By David K. Hou, Esq.
This article provides an update on recent cases regarding the transfer of structured settlement payment rights in New York. The New York Structured Settlement Protection Act (“SSPA”) requires judicial approval for the transfer of structured settlement payment rights. In 2004, the SSPA was amended to eliminate the requirement that a court determine that a payee suffered a hardship (although it retained the existence of a hardship as a relevant consideration), as a prerequisite to the approval of the transfer of structured settlement payment rights, in favor of requiring a court to determine that the terms of the transfer are “fair and reasonable” and that the transfer is in the “best interests” of the payee; what terms are “fair and reasonable”, and what is in the payee’s “best interests” inherently requires a case-by case determination of the totality of the circumstances.
Judicial approval of petitions to approve the transfer of structured settlement payment rights are by no means guaranteed. Because the vast majority of cases in which such petitions are approved go unreported, whereas the vast majority of petitions which are not approved are reported, a consideration of recent reported cases provides useful guidance as to what transfer terms have not been deemed “fair and reasonable”, and/or not in a payee’s “best interests”.
Recent Decisions Considering What Transfer Terms Are Not “Fair And Reasonable”.
The annual discount rate used to determine the gross advance amount, and the net amount received by the payee in relation to the amount of payment being transferred remain the principal considerations as to whether transfer terms are “fair and reasonable”. Under the court’s “totality of the circumstances” analysis, no single factor is determinative; thus, for example, higher annual discount rates may be overcome by hardships or other compelling circumstances presented by the payee. However, absent such extenuating factual circumstances, recent cases have regularly demonstrated that annual discount rates in excess of seventeen percent are not “fair are reasonable.”
There is no minimally acceptable annual discount rate; courts routinely cite older cases disapproving a 15.46% discount rate, and in July, 2008, one court disapproved an 11.78% annual discount rate. In that case, without elucidating what annual discount rates might be acceptable, the court summarily stated that “Petitioner has failed to explain why such a high discount rate on a risk free investment is warranted.” This case may be considered an “outlier” case, in comparison to the aforementioned reported decisions rejecting considerably higher discount rates. Notably, also in July, 2008, another court determined that a similar 11.17% annual discount rate was fair and reasonable.
Recent cases have also compared the net payment received by the payee in relation to the aggregate payment rights being transferred. However, the question of whether how such a broad comparison accurately accounts for the sometimes complex structure of periodic payments has yet to be determined.
Although rarely determinative of itself, the issue of deducting legal fees, filing fees, compliance and administrative fees, from the payee’s gross advance amount has been found to “add insult to injury”, especially where other financial terms appear to be unfair and unreasonable. Where such fees are deducted, factoring companies would be well served to specifically itemize and justify what such fees are, and how they are computed.
Recent Case Discussion Of What Is Not In A Payee’s “Best Interests”.
The two most notable developments in the “best interests” analysis are the disclosure of prior transfers, and the disclosure of details regarding the payee’s need for the proposed transfer.
If a payee has previously transferred payment rights, recent cases suggest that the specific details of such prior transfers, as well as the payee’s use of the prior advance funds, are relevant to the “best interests” analysis, and that the non-disclosure of such information runs the risk of judicial disapproval of the pending transfer. In fact, at least one court has suggested that the petitioner’s failure to disclose prior advances may be sanctionable. In Roman, the court had originally approved the proposed transfer in part on the belief that the payee was still entitled to the remainder of un-transferred payments. However, the court later vacated its approval upon discovering that the petitioning factoring company had failed to disclose that the payee had actually previously transferred the remainder of his payments nine months prior.
In addition, courts are also taking into consideration the length of time since the last petition for transfer of payment rights, and/or the time until the next payment is due. Clearly, courts will give greater scrutiny to situations where the payee has recently received advances for transfers, or will soon receive a substantial periodic payment; hence, the greater need for exigent or a material change in the payee’s circumstances in such cases. In one recent case, a payee sought to transfer partial payment rights to a structured settlement entered into by the minor payee’s mother only three years previously. That court acknowledged and deferred to the mother’s prior determination that a structured settlement was in the payee’s best interest; the court had granted the payee two opportunities to present his mother at the hearing to support the transfer or to otherwise demonstrate a change in his circumstances warranted approval of the transfer.
The failure to support or document the payee’s proposed uses for the advance amounts, is also an ongoing pitfall for factoring companies and payees alike. Whether the payee intends to pay for home repairs, purchase a vehicle, pay off debts, or otherwise, a petition’s likelihood of success can only be reduced by the failure to include such information, whether the advance amount will be sufficient for such purposes, and any supporting documentation.
Finally, courts continue to emphasize the need for payees to demonstrate that they have considered, or have attempted to locate, alternative means of financing their needs. One court has suggested that a payee must demonstrate that she has exhausted other financing options.
Other Considerations.
At least two courts have suggested that using part of the payee’s gross advance amount to acquire life insurance policies for the payees, with the factoring company as the primary beneficiary, is unconscionable and “blatantly unfair”.
One court has commented on the common, express provision in structured settlement agreements whereby the payee surrender his power to transfer or assign his rights to periodic payments. In Logan, the court noted that the prohibition against transfers or assignments may be waived by the obligor , but not by the payee, and that such waiver could not be inferred from the obligor’s mere silence or inaction.
Conclusion.
The inherent uniqueness of each case and the relative unavailability of decisions in which transfers of structured settlement payment rights are approved make it difficult to formulate any useable framework for predicting success. Nevertheless, some measure of guidance as to what is acceptable to the courts may be inferred through the careful consideration of the circumstances in which such petitions are not approved; as the courts gradually develop a fabric of case law precedent, the ongoing monitoring of reported cases – of what transfer terms are fair and reasonable, and what facts are sufficiently in a payee’s best interest – will therefore be necessary if such petitions are to be successful.
