Indiana University Law School Gives Law Degrees For This Nonsense? Part One

by Structured Settlement Watchdog®

Laura J. Koenig, then a JD candidate from Indiana School of Law, now of the United States District Court Southern District of Indiana, is listed as author of a work published in Summer 2007 entitled "Lies, Damned Lies, and Statistics? Structured Settlements, Factoring, and the Federal Government  (82 Ind. L.J. 809).

Ms. Koenig's use of the historical quote attributed to Victorian era British Prime Minister Benjamin Disraeli is reflective of a poorly written, poorly researched piece of work that draws predominantly on outdated information. Disraeli also said "He was distinguished for ignorance, for he had one idea, and that was wrong".

Ms. Koenig's opens her 2007 paper by citing a Jan 25, 1999 US News and World Report ("USNWR") Article concerning a claimant named Orlon Olsen, a horrible story about  how a structured settlement recipient who frittered away the first payment from his structured settlement payment  (created 15 years earlier) when he turned 18 and then sold the remaining structured settlement payment rights to JG Wentworth for a pittance, blew through that and at the time of the USNWR article was living out of his car. She then cites another story from the same USNWR report about another person who "got a raw deal" Koenig fails to recognize the impact of time value of money. JG Wentworth received the rights to receive future payments in exchange for a payment of "cash now". 

Koenig Referred to Structured Settlements as a Settlement Award. It's Not

Koenig's next mistake is in her definition of a structured settlement where she refers to something that does not exist.... a "settlement award". You either have a settlement or an award. You cannot be awarded a settlement. A jury or judge makes an award of damages. A settlement is negotiated compromise. To use Ms. Koenig's nomenclature..."unsurprisingly", the top 3 results for a Google search of "settlement award" at the time of original posting were from the website taxmama.com, settlementcentral.com (for "do-it-yourself personal injury claims") and Snopes.com (where you can check out hoaxes and urban legends). Perhaps Ms. Koenig will now learn the difference in the Southern District.

Koenig Attacks Justification For IRC 5891 and Our Response

Ms. Koenig goes on to attack the justification for IRC 5891, which she and the rest of the misinformed claim "legitimates" factoring and has been embraced by the industry.  Koenig goes on to say that IRC 5891 "ensures that factoring transactions receive court approval, lending legitimacy to the industry's malevolence. toward tort victims. Let me respond:

1. IRC 5891 does NOT legitimize factoring. IRC 5891 provides a tax exemption to the transaction provided certain conditions are met;
2. IRC 5891 does not ensure that factoring transactions meet Court approval.  For a structured settlement factoring transaction, a requirement to receive the tax exemption is that a court approve the transaction. No such court approval is required in factoring transaction where say a business wishes to factor its accounts receivable;
3. A structured settlement factoring transaction may occur without getting Court approval. In that scenario a 40% excise tax is applied;
4. The structured settlement industry has NOT embraced IRC 5891.

Koenig Did Not Give Credit Where Credit Was Due

Ms. Koenig, at N6 p10, credited associate Washington & Lee law professor Adam F. Scales' over played paper in characterizing the origin of the term "factoring transaction".  She also suggests that he is highly regarded in the structured settlement industry.  Let me respond:

1. Factoring is a profession that is as "old as the hills". Maybe even older!  Factoring originated in Ancient Messopotamia  [ see What is the history of factoring? (tradefinanceglobal.com]
2. The term "structured settlement factoring transaction" is what first appears in IRC 5891.
3. Associate Professor Adam Scales is not highly regarded by the structured  settlement industry. In my recollection he had never addressed the National Structured Settlement Trade Association and the presentation of his paper at the 2006 Society of Settlement Planners meeting I am told, had a very sparse turnout. I'd opine that the only structured settlement industry insider who cares what Scales says about structured settlements is Patrick Hindert.

Koenig Was Sucked into the "Hyberbolizing Squandering  Plaintiff" Vortex

Ms. Koenig got sucked into the "hyperbolizing squandering plaintiff" fomented by Scales' work. (p2)Koenig's practical experience with structured settlements appears to be nil. She wouldn't have learned much at Habitat for Humanity of Monroe County where Koenig "doubled as a volunteer services liaison and construction assistant".  According to public sources she also enjoys climbing up big piles of rocks. From what I've read of this paper, the inside of her head might be a worthy climb.

