable State court” means “a

court of the State which enacted” the “applica-ble State statute,” except that if the applicablestate statute is not a statute that has been enact-ed in the payee’s home state, the applicablestate court may also be “a court of the State inwhich the payee of the structured settlement isdomiciled.” IRC § 5891(b)(4). Like many ofthe SSPAs, § 5891 also contemplates possibleapproval of a transfer of structured settlementpayment rights by an administrative authoritythat had exclusive jurisdiction over the settledclaim. See § 5891(b)(2)(B)(ii) and note 6, supra.

19. IRC § 5891(b)(2).20. The Indiana and Kentucky SSPAs sug-

gest that either the transferee or the payee mayapply for approval of a transfer. See IND. CODE

ANN. §§ 34-50-2-8(b)(3)(C), 34-50-2-7(4); KY.REV. STAT. ANN. § 454.435. Under thePennsylvania SSPA, only the payee is authorizedto apply. See 40 PA. CONS. STAT. ANN. § 4004.

21. See, e.g., In re R & P Capital Res., Inc.(Hildreth), 772 N.Y.S.2d 461, 464 (N.Y. Sup.Ct. 2003) (“In order to satisfy the court’s obli-gation . . . to make inquiry of the propriety ofthe transaction for the individual consumerpetitioner, a personal appearance necessarily isrequired.”); In re Transfer of Structured



Settlement Proceeds to 321 HendersonReceivables Ltd. P’ship (Dreyer), Dubois Cty.,Ind. Super. Ct. No. 19D01-0304-MI-0033, June6, 2003 Order Denying Transfer ¶ 6 (“Absentpersonal testimony by the payee . . . Petitionerwas not able to present evidence or produceinformation that convinces the court that thetransfer contemplated is in the best interest ofthe payee”); cf. In re Settlement Funding(Platt), 774 N.Y.S.2d 635, 637, 641 (N.Y. Sup.Ct. 2003) (noting that the payee was “presentand provided the Court with an opportunity toevaluate credibility, financial acumen, and theextent to which he was or was not being com-pelled to make the transfer” and stressing “theCourt’s ability to see and hear the Payee andraise such inquiries as it felt necessary”); In re321 Henderson Receivables Ltd. P’ship(DeMallie), 769 N.Y.S.2d 859, 860 (N.Y. Sup.Ct. 2003) (payee “did not appear personallybefore the court, and the court has only frag-mentary information about his resources, livingsituation, health and financial needs”).

22. See, e.g., In re Ovation Capital, LLC(Lizotte), 2004 WL 233327, at *3 (Mass. Super.Ct. 2004) (“[t]he burden rests with the payee todemonstrate that the proposed transfer is in hisbest interests”). In seventeen states, allocation ofthe burden of proof is codified in SSPA provi-sions stating that the transferee is solely responsi-ble for fulfilling the conditions for an effectivetransfer. The states that have this SSPA provisionare AZ, CO, CT, ID, IL, IA, MS, NJ, NY, OK,RI, SC, SD, TX, UT, VA, and WA.

23. IRC § 5891(b)(2)(A)(ii).24. In re Settlement Funding

(Cunningham), 761 N.Y.S.2d 816, 818 (N.Y.Sup. Ct. 2003).

25. DeMallie, 769 N.Y.S.2d at 863; In reSettlement Funding (Asproules), 2003 N.Y. SlipOp. 51638(U) at *3 (N.Y. Sup. Ct. Dec. 30,2003); but see also In re Settlement CapitalCorp. (Ballos), 769 N.Y.S.2d 817, 823 (N.Y.Sup. Ct. 2003) (declining “to adopt, as a gener-al proposition, a ‘best interest’ standard thatbespeaks of ‘desperate or dire straits’ or a ‘lifeor death emergency’”); accord, In re DavidLantz, Steuben Cty., N.Y. Sup. Ct., Index No.88477, Jan. 9, 2004, Decision at 3. In dis-cussing the best interest test, several New Yorkcourts have cited legislative history suggestingthat under the New York SSPA transfers shouldbe approved only in cases involving “true hard-ship.” E.g., DeMallie, 769 N.Y.S.2d at 862;Ballos, 769 N.Y.S.2d at 818 n.1. The New YorkSSPA has recently been amended to state that“[p]rovided the court makes the [best interest/fairness and reasonableness] findings . . . thereis no requirement for the court to find that anapplicant is suffering from a hardship toapprove the transfer of structured settlementpayment rights.” 2004 N.Y. Laws ch. 480(amending N.Y. GEN. OBLIG. LAW § 5-1706(b)).

