Bankruptcy of Structured Settlement Payment Servicing Company

by John Darer® CLU ChFC CSSC RSP

My last post on structured settlement payment servicing by factoring companies and the consequences of factor or payment servicer bankruptcy seems to have struck a chord with Dallas TX lawyer Bruce W. Akerly, Esq. and I am pleased to print his thoughtful and articulate response in it's entirety.

I have taken the liberty to organize Mr. Akerly's letter in bullet points to make it easier to read. I have also added emphasis that forms the basis for questions that will be raised in response.

"Mr. Darer: Your attempt to raise a red-flag of suspicion by posing the question regarding a factor/servicing company bankruptcy is unfortunate. There is nothing about the filing of bankruptcy by a factor/servicing company that should adversely impact an annuitant’s right to receive payments.

1. In a bankruptcy, whether under chapter 7 or 11, all of a factor’s right to receive property, including the right to receive money through a court approved transfer or otherwise – would become property of the bankruptcy estate consistent with 11 U.S.C. § 541.
2. The servicing agreement, which is sometimes approved as part of a state court proceeding, would also be dealt with in the bankruptcy case, either as an asset itself, to the extent it may have a fee recovery component, or as an executory agreement, which must be either assumed or rejected by the debtor.
3. If the company filed chapter 11, it would be permitted to continue its operations in the ordinary course, which would include the right to receive the annuity payment stream and comply with its servicing obligations.
4. While the annuitant will likely receive notice of the bankruptcy, there would not be any interruption or impact on either the annuity issuer or the annuitant.
5. The bankruptcy company would be entitled to either assume or reject the servicing agreement. Assumption might also include an assignment to another servicing entity. Either way, there should be no impact on the annuitant or annuity issuer.
6. While the state court order approving the servicing arrangement may need to consulted, it is also possible that the factor could reject just the servicing agreement component which would merely require that the annuity issuer remit the required payments to both the factor and the annuitant.
7. Alternatively, if necessary, the parties could return to state court to seek approval of the transaction without the servicing component or seek declaratory relief before the bankruptcy court to determine the rights and/or obligations of the parties. Again, in either scenario the annuitant’s rights should not impacted.
8. The only difference under chapter 7 would be that a trustee would be appointed to oversee the assets of the bankruptcy estate and, if necessary, be permitted to continue the business affairs of the company in an effort to preserve the value of its assets, which would include the right to continue to receive payments and/or comply with the debtor's servicing obligations. These have value to the bankruptcy estate and the annuitant.
9. The trustee would likely seek to sell these valuable contract rights to another company in a business similar to that of the debtor/factoring company in order to preserve the value and benefit of the bargain between the contracting parties, including the bankruptcy estate.
10. Depending on the terms of the state court order, the trustee might also decide to reject the servicing agreement. As above, the obligation to pay would likely revert to the annuity issuer, with no impact on the annuitant. If there is any concern or ambiguity as to how to proceed, the trustee would likely seek a declaration of rights and/or obligations from the bankruptcy court, with notice to all parties. Again, no impact on the annuitant could be envisioned in such proceedings as all right to payment would be preserved. Nothing herein is intended as legal advice to any person or entity. The posting reflects only the opinions and thoughts of the author".

Once again I would like to thank Mr. Akerly for his thoughtful and articulate response.  A few thoughts which inspire further questions and comment:

• It is clear that a servicing agreement with a factoring company that goes Chapter 7 bankruptcy may be, at best, an "inconvenience" to the structured settlement annuitant. Such inconvenience (or worse) may involve additional costs and emotional capital.
• The point highlighted in #6 above states "which would merely require that the annuity issuer remit the required payments to both the factor and the annuitant". It has been alleged by Matt Bracy of Settlement Capital Corporation that servicing agreements exist because some structured annuity issuers WILL NOT split payments to their annuitants. if they only sell part of their structured settlement payment rights. If point #6 is true what makes one think that the annuity issuer will all of a sudden agree to split payments? 
• The Structured Asset Funding case involving the "CT Woman" also illustrated the problems associated with servicing. According to the "CT Woman" the structured annuity issuer allegedly refused to deal with the "CT Woman's" questions about her structured settlement (she only sold $1,600 of $10,000 per month of structured settlement payments) and instead referred her to the servicer, Structured Asset Funding which purchased the $1,600 per month and we understand to be the servicer of the remainder).
• In my opinion, if the reason servicing payments is even necessary is the refusal to split by an annuity issuer then we need to identify which annuity issuers fall into this category and speak with them to develop an alternative solution.
• I think it is safe to assume there is a majority that would agree that there are extreme circumstances that may warrant a sale of periodic payment rights, but it may not be prudent to factor more than reasonably necessary due to the high transactional costs.Servicing is only a potential problem when there is a partial sale of structured settlement payment rights.
• It has also been alleged, by several in the factoring industry, that servicing exists to feather the factoring company "nest" for future factoring deals. If this is true, then one can hardly see the value of a structured settlement servicing agreement (to the annuitant) in the first place. It is not hard to imagine why it looks good to the factoring company's investors to have servicing agreements on the books. 
• If you are in the primary placing market for structured settlements you may emphasize, among other things, the simplicity and the "on time every time" aspect. If you are settlement consultant or plaintiff lawyer and the structure is being placed with New York Life or Met Life, are you thinking top shelf financial quality and service BY NEW YORK LIFE or METLIFE, or some entity like Structured Asset Funding that is a pimple in size by comparison? I'm not insinuating that either of these two fine companies will not split payments, but I use them to underscore my point.