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Genex Capital Corporation v Seeley Capital Management et al. Update

by Structured Settlement Watchdog

As part our ongoing commentary about the structured settlement secondary and tertiary markets and in particular structured settlement investments, it's time for an update on the Genex Capital v Seeley Capital litigation, and counterclaims by a group of investors against Genex Capital and its CEO Roger Proctor. This highly contentious and expensive litigation is an important one to follow to help investors, financial advisors (including settlement planners) appreciate the critical differences between buying an annuity and investing in structured settlement payment rights.  

Mr. Proctor has already eloquently described in this litigation what investors buy, as "subsets" of payment rights. That's a completely different thing than "an annuity", how it is often advertised and/or used in sale pitches by those who hock structured settlement payment rights to investors. 

More Investors Sue Genex Capital Corporation and Its CEO

On February 23, 2022, what appears to be a new set of investors have filed suit against Genex Capital Corporation and its CEO in Arizona Superior Court in Maricopa County Arizona. The matter is captioned Barry Beitman, Bruce Sweeney, Weill Guo, Quingling Zhang and Sandi Haskell, Plaintiffs v Genex Capital Corporation, Roger Proctor, Happy State Bank & Trust Company and Security Title Agency Inc.CV 2022-002266. A Certificate of Compulsory Arbitration was docketed on February 26, 2022

Plaintiffs are represented by Phoenix lawyer Devin Sreecherana of May Potenza Barran & Gillespie, the same lawyer who represents other investors against Genex Capital in a separate action filed in a November 2020 Complaint and Amended Complaint December 2020-CV-131796, which was subsequently consolidated with an action brought by Genex Capital Corporation against Seeley Capital Management, John M. Bulbrook Insurance Agency Inc., New England Annuity Associates LLC, Security Title Agency Inc and Loancare LLC  CV2020-004958

In support of the Genex Capital response to Seeley Defendants' Motion for Partial Summary Judgment, Genex Capital Corporation CEO Roger Proctor submitted a Declaration on January 3, 2022.  Here are some of the points made by Proctor and my commentary (highlights/emphasis ours for commentary):

Point #1

"Each of the Defaulting Investors in this litigation chose payment servicing over taking a direct assignment to the payments. As such they voluntarily elected to take the lesser subset of rights associated with the Receivables with all of the corresponding benefits and restrictions associated therewith rather than choosing to become the direct designated payee in the respective court orders. By this election the Defaulting Investors avoided having to, among other things, indemnify the Annuity Issuers and Annuity Owners."  [ Decl. of Roger Proctor 1/3/2022 at 1]

What is payment servicing with respect to structured settlement factoring?

Over the last 13 years I've addressed structured settlement payment servicing in numerous blog posts as well as a 2009 video with Dallas bankruptcy attorney Bruce Akerly.

A payment servicing agreement is only necessary when a person sells part of their structured settlement, and the annuity issuer will not "dice" payments. For example, the annuitant contracted to receive $1,000 per month when they settled their personal injury case. The structured settlement was funded with an annuity issued by a life insurer that will not "dice" payments. Some years down the road, the annuitant sold the rights to $500 per month of their $1,000 per month payments, but because the insurer would not dice payments, the full $1,000 per month had to go to the servicing company each month, where it would be "diced" and then distributed $500 to the annuitant and $500 to the investor in the structured settlement payment rights.

A payment servicing agreement may also be necessary at the discretion of the originating structured settlement factoring company, or a tertiary market company, if there is a large sale of structured settlement payment rights. The use of a servicer to dice up the larger deal into smaller subsets to make it easier to move the payment rights to investors.

Sometimes the settlement purchaser (or a related company) is the servicer. But things may get more complicated if the structured settlement payment rights are securitized or sold on.  It is then possible, yet another company could be the servicer!

In his declaration of 1/3/2022 Roger Proctor states that "Genex purchased Structured Settlement Quotes" (website at Structuredsettlement-quotes.com) "in March 2012... to support its search engine optimization for marketing of its annuity purchase services" {Decl. of Roger Proctor at 56].  It's notable that the Genex Capital owned website states "The servicing of structured settlement payments occurs when an annuitant enters into a structured settlement factoring agreement in which the annuitant chooses to split one or more payments and the factoring company becomes the payee of the entire payment. Once the factoring company receives the entire payment from the insurance company, they keep their agreed upon amount and pay the annuitant their portion".

Here are some concerns that the Genex Capital owned website makes regarding servicing of structured settlement payments

1. "Certain structured settlement factoring companies were using this scenario as an excuse to service annuities that did not need to be serviced. In other words, an annuitant would decide to sell their payments, the insurance company would agree to this, but the factoring company would still service the payments. The reason for this is because the factoring company is securing future deals by owning the rights to all of the future payments. Many annuitants would not understand this process and would think this is the norm for this type of transaction. That is false and has many implications.
2. The annuitant no longer owns the rights to their future payments. If they need help with anything regarding their annuity, they can no longer simply call the insurance company and speak to a licensed representative, instead they have to call the structured settlement factoring company to ask their question.
3. If the annuitant was ever in a situation where they needed to sell more payments, the structured settlement factoring company who completed their last transaction is the only company that is able to complete any future transactions for that individual.
4. Since the Chapter 11 Bankruptcy filing by JG Wentworth, investors are not interested in purchasing the rights to structured settlement payments serviced by other factoring companies. This means that any annuitant who has their payments serviced by a structured settlement factoring company will most likely be price gouged if they decide to sell more payments.
5. Structured Settlements 4 Real reported a story where Structured Asset Funding serviced a tort victim's payments but failed to mail the check on time. This should not happen but can happen because these types of companies are not geared to service annuity payments."   [reference to one of my blogs from 2009]