26. In re Structured Settlement PaymentRights of Mario Curto, Phila. Cty., Pa. Ct. of

Common Pleas, Sept. Term 2003 No. 03714,Mar. 23, 2004 Mem. at 4.

27. Settlement Capital Corp. v. State FarmMut. Auto. Ins. Co. (Lundgren), 646 N.W.2d 550,556 (Minn. Ct. App. 2002) (citations omitted).

28. In re Petition of Settlement CapitalCorp. (Platt), 774 N.Y.S.2d 635, 638–39 (N.Y.Sup. Ct. 2003) (citing Lundgren, Spinelli, 803A.2d 172, and Ballos, 769 N.Y.S.2d 817). Seealso Lizotte, 2004 WL 233327, at *3.

29. Spinelli, 803 A.2d 172, 175.30. Curto, supra note 26, at 3.31. DeMallie, 769 N.Y.S.2d at 861.32. In re Johnny Bush, Allegheny Cty., Pa.

Ct. of Common Pleas, Civ. No. GD04-008825,Apr. 29, 2004 Opinion and Order at 4.

33. Asproules, 2003 N.Y. Slip Op.51638(U) at *4.

34. See, e.g., Cunningham, 761 N.Y.S.2d at819 (“initially an interest rate of no more than8% would be ‘fair and reasonable’ so long asthe transferee does not charge its counsel feesand costs to the payee as transfer expenses”). Inthree states, the SSPAs themselves imposestatutory ceilings on discount rates. See MICH.COMP. LAWS ANN. § 691.1193(1)(a)(vi) (dis-count rate “used in determining the discountedpresent value of the structured settlement pay-ments to be transferred may not exceed 25%per year”); NEB. REV. STAT. § 25-3104(5)(transferee may not “contract for or receive adiscount or finance charge that would result inan effective annual rate in excess of the maxi-mum interest rate per year applicable inNebraska to a consumer loan”); N.C. GEN.STAT. § 1-543.12(6) (“[t]he discount rate usedin determining the net amount payable to thepayee . . . does not exceed an annual percent-age rate of prime plus five percentage pointscalculated as if the net amount payable to thepayee . . . was the principal amount of a con-sumer loan”).

35. DeMallie, 769 N.Y.S.2d at 861. Seealso, e.g., Platt, 774 N.Y.S.2d at 641 (“[n]ouniversal percent prohibition can be adopted asa judicial standard, given the need for flexibili-ty and the function delegated to the courts touse their discretion”); In re Ryan Barr, 2004WL 2008607, at *2–*4 (N.Y. Sup. Ct. 2004);Bush, supra note 32, at 4.

36. See, e.g., Davis v. Travelers Cas. & Sur.Co., 2002 Conn. Super. LEXIS 2256, at *8(June 10, 2002); Ballos, 769 N.Y.S.2d at825–29; In re Chrystal Dashnaw, WashingtonCty., N.Y. Sup. Ct., Index No. 57-1-2003-0206,July 31, 2003 Order and Judgment at 3.

37. In re Rapid Settlements, Ltd. (Phillips),2004 WL 3214459, at *2 (N.Y. Sup. Ct. Oct.24, 2004) (citations omitted). See also, e.g.,Cunningham, 761 N.Y.S.2d at 818–19; Ballos,769 N.Y.S.2d at 826 (“basing a determinationupon the comparable or prevailing interest ratesin the industry is dubious”); DeMallie, 769N.Y.S.2d at 861–62; Spinelli, 803 A.2d 172 at178–79.

