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Recycled Annuties a Bad Alternative For Funding a Structured Settlement, Says Philadelphia Lawyer to American Bar Association

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Are Recycled Structured Settlement Payment Streams Suitable As Investments for Injured Plaintiffs?

Cozen & O'Connor's Stephen R. Harris' excellent article about the perils of Recycled Structured Settlements has been published by the American Bar Association Litigation Section Admiralty Litigation Committee on December 18, 2018. Harris is an authority on structured settlements and structured settlement factoring transactions. He represents more insurers in structured settlement litigation throughout the nation than any other attorney in the country, according to his bio on the Cozen & O' Connor website.

Harris addresses a phenomenon that first surfaced in or about 2009 in Florida as a structured settlement alternative, in response to lower interest rates and the very real dangers that lurk in current environment.  The structured settlement alternative product is not an annuity at all, but is often scam labeled as an annuity by peddlers of what are properly defined as structured settlement receivables, the alternative investment, including some licensed insurance agents, to lower the guard of potential buyers and judges where a settlement requires court approval. Harris opines that recycled structured settlement payment streams (also known as structured settlement receivables) are not a suitable replacement for traditional structured settlements. When considering a structured settlement, brokers, attorneys, judges, and settlement claimants are best served by a structured settlement which is tax free and funded by a highly regulated and rated insurance company, says Harris.

How Does a Recycled Structured Settlement Payment Work?

Step 1

An existing structured settlement payment stream is purchased by a factoring company from an existing settlement plaintiff through a proceeding under a state’s Structured Settlement Protection Act (“SSPA”). The SSPA provides protections for individuals who seek to sell all or a portion of their structured settlement payment stream for a lump sum payment.

Step 2
After obtaining a court order approving the purchase of an individual’s payment rights, the factoring company finalizes a separate contract with a different plaintiff to sell the individual’s payment rights; hence the term “recycled structured settlement." The second plaintiff may or may not be from the same state as the selling annuitant. The second plaintiff purchases the recycled payment stream from his/her lump sum settlement of her personal injury or workers compensation claim.  Some settlement planners may utilize a qualified settlement fund to evade closer scrutiny.

Recycled "Payment Stream is Taxable, Fraught With Risk, the Deal Is Not As Good As Advertised"

As Harris observes "Not surprisingly, the amount paid by the second plaintiff for the recycled payment stream is much greater than what the factoring company paid to the original payee". The factoring company has to make its "vig".  Harris says "The factoring company markets the recycled payment stream based on its apparently attractive yield. However, because the recycled payment stream is taxable and also fraught with risk, the deal is not as good as advertised". 

Note that the investor plaintiff (second plaintiff referred to by Harris) may be purchasing the investment from an intermediary who is selling on from the original structured settlement factoring transaction. As recent legal activity has shown all is not what it seems when the deal goes bad. There is more than enough bad news to question the suitability of recycled structured settlement payment rights/ structured settlement derivatives as an investment for plaintiffs.

A. Wall case

• Retiree sold "secondary market annuity"
• Fraud in the origination. It was discovered some time after what was thought to be the conclusion of the transfer.
• Florida court vacates transfer order, orders that the annuity issuer redirect the payments to the attorney for the original payee, screwing the investor out of $150,000 the amount they invested in the recycled payments.
• Investor sues but matter is dismissed and investor cannot collect from the originator, Corona Capital, the “sour lime in the bottle” being that was no direct contractual relationship.
• After winning on summary judgment against intermediary in 2017, the judgment was overturned by the Third Circuit in November 2018.  Investor spent thousands of dollars, received an insurance recovery from the financial advisor who placed them into the wayward investment and has to fight for scraps in an unjust enrichment claim against the intermediary requiring even more legal expense! Does this type of risk seem suitable for an injured plaintiff?

B. Factoring company fraud

Harris refers to several cases currently pending  (some of which I've previously covered here) where, despite court orders authorizing the transfers, the payee now seeks to have the orders vacated on the basis of factoring company fraud. In several such cases, the payees allege that they were not residents of the states where the transfers took place, and now seek to void the transfer orders.