Point #2

Proctor declares that "Structured settlement annuities are contractual arrangements in which an annuitant or payee (“Original Annuitant” or “Annuitant”) receives future payments as part of a settlement or judgment in connection with a tort claim. Typically, an Annuitant cannot transfer or assign its interest in the annuity without express judicial approval that is confirmed through a final order. Genex’s business model is based on providing Annuitants with an opportunity to sell all or a portion of their annuities for a present-day cash value."  [Decl. of Roger Proctor 1/3/2022 at 9-11]

Comment: Annuitants cannot sell structured settlement annuities. They can only sell structured settlement payment rights. Structured settlement annuitants do not own the annuity or annuities funding the structured settlement payment obligation established when their legal case was settled. Thus, structured settlement annuitants cannot sell the annuities.

Assured Annuity is self-described by Genex as its retail arm. It is believed to have been established after the Genex relationship with the Seeley Defendants had terminated September 9, 2013.  I've long questioned the use of the term annuity by Genex in this context [see Is The Assured Annuity Really an Annuity?  November 19, 2013]. I do not believe that if put to the test that Genex Capital, could supply proof of any structured settlement annuity contract it has purchased from an annuitant for whom the structured settlement was established. Indeed, Proctor himself admits that "Once judicial approval of the sale is obtained, Genex receives assignment of the annuity payments in exchange for an agreed-upon monetary lump-sum amount. [ Declaration of Roger Proctor 1/3/2022 at #13]. On the Assured Annuity website (located at assuredannuity.com) at time of publishing, it states "We buy structured settlement payment rights and other annuity payments.

Point #3

As a critical part of its business, Proctor states that "Genex must review the background and suitability of all prospective investors to ensure compliance with a plethora of laws and regulations, including anti-money laundering laws, financial-disclosure requirements, and other rules that prevent unlawful financial transactions

Genex also must determine investor suitability in accordance with its “know your client” protocols, consistent with, among other rules, Financial Industry Regulatory Authority Rule 2090 and Rule 2011"

FINRA Rule 2090 mandates that member firms must “use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”

FINRA Rule 2111 requires that a broker have a "reasonable basis" to believe that a recommended transaction or investment strategy is "suitable for the customer" based on facts obtained through "reasonable diligence." This rule is aimed at remedying past abuses and "yield-chasing" behavior in brokers at a client's expense

Then there is FINRA 2210 which covers advertising. 

Who is Covered by FINRA Rules?

Because FINRA oversees workers within the financial industry, its rules primarily apply to brokers and financial advisors. Anyone who buys or sells stocks or securities on behalf of clients is required to get certification, register their name and address, and follow other requirements. To follow these requirements, these professionals must go through FINRA, which means putting nearly every stockbroker or financial advisor under FINRA’s authority.

Specifically, FINRA’s regulations govern “broker-dealers.” This is a broad term used to encompass both agents of financial transactions as well as those who trade for themselves or their firm. For instance, if your stockbroker buys stocks for you, they would be acting as a broker, but if they perform transactions for their brokerage firm’s own accounts, they function as a dealer instead. Regardless, FINRA covers both of these types of professionals, creating rules and regulations to govern their actions.

Under the terms of the agreement between Genex and Seeley and Bulbrook, which Genex acknowledges was consummated on an oral agreement and
handshake and not a written contract, in every instance where a new investor sought to purchase a Genex Receivable, Seeley and Bulbrook were responsible for completing the “know your client” protocols approved by Genex, facilitating the completion of an investor suitability form, providing a copy of the Bulbrook Buyer’s Guide approved by Genex, and obtaining required signatures on the RPA, all of which documents were either drafted by Genex or approved by Genex. From time to time, Genex sought proof that these requirements were being satisfied and at no time during the relationship did
Genex have concerns about same.

While I was unable to locate the name of Genex Capital Corporation, Genex Strategies or Roger Proctor on FINRA Broker Check or the IAPD database, it is good to see that the Genex Capital CEO aspires to FINRA standards.  Did/Does Genex consider the products it offers/distributes to be securities? It sure would be great to see them regulated.

POINT #4

Proctor states that "Genex owes obligations to the Annuity Issuers, and to Annuity Owners/Obligors throughout the term of each Receivable transaction as specified in each court order. In light of these obligations, it is a critical to Genex that it understand the transaction history for all Receivables, ensure that its records are complete and accurate, control downstream further assignments, and know at all times the identity of the legitimate end Payee".  [ Decl. of Roger Proctor January 3, 2022, at 24] He states that "Uncontrolled, unapproved, or secret transactions bypassing Genex’s oversight puts Genex at risk of possibly directing payment to the wrong person, double payments, fraud and confusion".  [Decl of Roger Proctor 1/3/2022 at 25]

 

IN THE SUPERIOR COURT OF THE STATE OF ARIZONA
IN AND FOR THE COUNTY OF MARICOPA
GENEX CAPITAL CORPORATION, a Delaware corporation; Plaintiff,
vs.
SEELEY CAPITAL MANAGEMENT, INC., a Massachusetts corporation; et al.,Defendants.
Case Nos: CV2020-004958 CV2020-013796 (Consolidated)
DECLARATION OF ROGER PROCTOR IN SUPPORT OF GENEX’S RESPONSE TO SEELEY DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT
AND RELATED COUNTERCLAIM. RICHARD L. KEEFER and VICKI L. KEEFER, husband and wife; et al., Plaintiffs,
vs.
GENEX CAPITAL CORPORATION, a Delaware corporation; et al., Defendants.

