by John Darer CLU ChFC MSSC CeFT RSP CLTC
Executive Life of New York structured settlement annuitant Eric Yerkes sought recovery of the shortfall he suffered when ELNY went into liquidation in 2013, by first going after the released defendant and its insurers. After that effort failed failed in 2015, Yerkes went after his lawyers. The action against his lawyers is still pending in New Jersey Federal Court. Dual summary judgment motions are pending.
Qualified Assignment Protected Cessna and Its London Market Insurers
The case concerns an underlying suit Eric Yerkes brought against Cessna in which he was represented by the late Paul Anapol, a name partner in what was then Anapol Schwartz Weiss & Schwartz PC. Anapol died in 2012. Yerkes, who was 16 at the time of the crash, sued Cessna over a 1981 plane crash near the Grand Canyon that left him with permanent injuries, and settled in 1986 for a $125,000 payout, monthly payments of $1,000 and five-year lump sum payments escalating from $25,000 in 1991 to $2 million in 2041, according to court records. The payments were provided through an annuity purchased from Executive Life Insurance Co. of New York. ELNY was declared insolvent in 2012 and underwent restructuring. The surviving company is known as Guaranty Association Benefits Company (GABC). As a result, Yerkes' monthly payments were cut by 44% in 2013, according to court papers.
Yerkes claims that Anapol Weiss (as the firm is now known) assured him the monthly payments were guaranteed by Cessna, but he did not discover this was untrue until after he attempted to sue Cessna and its insurers, over the reduced payments on the advice of another Anapol Weiss attorney. The case was filed in 2014 and a Second Amended Complaint was dismissed in March 2016. A central point of that dismissal against Cessna and Certain Underwriters at Lloyds of London, is that there was a qualified assignment, a legal novation to which Yerkes consented.
What is a Qualified Assignment?
A qualified assignment is a transfer of a contractual obligation to make future periodic payments under a settlement agreement, which satisfies the requirements of Internal Revenue Code (IRC) §130. In a structured settlement agreement the original obligor (the defendant, insurance carrier for the defendant, or the trustee of a IRC 468B qualified settlement fund, assigns its obligation to make the future periodic payments defined in the settlement agreement to a "qualified assignment company"
Only payments which represent damages for personal injury, physical sickness, wrongful death and payments for workers compensation may be assigned by way of a qualified assignment.
Generally a qualified assignment company is a special purpose company, which does little more than hold an annuity or United States Treasury obligations as a "qualified funding asset" [as defined in IRC §130(d)] to back up the obligations it assumes from Defendants, Insurers or a qualified settlement fund trustee. A qualified assignment company may actually be an insurance company itself, such as New York Life Insurance and Annuity Corporation (the assignee of New York Life funded structured settlements). When an annuity is used as a qualified funding asset, the qualified assignment company is usually related to the life insurance company issuing the structured settlement annuity. A critical point, as it was the follow up case in Yerkes v Cessna et al., a qualified assignment requires the plaintiff's consent.
Read more about a qualified assignment in the context of How Structured Settlements Work
Yerkes Sues Law Firm That Represented Him for Legal Malpractice an Breach of Contract
Yerkes then filed suit against Philadelphia based plaintiff law firm Anapol Weiss in April 2017, saying the law firm of his former attorney, on the grounds that Defendant committed legal malpractice and breached its contract with him when Plaintiff's lawyer, Paul Anapol, negligently misrepresented that certain annuity payments provided for in a settlement agreement, negotiated by Anapol, would be or were "guaranteed" by Cessna. Yerkes claims that Anapol misled him and that he would not have taken the settlement if he had realized Cessna didn't guarantee the payments. See Eric Yerkes, Plaintiff v Anapol Weiss, Defendant in the United States District Court, District of New Jersey Case 1:17 cv-02493.
