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Factoring "Wet Ink" Structured Settlements : PR Disaster For Factoring Cos. and Investors?

by John Darer CLU ChFC CSSC RSP

Factoring of "wet ink" structures

Last year's  "Connecticut Woman" story involved a member of our industry who sold a resident of my state a large structured settlement in August 2008. Then, an incredibly short time later, figuratively, before the ink was even dry on the structured settlement,  referred her to a factoring intermediary when she needed cash to help complete an add-on to her home so her ailing father could live on the premises in his remaining time on this Earth. My account of the story was based on extensive conversations with the Connecticut woman, who was referred to me by the former Executive Director of NSSTA, Joe Ricci. We've already covered the issue of the ensuing 6 month delay.

The issue of factoring of a wet ink structured settlement is what troubles the structured settlement watchdog. While fellow muckraker Mark Wahlstrom's posts about "changing the industry conversation" do not include a discussion of this problem, it is one that is timely, perhaps even more timely than some of the mostly former practices he cites. Factoring, or perhaps the misconceptions about factoring has got to be a.. er... "factor" in the equation.

FACT: If an annuitant factors a "wet ink structured settlement", he or she will likely suffer a significant short term loss of capital

Such loss is likely to be commensurate with losses owners of shares in a mutual fund or stock would suffer in a stock market crash, even though a structured settlement is supposed to be a safe investment. One measures this loss of capital by comparing the original cost of the payment stream being sold or transferred just a month or two earlier, with the cash that the unfortunate annuitant will now receive from a factoring company. I would like to underscore that It's NOT that the structured annuity is unsafe, it's the sequence of transactions in such an incredibly short period of time that raises the ethical eyebrow.

The need to factor a "wet ink structured settlement"  is,  in the opinion of this author, the likely result of:

1. Failure of the settlement planner or lawyer to gain an adequate understanding of client needs

2. Inadequate job by settlement planning or financial advisor in settlement planning process to assess immediate cash needs

3. Over structuring the settlement, which in my opinion is a function of 1 and 2 (although the cynical might attribute it to greed)

Regardless of the reason, the factoring companies who buy these are the enablers of this activity and they have the power to stop it. Buying, or attempting to buy,  "wet ink structured settlements" is a sleazy practice in the opinion of this author. 

While my industry may wish to chuck spears at the cash now pushers, I would also opine that the factoring industry response is likely to provide support for the points I have made above. Within the structured settlement industry look no further than Allstate Life Insurance Company which, to its credit, established policy and procedure concerning its Advanced Funding Exchange Notice (AFEN) to prohibit such transactions for the first two years of the contract's existence.

Members of the settlement profession should learn more about the business practices of those they refer business to, in advance, and obtain a commitment from the companies they do business with that they do not engage in this practice. They should consider boycotting those companies that enable these transactions.

I also pose the following questions to the public relations departments and chief executives of major domestic and European institutional investors of securitizations in structured settlements.

1. Is it not enough that the "discount rates to the desperate" for the structured settlement factoring cash flows brimming the portfolios that you purchase, average in the high teens?
2. How would it look if it hit the mainstream media or some attorney general conducted an investigation and determined that your institution is buying paper that included "wet ink structured settlements"? 
3. Does your company's stated investment policy for the portfolio of structured settlements you are purchasing, does it include a filter for "wet ink structured settlements"?
   

Plaintiff Representation in Structured Settlements | Yanisse Adrian v Mesirow Case

by John Darer CLU ChFC CSSC RSP

Court decision specifies that a plaintiff CANNOT rely on the defense expert and claim damages

A July 9, 2010 Federal court decision in Puerto Rico styled Yanisse Adrian v  Mesirow Financial Structured Settlements, LLC underscored the wisdom of a plaintiff and plaintiff attorney seeking independent consultation in the structured settlement discussion.

Plaintiff Yanisse Adrian received no "besos" from United States District Court judge Francisco Besosa as he granted the defendants' summary judgment motion an dismissed her case against Mesirow Structured Settlements, LLC, et al.