 

Let's go back to Genex Capital CEO Roger Proctor's declaration of 1/3/2022, wherein Roger Proctor states that "Genex purchased Structured Settlement Quotes" (website at Structuredsettlement-quotes.com) "in March 2012... to support its search engine optimization for marketing of its annuity purchase services" [Decl. of Roger Proctor at 56].

Exactly what kind of strategy was employed in doing so?  In my opinion, at its apex, the SSQ website was a massive brandjacking engine. I've followed and chronicled my observations about SSQ in this forum from time to time for more than a decade. Some important observations:

One of the first moves after acquiring the site from Andrew Cravenho was to change the name from Settlement Quotes to Structured Settlement Quotes ("SSQ") and to make over the site. The makeover was published on or about July 17, 2012. Among its features were A to Z directory and review pages for more than a hundred insurers and structured settlement factoring firms like JG Wentworth and Peachtree that were and still are competitors to Genex Capital. If one were to enter a search for an insurance company name and quotes or structured settlement quotes the search engine results pages (SERPS) would invariably come up with SSQ web page for that insurer at or about the top results.

On February 5, 2013, I created the following screenshot which is an example of how New York Life was brandjacked

Download New york life structured settlement quotes - Google Search SSQ Brand Jack example 2-5-2013 

In the above document you will see that the title of the search engine result has been purposely aligned to show the name of the insurance company and structured settlement quotes. Titles, meta tags and descriptions that appear in search results can easily be controlled by the domain owner, or someone working on their behalf.

As of March 1, 2022, the SSQ website shows a copyright date of 2015.  Standard & Poor's credit ratings for insurers show ratings from 2011. It's clear that the insurers have not been updated since 2012. Res Ipsa Loquitur.

Contemporaneous Observations about SSQ

Structured Settlement Quotes (SSQ) Offers Payoff To Insurance Company Executive for Confidential Information  July 17, 2012

SSQ Settlement Quotes Engaged in SEO Madness- 843 Steps Beyond  January 15, 2013

SSQ Structured Settlement Factoring Company Reviews April 2, 2013

SSQ Structured Settlement Quotes Spam Links JG Wentworth "Review" Page.  December 2, 2013

 

 

 

 

 

 

 

SMA | It Isn't This Convoluted If You Buy a Legitimate Annuity

by Structured Settlement Watchdog

My word! There are many more steps to creating an intellectually dishonest Secondary Market "Annuity" than a applying for a legitimate annuity.  Setting aside the immutable fact that the National Association of Insurance Commissioners (NAIC) does not recognize acquired structured settlement payment rights as an annuity or insurance product [see Statutory Issue Paper No. 160, finalized April 6, 2019], the fact that the following chart (sourced from EquityNet for critical commentary 2/16/2022) shows 13 steps for a single deal, should erase any lingering doubts.

If you are a financial planner or settlement planner who recommended that your client buy and you subsequently sold them factored structured settlement payment streams that you told them was an annuity, you may want to change your underwear now.  When the layers of the onion are eventually pulled back you may find that many who advised investors to buy these instruments did not fully understand the product they recommended and/or sold to their clients.  Did they do enough?

One wonders what a similar chart for the DeAngelo Simmons, Atlantic Solutions, Paul Millsap and Michael Vick deals would look like, and whether or not investors would have still gone through with the transactions they did or would have taken a pass.

Buying a Legitimate Annuity is Much Simpler Than This    

 

 

If There's No 1099 Do You Still Have to Pay Tax on Your Structured Settlement Investment?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Investors in structured settlement payment rights may not receive an IRS Form 1099 from the life insurance company that issued the underlying annuity, even though there has been a direct assignment of structured settlement payment rights. This does not mean that no taxes are due.

The question arose when an investor contacted New York Life and was told that they would not receive a 1099, by a representative in the New York Life customer service department. The underlying structured settlement payments were (1) payments for worker's compensation under IRC 104(a)(1) payments, or (2) for damages on the account of personal physical injury or physical sickness. However, the income tax exclusion under IRC 104(a)(1) or IRC 104(a)(2) would only apply to the initial payee and their named beneficiary. It does not apply to the investor.

Despite the sometimes intellectually dishonest marketing by firms selling assignment structured settlement payments (or subsets of those rights) to investors as annuities, be forewarned that acquired structured settlement payments rights are not recognized as annuities or insurance products by the NAIC.

26 U.S. Code § 61 - Gross income defined

(a)General definition Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

(2) Gross income derived from business;

(3)Gains derived from dealings in property;

(4)Interest;

(5)Rents;

(6)Royalties;

(7)Dividends;

(8)Annuities;

(9)Income from life insurance and endowment contracts;

(10)Pensions;

(11)Income from discharge of indebtedness;

(12)Distributive share of partnership gross income;

(13)Income in respect of a decedent; and

(14)Income from an interest in an estate or trust.

Outright investment made with after tax dollars

If you simply paid $100,000 in 2012 to buy someone else's $198,200 lump sum structured settlement payment due in 2022, you will have to declare the $98,200 difference whether or not you received a 1099.

If you receive a 1099 it may come from the life insurance company if you have a direct assignment of structured settlement payment rights by court order, or it may come from a third-party payment servicer if you invested in a subset of an assignment of structured settlement payment rights.

What if the Structured Settlement Investment Was Purchased in a Roth IRA?

Note however, if the purchase of structured settlement payment rights was made with funds in your Roth IRA, are an asset of your Roth IRA, and the distribution is made after the account has been open at least 5 years, you may qualify for tax-free withdrawals of both Roth IRA contributions and any accumulated earnings.