38. Hildreth, 772 N.Y.S.2d at 463.39. If the party opposing an application is

the structured settlement obligor or the annuityissuer, it typically will have little or no infor-mation about the payee. If the party opposingthe application is a member of the payee’s fam-ily or someone else who has continuing rightsor obligations under the payee’s structured set-tlement, the opponent, although perhapsacquainted with the payee’s situation, is likelyto be appearing pro se. Thus, even when anapplication is opposed, the opponent is not like-ly to conduct any searching cross-examination.

40. For a detailed account of such sales tac-tics, see Wiggins v. Peachtree SettlementFunding (In re Wiggins), 273 B.R. 839, 849–50(Bankr. D. Idaho 2001).

41. See In re Jessica Reehl, Rensselaer Cty.N.Y. Sup. Ct., Index No. 207392, Apr. 29, 2003Decision/Order at 5 (“the Court is of the viewthat in order to assess the overall best interestof the payee, and the welfare of the payee’sdependents, the application should disclosewhether other periodic payments have beentransferred, the date of such transfer(s), and theconsideration received”). Transfer applicationsdo not generally include such information. Nordo they include information about otherinstances in which proposed transfers by apayee may have been disapproved by othercourts. When a transfer application has beendisapproved in one forum (or withdrawn inresponse to opposition), it is not uncommon fora similar application, making no reference tothe application that was disapproved (or with-drawn), to be filed in another forum.

42. See, e.g., Phillips, 2004 WL 3214459,at *1: When . . . [the payee’s first transfer ofpayment rights] was brought before this courtfor approval, Phillips claimed that she wasgoing to use the money to put a down paymenton a home, purchase a used car to enable her towork at Wal-Mart, purchase clothes for her sonand furniture for the house, and put the remain-der into a savings account. . . . That clearly didnot happen, however, because she is once againbefore the court looking to sell her final pay-ment, for even less cash, again to put a downpayment on a home.

43. Spinelli, 803 A.2d at 178.44. See N.Y. GEN. OBLIG. LAW § 5-1703(d).45. See note 5, supra.46. See Barr, 2004 WL 2008607, at *1

(“[w]here fees are imposed on a modestadvance payment, doing so results in a dramat-ic increase to the effective rate of interest if theadvance were considered a loan. For example,in Asproules, the 19.82% discount rate jumpedto an effective loan rate of 22.49% since the$2,200 in fees reduced Mr. Asproules’ grossadvance of $16,200 to a net of $14,000.”).

47. In particular, payees seeking to transferpayments for the second (or third or fourth)time may effectively have been locked intodealing with the same factoring companies with


which they dealt before. Factoring agreements,especially those entered into before enactmentof SSPAs and IRC § 5891, often create encum-brances that extend to all of a payee’s paymentrights, not just the specific payment rights thatare sold (or earmarked to repay a secured loan).These encumbrances can make it difficult,time-consuming and costly for a payee contem-plating a second (or subsequent) factoringtransaction to do business with a different fac-toring company. Even when there is no encum-brance in favor of the first factoring companywith which a payee has done business, practicalconsiderations often make it difficult for apayee to change factoring companies unless allof the payments assigned to the first factoringcompany have been made before the payee pro-poses to transfer payment rights to a differentcompany. The discount/interest rates offered topayees in second (or subsequent) transactionsare often higher, sometimes substantially high-er, than the rates charged in initial transactions.

48. CALIFORNIA ATTORNEY GENERAL’S

OFFICE, IMPACT OF PRIOR COURT APPROVAL ON

THE TRANSFER OF STRUCTURED SETTLEMENT

PAYMENT RIGHTS 9–10, tables 4–7 (2004). Inthese tables, “contract price” refers to the netpayment made by the factoring company inexchange for transferred payment rights, and“present value” refers to the discounted presentvalue of transferred future payments, as calcu-lated using the discount rate published by theInternal Revenue Service for purposes of valu-ing annuities, i.e., the Applicable Federal Ratedescribed in note 5, supra.