In May 2020 Yerkes urged a New Jersey U.S. District Judge Jerome B. Simandle to grant him a partial summary judgment in the suit accusing Anapol Weiss of giving bad legal advice regarding the $6.7 million plane crash settlement, saying it was undisputed the firm misled him. Yerkes accuses Anapol Weiss of falsely assuring him that monthly payments from a structured settlement he accepted from Cessna Aircraft Co. over the 1981 Grand Canyon plane crash were guaranteed by Cessna. Yerkes said he submitted as evidence documentation from the firm that unequivocally stated that the periodic payments were guaranteed by Cessna, assuming that Yerkes, who was 16 years old at the time of the crash, would live another 59 years.
As set forth in Yerkes' motion "Despite the unequivocal representation by defendant (Anapol Weiss) to plaintiff that the periodic payments were 'guaranteed' by Cessna, there is no dispute that the payments in fact were not guaranteed," the motion said. In addition, Yerkes said that because Anapol Weiss knew that it was standard practice in structured settlements for defendants to be released from liability ( by way of a qualified assignment), it also knew that the responsibility for payments shifts to the life insurance company that issues an annuity policy to an injured party. "There is no dispute that defendant should have known, and in fact did know, that by executing the Cessna settlement agreement, plaintiff was releasing Cessna from all liability and that neither Cessna nor anyone else 'guaranteed' the periodic payments," he said.
Yerkes asked Judge Simandle to rule that Anapol Weiss breached its duty of care to him, and said the issues of causation and damages should be left up to a jury at trial.
Exhibit B to the Yerkes' complaint is a copy of the Recapitulation and Distribution Statement is notable to me for the following:
- The Sum of $1,000.00 Paid Per Month for Life; Guaranteed for Twenty (20) Years; To Be Paid Directly to Eric N. Yerkes, His Estate or Designee Should He Predecease the Guaranteed Twenty (20) Year Period. [Setting aside the odd use of term "predecease", this is what is known as a Certain & Life Annuity. Payments are guaranteed for the certain period, whether or not the Payee survives the payment schedule and life contingent thereafter.] Despite this Yerkes' produced they had Yerke's sign that says " The Total Payout, Assuming a 59 Year Life Expectancy is $6,668,000.00, of which all but the sum of $468,000.00 is guaranteed by Cessna, its Insurers and Assignees to be paid even in the event that Eric N. Yerkes does not survive to his life expectancy of 59 years". Comment: The law firm's alleged recitation seemed rubbish to me given that just before that it discusses a 20 year guarantee period.
- No payment dates are specified on the lump sums.
- The Cost of the Periodic Payments is noted "computed to be $275,000". Comment: $275,000 to produce $6,668,000 from a company for which, other than A.M. Best, there was red flag after red flag about Executive Life and First Executive? Junk upon junk?
"No, we would not allow a client to enter into an annuity contract with any life insurance company that wasn't -- didn't receive the highest rating at the time of the contract" -excerpt of Sol Weiss' deposition found in the Court documents.
Anapol Weiss claims the typical defenses that one would expect such as time barred, disputes New Jersey law applies, The Dead Man Rule (Paul Anapol is dead), that the defense controlled the structures then... Whether or not such defenses are successful belies a few facts that Anapol Weiss simply cannot get around, in my opinion. It's important to set the record straight, even if only for historical purposes.
What Anapol Weiss Cannot Get Around, In My Opinion
It is clear from Sol Weiss' testimony that is in the record that Anapol advised Yerkes to enter into an agreement with a company solely based on "the highest rating at the time of the contract". In 1986, A. M. Best's highest rating was A+.
- Like most qualified assignment companies, First Executive Corporation was not a life insurance company and so Anapol's client Yerkes was NOT entering into a contract with a life insurance company. They represented their client and counseled them about entering to a contract with the Defendant and the Defendant's insurer that included a promise to make future periodic payments.
- In that contract there was a provision that permitted with the consent of Plaintiff, to make an assignment that obligation to First Executive Corporation, an entity that two years earlier lost a customer representing 20% of the previous year's sales. In my January 2013 post ELNY Qualified Assignment Co | Writing Was on the Wall (Street Journal), 1984! , I asked, "if you were running a business and a customer, who represented 20% of last year's sales, decided to no longer do business with you, do you think there would be any impact?
