By David K. Hou, Esq.[i]
This article provides an update on recent cases regarding the transfer of structured settlement payment rights in New York.[ii] Because the majority of cases in which such petitions are approved go unreported, whereas many 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 The “Best Interests” Of The Payee.
The payee’s inability to demonstrate an adequate appreciation of the proposed transaction, as well as the failure to support or document the payee’s need for the advance amounts continues to be the principal causes for a finding that the transaction is not in the payee’s best interest. Whether the payee intends to pay for school, home repairs, purchase a vehicle, pay off debts, or otherwise, a petition’s likelihood of success can only be reduced by the failure to produce detailed information about the payee’s alleged needs.
In Matter of Settlement Funding of New York, LLC [Hiciano], 2010 N.Y. Slip Op 33207U (Sup. Ct. New York Cty. Oct 20, 2010), the payee stated that the advance funds would be used for capital improvements to his business. However, the payee submitted no information about his business, nor any information regarding any attempts made to secure financing from other sources. Notably, the payee stated that the transaction was more advantageous to a loan because no “interest” would be paid. The Court stated that the payee’s failure to comprehend the nature of how interest is factored into SSPA transactions demonstrated a lack of adequate financial understanding, and therefore denied the petition.
In 2010, New York courts particularly scrutinized proposed transfers of payment rights from college-aged payees.[iii] In these cases, the courts closely considered whether the payee possessed sufficient maturity and financial acumen to fully appreciate the transaction. Often in these cases, the payee may be full-time students and will have no or limited other sources of income; they may demonstrate a historical inability to manage their expenses and liabilities; and they may not have consulted with an independent advisor who has approved of the transaction. It is no surprise in such circumstances, then, that such petitions are denied.
In Williams, the payee was an eighteen year old full time student, residing with her parents, who wanted the advance to rent an apartment, prepay utilities, college tuition not covered by financial aid, and to pay past court fines. The payee had no other sources of income. The aggregate payments were $40,452.00; the advance, including $2000.00 for legal fees and $200 for “processing fees”, was $19,657.00. The annual discount rate was 14.99%. The Court determined both that the 14.99% discount rate was not fair and reasonable, and that facts demonstrated the payee did not appreciate the consequences of the transfer, given her age, irresponsibility with the law, and her failure to consult with an advisor.
In Crotty, the payee was an unemployed full-time student who lived at home with other unemployed family members. The aggregate of the payments was $120,000, and the advance amount was $40,496.22. The payee sought the funds to pay back rent and for anticipated college tuition. The Court noted that the payee had not submitted proof that she had been accepted to college, and her payments were the primary source of income for the payee’s entire household. The payee had recently received a substantial periodic payment and yet could not account for it. The Court further noted that the payee did not have the maturity, sophistication or intelligence to appreciate the transaction, given her failure to seek independent financial advice, and the Court’s view that adequate planning of the periodic payments would satisfy her stated goals and needs.
Similarly, in LoBello, the payee was a college student with summer employment. The Court held that the payee had failed to indicate what other sources of income existed, and whether he received financial support from his family. The payee also failed to provide detailed information regarding the liabilities he intended to pay off, what he intended to use any surplus advance funds for, or explain why he could not have obtained loans from third parties.
In Point Du Jour, the payee was twenty-one years old, employed, and was to use the advance to purchase a home. The aggregate payments were $85,651.00, and the advance was $28,196.72. The annual discount rate was 14.99%. The Court held that the payee had failed to provide any information regarding the house purchase transaction, or demonstrate why her existing income and future annuity payments were inadequate to meet her needs. The payee had not attempted to obtain traditional mortgage financing, and although the payee had consulted with a financial advisor, the advisor had not either approved or disapproved of the transaction.
Recent Decisions Considering What Transfer Terms Are “Fair And Reasonable”.
Although New York courts continue to routinely cite older cases which disapprove of annual discount rates in excess of 15.46%[iv], in 2010 several courts determined that annual discount rates under 15% may also be unreasonable. Courts in several cases have found that annual discount rates of 14.99% are unreasonable.[v] However, the fact that some courts have so concluded does not obviously mean that 14.99% is now the maximum acceptable rate.[vi] In other cases, courts have denied petitions, without much surprise, where the annual discount rates approach 20%.[vii]
Of note is the fact that New York courts continued to compare 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 and potentially superficial 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, and other unspecified “processing fees” from the payee’s gross advance amount has continued to be view with disfavor by courts, especially where other financial terms appear to be unfair and unreasonable.[viii] Certainly, such amounts do not improve a petition’s likelihood of success. 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.