1. Koenig's faulty research tour suggested that the United States has a unique ability to control the benefits it receives from tax breaks outlined in IRC 130 in tort suits against the federal government. Let me respond.
2. IRC 130 is a tax break for a qualified assignment company, which takes on a periodic payment obligation from a defendant or defendant's insurer. Normally corporate ownership of annuities is unfavorably taxed. Payments would sy=till be attractive, but less flexiblehave to be substantually equal and compleyw ith IRC 72(u)
3. Qualified assignments are desirable to both plaintiffs and defendants. The defendant gets a write off. The plaintiff does not have to rely on the creditworthiness of the defendant or its insurer. The tax exclusion to the assignee pusuant to IRC 130, is what makes the transaction work.
4. It should however be noted that prior to the Periodic Payment Settlement Act of 1982 the periodic payment obligation was created by and resided with the defendant....not necessarily the best position for the plaintiff.
5. The United States generally does NOT assign its periodic payment obligations. Even if it did do qualified assignments, the United States government does not pay income taxes and therefore would not benefit from the write off afforded to taxable entities which are the end result of the novation afforded by a qualified assignment pursuant to IRC 130;
6. Academics like Koenig who rely on news bytes taken from outdated 7 year old articles was sheer laziness.  All Koenig had to do (BUT DIDN'T) was extend her research by interviewing structured settlement professionals, a settlement planner or a factoring company representative to learn of examples that the "squandering plaintiff" is not hyperbole.

Koenig's Statement on the Origins of Structured Settlements inaccurate about IRC 104(a)(2)

Koenig's inaccurated states that IRC Section 104(a)(2) "excludes any payments received by a claimant pursuant to a structured settlement for a tort claim from the claimant's income, making structured settlements equal to lump sums in terms of the tax liability".

1. The word "structured settlement" does NOT appear in IRC 104(a)(2). IRC 104 (a)(2) is a section of the Internal Revenue Code that excludes certain types of damages from income taxation.
2. Settlements received in a lump sum are not equal to structured settlements in terms of the claimant's tax liability, as Koenig suggests.
3. While a lump sum with a 104(a)(2) exclusion is income tax free in the year of settlement subsequent investment earnings may be taxable.
4. The tax exclusion applies to all future structured settlement payments, even if they total an amount greater than the initial cost of the structured settlement, as each of the future periodic payments (if negotiated and properly reflected in closing documents)is payment of damages subject to IRC 104(a)(2).

Koenig then incorrectly asserts that Congress conditioned IRC Section 130 tax benefits on the defendants turning over their liability for the settlement awards to third party insurers and annuity issuers, who also benefited from the IRC 130 tax structure. Koenig then incorrectly asserts "that once the parties agreed to a settlement sum, IRC 130 required the defendant to devise a payment schedule, ranging from a few months to the duration of the claimant's life". Koenig then incorrectly asserts that "the annuity issuer then assumed the defendant's obligation to make the scheduled payments to the claimant". Koenig then incorrectly asserts that a qualified assignment enabled the defendant and the annuity issuer to benefit from the tax benefits of IRC 130 citing a 2005 Robert W. Wood, Esq. article on non qualified assignments  (n19 p11). Koenig then incorrectly asserts, citing Adam Scales, that the annuity issuer is not taxed on payments it received from the defendant to purchase the annuity. Allow me to respond...