The Adrian case, in which it appears neither the plaintiff nor her attorney had timely settlement planning representation, underscores why EVERY plaintiff, directly, or through their attorney, should seek out the services of a credentialed settlement planner early on.

During the pendency of the case the tax laws in Puerto Rico changed. On July 4, 2006, new Act No. 117:

1. Categorized payments for mental anguish as taxable income. ( P.R. Laws Ann., Tit. 13, § 8422(b)(5) and later Administrative Determination 07-01, which clarified that such payments are subject to withholding
2. Payments for physical injury were not categorized as income.

Yanisse Adrian had contended that she only accepted a structured settlement as a result of her reliance on numerous representations made to her by defendant Mesirow Financial Structured Settlements, LLC ("Mesirow"), a structured settlement broker. Adrian further alleged that she would not have agreed to the terms of the April 17, 2007 settlement were it not for her reliance on Mesirow's advice and promises regarding Adrian's tax immunity. Adrian alleged that she relied on Mesirow to advice her regarding Puerto Rico's tax laws and the requirements of Puerto Rico's Treasury Department ("Hacienda"), and that Mesirow made representations to the effect that Adrian would not owe taxes to Puerto Rico (nor would any withholding occur) related to the settlement of her suit if she opted to rely on Mesirow's services. Mesirow was accused of (1) negligence; (2) negligent misrepresentation; (3) fraudulent inducement; (4) breach of fiduciary duty; (5) equitable estoppel; and (6) promissory estoppel.

Mesirow argued that it had no influence on the plaintiff's settlement decisions and that it had legitimate concerns not to be exposed to potential tax liability or regulatory action against their insurance licenses or criminal prosecution for failure to follow Puerto Rico law.

The conclusions of the Court have important implications for structured settlement and settlement planning practice

A. Misrepresentation

According to Mesirow, Yanisse Adrian could not show that her reliance was reasonable because the alleged misrepresentation regarded a matter of law and regarded matters plaintiff could ascertain independently. "There is no liability for casual statements, representations as to matters of law, or matters which plaintiff could ascertain on his own in exercise of due diligence." Id. (citing AMA Management Corp., 309 S.C. at 874. A plaintiff's reliance is justified only if "the defendant occupies a superior position to the plaintiff with respect to knowledge of the truth of the statement made." O.C. Gruber v. Santee Frozen Foods, Inc., 309 S.C. 13 (Ct. App. 1992).

Adrian implied that Mesirow's representative whom Adrian trusted to keep Adrian's best interests in mind, held herself out as someone occupying a superior position as to the tax matters as issue. Further, Adrian argues that Mesirow rep's promises "were made without any qualification that Plaintiff get any tax advice." (Docket No. 147 at 19.) The court found this argument is without merit.  The Court went on to  state that Adrian cites no legal authority to support her contention that a plaintiff may rely upon a defendant's statements if those statements were unqualified by a suggestion to seek outside advice.

B. Duty of Care

The Court reasoned:

1. The primary broker-client or broker-buyer relationship here that would come closer to the sort of business relationship alluded to by Adrian's analogy was not between Mesirow and Adrian, but between Mesirow and Fireman's Fund, and perhaps with the other defendants.
2. Even though Adrian may have exhibited her trust in Mesirow rep's judgment, and even though the Mesirow rep may have intended for Adrian to trust her judgment, the fact is that she worked for the defense side of the underlying case, and she took direction ultimately from Fireman's Fund; she was not beholden to Adrian. 

C. Breach of Duty

Because the Mesirow reo's actions and efforts were more than reasonable in the circumstances, the Court finds that neither she nor Mesirow breached any duty. The Court stated that the record shows that the Mesirow rep acted diligently to research both the possible tax consequences of a structured settlement by reading a translated version of the Puerto Rico tax code and discussing the tax issue. It reasoned that although the Mesirow rep's efforts may not have been successful, the record shows that those efforts were made.

