By: David K. Hou
Boylan Brown
Rochester, NY
This article provides an update on recent cases regarding the transfer of structured settlement payment rights in New York. The New York Structured Settlement Protection Act (SSPA) requires judicial approval for the transfer of structured settlement payment rights.[i] In 2004, the SSPA was amended to eliminate the requirement that a court determine that a payee suffered a hardship (although it retained the existence of a hardship as a relevant consideration), as a prerequisite to the approval of the transfer of structured settlement payment rights, in favor of requiring a court to determine that the terms of the transfer are fair and reasonable[ii] and that the transfer is in the best interests of the payee;[iii] what terms are fair and reasonable, and what is in the payees best interests inherently requires a case-by case determination of the totality of the circumstances.[iv]
Judicial approval of petitions to approve the transfer of structured settlement payment rights are by no means guaranteed. Because the vast majority of cases in which such petitions are approved go unreported, whereas the vast majority of petitions which are not approved are reported, a consideration of recent reported cases provides useful guidance as to what transfer terms have not been deemed fair and reasonable, and/or not in a payees best interests.[v]
Recent Decisions Considering What Transfer Terms Are Not Fair And Reasonable
The annual discount rate used to determine the gross advance amount, and the net amount received by the payee in relation to the amount of payment being transferred remain the principal considerations as to whether transfer terms are fair and reasonable.[vi] Under the courts totality of the circumstances analysis, no single factor is determinative; thus, for example, higher annual discount rates may be overcome by hardships or other compelling circumstances presented by the payee.[vii] However, absent such extenuating factual circumstances, recent cases have regularly demonstrated that annual discount rates in excess of seventeen percent are not fair are reasonable.[viii]
There is no minimally acceptable annual discount rate; courts routinely cite older cases disapproving a 15.46% discount rate,[ix] and in July, 2008, one court disapproved an 11.78% annual discount rate.[x] In that case, without elucidating what annual discount rates might be acceptable, the court summarily stated that Petitioner has failed to explain why such a high discount rate on a risk free investment is warranted.[xi] This case may be considered an outlier case, in comparison to the aforementioned reported decisions rejecting considerably higher discount rates. Notably, also in July, 2008, another court determined that a similar 11.17% annual discount rate was fair and reasonable.[xii]
Recent cases have also compared the net payment received by the payee in relation to the aggregate payment rights being transferred.[xiii] However, the question of whether how such a broad comparison accurately accounts for the sometimes complex structure of periodic payments has yet to be determined.
Although rarely determinative of itself, the issue of deducting legal fees, filing fees, compliance and administrative fees, from the payees gross advance amount has been found to add insult to injury, especially where other financial terms appear to be unfair and unreasonable.[xiv] Where such fees are deducted, factoring companies would be well served to specifically itemize and justify what such fees are, and how they are computed.[xv]
Recent Case Discussion Of What Is Not In A Payees Best Interests
The two most notable developments in the best interests analysis are the disclosure of prior transfers, and the disclosure of details regarding the payees need for the proposed transfer.
If a payee has previously transferred payment rights, recent cases suggest that the specific details of such prior transfers, as well as the payees use of the prior advance funds, are relevant to the best interests analysis, and that the non-disclosure of such information runs the risk of judicial disapproval of the pending transfer.[xvi] In fact, at least one court has suggested that the petitioners failure to disclose prior advances may be sanctionable.[xvii] In Roman, the court had originally approved the proposed transfer in part on the belief that the payee was still entitled to the remainder of un-transferred payments. However, the court later vacated its approval upon discovering that the petitioning factoring company had failed to disclose that the payee had actually previously transferred the remainder of his payments nine months prior.[xviii]
In addition, courts are also taking into consideration the length of time since the last petition for transfer of payment rights, [xix] and/or the time until the next payment is due.[xx] Clearly, courts will give greater scrutiny to situations where the payee has recently received advances for transfers, or will soon receive a substantial periodic payment; hence, the greater need for exigent or a material change in the payees circumstances in such cases. In one recent case, a payee sought to transfer partial payment rights to a structured settlement entered into by the minor payees mother only three years previously.[xxi] That court acknowledged and deferred to the mothers prior determination that a structured settlement was in the payees best interest; the court had granted the payee two opportunities to present his mother at the hearing to support the transfer or to otherwise demonstrate a change in his circumstances warranted approval of the transfer.[xxii]
The failure to support or document the payees proposed uses for the advance amounts, is also an ongoing pitfall for factoring companies and payees alike. Whether the payee intends to pay for home repairs, purchase a vehicle, pay off debts, or otherwise,[xxiii] a petitions likelihood of success can only be reduced by the failure to include such information, whether the advance amount will be sufficient for such purposes, and any supporting documentation. [xxiv]
Finally, courts continue to emphasize the need for payees to demonstrate that they have considered, or have attempted to locate, alternative means of financing their needs.[xxv] One court has suggested that a payee must demonstrate that she has exhausted other financing options.[xxvi]
Other Considerations
At least two courts have suggested that using part of the payees gross advance amount to acquire life insurance policies for the payees, with the factoring company as the primary beneficiary, is unconscionable and blatantly unfair.[xxvii]
One court has commented on the common, express provision in structured settlement agreements whereby the payee surrender his power to transfer or assign his rights to periodic payments.[xxviii] In Logan, the court noted that the prohibition against transfers or assignments may be waived by the obligor[xxix], but not by the payee, and that such waiver could not be inferred from the obligors mere silence or inaction.[xxx]
Conclusion
The inherent uniqueness of each case and the relative unavailability of decisions in which transfers of structured settlement payment rights are approved make it difficult to formulate any useable framework for predicting success. Nevertheless, some measure of guidance as to what is acceptable to the courts may be inferred through the careful consideration of the circumstances in which such petitions are not approved; as the courts gradually develop a fabric of case law precedent, the ongoing monitoring of reported cases - of what transfer terms are fair and reasonable, and what facts are sufficiently in a payees best interest - will therefore be necessary if such petitions are to be successful.