1. IRC 130 is incorrectly cited by Koenig at n17 p10
2. Koenig again incorrectly marries the mutually exclusive terms "settlement" and "award"
3. Based on conclusions apparently drawn from her incorrect citation she incorrectly states that defendants' benefits from IRC 130 are conditioned on turning over their liability for the "settlement awards" to third-party insurers and annuity issuers. Qualified assignees under IRC 130 are generally third-party special purpose corporations. One is actually an annuity issuer (New York Life Insurance and Annuity Corporation) and in two other cases it is a property and casualty insurer (American Home Assurance Company and National Union Fire Insurance Company of Pittsburgh, PA). Even in the case of NYLIAC, the qualified assignee assumes the liability from the defendant and THEN the annuity is purchased. Even after the annuity is purchased, after a qualified assignment is completed the assignee is the party who has the liability to make payments to the plaintiff, not the annuity issuer. The annuity issuer is obligated to the assignee, which may direct the annuity issuer to make payments directly to the plaintiff.
4. IRC 130 does not require the defendant to devise a payment schedule. It simply states that the amount and payment schedule must be fixed and determinable. As a practical matter the schedule can be devised by either party or negotiated between them. Ultimately a fixed and determinable schedule must be agreed upon
5.  a structured settlement of a few months would not make sense. Ergo a qualified assignment involving such a short periodic payment term would not make sense
6. once again... the annuity issuer does not assume the defendant's obligation the assignee does
7. I doubt that Robert Wood has been quoted accurately. If she has quoted him correctly then HE is wrong! Annuity issuers derive no tax benefit from IRC 130;
8. For an annuity issuer premium represents revenue that forms part of its tax equation. It appears that the error prone Koenig should have referred to the "qualified assignee".

Koenig Fails on How a Structured Settlement Works 

Continuing on to the end of the structured settlement section (p3) Koenig's explanation of how a structured annuity works is comical. Its bad enough that Adam Scales had it wrong but Koenig is left wanting for not checking the facts. Don't they teach Present Value at Indiana University? Koenig states "this tax treatment of structured settlements allowed defendants to release their liability for a much lower cost using periodic payments transferred to and distributed by a third party than lump sums paid directly by the defendant" , What's wrong with that?

1. The tax treatment has NOTHING to do with the release of liability which must still be negotiated. Whether or not the tax treatment is an adequate impetus for a plaintiff to settle remains to be seen "case by case";
2. While some defendants try to negotiate a split the tax subsidy, that is not the prime source for savings;
3. The defendant can negotiate  a cost savings or the plaintiff can benefit from using periodic payments WITHOUT transfer of (liability to make) periodic payments.
4. Koenig then incorrectly states that "the annuity issuer is taxed for the income it received-usually, a standard assignment fee of 4% of the annuity cost plus the annuity's investment returns-that exceeded the annuity cost". Koenig then incorrectly states that "the tax was offset, however, because the issuer presumably claimed the income as a business-expense deduction, thereby opening a minimal cost and low-risk market for the insurance industry to reap profits from structured settlements". Allow me to respond..
5. The annuity issuer is taxed on income it receives, BUT the assignment fee is not income to the annuity issuer, it is income to the assignee; (
6. Assignment fees are NOT standard at 4%. The range is from $0 to $750;
7. The simplistic view of tax on investment returns-that exceeded the annuity cost fails to account for the differences between ordinary income, short term and long term capital gains and the possibility that the annuity issuer might have loss carry forwards;
8. Koenig presumes wrong when she stated the income is claimed as a business expense deduction. Duh, it's either income or it's an expense! Koenig's presumption rebuts her own immediately preceding assertion?

Koenig then makes the outrageous assertion that the United States Treasury is essentially a co-defendant for tortfeasors. Sucked in again by Scales' , her apparently poor research skills and her apparent lack of independent thought, she uses an "estimate that the US Treasury "chips in" 10-30% of the settlement cost". I'm sure defendants would enjoy the savings if they knew about it.

Laura J. Koenig might have done better had she done better research. Apparently Ms. Koenig had a bad case of senioritis. Only a year before Indiana law School Dean Lauren Robel was quoted, in the March/April 2006 Indiana law Update, "she is regarded by her faculty as a creative thinker, researcher and future doer in public interest advocacy". It is not clear why she did not contact any authors of seminal industry texts, the NSSTA or even consult any experienced practitioners. As it is what she has done in this piece is an absolute train wreck and I'm only through with 1/3 of her paper. 

I'll leave Ms. Koenig and her "advocati diaboli" with these timeless words of wisdom from Benjamin Disraeli   "To be conscious that you are ignorant is the first step to knowledge"