D. Promissory Estoppel

The Court claim of promissory estoppel was dismissed on summary judgment because the Court had already concluded that Adrian's reliance on Mesirow rep's alleged statements was unreasonable. The Court had already concluded that Adrian had independent knowledge regarding the facts in question.

Source: Excerpts from the Opinion and Order  

ADRIAN v. MESIROW FINANCIAL STRUCTURED SETTLEMENTS, LLC

YANISSE ADRIAN, Plaintiff,
v.
MESIROW FINANCIAL STRUCTURED SETTLEMENTS, LLC, et al., Defendants.

Civil No. 08-1180 (FAB).

United States District Court, D. Puerto Rico.

July 9, 2010.   Download 15912607080

Comments

Unlike the facts and circumstances involved with a 2001 decision Lyons v MMIA 730 N.Y.S. 2d 345, privity did not come into play.

Plaintiffs' counsel! Here is the seminal case for why you and/or your client need your own settlement specialist.  It need not matter that the specialist is plaintiff exclusive. It does matter that:

(1) you have your own settlement expert;

(2) The settlement expert is properly credentialed;

(3) you retain the settlement expert early enough to have an impact

In a bizarre twist, it should be noted that a review of the record for the case shows that the plaintiff DID eventually consult with her own settlement consultants, Joe DiGangi and Tucker Ervin of Millennium Settlements, but "late in the day". Among other things in the record is a transcript of DiGangi's deposition, copies of communications and proposals.

Post Script: On September 14, 2011, the U.S. Court of Appeals, First Circuit dismissed the Plaintiff's appeal. Yanisse Adrian Silva v. Mesirow Financial, et al Case10-1926

Structured Settlement Planning Errors and Omissions Insurance

by John Darer CLU ChFC CSSC RSP

Structured settlement brokers are the obstetricians and gynecologists of the insurance field, when it comes to errors and omissions insurance coverage. Despite the fact that many structured settlement transactions require the review of multiple attorneys, and often a judge, the insurance prices are trending at a high multiple by comparison, to coverage offered to insurance agents (whose business requires less real-time transactional scrutiny).

Today structured settlement brokers do more than simply place structured settlement annuities. They are involved in planning issues that may or may not involve the placement of a structured settlement annuity. They may place life insurance, long term care insurance, disability insurance, SPIAs, indexed annuities, mutual funds and variable annuities (if they have securities license) and other financial products. Most policy forms specify that ancillary planning services are related to a covered product.

Given the aforementioned, and the recognition that most E&O coverage offered on the market for structured settlements limits coverage to placement of structured settlements and related services, an improved solution is needed. The last reasonably priced solution was an annuity issuer sponsored plan that offered comprehensive coverage but is no longer available due to Aviva's withdrawal from the structured settlement market.

Individual members of the settlement industry, who are also members of the Society of Financial Service Professionals ("SFSP") can purchase a comprehensive group E&O plan for annual premiums advertised as low as $530 (more if add mutual funds and securities), with defense costs OUTSIDE the policy limits. The FSP Risk Purchasing Group plan also offers entity coverage at reasonable prices. The SFSP program is administered by Calsurance.

Of note to those in the settlement profession Section P of the exclusions states:

"Based upon, arising out of or in anyway involving the offering, sale or servicing of any structured settlement, provided, however, this exclusion shall not apply to a Claim solely based upon or arising out of selling or servicing a Covered Product utilized to fund a structured settlement.

According to the Enrollment Packet

Covered Products under Tier I included Fixed Annuities

Covered Products under Tier II include Variable Products

Inasmuch as the preponderance of structured settlements are funded with fixed annuities, this author will attempt to clarify the obvious when business resumes after the holiday weekend.

 IRC 5891 (c)(1) defines "structured settlement" as

 "an arrangement—

(A) which is established by—

(i) suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104 (a)(2), or

(ii) agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104 (a)(1), and (of significance to the issue at hand)

(B) under which the periodic payments are—

(i) of the character described in subparagraphs (A) and (B) of section 130 (c)(2), and

(ii) payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.