A Roth conversion is a strategy that allows you to pay income taxes on some or all of your retirement assets today, rather than when you withdraw them in retirement. Certain financial advisers were advising clients to do a Roth Conversion and to use the proceeds to buy factored structured settlement payment rights held in the Roth IRA.

Your eligibility to contribute to a Roth IRA is subject to your level of income. If you file taxes as a single person, you can contribute to a Roth IRA only if your Modified Adjusted Gross Income (MAGI) is less than $144,000 for the tax year 2022. If you are married and file taxes jointly, the IRS allows you to contribute to a Roth IRA only if your MAGI is under $214,000 for the tax year 2022.   

26 U.S. Code § 408A - Roth IRAs

 

 

CrowFly Makes Astonishing Claim That It Is the Only One That Works with Real People

by Structured Settlement Watchdog

In describing how it's structured settlement buyer network works, CrowFly, LLC of Buffalo has made the astonishing claim in its blog that it is the only company that provides individual investors (described as real, everyday people) with access to purchase the rights to seller's future payments."

Here is the citation:

"We’re also the only company that provides individual investors (read: real, everyday people) with access to purchase the rights to sellers’ future payments. Other companies rely on big institutions to purchase them, but we saw there was an opportunity to empower people who are planning for retirement or working to build their portfolios to purchase structured settlement payments as an investment. More buyers = more competitive offers for sellers = you get more value for your future payments". 

When reached for comment, Ross Pearlstone of DCF Exchange responded that DCF Exchange "provides real people with the access to purchase rights to seller's future payments", adding in full dead pan crow "but we have (on occasion) worked with farm animals and aliens and lately business has been rather brisk". 

DCF Exchange has been in business longer than CrowFly and it seems a silly claim for CrowFly to make given its co-Founder and Director John T. Bair's prior communication with an officer of DCF.  

A spring lamb crows Sly and the Family Stone

 

 

Individuals Don't Own Structured Settlement Annuities. You Can't Sell What You Don't Own

by Structured Settlement Watchdog

CrowFly, LLC of Buffalo claims that you can "purchase structured settlement annuities from individuals" (see below).  Now that would be a neat party trick!

Excerpt of CrowFly LLC Paid Google Ad 2/13/2022

Before you "invest in social good", consider that in the majority of cases, structured settlement annuities are purchased by a qualified assignment company or a non-qualified assignment company.  Structured settlement annuities are not owned by individuals.  Individuals can't sell them and therefore you can't buy them from individuals. This is really basic Structured Settlements 101.  Here is the typical language found in settlement documents:

"Neither the Plaintiff, nor the Payee, nor anyone acting on Plaintiff's or Payee’s behalf: shall have any right of or incidence of ownership whatsoever in the annuity policy; shall have any right to accelerate or defer payments due from the Assignee; shall have any right to increase or decrease any payments due from the Assignee; shall have any other right of dominion or control of or over any annuity policy, which shall be owned exclusively by the Assignee.  

Furthermore, the National Association of Insurance Commissioners has expressly stated in Statutory Issue Paper No. 160 (issued April 6, 2019) that acquired structured settlement payment rights are not an annuity or an insurance product (i.e., you're not buying an annuity). 

So why would CrowFly pay to advertise that you can purchase structured settlement annuities directly from individuals when you can't?

 

 

 

AnnuityExpertAdvice.Com on Secondary Market Annuity is Just "Plummer's Crack"

by Structured Settlement Watchdog

What Are Secondary Market Annuities and How Do They Work? 

Shawn Plummer's explanation of "secondary market annuities" is a floater, totally useless.  Any legitimate annuity expert would know that factored structured settlement payments are not an annuity and are not an insurance product.

Despite the clear evidence that:

• the National Association of Insurance Commissioners does not consider factored structured settlement payments as annuity, or an insurance product [ Statutory Issue Paper NO. 160], Shawn Plummer continues to misinform on the subject
• an increasing number of states adopting the NAIC Model Life & Health Guaranty Act it's clear that the same statutory protections do not apply to investors in factored structured settlement payment streams as they might to owners of legitimate annuities, why is it necessary for Plummer to clog up the information pipeline with misinformation?
• Past and ongoing investor litigation over what Plummer refers to as secondary market annuity, makes the usage of "secondary market annuity" as a sales pitch irresponsible and even reckless. 

Six Examples of "Plummer's Crack" in a Single Post

1. Refers to a television commercial as a secondary market annuity or SMA  No
2. "Ever seen television commercials about instantly getting cash for annuity payments or “Sell My Annuity”?  This is called Secondary Market Annuities or SMAs" No
3. "A secondary market annuity is selling an income annuity to a 3rd party company [(Annuity Buyers (sic)] for cash in exchange for annuity payments".    No as to structured settlements  
4. "Basically, a secondary market annuity is selling your current income annuity (immediate annuity, deferred income annuity, structured settlement annuity, lottery payout) at a heavily discounted rate to an annuity buyer for a lump sum of cash" No as to structured settlements
5. "Secondary market annuities are just income streams currently owned by private parties and resold to another private party" NO as to structured settlements
6. The new private party will become the new owner of the annuity contract and the (sic) pocket annuity income distributions as a long-term investment".  No as to structured settlements

Three Secondary Market Annuity Examples That Shawn Plummer Gets Wrong

1. Structured Settlements   No
2. SMA  No
3. Factored Structured Settlements   No

If you're going to call yourself an annuity expert and expect people to rely on you for "annuity expert advice", then get your facts straight.

