by John Darer CLU ChFC MSSC RSP CLTC
The possibility that an order approving the transfer of structured settlement payments could be vacated has been reasonably foreseeable since January 2002, when a law established by an act of Congress in 2001, creating IRC §5891, imposed an excise tax if a "qualified order" is not obtained.
What is a Qualified Order in Relation to a Transfer of Structured Settlement Payment Rights?
1.QUALIFIED ORDER: For purposes of this section, the term “qualified order” means a final order, judgment, or decree which:
A.finds that the transfer . . .
i.does not contravene any Federal or State statute or the order of any court or responsible administrative authority, and
ii.is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents, and
B.is issued –
i.under the authority of an applicable State statute . . . .
2.APPLICABLE STATE STATUTE: For purposes of this section, the term “applicable State statute” means a statute. . . enacted by
A.the State in which the payee of the structured settlement is domiciled, or
B.if there is no statute described in subparagraph (A), the State in which either the party to the structured settlement (including an assignee under a qualified assignment under section 130) or the person issuing the funding asset for the structured settlement is domiciled or has its principal place of business.
Transactional Risk, a Known Risk, Largely Ignored in Marketing Structured Settlement Payment Rights to Investors
Structured Settlement Factoring industry dirt that's just too hard to ignore
- A former employee of Peachtree Settlement Funding was arrested in 2010 for extortion for threatening to expose, upon information and belief, among other things, forum shopping. Three years later a decision filed August 26, 2013 in Settlement Funding, LLC (Peachtree Settlement Funding) v Cathy Brenston, 2013 IL App (4th) 120869, the subject matter of which involved THREE prior transfer orders (June 28,2007; March 31,2008 and April 10, 2008) approved by the Circuit Court of Sangamon County and a petition by the seller, MORE THAN TWO YEARS AFTER these the transfer orders to vacate the Orders on the basis of fraud by the purchaser and the assertion of a legal disability of incompetence, the Illinois Appellate Court reversed a lower court decision denying the petition to vacate
- It was known to structured settlement factoring stakeholders in October 2013 that Thomas Rubino, then a paralegal at the New York City personal injury law firm of Paris & Chaikin had falsified structured settlement transfer orders after Paris & Chaikin informed its clients JG Wentworth, Stone Street Capital and Woodbridge Structured Funding. The shenanigans were perpetrated during his employment from July 10, 2010 to October 2013.
Law Professor Advised Caution But Failed to Identify Key Risk to Investors
Yet in January 2014 National Underwriter published an article by Texas A&M law professor Robert Bloink, that not only promoted the mislabeled secondary market annuities (which National Underwriter misfiles under Annuities, Fixed Indexed) as an asset class for financial advisors to recommend to their clients, but also failed to identify transaction risk.
Bloink said "Secondary market annuities are not without risk—interest rates could rise during the annuity’s term and the insurance carrier’s financial health, as always, is critical to the success of the transaction. Because of these risks, and the fact that the market has been an unknown to many until recently, it is important that advisors are fully informed before recommending the strategy to any client".
Transaction Risk in Structured Settlement Investing Is Greater Than Insolvency Risk
Arguably transaction risk is a greater risk than insolvency risk and in some cases it's out of your control. Failure to identify reasonably foreseeable transaction risk has been typical of many peddlers of the mislabeled "secondary market annuities" which are derivatives, not annuities. What is both surprising and disappointing to me is that a law professor at a premier educational institution and an insurance industry publication would actually attempt to validate an illegitimate terminology.
"The buyer is depending on the validity of the court order approving the sale of the annuity. The court approving the transaction must have jurisdiction over the assignment of the annuity and the parties involved in the transaction" -Pacific Structured Assets
A Pittsburgh couple invested retirement money in a structured settlement derivative mislabeled as a "secondary market annuity" in 2012. In 2014, the same year that the Bloink article was written they discovered that the court order was procured by fraud and vacated leaving them with nothing to show for their investment, a loss of almost $153,000 plus legal fees incurred since then trying to get money from those who advised or participated in selling them the ill-fated investment. The recent Wall case, is a cautionary tale. The intermediary Altium Group obtained a legal opinion that the transaction was sound but the investor and Altium were both burned by a forgery that was uncovered later.
A December 15, 2014 article published at WealthManagement(dot)com Stan Haithcock (a/k/a "Stan the Annuity Man") is quoted “It’s kind of messy,” he says, noting the market is largely unregulated. “Most (insurance) agents are not qualified to sell them"
Tom Hamlin, of Somerset Wealth Strategies said in the January 2014 National Underwriter article, "Secondary annuities are a safe money strategy that's not too good to be true, just too good to last." Yet less than 3 years later Somerset suspended sales of the structured settlement derivatives, believed to be due to one or more deals acquired for clients from Access Funding. One of those clients who contacted me is a senior from Florida, who recently received notice that payments were suspended due to competing claims. Her deal was consummated about the time the National Underwriter article citing Hamlin was published.