Sell Structured Settlement "Best Interest Test"...Decisions Expose Dangers

by John Darer® CLU ChFC CSSC RSP

Cash now pushers need to establish more ethical credibility instead of hanging their hat on "the best interest test".

The crux of their argument is that a judge must look over every structured settlement factoring transaction so consumers are protected. But an examination of some of the published cases denied by judges around the country suggest that some of the factoring companies are not doing any sort of triage or even basic planning for the structured settlement annuitants and that the judge really acts like a "crash barrier".

EXAMPLES

A. Factoring Company: Structured Asset Funding

Matter of Medina NY Sup. Ct Bronx Cty. 26063/08 Dec 12, 2008  "Ms. Medina does not indicate whether or not she is employed or otherwise receives a monthly income in order to enable her to pay her monthly rent, utilities and other household expenses"

B. Factoring Company: Novation Capital

In Matter of Novation Capital, LLC v Knight 2008 NY Slip Op 51628 (U)  Decided July 29, 2008.

In April 2006, Jamel Knight's net settlement was allocated 60% to cash and 40% to a structured settlement with Massachusetts Mutual Life Insurance Company, an A++XV rated annuity issuer. The annuity pays him $1,978.11 per month for life with 360 months (30 years) certain. He also receives $700 per month in disability payments.

According to the footnotes to the Slip Opinion, Knight gave his father $400,000, his mother $100,000 and $100,000 to various friends and took on debt to purchase house, build a vacation home and open a soul food restaurant that paid him $25,000-$30,000 in 2007. His mortgage is $2,500 per month. Knight has 5 children ranging in age from 1 to age 17. His two oldest do not reside with him and the oldest is now a father.  Among reasons for denial of petition:

1. Knight's inability to "demonstrate an acuity for financial management". Despite the sizable net settlement sum he received "up front" he still finds himself in debt.
2. The monthly payments from the structured settlement seem to be the only financial security he retains.
3. Knight's being unable to explain where 40% of the sell proceeds would go

Further Commentary
Such cases expose the potential dangers of simply relying on a factoring company to look out for your "best interest".

The operative question in these cases and others that may slip by the judge is what questions are factoring companies asking structured settlement recipients? In these two case examples the factoring of structured settlement payments was ultimately deemed unacceptable by the judge, yet clearly acceptable to the factoring company.

Another question is who does the factoring company owe a duty to? Does it owe a duty to its investors or to the structured settlement annuitant?  It can be argued that the factoring company is simply in the business of providing liquidity to people who need it and request it of them. It can be argued that any "underwriting" that they do is to protect investors in the deal or investors in the settlement purchaser's securitizations.

There is no licensing required to distribute "financial crack" or to assure an even basic level of competence in those that deal with consumers.