Secondary Market "Annuities" Who's Vetting This Stuff?

by Structured Settlement Watchdog

Watch Part 1 of a multi-part video series examining the tertiary market for structured settlement payment rights which may be of interest to:

• Structured settlement investors.  Individual retail investors who have invested or have been advised to invest in other people's structured settlement payments, who buy those structured settlement payment rights at a discount direct, or via an assignment of payment rights from a structured settlement factoring originating company. 
• Investors who have been advised to cash in other annuities, thrift savings plans or other pensions to buy other people's structured settlement payments having been told they were annuities.
• Fiduciaries, whether individuals or institutional who are evaluating opportunities pitched by financial advisors or settlement planners who have placed or are considering placing clients into factored structured settlement payment streams, or factored payment streams of any kind.
• Judges, surrogates and guardian ad litem who may encounter such investments proposed in a settlement plan, investment proposal or other sales pitch by a financial adviser, settlement planner
• Directors of State Life Insurnace Guaranty Associations and members of NOLHGA, 
• Rohit Chopra, The Consumer Financial Protection Board. 
• Mainstream news media.

 

Beware the Retirement Annuity to Secondary Market "Annuity" Tax Trap

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Holders of retirement annuities may be in for a nasty surprise if they liquidate their long term tax deferred annuities for "secondary market annuities". For

Selling a legitimate annuity to buy a factored structured settlement payment stream that is labeled an annuity but is not an annuity does not qualify for a 1035 exchange

some it could mean hundreds of thousands in taxes!  That's because acquired structured settlement payment rights are not annuities despite the scam label that may be bestowed on them falsely suggesting they are.  Whether through ignorance, negligence, commission hunger or fraud, salespeople who pitch the surrender of legitimate retirement annuities for " secondary market annuities" are not able to avail their clients of a Section 1035 Exchange that would mitigate the tax hit. 

What is a 1035 Exchange?

A Section 1035 exchange replaces an annuity for a new one without tax consequences.

Section 1035(a)(3) provides that no gain or loss shall be recognized on the exchange of an annuity contract for another annuity contract. Section 1.1035-1 of the Income Tax Regulations provides "that the exchange, without recognition of gain or loss, of an annuity contract for another annuity contract under ' 1035(a)(3) is limited to cases where the same person or persons are the obligee or obligees under the contract received in the exchange as under the original contract".  [Source  IRS.gov }

Where is a 1035 Exchange used?

• A Section 1035 exchange replaces an annuity for a new one without tax consequences.
• This is often used to replace outdated contracts with new contracts that have better terms.
• To replace an annuity for another annuity contract with identical annuitants
• To replace a life insurance policy with another life insurance policy, endowment policy, or annuity contract
• To replace one endowment policy for an identical endowment policy or an annuity contract
• The 2006 Pension Protection Act  (effective in 2010), modified the law to allow exchanges into long-term care products. All distributions from non-qualified annuities for qualified long term care expenses are tax free, regardless of cost basis whether the distributions are from your cash value component of your annuity or from your annuity's long term care extension of benefits provision.
   

 

 

Secondary Market "Annuity" E&O Claim Exposures for Financial Advisors, Settlement Planners and Their E&O Insurers

by John Darer CLU ChFC MSSC CeFT RSP CLTC

E&O claims exposure for secondary market "annuities" is a ticking time bomb for Financial Advisors, Settlement Planners and E&O Insurers

The use of the term annuity to solicit investors in factored structured settlement payment streams is a massive untruth that has been used to unload other people's structured settlement payments on soon to be retirees, retirees and injured individuals.  Emboldened by the massive regulatory gap, tertiary market entities have leveraged the scam label "secondary market annuities" by attaching it to just about any type of cash flow they can get on their shelves.  The tertiary market companies market the scam labeled alternative investments (bearing a much higher risk profile) to financial advisors who then sell them as "secondary market annuities" to unsuspecting clients who have trusted them,  because they have been sold legitimate annuities by the financial advisors, many of which are licensed and regulated insurance agents. Therein lies the exposure.

One Thing a Licensed Insurance Agent or Financial Advisor Should Know About an Annuity

A licensed insurance agent should know what an annuity is and also recognize what is not an annuity.  It's fundamental knowledge that is typically part of the first primer that one must read to prepare for a state insurance licensing exam.

There is a clear cut definition of an annuity on the website of each state insurance regulator (sample below). Many states have mandatory continuing education requirements for annuities.

Why would any licensed insurance agent or a financial advisor dabbling in a factored structured settlement market place, put their license, reputation and livelihood on the line by running a false flag up their flag pole. 

How Insurance Regulators Define an Annuity

Maryland  An annuity is a contract between you and an insurance company under which you make either a lump sum payment or a series of payments, and in exchange, the insurance company agrees to make payment to you in the future.

Delaware An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. 

New York    An annuity is a contract between a purchaser and an insurance company in which the purchaser agrees to make a lump sum payment or series of payments in return for regular disbursements, beginning either immediately (within 12 months) or at some future date. 

 

Connecticut An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. 

