by Structured Settlement Watchdog
It's not looking good for factoring companies and investors in the Zachary Barber case (in substance "Happy Birthday You're 18 and Your Structure is Gone"), where a May 14, 2021 published decision denied their motion to quash
- Confirmed Allegheny County, the original forum where the structured settlement was approved as proper forum decisions related to the structured settlement.
- Details Rubber Stamped Orders that did not comply with the Pennsylvania Structured Settlement Protection Act
- Confirmed that payments continue to be paid into the Court (and not to investors, or Zach until the matter is adjudicated)
ZACHARY BARBER, JEFFREY BARBER, ADMINISTRATOR OF THE ESTATE OF LINDA LEE JENKINS A/K/A/ LINDA LEE BARBER, DECEASED
v. BRUCE STANKO, NORTH HILLS PHARMACY SERVICES, LLC; PACERCHECK, INC.; ET AL
APPEAL OF: SEMPRA FINANCE, LLC ("SEMPRA") : IN THE SUPERIOR COURT OF PENNSYLVANIA No. 615 WDA 2020
Appeal from the Order Entered June 5, 2020 In the Court of Common Pleas of Allegheny County Orphans' Court at No(s): No. 4037 of 2005
It raises the obvious questions over how many other cases are out there in Pennsylvania where one, or both or other factoring companies may be implicated in the future with the engagement in similar behavior in Pennsylvania?
According to the published decision, written by Judge Pellegrini, Pinnacle Capital, LLC (Pinnacle), Sempra Finance, LLC (Sempra), Habitus Funding (Habitus) and Michael J. Pickett (Pickett) appealed from a June 22, 2020 order of the Court of Common Pleas of Allegheny County (Allegheny County Orphans’ Court) that effectively denied motions to dissolve an injunction involving a January 31, 2020 order requiring all (structured settlement) annuity payments to Zachary Barber (Zachary) provided for in its 2005 Settlement Approval Order be paid into court until allegation of statutory violations, forum shopping and fraud presented in the underlying proceeding had been determined.
[ as noted in the Court's decision, Pickett was the assignee (investor)in the Pinnacle originated payments and Habitus the assignee (investor) in the Sempra Finance originated payments.]
Judge Comes Out Strong For the Intent of Structured Settlements
Structured settlements were rare until a series of IRS rulings in the late 1970s declared that periodic payments in structured settlements would not be subject to federal income tax. Congress effectively codified these administrative rulings with the passage of the Periodic Payment Settlement Act of 1982. See PUBLIC LAW 97-473—JAN. 14, 1983.2 The passage of this Act incentivized plaintiffs to forgo a lump-sum payment in favor of a structured settlement to provide tort victims with long-term economic security by providing guaranteed income with spendthrift protection.
Judicial Concerns About Factoring Predators and Congressional Intent
While structured settlements provided those benefits, payees of structured settlements were precluded from securing a lump-sum payment by cashing in their remaining payments to take care of current needs or wants, real or imagined. Like all things involving substantial sums of money and wants and desires, there developed an industry to allow plaintiffs to “change their minds” and transfer their payments to a factoring company who offered less than the present value of those payments. The practice of structured settlement transfers raised a concern that personal injury claimants are being exploited by factoring companies that take advantage of vulnerable and unsophisticated claimants. See Johnson v. Structured Asset Services, LLC, 148 S.W.3d 711, 728 (Tex.App.2004) (“Because the underlying purpose of a structured settlement is not only to compensate an injured party but also to protect that party from his own improvidence, a number of commentators, courts, and legislatures have become concerned by the growing number of companies, sometimes called ‘factoring companies,’ that purchase structured settlements from a personal injury victim by paying him immediate cash for the right to future payments under the settlement.”).
On account of these concerns, Congress amended the Internal Revenue Code in 2002 to impose “a tax equal to 40 percent of the factoring discount” upon any person or entity “who acquires directly or indirectly structured settlement payments rights in a structured settlement factoring transaction....” 26 U.S.C. § 5891(a).3 However, a statutory exception to that tax has been created for any transfer of structured settlement payment rights that is approved in advance by a qualified court order. See 26 U.S.C. § 5891(b)(1). To constitute a “qualified order” under Section 5891, the order must expressly find that the proposed transfer does not contravene any federal or state law, regulation or order, and that the sale “is in the best interest of the payee, taking into account the welfare and support of the payee's dependents....” 26 U.S.C. § 5891(b)(2)(A)(i)-(ii). To avoid paying a 40 percent tax on the factoring discount amount, any company wishing to purchase a payee’s structured settlement rights must secure a court order concluding that the transfer is in the payee’s best interests.