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[i] N.Y. Gen. Oblig. Law 5-1701 et seq. (McKinney 2008). The SSPA was enacted to protect structured settlement payees from being taken advantage of by unscrupulous businesses seeking to acquire their structured settlement payment rights, through the use of various procedural safeguards to ensure that payees are fully informed of their rights and the value of their transfer. Id. at 5-1705, 5-1706. A New York Court has recently determined that the SSPA applies even where the payee wishes to renegotiate (and accelerate) the terms of the settlement with the defendants insurer. See Warde v. Gershom, No. 13930/96 (Sup. Ct. Kings County, November 28, 2008).
[ii] The annual discount rate used to calculate the gross advance amount paid to the payee, as well as any costs, fees or related expenses imposed on the payee, are all relevant to whether transfer terms are fair and reasonable. See 321 Henderson Receivables Origination, LLC, v. Nelson, No. 19285/08 (Sup. Ct. Kings County Oct. 3, 2008); 321 Henderson Receivables Origination, LLC, v. Welch, No. 260141/08 (Sup. Ct. Bronx County Sept. 12, 2008).
[iii] In considering a payees best interests, courts will consider the payees physical age and level of maturity, physical and mental capacity, ability to earn a living and provide for dependents, the intended use of proceeds of transfer, the need for medical or other professional treatment, the existence of hardship; whether payee obtained independent legal and financial advice about the consequences of transfer, and whether payee demonstrates an appreciation of them. See Novation Capital, LLC v. Knight, 2008 N.Y. Slip Op. 51628U, *4-5 (Sup. Ct. Orange County July 29, 2008); 321 Henderson Receivables Origination, LLC v. Walker, No. 4409/08, 2008 N.Y. Misc. LEXIS 4862 (Sup. Ct. Kings County July 8, 2008).
[iv] See 321 Henderson Receivables Origination (Welch), No. 260141/08.
[v] To date, all reported decisions applying the SSPA have originated from the lower courts; no appellate courts in New York have had occasion to consider application of the SSPA. See 321 Henderson Receivables Origination (Walker), No. 4409/08.
[vi] See fn. 2, supra.
[vii] See 321 Henderson Receivables Origination (Walker), No. 4409/08. What circumstances have not been considered to be hardships or otherwise sufficiently compelling, are discussed, infra.
[viii] See 321 Henderson Receivables Origination (Nelson), No. 19285/08 (holding 19.99% discount rate not fair and reasonable); 321 Henderson Receivables Origination (Welch), No. 260141/08 (holding 17.03% was not fair or reasonable); 321 Henderson Receivables Origination (Walker), No. 4409/08 (holding 18.15% discount rate was not fair and reasonable); Settlement Funding of New York, LLC v. LM Property and Cas. Ins. Co., 2008 N.Y. Slip Op. 50491U (Sup. Ct. Broome County Mar. 13, 2008) (holding 19.99% discount rate not fair and reasonable); Lump Sum Capital, LLC v. Ciemielewski, 2008 N.Y. Slip Op. 50141U (Sup. Ct. Broome County Jan. 22, 2008) (holding 18.68% discount rate not fair and reasonable); In re 321 Henderson Receivables Origination, LLC (Logan), 2008 N.Y. Slip Op. 28072 (Sup. Ct. Queens County Jan 2, 2008) (holding 18.58% discount rate not fair and reasonable).
[ix] See, e.g., Novation Capital, 2008 N.Y. Slip Op. at *4-5, and 321 Henderson Receivables Origination (Welch), citing In re Settlement Funding of New York, LLC (Cunningham), 195 Misc.2d 721 (Sup. Ct. 2003).