 

CGS Section 38a-430(a) No life insurance or annuity policy or contract shall be delivered or issued for delivery to any person in this state, nor shall any application, rider or endorsement be used in connection therewith, until a copy of the form thereof shall have been filed with and approved by the commissioner

 

Also,  Any domestic insurance company empowered to make contracts contingent upon life may grant and issue annuities either in connection with or separate from contracts of insurance predicated upon life risks. [ref. CGS Sec 38a-432]

 

"Sunrise Subset"

In its answer to Plaintiffs' First Amended Complaint and Counterclaims in ongoing Arizona litigation cited below, dated June 11, 2021, Genex Capital Corporation admitted, in answering paragraph 31, that "one component of its business involves purchasing from payees future structured settlement payments due under structured settlement annuities and assigning to investors a subset of those rights..."  (emphasis added)  ( also multiple other references to "subsets of those rights..." Ibid at 13, 53, 56, 89, 109, 126)

Source: Genex Capital Corporation, a Delaware Corporation  v Seeley Capital Management, Inc., a Massachusetts corporation; et al and Related Counterclaim  Richard L. Keefer and Vicki L. Keefer, husband and wife; et al; v Genex Capital Corporation, a Delaware Corporation; et al and Genex Capital Corporation, a  Delaware Corporation, a  Delaware Corporation v Richard L. Keefer and Vicki L. Keefer, husband and wife, Hunmi Pak, a married man; E. Dwayne Walls, a married man; and PANABCO, a partnership  Arizona Superior Court County of Maricopa Case Nos. CV 2020-013796 and CV2020-004958 (Consolidated)  [the pleadings are a matter of public record]

The above admission(s) by Genex Capital Corporation in its answer to the First Amended Complaint, is very helpful to illustrate, support and underscore some important points:

• When you buy a legitimate annuity you are buying the actual annuity contract, which is an actual insurance product. 
• An insurance product can only be sold by appropriately licensed and appointed insurance agents and brokers in accordance with the laws of various states.
• When the originating structured settlement factoring company buys structured settlement payments in a structured settlement factoring transaction they are not buying an annuity.
• Furthermore, unless the investor is a "direct designated assignee" in the court order approving the structured settlement transfer, the investor is buying a subset of rights to certain payments  ( see Ibid at 45 in contrast to Ibid at 13, 53, 56, 89, 102, 126).
• Ownership of the actual annuity that is generating the payments is not transferred to the originating structured settlement factoring company.
• Since the originating structured settlement factoring company is not buying an annuity, but rights to payments,  it follows that "a subset of those rights" (as Genex Capital Corporation eloquently refers to what investors are actually buying in exchange for their investment), is not an annuity.    

Given what Genex Capital admits in its answer to the investor complaint cited above, Genex (via Assured Annuity), as well as others use the term "annuity" to market "subsets of these rights", originated from structured settlement factoring transactions. 

But a foreseeable exposure here is on the shoulders of the army of licensed insurance agents, financial advisors and settlement planners, who are supposed to know what an annuity is, who are regulated by one or more state insurance departments or self regulatory organizations, who may be misrepresenting to their investors what the investors are buying, with potentially disastrous consequences!  

Are Subsets of Athlete Contracts Annuities ?

Now, let's take this a step further.  There are other types of factored cash flows, like athlete's contracts, where tertiary market companies and/or licensed insurance agents and financial advisors in their brokerage channels are slapping on the "secondary market annuity" label to sell "subsets of rights" in such cash flows to investors. It's reckless.

 

 

 

 

 

 

 

 

Structured Settlement Investors' Bad Hair Day in Barber Case as PA Superior Court Quashes Appeal

by Structured Settlement Watchdog

It's not looking good for factoring companies and investors in the Zachary Barber case  (in substance "Happy Birthday You're 18 and Your Structure is Gone"), where a May 14, 2021 published decision denied their motion to quash

1. Confirmed Allegheny County, the original forum where the structured settlement was approved as proper forum decisions related to the structured settlement.
2. Details Rubber Stamped Orders that did not comply with the Pennsylvania Structured Settlement Protection Act
3. Confirmed that payments continue to be paid into the Court (and not to investors, or Zach until the matter is adjudicated)

ZACHARY BARBER, JEFFREY BARBER, ADMINISTRATOR OF THE ESTATE OF LINDA LEE JENKINS A/K/A/ LINDA LEE BARBER, DECEASED
v. BRUCE STANKO, NORTH HILLS PHARMACY SERVICES, LLC; PACERCHECK, INC.; ET AL
APPEAL OF: SEMPRA FINANCE, LLC ("SEMPRA") : IN THE SUPERIOR COURT OF PENNSYLVANIA  No. 615 WDA 2020
Appeal from the Order Entered June 5, 2020 In the Court of Common Pleas of Allegheny County Orphans' Court at No(s): No. 4037 of 2005

It raises the obvious questions over how many other cases are out there in Pennsylvania where one, or both or other factoring companies may be implicated in the future with the engagement in similar behavior in Pennsylvania?

According to the published decision, written by Judge Pellegrini, Pinnacle Capital, LLC (Pinnacle), Sempra Finance, LLC (Sempra), Habitus Funding (Habitus) and Michael J. Pickett (Pickett) appealed from a June 22, 2020 order of the Court of Common Pleas of Allegheny County (Allegheny County Orphans’ Court) that effectively denied motions to dissolve an injunction involving a January 31, 2020 order requiring all (structured settlement) annuity payments to Zachary Barber (Zachary) provided for in its 2005 Settlement Approval Order be paid into court until allegation of statutory violations, forum shopping and fraud presented in the underlying proceeding had been determined.  

[ as noted in the Court's decision, Pickett was the assignee (investor)in the Pinnacle originated payments and Habitus the assignee (investor) in the Sempra Finance originated payments.]

Judge Comes Out Strong For the Intent of Structured Settlements

Structured settlements were rare until a series of IRS rulings in the late 1970s declared that periodic payments in structured settlements would not be subject to federal income tax. Congress effectively codified these administrative rulings with the passage of the Periodic Payment Settlement Act of 1982. See PUBLIC LAW 97-473—JAN. 14, 1983.2 The passage of this Act incentivized plaintiffs to forgo a lump-sum payment in favor of a structured settlement to provide tort victims with long-term economic security by providing guaranteed income with spendthrift protection.