IRC 130 (d) provides for only two types of qualified funding assets

1. Any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or

2. Any obligation of the United States

Irrespective to what needs to be clarified, those concerned should consider the following:

While many of the members of the profession operate as independent contractors with their own entities affiliated with a larger producer group the indications seem to be that traditional structured settlement E&O coverage does not extend to the entities of the brokers-only to the brokers themselves. Try asking your entity to be listed a s named insured under your firms E&O policy. If the affiliation contract between the agency and the broker's or planner's entity and that entity is what is being held out to the public, what happens if that entity is sued?  Does the extension of coverage to the individual and not entity increase exposure and give a potential litigants a lever for veil piercing? What exposure does the entity have?

The Society of Financial Service Professionals is an 80 year old national network of credentialed professionals working in diverse financial disciplines and has nearly 17,000 members nationwide , including this author.

Regular Membership is open to financial service professionals holding any of the following credentials in good standing:

1. 1. CASL®
   2. CEBS®
   3. CFA®
   4. CFP®
   5. ChFC®
   6. CLF®
   7. CLU®
   8. CPA
   9. CPC
   10. CTFA
   11. Enrolled Actuary
   12. JD
   13. MSFS
   14. MSM
   15. REBC®
   16. RHU®
2. Associate membership is available to those students who have successfully completed one course towards the above credentials.
3. Members must meet the CE requirements of their credential, comply with the Society's Code of Professional Responsibility and pay their dues on time.

Is Plaintiff Structured Settlement Broker "Legally Liable", as Advertised? No, Alleges Defense!

by Structured Settlement Watchdog®

Certain structured settlement experts promote the theory that a legal obligation or duty is created as the result of an attorney retaining that settlement professional.

For example:

• "an expert with a legal duty to you"
• " a broker to be held accountable and legally liable to you"
• Shouldn’t your clients, with the assistance of their own qualified expert (who is legally accountable to them) and not the casualty company you have been fighting to settle their claim, be making these choices?

Yet a backhanded comment contained in a recent email between two New York City area structured settlement brokers that I respect, raises an interesting question of duty, obligation and legal liability.

 In the words of the broker representing the defense in the particular case:

"And if the plaintiff is not paying you directly, you do not represent the plaintiff, nor may you be liable to the plaintiff for any advice you give him.  If a broker receives pay from the commission issued from the funds used to purchase the annuity, then he represents the defense and plaintiff may not hold him liable for his advice.   The only reason I am sure of this is because I was involved in a case in Queens Supreme where the plaintiff sued his attorney, his attorney brought in "his" broker into the suit, and the first thing the Court did was to let the plaintiff broker out of the suit because he was not paid by the plaintiff to represent him or to secure financial advice from him". 

A copy of the Queens New York Supreme decision to dismiss the plaintiff broker from the third party action has been requested.

1. Certainly if the "legal advice" of the defense representative were true would there be any need for plaintiff advisers to carry professional errors and omissions insurance?
2. It would be of interest to the structured settlement industry and trial lawyers throughout New York State, to understand the context of the decision in relation to the plaintiff's suit.
3. It would be interesting to identify the plaintiff broker in question to determine if the broker's advertising emphasized "legal obligation" and "legal duty" as a hook and then "high tailed it outta there" after he/she was sued by the person that brought 'em to the dance.

   As someone who in the majority view,  firmly believes that a plaintiff should be represented by a qualified financial professional, I also believe that the professional SHOULD be accountable in the event of negligence.

   • It seems that the defense representatives perspective is the structured settlement transaction itself, not what planning leads up to it or the "meeting of the minds" that causes it to happen.
   • It would be worthwhile for the National Structured Settlement Trade Association which represents all interests to obtain the decision and to provide its own legal analysis of this issue.
   • It would also be worthwhile for the Society of Settlement Planners to do its own analysis.