Pennsylvania Structured Settlement Protection Act
The Court stated "Like almost all states, Pennsylvania has adopted the SSPA to functionally allow the transfer of structured settlement payments. It provides, among other things, that, “[n]o transfer of structured settlement payment rights shall be effective ... unless the payee has filed a petition requesting such transfer and the petition has been granted by final order or decree of a court of competent jurisdiction based on such court’s express written findings that .... [t]he payee has established that the transfer is in the best interests of the payee or his dependents.” 40 P.S. § 4003(a)(3)."
Pennsylvania SSPA Places the Common Pleas Court in Presumptive Position of Guardian of A Person
According to the decision "It has been said that the SSPA places the common pleas court in “position of a guardian of a person who stands in the presumptive position of the defenseless recipient of a benefit. It is for the Court to determine, as a guardian would, on an independent basis, whether the transaction serves the best interests of an unsophisticated (if not incompetent) person” and “is to ensure that an otherwise financially defenseless and possibly injured individual would receive a regular, sustaining source of income.” In re Jacobs, 936 A.2d 1156, 1160 (Pa. Super. 2007).
Requiring a judge to serve as guardian to protect the interests places the judge in unfamiliar territory. Generally, the petition to transfer payment is unopposed with plaintiff-payee wanting to transfer payments so that it can receive payments for what he or she considers in its best interests, whether it is or not, and the factoring company wanting it approved so it can make the Requiring a judge to serve as guardian to protect the interests places the judge in unfamiliar territory. Generally, the petition to transfer payment is unopposed with plaintiff-payee wanting to transfer payments so that it can receive payments for what he or she considers in its best interests, whether it is or not, and the factoring company wanting it approved so it can make the most money. That requires the trial judge to make an independent determination of whether the sale is in the best interests of the plaintiff-payee based on economic factors that it is not within its ken and with parties who are not that forthcoming. Moreover, this determination is made even more difficult because the proceedings are non-adversarial, with no factual development and competing positions to inform its judgment as would be the usual. It depends on the forthrightness and good faith of counsel to provide all the information available for the judge to make an informed decision on what is in the best interests of the plaintiff-payee to avoid fraud on the court.
While 40 P.S. § 4003 sets forth several conditions that must be met before a transfer can be approved, other sections are pertinent here. Section 4004 of the SSPA, 40 P.S. § 4004, provides that the petition to transfer structured settlement payments shall be filed where the payee is domiciled; another of those conditions requires that the transfer also must be “expressly approved in writing by ... any court or responsible administrative authority that previously approved the structured settlement.” 40 P.S. § 4003(a)(5)(i)(B). This approval is required because they are commonly used to resolve tort claims of minors, as well as adults who have suffered injuries that have rendered them legally incompetent, before any transfer can be effectuated.
No Separate Counsel Was Afforded to or on Behalf of then Minor Zachary Barber Even Though There Was a Conflict of Interest
Even though there was an apparent conflict between Zachary and Father’s interest, Zachary, the payee, was not appointed separate representation in any of proceedings seeking to sell his annuities to fund Father’s obligations
Under the SSPA, “the courts were given the mandate to supervise all aspects of settlements in which a minor is a party in interest[.]” Power by Power v. Tomarchio, 701 A.2d 1371, 1374 (Pa. Super. 1997) (emphasis in original); see also In re Benninger, 357 B.R. 337, 351 (Bankr. W.D. Pa. 2006) (the Structured Settlement Approval Act “is designed to protect beneficiaries of structured settlements from being taken advantage of by others.”)
To ensure that beneficiaries of structured settlements rights are protected, especially minors, the SSPA requires the approval of the court who initially approved the structured settlement must be obtained before the transfer of any payment is effective. As previously mentioned, 40 P.S. § 4003(a)(5)(i)(B) provides that: No transfer of structured settlement payment rights shall be effective and no structured settlement obligor or annuity issuer shall be required to make any payment to any transferee of structured settlement payment rights unless the payee has filed a petition requesting such transfer and the petition has been granted by final order or decree of a court of competent jurisdiction based on such court’s express written findings that:
(B) any court or responsible administrative authority that previously approved the structured settlement; (Emphasis added.)
It appears that in all instances, approval from the court or agency that approved a previous structured settlement is needed because, necessarily, the proposed transfer would be contravention of previous orders; otherwise a petition to transfer benefits would not be needed.
