Sovereign immunity has become a major roadblock to the factoring industry's purchase of structured settlement payment rights. Several recent cases frame the United States's government's claim its sovereign powers over attempts to complete structured settlement factoring transactions where the United States is the structured settlement obligor.
The United States government has sovereign immunity and may not be sued unless it has waived its immunity or consented to suit. The Federal Tort Claims Act (FTCA) is a limited waiver of the immunity if a tortious act of a federal employee causes damage. According to Wikipedia "there are are a number of statutory exceptions and judicially-fashioned limiting doctrines applicable". While Title 28 U.S.C. § 1331 confers federal question jurisdcition on district courts, the statute has been held not to be a blanket waiver of sovereign immunity on the part of the federal government.
The following cases form part of a growing body of law on the subject.
1. Transamerica Assurance Corporation Plaintiff v Settlement Capital Corporation Defendant-Appelant, UNted States of America Defendant-Appellee, Gary Steele Defendant United States Court of Appeals 6th Circuit, decided June 5, 2007
The Court stated that the question is whether the circumstances of this case implicate sovereign immunity under the formulations of seminal soverign immunity cases
Larson 337 US 682 (1949)
and Land v. Dollar. "That is, does a state-court decision ordering the federal government to direct TransAmerica to change the annuity payee from Steele to Settlement Capital compel or require action from the sovereign, Larson, 337 U.S. at 687–88, or “expend itself on the public treasury or domain, or interfere with the public administration”? Land v. Dollar, 330 U.S. at 738. The Court decided it does both. The Court went on to state "Although a single instance of compelling the government to file paperwork might seem trifling, the core administrative concern, see Land v.Dollar, 330 U.S. at 738, is national in scale, and under the plain language of Larson, compulsion itself is the vice that implicates federal sovereign immunity.
The Court's states "Settlement Capital argues that there is no federal interest at stake here because in passing the Victims of Terrorism Tax Relief Act of 2001, in particular 26 U.S.C. § 5891, Congress "blessed the practice of factoring structured settlements" without regard to the identity of the annuity owner (be it the government or a private party).
The Court goes on to states "Its argument, however, obscures the true nature of its asserted entitlement." which is revealing. Some factoring companies and their affiliates have positioned 26 U.S.C. § 5891 using this arguably fallacious "blessing" theme (and the absence of tough state of federal regulations on the promotion of their services) to justify their existence in some cases through questionable marketing practices. More troubling is that this is a theme that I've heard from a few individual annuity brokers to justify taking fees or commissions from factoring companies or to support their marketing efforts. The Society of Settlement Planners even made factoring a focal point of the proposed standards of conduct at its recent annual meeting.
However, while not providing any endorsement, this author has found Settlement Capital Corporation to be one of the more responsible marketing companies in the factoring industry.
2. In the Matter of Application of Rapid Settlements, Ltd for Approval of Transfer of Payment Rights of Richard Gregory Holder United States District Court, Western Oklahoma CIV-04-645-L Decided November 6, 2004
The Court agreed with the position of the United States that the diversity statute cited by Rapid in the Complaint clearly DOES NOT provide a basis for jurisdiction over the United States in this matter.
The Court also trashed Rapid's argument that the Victim's of Terrorism Tax Relief Act provides an unequivocated waiver of soverign immunity by stating "Section 115 of the VTTRA pertains to the tax treatment of certain settlement payments...i.e. it is not a "blessing"
3. Settlement Funding, LLC D/B/A Peachtree Settlement Funding as Seller/Servicer for Peachtree Finance Company, LLC Plaintiffs v Rose Garcia, Transamerica Occidental Life Insurance Company and the United States of America United States District Court Western Texas Waco Division Civil Action W-04-CA 339 Decided December 12, 2006
In response to an Interpleader action, the United States requested confirmation of its contractual rights as owner of the Transamerica annuity contract its purchased pursuant to an Amended Consent Judgment in a 1992 case. It asserted that Settlement Funding, LLC (Peachtree) could not have been granted a security interest in the contractual right to designate annuity payment because Rosa Gracia could not assign the right to designate the payee.
The court granted United States motion for summary judgment on sovereign immunity issue. The Court found, among other things:
- that while the United States did purchase an annuity that Rosa Garcia was NOT a party to that annuity contract.
- that Rosa Garcia did not acquire any rights to control the payments pursuant to the annuity contract
- that the United States is contractually bound by the Amended Consent Judgment to apply the annuity funds for the benefit of Garcia.
- Garcia only had rights against the United States not Transamerica
- that Transamerica must act at the direction of the United States
- that the alleged security interest claimed in the UCC filing by Settlement Funding, LLC (Peachtree) is without merit as Garcia did not have the rights to pledge the annuity payments as collateral.