Judicial Concerns About Factoring Predators and Congressional Intent

While structured settlements provided those benefits, payees of structured settlements were precluded from securing a lump-sum payment by cashing in their remaining payments to take care of current needs or wants, real or imagined. Like all things involving substantial sums of money and wants and desires, there developed an industry to allow plaintiffs to “change their minds” and transfer their payments to a factoring company who offered less than the present value of those payments. The practice of structured settlement transfers raised a concern that personal injury claimants are being exploited by factoring companies that take advantage of vulnerable and unsophisticated claimants. See Johnson v. Structured Asset Services, LLC, 148 S.W.3d 711, 728 (Tex.App.2004) (“Because the underlying purpose of a structured settlement is not only to compensate an injured party but also to protect that party from his own improvidence, a number of commentators, courts, and legislatures have become concerned by the growing number of companies, sometimes called ‘factoring companies,’ that purchase structured settlements from a personal injury victim by paying him immediate cash for the right to future payments under the settlement.”).

On account of these concerns, Congress amended the Internal Revenue Code in 2002 to impose “a tax equal to 40 percent of the factoring discount” upon any person or entity “who acquires directly or indirectly structured settlement payments rights in a structured settlement factoring transaction....” 26 U.S.C. § 5891(a).3 However, a statutory exception to that tax has been created for any transfer of structured settlement payment rights that is approved in advance by a qualified court order. See 26 U.S.C. § 5891(b)(1). To constitute a “qualified order” under Section 5891, the order must expressly find that the proposed transfer does not contravene any federal or state law, regulation or order, and that the sale “is in the best interest of the payee, taking into account the welfare and support of the payee's dependents....” 26 U.S.C. § 5891(b)(2)(A)(i)-(ii). To avoid paying a 40 percent tax on the factoring discount amount, any company wishing to purchase a payee’s structured settlement rights must secure a court order concluding that the transfer is in the payee’s best interests.

Pennsylvania Structured Settlement Protection Act

The Court stated "Like almost all states, Pennsylvania has adopted the SSPA to functionally allow the transfer of structured settlement payments. It provides, among other things, that, “[n]o transfer of structured settlement payment rights shall be effective ... unless the payee has filed a petition requesting such transfer and the petition has been granted by final order or decree of a court of competent jurisdiction based on such court’s express written findings that .... [t]he payee has established that the transfer is in the best interests of the payee or his dependents.” 40 P.S. § 4003(a)(3)."

Pennsylvania SSPA Places the Common Pleas Court in Presumptive Position of Guardian of A Person

According to the decision  "It has been said that the SSPA places the common pleas court in “position of a guardian of a person who stands in the presumptive position of the defenseless recipient of a benefit. It is for the Court to determine, as a guardian would, on an independent basis, whether the transaction serves the best interests of an unsophisticated (if not incompetent) person” and “is to ensure that an otherwise financially defenseless and possibly injured individual would receive a regular, sustaining source of income.” In re Jacobs, 936 A.2d 1156, 1160 (Pa. Super. 2007).

Requiring a judge to serve as guardian to protect the interests places the judge in unfamiliar territory. Generally, the petition to transfer payment is unopposed with plaintiff-payee wanting to transfer payments so that it can receive payments for what he or she considers in its best interests, whether it is or not, and the factoring company wanting it approved so it can make the Requiring a judge to serve as guardian to protect the interests places the judge in unfamiliar territory. Generally, the petition to transfer payment is unopposed with plaintiff-payee wanting to transfer payments so that it can receive payments for what he or she considers in its best interests, whether it is or not, and the factoring company wanting it approved so it can make the most money. That requires the trial judge to make an independent determination of whether the sale is in the best interests of the plaintiff-payee based on economic factors that it is not within its ken and with parties who are not that forthcoming. Moreover, this determination is made even more difficult because the proceedings are non-adversarial, with no factual development and competing positions to inform its judgment as would be the usual. It depends on the forthrightness and good faith of counsel to provide all the information available for the judge to make an informed decision on what is in the best interests of the plaintiff-payee to avoid fraud on the court.

While 40 P.S. § 4003 sets forth several conditions that must be met before a transfer can be approved, other sections are pertinent here. Section 4004 of the SSPA, 40 P.S. § 4004, provides that the petition to transfer structured settlement payments shall be filed where the payee is domiciled; another of those conditions requires that the transfer also must be “expressly approved in writing by ... any court or responsible administrative authority that previously approved the structured settlement.” 40 P.S. § 4003(a)(5)(i)(B). This approval is required because they are commonly used to resolve tort claims of minors, as well as adults who have suffered injuries that have rendered them legally incompetent, before any transfer can be effectuated.

No Separate Counsel Was Afforded to or on Behalf of then Minor Zachary Barber Even Though There Was a Conflict of Interest

Even though there was an apparent conflict between Zachary and Father’s interest, Zachary, the payee, was not appointed separate representation in any of proceedings seeking to sell his annuities to fund Father’s obligations

Under the SSPA, “the courts were given the mandate to supervise all aspects of settlements in which a minor is a party in interest[.]” Power by Power v. Tomarchio, 701 A.2d 1371, 1374 (Pa. Super. 1997) (emphasis in original); see also In re Benninger, 357 B.R. 337, 351 (Bankr. W.D. Pa. 2006) (the Structured Settlement Approval Act “is designed to protect beneficiaries of structured settlements from being taken advantage of by others.”)