49. Until January 2002, the CaliforniaSSPA did not require that transfers receive priorcourt approval, although it did require thattransfer agreements be filed with the AttorneyGeneral’s Office. Hence the data for 2000 and2001 reflect a regime in which the fairness andreasonableness of transfer terms was not sub-ject to judicial evaluation. The data for 2002and 2003 cover transactions that were subjectto court approval but without regard to whetherthe transactions were approved. (Most were.)Interview with Cynthia Robinson, AssociateGovernmental Program Analyst, Office of theCalifornia Attorney General, March 8, 2005.Thus, the rates for all years covered in theCalifornia study are those that factoring compa-nies charged, or sought to charge, not rates thatcourts necessarily approved.

50. The “effective-equivalent” interest ratesfrom which these mean and median figures arederived were taken directly from the factoringcompanies’ disclosures of “effective equivalentinterest rates,” as required under CAL. INS. CODE

§ 10136(a)(7). Interview with Cynthia Robinson,Associate Governmental Program Analyst, Officeof the California Attorney General, March 8,2005. Those disclosures in many cases wouldhave understated the effective cost of borrowingfor customers of factoring companies that chargefees that are deducted from the transaction pro-

ceeds. See note 46, supra.51. See, e.g., Florida Asset Financing Corp.

v. Utah Labor Comm’n, 2004 UT App. 273, 98P.3d 436, 439–40 (Utah Ct. App. 2004), cert.granted, __ P.3d __, 2004 WL 3210799 (UtahDec. 3, 2004) (contrasting Utah’s Workers’Compensation statute with those of states that“explicitly prohibit the assignment of [worker’scompensation] benefits,” including the statutesof Arizona, California, Florida, Kentucky, andNevada); J.G. Wentworth, S.S.C., L.P. v. SAFE-CO Life Ins. Co., 755 So. 2d 138, 139 (Fla.Dist. Ct. App.1999) (affirming summary judg-ment invalidating purported purchase of futurepayments under settlement of Florida workers’compensation claim); In re Roger Dunn, 2005WL 758610, at *1 (Ind. Cir. Ct. 2005) (findingthat the Illinois Workers’ Compensation Actprohibited transfer of payment rights under aworkers’ compensation settlement), appealnoticed Apr. 5, 2005; Bernard Johnson v.Friendly Hiking Servs., Inc., Cal. Workers’Comp. App. Bd. No. SF405873, June 12, 1998Minutes of Hearing and Order (“under[California] Labor Code § 4900, a claim forWorkers’ Compensation, including payments ofcompensation to be made under a settlementagreement, cannot be assigned before payment”).

52. The states in this category are CA, CO,FL, ID, IN, KY, LA, MD, MN, NE, NY, NC,OH, SC, TN, and WV. Cf. In re StratCap Invs.,Inc., 796 N.E.2d 73 (Ohio Ct. App. 2003) (find-ing that definition of “structured settlement” inOhio SSPA does not extend to settlements ofworkers’ compensation claims); Dunn, 2005 WL758610, at *2 (same, under Indiana SSPA).

53. See, e.g., COLO. REV. STAT. § 13-64-209(restricting assignment of rights to receive periodicpayments under postjudgment settlements of med-ical malpractice actions); 735 ILL. COMP. STAT. §5/2-1715 (same); MONT. CODE ANN. § 25-9-405(same); N.Y. C.P.L.R. §§ 5038, 5048 (same); seealso, e.g., J.G. Wentworth S.S.C. L.P. v. Ortega,Palm Beach Cty., Fla. Civ. No. CA-02-03013 AJ,July 2, 2002 Final Order ¶ 3 (“The proposedtransfer of structured settlement payment rightsfrom Ortega to Wentworth would ‘contraveneother applicable law’ because it would . . . violatethe provisions of New York Civil Practice Law andRules § 5041 et seq. . . . which created and gov-erns Ortega’s payment rights and which . . . pro-hibits transfer of such rights.”).