[x] See In re Symetra Assigned Benefits Serv. Co. (Dillenbeck), No. 2008-0595 (Sup. Ct. Montgomery County July 14, 2008) (dismissing petition to approve transfer of $100,000.00 future payment due in ten years for $80,821.25).
[xi] Id. As will be discussed, infra., the court also determined that the payees failure to consider alternative means of financing his needs negatively affected the best interests analysis.
[xii] See Novation Capital, 2008 N.Y. Slip Op. at *4-5 (holding discount rate was fair and reasonable, but that the transfer was not in the payees best interests).
[xiii] See 321 Henderson Receivables Origination (Welch), No. 260141/08, (finding gross advance amount was less than ten percent of aggregate payments transferred); Lump Sum Capital, 2008 N.Y. Slip Op. at *1 (finding advance was ten percent of total payments transferred); Settlement Funding of New York, LLC (Butts), 2007 N.Y. Slip Op. 51689U (Sup. Ct. Broome County Aug. 28, 2007) (finding payee was only receiving net ten percent of transferred amount).
[xiv] See LM Property and Cas. Ins. Co., at *1; In re 321 Henderson Receivables Origination, LLC (Logan), 2008 N.Y. Slip Op. at *1; Settlement Funding of New York, LLC (Butts), 2007 N.Y. Slip Op. at *1.
[xv] 321 Henderson Receivables Origination (Nelson), No. 19285/08; 321 Henderson Receivables Origination (Welch), No. 260141/08.
[xvi] See 321 Henderson Receivables Origination (Welch), No. 260141/08 (noting that prior transfer was less than one year prior, and payee failed to disclose use of prior advance); Novation Capital, at *4-5; Settlement Funding of New York, LLC v. American Home Assurance Co., No. 100497/08 (Sup. Ct. New York County June 6, 2008); LM Property and Cas. Ins. Co., at *1; Lump Sum Capital, 2008 N.Y. Slip Op. at *1; In re 321 Henderson Receivables Origination (Logan), 2008 N.Y. Slip Op. at *1; Settlement Funding of New York, LLC v. Sun Life Assurance Co., 2007 N.Y. Slip Op. 52548U (Sup. Ct. Bronx County Oct. 29, 2007).
[xvii] 321 Henderson Receivables Origination v. Roman, 15 Misc.3d 1135(A) (Sup. Ct. Bronx County May 14, 2007).
[xviii] Id.
[xix] See 321 Henderson Receivables Origination (Welch), No. 260141/08; 321 Henderson Receivables Origination, (Walker), No. 4409/08 (three years prior); Settlement Funding of New York, LLC (Butts), 2007 N.Y. Slip Op. at *1 (considering fourth petition, three months after the third transfer was approved).
[xx] See LM Property and Cas. Ins. Co., 2008 N.Y. Slip Op. at *1.
[xxi] See 321 Henderson Receivables Origination (Walker), No. 4409/08.
[xxii] Id.
[xxiii] Courts have suggested that the repayment of back loans, credit card debts, purchasing a new car, or home improvements, are relatively minor financial burdens and do not satisfy the best interests analysis. See 321 Henderson Receivables Origination (Nelson), No. 19285/08.
[xxiv] See Novation Capital, 2008 N.Y. Slip Op. at *4-5; 321 Henderson Receivables Origination, LLC v. Willliams, 2008 N.Y. Slip Op. 51182U (Sup. Ct. Kings County June 12, 2008); LM Property and Cas. Ins. Co., 2008 N.Y. Slip Op. at *1; Lump Sum Capital, 2008 N.Y. Slip Op. at *1; In re 321 Henderson Receivables Origination, LLC (Logan), 2008 N.Y. Slip Op. 28072 (Sup. Ct. Queens County Jan 2, 2008); Sun Life Assurance Co., 2007 N.Y. Slip Op. at *1.
[xxv] See 321 Henderson Receivables Origination (Nelson), No. 19285/08; In re Symetra Assigned Benefits Serv. Co. (Dillenbeck) No. 2008-0595.
[xxvi] See 321 Henderson Receivables Origination (Nelson), No. 19285/08.
[xxvii] See 321 Henderson Receivables Origination, LLC v. Windom, 2007 N.Y. Slip Op. 51400U (Sup. Ct., Albany County July 20, 2007); Settlement Funding of New York, LLC v. Home Ins. Co., No. 80072/07, 2007 N.Y. Misc. LEXIS 4785 (Sup. Ct. Richmond County June 19, 2007).
[xxviii] In re 321 Henderson Receivables Origination (Logan), 2008 N.Y. Slip Op. at *1.
[xxix] The payment obligor frequently does not appear or have any objection to the proposed transfer because its payment obligation remains the same regardless; only the payee changes. Id.
[xxx] Id. at *3. In light of the non-waiver, the Court strictly applied the anti-assignment provision of the structured settlement agreement.