Moreover, neither the Butler nor Beaver County courts made any finding that such transfers were not in contravention of the terms of the 2005 Settlement Approval Order. While they included boilerplate language contained in 26 U.S.C. § 5891, this language is found in the section about whether the court’s orders were “Qualified Orders” for tax purposes and is not a finding regarding the 2005 Settlement Approval Order. See 26 U.S.C. § 5891. This is not surprising because it appears that neither Butler nor Beaver County were made aware of the 2005 Settlement Approval Order. Because Section 4003(a)(5)(i)(B) applied and it requires that the court that approved the structured settlement agreement must approve in writing the proposed transfer, the Allegheny County Orphans’ Court was required to approve any changes in payments made under the 2005 Settlement Approval Order. See In re Am. Dredging Co., 2011 WL 4971829, at *2 (E.D. Pa. Oct. 18, 2011) (finding that sale of portion of settlement for a lesser lump sum than would have been realized if paid at the set disbursement date “would contravene the terms of that structured settlement agreement. Accordingly, pursuant to the language of the statute, [the court that approved the original settlement] must expressly approve in writing the transfer of structured settlement rights before the [another] court may grant its approval.”).
Requiring the court that initially approved the structured settlement to approve any change in its terms advances the SSPA’s purpose to protect beneficiaries of structured settlements from being taken advantage of by others because those courts were aware of the reasons why a settlement was not paid in a lump sum but structured. Additionally, approvals of the court that initially approved of a structured settlement to a minor are especially important because that court can determine if the transfer of payments would serve the interest of the minor and order, if necessary, that a guardian represent the minor’s interests. In this case, the Allegheny County Orphans’ Court did not approve, as required by 40 P.S. §4003 (a)5(i), any of the transfer of payments purportedly authorized by the Butler and Beaver County courts due to Zachary to Pinnacle, Sempra, Habitus and Pickett, with his Father keeping the proceeds of those sales. Zachary contends that Father fraudulently realized the profits for himself in violation of the 2005 Settlement Approval Order’s terms.
In light of these accusations, the Allegheny County Orphans’ Court entered “[t]he January 31, 2020 Order directing future payments to be made to the Prothonotary … out of an abundance of caution for the sole purpose of safeguarding the minor’s funds until this matter could be properly adjudicated.” (Orphans’ Court Opinion, 9/20/20, at 6). In other words, it was not issuing a preliminary injunction, but keeping the 2005 Settlement Approval Order in place until it could determine who was entitled to the payments to be made thereunder.17 See Commonwealth v. Shaffer, 712 A.2d 749, 751 (Pa. 1998) (“[I]t is axiomatic that a court has inherent power to enforce its own orders of court and this court will not interfere with this enforcement absent an abuse of discretion.”).
Moreover, we note briefly that Pinnacle and Pickett alternatively argue that “Sempra’s appeal of the coordination order … did not require the [court] to stay this matter in its entirety.” (Pinnacle’s Brief, at 26); (see Pickett’s Brief, at 20).
Rule 1701 provides, in pertinent part, that: (a) General rule.--Except as otherwise prescribed by these rules, after an appeal is taken or review of a quasijudicial order is sought, the trial court or other government unit may no longer proceed further in the matter. (b) Authority of a trial court or other government unit after appeal.--After an appeal is taken or review of a quasijudicial order is sought, the trial court or other government unit may:
(1) Take such action as may be necessary to preserve the status quo[; and]
(2) Enforce any order entered in the matter[.]
(c) Limited to matters in dispute.--Where only a particular item, claim, or assessment adjudged in the matter is involved in an appeal … the appeal … shall operate to prevent the trial court … from proceeding further with only such item, claim, or assessment, unless otherwise ordered by the trial court … as necessary to preserve the rights of the appellant.
Pa.R.A.P. 1701(a), (b)(1)-(2), (c).
The Allegheny Count Orphans’ Court did not abuse its discretion to stay all proceedings to preserve Zachary’s rights in the structured settlement.The coordination order from which Sempra appealed, although not directly involving Pinnacle or Pickett, went to the larger issue of whether the Butler and Beaver County orders were effective because Pinnacle and Sempra had not received the approval of the Allegheny Court Orphans’ Court as required by P.S. § 4003 (a)(5)(i) before a change in payments set forth in the 2005 Settlement Approval Order can occur, as well as fraud, forum-shopping and fraud on the court. Hence, the Allegheny County Orphans’ Court did not abuse its discretion in staying all proceedings in this matter, including its January 31, 2020 order that annuity payments be deposited with the Prothonotary, pending full adjudication of all allegations, rather than attempting to address them piecemeal.
The Court concluded that "because the January 31, 2020 order was not a preliminary injunction, the June 22, 2020 order, the order from which this appeal is taken, could not “continue” it, and is neither a final appealable order nor appealable pursuant to 311(a)(4), and we quash".
Download Opinion - Barber case Affirmed
Download Opinion - Quashed Appeals of Pinnacle Capital LLC, Michael Pickett and Habitus Funding
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