54. Cf. N.Y. C.P.L.R. § 1206(c) (“the abilityof an infant who has attained the age of eight-een years to accelerate the receipt of futureinstallment payments pursuant to a structuredsettlement agreement shall be governed by theterms of such agreement”).

55. See, e.g., J.G. Wentworth S.S.C. L.P. v.Callahan, 649 N.W.2d 694, 699 (Wis. Ct. App.2002) and cases cited therein.

56. See, e.g., In re Emerald Funding Corp.(Brown), Monroe Cty., N.Y. Sup. Ct. Index No.2003/3376, June 4, 2003, Mem. Decision at 7 (“Ifprior to the act [the New York SSPA] a clause

such as the one at issue here barred assignment. . . it should operate just as effectively after-wards.”); Lizotte, 2004 WL 233327 at *4; RapidSettlements, Ltd. v. SAFECO Nat. Life Ins. Co.(Morgan), 2005 WL 246458, at *2 (Conn. Super.Ct. Jan. 4, 2005) (disapproving application underConnecticut SSPA based on contravention of anti-assignment provisions); In re Transfer by RayeAnn Brown, Del. Cty., Ind. Cir. Ct. No. 18C03-0204-PL-11, July 3, 2002 Order (same, underIndiana SSPA); In re Transfer [by] VincentZarbaugh, Franklin Cty., Ohio Probate Ct. No.484364, Jan. 14, 2002 Entry (same, under OhioSSPA); In re Transfer [by] Troy Walker, FayetteCty., Tenn. Cir. Ct. No 4647, Feb. 23, 2005 Order(same, under Tennessee SSPA); cf. Platt, 774N.Y.S.2d 635, 639–40 (citing cases under NewYork SSPA in which insurers objected to transfersbased on antiassignment provisions); but see alsoSpinelli, 803A.2d 172, 181 (approving transferover insurer’s objection; finding that antiassign-ment provision did not nullify the transfer);Lundgren, 646 N.W.2d 550, 554 (“the court isarguably empowered to override an antiassign-ment clause”).

57. The SSPAs in the following states requirea finding that the payee has actually receivedindependent professional advice: AK, DE, FL,LA, ME, MD, MA, MI, MN, NC, and OH.

58. See, e.g., In re Approval for Transfer ofStructured Settlement by Reney Woodard, LinnCty., Iowa Dist. Ct. No. LACV 043227, Nov. 8Order Denying Petition (attorney’s letter “was invirtually identical form to those of attorneys’ let-ters in similar proceedings reviewed by this Court.. . . [Attorney] further advised this Court that hisname had been provided to Ms. Woodard on a listof attorneys suggested by [the factoring compa-ny]. . . . In light of the manner in which represen-tation was provided to Ms. Woodard, a seriousquestion arises as to how the attorneys on [thefactoring company’s] attorneys list are paid.”);Zarbaugh, supra note 56, at 3 (“The Court notesthat the [attorney’s] letter is a pre-printed form . . .which [the factoring company] provided to [theattorney]. At the hearing, Counsel for [the factor-ing company] explained to the Court that [theattorney]’s name appears on a list of attorneys that[the factoring company] provided to [the payee].Additionally, the Court notes that at the bottom ofthe letter, [the attorney] advises [the factoringcompany] to ‘send a $300.00 check . . . this pay-ment will represent payment in full of my legalfees for services rendered to [the payee] regardingthis matter.’.”)

59. Many SSPAs define the term “inde-pendent professional advice” (or an equivalentterm) in a manner that disqualifies advice ren-dered by anyone who is affiliated with or com-pensated by a transferee. Definitions of thiskind appear in the SSPAs of the followingstates: AK, CA, DE, FL, LA, ME, MD, MA,MI, MN, MO, NY, NC, and OH.