- Some would have you believe (through the lens of the past decade) that in the 1980s the only means of financial news and education was by a figurative Mullet-headed or Rooster-Mohawked "Paul Revere" or "Ye Olde Towne Crier", but we had "something that was black and white and read all over" (newspapers in tabloid and broad page form) and news on TV, cable TV (CNN started in 1980) (Financial News Network 1981). There were cell phones, car phones
In August 1984, two years before Anapol advised Eric Yerkes to enter into an assignment agreement with First Executive Corporation. E.F. Hutton & Co., then a major brokerage firm based in New York, decided to stop selling a tax advantaged insurance annuity marketed by a unit of First Executive Corp., which was based in Beverly Hills, California. E.F.Hutton also dropped certain other insurance concerns' annuities. E.F.Hutton's sales of the insurance product, known as a single-premium deferred annuity, accounted for about 20% of First Executive's total annuity sales in 1983. When E.F. Hutton's decision was announced, one Wall Street analyst estimated that First Executive would lose $100 million a year in new sales. News of Hutton's decision was first reported in the Wall Street Journal's Heard on the Street column.
Here's what happened in the run up to Anapol's decision to advise his client to agree to a contract with First Executive Corporation, an entity that was already in trouble:
....1982 Baldwin United (one of the top 20 business failures of the 20th Century), 1983 Charter Security 1984 Storm Warnings on First Executive... How many plaintiff lawyers advised their clients to enter into qualified assignments with the First Executive assignee/ ELNY annuity issuer combination after 1984?"
Anapol Weiss is a very successful plaintiff personal injury firm. But it seems to me that there was no further due diligence than looking at the A.M. Best rating for Executive Life of New York in 1986 and ELNY having the best price. Like I said and have written many times before about ELNY, red flags were out there, in the newspapers, on prime time news, way before this (in my opinion) ill-advised transaction took place.
The Red Flags That Should Have Given Anapol Pause
1. September 27, 1983 New York Times "The Baldwin-United Corporation, the Cincinnati piano company that borrowed heavily to move into the insurance business, filed for protection under the bankruptcy laws yesterday in one of the largest financial collapses in American history. The company was a casualty of over expansion, built on complex financial maneuvers. Its failure followed four months of intensive efforts to keep the company out of bankruptcy, and further complicated efforts to salvage the savings of thousands of Americans who bought policies from Baldwin-United subsidiaries. Baldwin was the #1 seller of annuities at the time.
"Philadelphia investors who purchased annuities from Baldwin-United Corp. are banding together to protect their interests in the fight to carve up the collapsing company's assets.
Leaders of a newly formed Baldwin-United Corp. Annuity Holders Protective Committee will meet here tomorrow afternoon to prepare for a general meeting of interested annuity holders to be held within the next three weeks, said Richard D. Greenfield, counsel for the committee and senior partner of Greenfield &..."
3. January 27, 1984 New York Times ANNUITIES: A NEW LIFE AFTER BALDWIN-UNITED'S FALL
"Investors have turned away not only from Baldwin, but from other big sellers of single-premium policies, including the Charter Company and the First Executive Corporation. Instead, the new growth in the annuity business has benefited the old- line conservative companies, such as the Aetna Life and Casualty Company, the Equitable Life Assurance Society of the United States, the Travelers Corporation and the Prudential Insurance Company of America".
5. May 6, 1984 New York Times CHARTER'S MARCH INTO BANKRUPTCY
In the same article came the following report:
"In a memorandum sent to its account executives, Merrill Lynch Life Agency, a Merrill Lynch subsidiary that sells annuities and receives commissions from the issuing companies, said that after Dec. 1, it would no longer handle annuities issued by Charter Security Life, a subsidiary of the Charter Company, the Capital Life Insurance Company, Old Republic Life of New York, the John Alden Life Insurance Company and Executive Life". (Ibid para. 8)