by Structured Settlement Watchdog®
Servicing of structured settlement payments is a misnomer. Servicing of structured settlement payments does not have a long term benefit to the structured settlement annuitant and here's why.
If an annuitant who needs a modicum of liquidity, that can only be provided by selling a small portion of his or her structured settlement payments, in some cases the entire structured settlement payment must be transferred to the factoring company. Even the part that you are not selling!
For example, say you're receiving $7,500/month from XYZ life insurance company and you need to raise cash that can be accomplished by selling $500 per month of payments for 10 years, XYZ could require the servicing arrangement. So Structured Settlement Buyer LLC gets the full $7,500 processes the check, keeps the $500 you sold and pays you the difference. This process goes on and on for the duration of the transferred obligation. You can't even call the life insurance company to change a bank account or change a beneficiary. They won't speak with you when there's a servicing arrangement in place. And you the annuitant are exposed to additional costs and hassle that you may not be able to afford if the servicing company goes belly up.
I did an extensive series of podcasts and video commentary on structured settlement servicing in October 2009 for the Legal Broadcast Network, including a 2 part interview with Dallas bankruptcy attorney Bruce Akerly .
An informative article about servicing was recently published by the Philadelphia law firm of Drinker Biddle and Reath about recent court decisions in California and Texas
Drinker Biddle states that the majority of Structured Settlement Protection Acts contain “anti-split payment” provisions that protect annuity issuers from being forced to send portions of payments to multiple parties.
It is my understanding however, that it is a long standing practice of some life insurers, including a currently writing company, to require selling annuitants to participate in servicing arrangements on partial structured settlement transfers and that some settlement purchasers are actually not enthused about them.
What Drinker Biddle says is that for the past few years, a number of structured settlement factoring companies have been seeking to force annuity issuers to use “servicing arrangements” to get around these “anti-split payment” provisions in the SSPAs.
Drinker Biddle says that structured settlement servicing is permissible if the annuity issuer and other interested parties agree. However, as was also concluded in my 2009 research, the practice creates concerns for some annuity owners and issuers.
- For example, there is some question about the effect of a factoring company bankruptcy. Does the structured settlement claimant still get his or her portion and, if not, could the claimant pursue the annuity owner or issuer? (The answer should be no, but prevailing on that issue in litigation could be expensive.)
- Also, because factoring companies sometimes require claimants to agree to rights of first refusal, structured settlement owners and issuers can be dragged into litigation if the structured settlement claimants seek to sell to other factoring companies the portions of the payments that were not sold in the earlier deals. Thus, annuity owners and issuers often resist the imposition of servicing arrangements, arguing that imposing such arrangements violates the applicable SSPAs and the right of freedom of contract.
Drinker Biddle's publication cites the following appellate decisions addressing serving arrangements that were published in Texas and California:
- In Re Rains, No. 07-14-00132-CV, 2015 Tex. App. LEXIS 8219 (Tex. App. Aug. 5, 2015); and
- RSL Funding, LLC v. Alford, E060421, 2015 Cal. App. LEXIS 714 (Cal. Ct. App. Aug. 18, 2015), modified and rehearing denied, 2015 Cal. App. LEXIS 795 (Cal. Ct. App. Sept. 10, 2015).
The courts rejected the notion that a structured annuity owner (typically a qualified assignment company) or structured annuity issuer can be forced into a servicing arrangement. Drinker Biddle opines that these decisions should have far-reaching effects since most SSPAs contain similar “anti-split payment” language and courts in other jurisdictions will likely be guided by these appellate decisions.
In Rains, the Texas Court of Appeals held, under the Texas SSPA, that MetLife, as annuity issuer, could not be compelled to accept a servicing arrangement that was not contemplated by the contracting parties at the time the annuity was issued. In reviewing the Texas SSPA, the court “found nothing that authorized a trial court to unilaterally modify the terms of a previously existing contract.” Furthermore, “the trial court had no authority to simply decide to change those portions of the annuity contract obligating Met to pay [the payee]. The terms of the contract regarding Met’s obligation to pay [the payee] were unambiguous and definite; thus, the court was obligated to enforce them as written unless the parties agreed otherwise.”
In RSL Funding, State Farm appealed a trial court order that directed it to split payments between the original payee and RSL’s assignee. On appeal, RSL (the factoring company) conceded that having State Farm split payments violated the California SSPAs', and proposed that the case be remanded to the trial court to “order a servicing arrangement under which State Farm would send the entirety of the [structured settlement] payments” to RSL’s assignee, so that the assignee could then remit the balance of the payments not purchased by RSL to the claimant. The court reasoned that the imposition of such a servicing arrangement on State Farm “would put [State Farm] in the position of having to rely on another entity to fulfill its contractual obligations to [the claimant] and would expose State Farm to litigation if, for example, RSL or its assignee sought bankruptcy protection.” 2
In both Rains and RSL Funding, the annuity issuers focused on the applicable SSPAs' mandatory prohibition regarding divided payments and argued that the courts had no authority to impose a servicing arrangement that compelled the issuers to pay to the factoring companies monies that the annuity contracts required the annuity issuers to pay to the payee.
In the many states where there is anti-split payment language in the SSPA, these decisions should serve as a useful tool to stop transactions where the factoring company contracts to purchase only a portion of a claimant’s structured settlement payments and the annuity issuer is unwilling to enter into a servicing arrangement. In short, if the statute prohibits an annuity issuer from being forced to split payments, and a servicing arrangement cannot be forced upon an annuity issuer, a partial payment transaction has no way to proceed.
The advent of structured settlement factoring has raised costs of structured settlement annuity issuers and qualified assignment company annuity owners. Those cost include legal fees for each structured settlement factoring transaction, and staffing and monitoring for compliance with 48 state SSPAs. Many annuity issuers or annuity owners charge settlement purchasers a fee, sometimes a substantial fee ($1,800-$3,000 per deal) to help cover their costs. Ultimately this comes out of the hide of the selling annuitant on the back end instead of at the front end where it would impact the overwhelming majority who do not sell, with higher prices for the products.