60. See Cunningham, 761 N.Y.S.2d at 818(“these applications should be treated as coming


without the independent advisor’s endorsementunless the advisor submits an affidavit expresslystating that he or she endorses the transfer andgives specific reasons for doing so”).

61. Unlike other SSPAs, the Indiana,Nevada, and West Virginia statutes do not spec-ify the conditions under which they apply.

62. This combination of triggering condi-tions appears in the SSPAs of the followingstates: CT, IL, IA, MS, NJ, NY, OK, RI, SD,TX, UT, VA, and WA.

63. U.S. CONST. art IV, § 1 (“Full Faith andCredit shall be given in each State to the publicActs, Records, and Judicial Proceedings ofevery other State”); see also 28 U.S.C. § 1738(implementing the Full Faith and Credit Clause).

64. See DEL. CODE ANN. tit. 10, §6602(p)(2) (definition of “structured settlementpayment rights”), § 6601(5)a.1-2 (requiringapprovals).

65. Two courts have considered and rejectedconstitutional objections to application of theSSPA(s) of states other than the state in which apayee is domiciled. See Legal Asset Funding,LLC v. Travelers Cas. & Sur. Co., 155 F. Supp.

2d 90 (D.N.J. 2001) (confirming applicability ofConnecticut SSPA to a transfer of payment rightsby a Texas resident); Settlement Funding LLC v.Hunt, St. Louis Cty. Mo. Cir. Ct. Cause No. 01CC-2247, Sept. 10, 2002 Judgment (findingKentucky SSPA applicable to a transfer by apayee allegedly residing in Missouri).

66. The Louisiana SSPA provides forauthorization of a transfer of structured settle-ment payment rights “in advance by ex parteorder.” LA. REV. STAT. ANN. § 2715.B(1). It isnot clear how this procedure can be reconciledwith due process. In practice, however, interest-ed parties generally are notified of applicationsmade under the Louisiana SSPA.

67. In re Katherine Campina, Benton Cty.Minn. Dist. Ct. No. C5-99-1177, Jan. 10, 2002Order at 8 (vacating prior order underMinnesota SSPA approving transfer in theabsence of notice to certain interested parties).

68. Courts should also be prepared to con-sider whether there are parties who may not fallwithin the applicable SSPA definition(s) of“interested parties” but may nevertheless beindispensable parties. If, for example, a payee

has been party to a previous factoring transac-tion, the transferee in that prior transaction mayhave (or claim to have) an interest that extendsto payment rights that are the subject of a newapplication. Whether or not the prior transfereequalifies as an interested party under the appli-cable SSPA(s), it should nevertheless be madeparty to the new proceeding, based on applica-ble joinder rules because the prior transfereeclaims an interest in the subject payment rights.Disposition of the new application in the priortransferee’s absence may impair its ability toprotect its claimed interest and may leave thestructured settlement obligor and annuity issuersubject to substantial risks of incurring doubleobligations. Cf. FED. R. CIV. P. 19(a).

69. Depending on the nature of the under-lying settlement, structured settlement paymentrights may qualify for exemption under any ofa variety of federal and state laws, including,for example, § 522(d)(11) of the BankruptcyCode, the Federal Employees’ CompensationAct, 5 U.S.C. § 8130, state workers’ compensa-tion laws, and state insurance laws applicableto annuity contracts.

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AUTHOR: Daniel Hindert and Craig Ulman

SOURCE: Number 2, Volume 44, Spring 2005, ABA, The Judge's Journal - 19

Transfers of Structured Settlement Payment Rights: What Judges Should Know . . . .

NUMBERPAGES: The entire article

YOURTITLE: NC Conference of Superior Court Judges Summer Conference

YOURPUBLISHER: Institute of Government - sponsor

PUBLICATIONTYPE: CJE Handout to Superior Court Judges

NUMBERCOPIES: 110 - the number of Superior Court Judges in NC

PRICE: Free, only judges in attendance

DISTRIBUTIONDATE:June 2008