To ensure that beneficiaries of structured settlements rights are protected, especially minors, the SSPA requires the approval of the court who initially approved the structured settlement must be obtained before the transfer of any payment is effective. As previously mentioned, 40 P.S. § 4003(a)(5)(i)(B) provides that: No transfer of structured settlement payment rights shall be effective and no structured settlement obligor or annuity issuer shall be required to make any payment to any transferee of structured settlement payment rights unless the payee has filed a petition requesting such transfer and the petition has been granted by final order or decree of a court of competent jurisdiction based on such court’s express written findings that: 

(B) any court or responsible administrative authority that previously approved the structured settlement; (Emphasis added.)
It appears that in all instances, approval from the court or agency that approved a previous structured settlement is needed because, necessarily, the proposed transfer would be contravention of previous orders; otherwise a petition to transfer benefits would not be needed.

Moreover, neither the Butler nor Beaver County courts made any finding that such transfers were not in contravention of the terms of the 2005 Settlement Approval Order. While they included boilerplate language contained in 26 U.S.C. § 5891, this language is found in the section about whether the court’s orders were “Qualified Orders” for tax purposes and is not a finding regarding the 2005 Settlement Approval Order. See 26 U.S.C. § 5891. This is not surprising because it appears that neither Butler nor Beaver County were made aware of the 2005 Settlement Approval Order. Because Section 4003(a)(5)(i)(B) applied and it requires that the court that approved the structured settlement agreement must approve in writing the proposed transfer, the Allegheny County Orphans’ Court was required to approve any changes in payments made under the 2005 Settlement Approval Order. See In re Am. Dredging Co., 2011 WL 4971829, at *2 (E.D. Pa. Oct. 18, 2011) (finding that sale of portion of settlement for a lesser lump sum than would have been realized if paid at the set disbursement date “would contravene the terms of that structured settlement agreement. Accordingly, pursuant to the language of the statute, [the court that approved the original settlement] must expressly approve[] in writing the transfer of structured settlement rights before the [another] court may grant its approval.”).

Requiring the court that initially approved the structured settlement to approve any change in its terms advances the SSPA’s purpose to protect beneficiaries of structured settlements from being taken advantage of by others because those courts were aware of the reasons why a settlement was not paid in a lump sum but structured. Additionally, approvals of the court that initially approved of a structured settlement to a minor are especially important because that court can determine if the transfer of payments would serve the interest of the minor and order, if necessary, that a guardian represent the minor’s interests. In this case, the Allegheny County Orphans’ Court did not approve, as required by 40 P.S. §4003 (a)5(i), any of the transfer of payments purportedly authorized by the Butler and Beaver County courts due to Zachary to Pinnacle, Sempra, Habitus and Pickett, with his Father keeping the proceeds of those sales. Zachary contends that Father fraudulently realized the profits for himself in violation of the 2005 Settlement Approval Order’s terms.

In light of these accusations, the Allegheny County Orphans’ Court entered “[t]he January 31, 2020 Order directing future payments to be made to the Prothonotary … out of an abundance of caution for the sole purpose of safeguarding the minor’s funds until this matter could be properly adjudicated.” (Orphans’ Court Opinion, 9/20/20, at 6). In other words, it was not issuing a preliminary injunction, but keeping the 2005 Settlement Approval Order in place until it could determine who was entitled to the payments to be made thereunder.17 See Commonwealth v. Shaffer, 712 A.2d 749, 751 (Pa. 1998) (“[I]t is axiomatic that a court has inherent power to enforce its own orders of court and this court will not interfere with this enforcement absent an abuse of discretion.”).
B. 
Moreover, we note briefly that Pinnacle and Pickett alternatively argue that “Sempra’s appeal of the coordination order … did not require the [court] to stay this matter in its entirety.” (Pinnacle’s Brief, at 26); (see Pickett’s Brief, at 20).
Rule 1701 provides, in pertinent part, that: (a) General rule.--Except as otherwise prescribed by these rules, after an appeal is taken or review of a quasijudicial order is sought, the trial court or other government unit may no longer proceed further in the matter. (b) Authority of a trial court or other government unit after appeal.--After an appeal is taken or review of a quasijudicial order is sought, the trial court or other government unit may: 

(1) Take such action as may be necessary to preserve the status quo[; and]
(2) Enforce any order entered in the matter[.]
(c) Limited to matters in dispute.--Where only a particular item, claim, or assessment adjudged in the matter is involved in an appeal … the appeal … shall operate to prevent the trial court … from proceeding further with only such item, claim, or assessment, unless otherwise ordered by the trial court … as necessary to preserve the rights of the appellant.
Pa.R.A.P. 1701(a), (b)(1)-(2), (c).

The Allegheny Count Orphans’ Court did not abuse its discretion to stay all proceedings to preserve Zachary’s rights in the structured settlement.The coordination order from which Sempra appealed, although not directly involving Pinnacle or Pickett, went to the larger issue of whether the Butler and Beaver County orders were effective because Pinnacle and Sempra had not received the approval of the Allegheny Court Orphans’ Court as required by P.S. § 4003 (a)(5)(i) before a change in payments set forth in the 2005 Settlement Approval Order can occur, as well as fraud, forum-shopping and fraud on the court. Hence, the Allegheny County Orphans’ Court did not abuse  its discretion in staying all proceedings in this matter, including its January 31, 2020 order that annuity payments be deposited with the Prothonotary, pending full adjudication of all allegations, rather than attempting to address them piecemeal. 

The Court concluded that  "because the January 31, 2020 order was not a preliminary injunction, the June 22, 2020 order, the order from which this appeal is taken, could not “continue” it, and is neither a final appealable order nor appealable pursuant to 311(a)(4), and we quash".

Download Opinion - Barber case Affirmed

Download Opinion - Quashed Appeals of Pinnacle Capital LLC, Michael Pickett and Habitus Funding