by John Darer CLU ChFC CSSC RSP
The ELNY Liquidation Memorandum Decision of April 16, 2012 by Nassau County Supreme Court Judge John Galasso states in pertinent part (p5) : "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party." (emphasis ours).
Approximately 18 ELNY shortfall victims (out of 1500) filed an appeal of Judge Galasso's ruling.
The Insurers' motion sought to underscore that "at no time" did the liability insurers "undertake liability following qualified assignments - liability was extinguished pursuant to the qualified assignment arrangements." . In doing so the Insurers, through their motion, had attempted to distinguish the two types of structured settlement funding and ownership alternatives available during the time ELNY structured settlements were placed .
Let's take a look at the two alternatives:
A. "Buy and hold"
Parties come to an agreement on a future periodic payment obligation that is set forth in the Settlement Agreement. Defendant or Insurer buys a structured annuity (or annuities) to fund the future periodic payment obligation, for its convenience, and holds it as an asset on its books. Even though the periodic payment obligation is fully funded by the annuity, the Defendant or Insurer must retain a contingent liability on its books as set forth in FASB accounting rules. The Plaintiff is a general creditor of the Defendant or Insurer and has exposure to the creditworthiness of the annuity owner. For example a small auto insurer does a buy and hold and subsequently goes belly up. Or, for a present day example, a California city or town declares Chapter 9 bankruptcy as three have recently.
B. "Qualified assignment company buy and hold" after transfer of periodic payment obligation.
This is most commonly used today and has been available since the Periodic Payment Settlement Act of 1982 became effective in January 1983. The following chart from 4structures.com, LLC illustrates the steps of a structured settlement transaction that includes a qualified assignment [Technical note. While the chart presents an accurate picture of the basic elements of a structured settlement transaction, some aspects, e.g. Special Needs Trusts, were not de rigueur whenELNY was actively selling. Special Needs Trusts are designed to protect the plaintiff's ability to receive asset sensitive government benefits were a phenomenon of OBRA'93]
A critical difference with a qualified assignment is the transfer of the periodic payment obligation/novation that takes place BEFORE the annuity is purchased as a "qualified funding asset" in accordance with IRC Section 130(d). It's NOT the question of simply buying a structured annuity and then transferring the ownership of the annuity. The novation is important to the Defendant or Insurer's tax treatment of the amount the Defendant or Insurer pays to the qualified assignment company.
The judge's memorandum expressly states "purchased". Neither the Defendants nor their Insurers purchase the structured settlement annuity where there is a qualified assignment.
Industry colleague Patrick Hindert has previously written, "the legal rights and responsibilities of ELNY qualified assignments represent a critical issue that may subsequently be litigated by the ELNY structured settlement shortfall victims".
Here's some additional thoughts for discussion
Following are two examples of what I refer to as the "unwind paragraph" in a qualified assignment agreement. (Emphasis is ours)
In the event the Settlement Agreement is declared terminated by a court of law or in the event that Section 130(c) of the Code has not been satisfied, this Agreement shall terminate. The Assignee shall then assign ownership of any “qualified funding asset” purchased hereunder to Assignor, and Assignee’s liability for the Periodic Payments shall terminate.
Qualified Assignment Release and Pledge Agreement [used when secured creditor is desired and the assignment company offers it]
"Failure to Satisfy Section 130(c). If at any time prior to completion of the Periodic Payments, the Settlement Agreement is declared terminated in a final, non-appealable order of a court of competent jurisdiction (or in the case of a workers’ compensation settlement, a final order of the applicable workers’ compensation authority) or if it is determined in any such final order that the requirements of Section 130(c) of the Code have not been satisfied in connection with this Agreement: (i) the assignment by Assignor to Assignee-Debtor of the liability to make the Periodic Payments, Assignee’s acceptance of such assignment and the release by Claimant -Secured Party(s) of Assignor’s liability shall be of no force or effect; (ii) Assignee -Debtor shall be conclusively deemed to be acting as the agent of Assignor; (iii) the Annuity shall be owned by Assignor, which shall retain the liability to make the Periodic Payments; (iv) Assignee-Debtor shall have no liability to make any Periodic Payments; and (v) the parties hereto agree to cooperate in taking such actions as may be necessary or appropriate to implement the foregoing".
It appears from reading the paragraph that the two conditions under which an assignment can terminate is
- The Settlement Agreement is declared terminated in a final non-appealable order of a court of competent jurisdiction; or
- IRC 130(c) has not been satisfied [what I refer to as "the sneaky S.O.B. clause" which protects the assignee from someone trying to sneak in payments for damages that don't qualify under IRC 130(c) and could jeopardize the tax exclusion afforded the assignee under IRC 130.
While I am not a lawyer, it seems to me, as someone who is a credentialed structured settlement expert, that the hurdles the appealing shortfall payees have to overcome are
- Trying to overturn a Settlement Agreement that might have been in place for 20-25 years or
- Claiming that that the terms of IRC 130(c) were not satisfied, to attempt to induce an unwind by the assignee,
Is either of these scenarios realistic?
The qualified assignment is not the villain here. Without qualified assignments, and no viable alternative, proponents of structured settlements established from qualified settlement funds (QSF) would never be able to write structured settlements, depriving hundreds of thousands of mass tort victims the ability to benefit from this important settlement planning solution.
Furthermore, much is made over restrictions of some casualty insurers on acceptable annuity markets. Few liability insurers would accept a buy and hold today, knowing that the future benefits exceed the cost by millions.