C.  Pending Class Action

A pending putative class action seeks a constructive trust on all past and future payments received by factoring companies and their assignees on hundreds of transfers which occurred over many years in Portsmouth, Virginia, primarily bared on the allegation that the factoring companies violated the SSPA by not advising payees of their right to independent legal or financial counsel in connection with the transfers.

D.  Forgeries Galore

Harris states there have also been several instances where approval orders were forged, once by an employee of a New York law firm representing factoring companies, and then by an attorney who represented factoring companies in Florida. In the latter case, over 100 approval orders were forged. Although almost all of these transfers were later reconfirmed by the court, the assignees of the factoring companies ran the risk of losing their investments.

E.  More Risk Associated With Recycled Structured Settlements

According to Harris, "resales of investments in structured settlement payment rights, do not give the investor the protection of the SSPA offered the original payee receiving tax-free periodic payments, such as the right to review disclosures (including information on the discount rate being charged) and the accompanying court approval. Since the SSPAs apply to transfer of payees’ rights under the original structured settlement annuity, the purchaser of the recycled payment stream would not receive these consumer protections and would be at the mercy of the often unscrupulous elements of the structured settlement factoring industry". 

The Intellectually Dishonest Scam Label "Secondary Market Annuity"

A number of third parties, including licensed insurance agents who should know better,  use the intellectually dishonest scam label  "secondary market annuity" or "secondary market annuities" to market structured settlement receivables direct to consumer or to settlement planners, the latter of whom sell to their clients by parroting the same terms to their clients and to attorneys and judges.

"Arb This!" Third Circuit to Rapid Settlements

A Federal Court of Appeals in the 3rd Circuit in Allstate v. Rapid Settlements, 2009 WL 514080 (C.A.3 (Pa.)) slammed a Rapid Settlements deal because no state court had signed off on it, as required by structured settlement protection acts in at least 43 states, including the Commonwealth of Pennsylvania

The underlying case involved Rapid's attempts to purchase structured settlement payment rights from Andino Ward whose April 1991 settlement with the City of Philadelphia included future periodic payments funded with a structured annuity from Allstate Life Insurance Company.

U.S. Circuit Judge Joseph F. Weis Jr. wrote that Rapid Settlements has frequently tried to evade the consumer safeguard (of obtaining prior Court approval) by utilizing a Texas arbitration group when state courts reject their initial attempts. A judge in Montgomery County, PA ( where Andino Ward lives) had previously rejected his deal, according to the ruling.

Weis wrote. "We are one of the many courts to face Rapid Settlements' transparent attempts to use this arbitration scheme to evade the legislatures' intentions to protect the recipients of structured settlement payments...the cases frequently involve the same arbitrator, he said.

Allstate Settlements Corp., represented by Philadelphia lawyer Stephen R. Harris of Drinker Biddle,  is the owner of the annuity in question. Allstate filed suit against Rapid Settlements and Ward, arguing that the proposed factoring deal did not follow state law and was therefore invalid.

The win follows a similar outcome in February 2009 in the 2nd U.S. Circuit Court of Appeals. Read Structured Settlement's 4Real February 11, 2009 report by clicking here

Stewart A. Feldman, Esq.  the principal owner of Rapid Settlements, was cited by various Associated Press sources as having called arbitration appropriate, efficient and cost-effective and said Allstate had a business interest in challenging the arbitrator's decision. Perhaps Feldman is referring to the fact that Allstate annuitants have the ability to commute their annuities directly with Allstate. In the current economic environment such discount rates may be more competitive than what cash now pushers offer.

"The fact that the Pennsylvania courts declined to give all deference mandated by the U.S. Supreme Court to the decision of a neutral third party arbitrator should be a matter of great concern to businesses throughout the country," Feldman said.

For a Copy of the Third Circuit Ruling please follow this link http://www.ca3.uscourts.gov/opinarch/073224p.pdf