A few additional considerations from recent decisions are worth noting. One court has reiterated that comparisons to credit card advances or other financial institutions were irrelevant to the Court’s analysis, as were enunciated risks of the transaction to the purchasing factoring company.[ix] Implicit in this determination is the view taken by the courts that the transfer of guaranteed structured settlement payment rights are low-risk transactions which favor factoring companies.
The Court in Davis also highlights the ongoing importance of fully disclosing the existence and outcomes of prior, particularly recent, transfers of such payment rights. The non-disclosure of such information not only raises the risk of judicial disapproval of the proposed transfer, but also in certain circumstances may subject the petitioner to sanctions for willful non-disclosure.
In addition, the common presence of non-assignment/non-acceleration clauses in the underlying settlement agreement continues to trouble courts. In LoBello, the Court denied the petition, holding that although the payee need not demonstrate a “true hardship”, the payee was not in sufficiently dire financial straits to justify disregarding the non-acceleration restraint in the underlying settlement agreement. In so holding, the Court inserts a nebulous middle ground standard of “dire hardship” into the best interests analysis. It remains to be seen whether the banner of this logic is adopted by other courts.
In Matter of Symetra Assigned Benefits Co. [Ortiz], (Sup. Ct. Monroe Cty., June 17, 2010), the Court took a different approach to the non-acceleration clause. In Ortiz, the Court originally denied the petition, citing a similar non-acceleration clause to that in LoBello, and relying on Singer Asset Finance Co. v. Bacchus, 294 A.D.2d 18 (4th Dept. 2002). Singer has subsequently been cited by In re 321 Henderson Receivables Origination, LLC, 2008 N.Y. Slip Op. 28072, 19 Misc. 3d 504 (Sup. Ct. Queens Cty. 2008), which , although denying the petition, noted that “a prohibition against assignments or transfers may be waived by the obligor . . . [although a waiver] will not be inferred from mere silence or inaction.” Id. at *3. In Ortiz, the petitioner submitted a consent obtained from the settlement obligor and, on reconsideration, the Court approved the petition. Petitioners dealing with the hurdle of non-acceleration clauses may therefore want to consider attempting to expand the adoption of the methodology espoused by 321 Henderson Receivables and implemented successfully in Ortiz.
The inherent uniqueness of each case and the relative absence of written 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 may be acceptable to the courts can often 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.
[i] David K. Hou, Esq., is an attorney in the Commercial Litigation practice group of Boylan Code, LLP in Rochester, New York. He concentrates his practice in the area of complex commercial litigation.
[ii] The New York Structured Settlement Protection Act (“SSPA”) requires judicial approval for the transfer of structured settlement payment rights. N.Y. Gen. Oblig. Law § 5-1701 et seq. (McKinney 2008). The SSPA was enacted to protect structured settlement payees from being taken advantage of by unscrupulous businesses seeking to acquire their structured settlement payment rights, through the use of various procedural safeguards to ensure that payees are fully informed of their rights and the value of their transfer. Id. at §§ 5-1705, 5-1706. The SSPA was amended in 2004 to eliminate hardship as a prerequisite (although it retained it as a relevant consideration), 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.
[iii] Matter of Settlement Funding of New York, LLC [Williams], 2010 N.Y. Slip Op 52103U (Sup. Ct. Queens Cty. Dec. 7, 2010) (Markey, J.); Matter of Settlement Funding of New York, LLC [Point Du Jour], 2010 N.Y. Slip Op 52102U (Sup. Ct. Queens Cty. Dec. 7, 2010) (Markey, J.); Matter of Settlement Funding of New York, LLC [Crotty], 2010 N.Y. Slip Op 32180U (Sup. Ct. Queens Cty., Aug. 3, 2010) (Satterfield, J.); Matter of Allstate Settlement Corp. [LoBello], 28 Misc.3d 1203A (Sup. Ct., Cortland Cty., June 3, 2010).
[v] Matter of Settlement Funding of New York, LLC [Williams], 2010 N.Y. Slip Op 52103U (Sup. Ct. Queens Cty. Dec. 7, 2010) (Markey, J.); Matter of Settlement Funding of New York, LLC [Point Du Jour], 2010 N.Y. Slip Op 52102U (Sup. Ct. Queens Cty. Dec. 7, 2010) (Markey, J.); Matter of Settlement Funding of New York, LLC [Crotty], 2010 N.Y. Slip Op 32180U (Sup. Ct. Queens Cty., Aug. 3, 2010) (Satterfield, J.).
[vi] Again, many petitions which are approved which may have higher annual discount rates are simply unreported. See, e.g., Matter of Clearscape Funding Corp. [Learch], (Sup. Ct. Wayne Cty., Sept. 30, 2010) (16.30% discount rate); Matter of Symetra Assigned Benefits Serv. Co. [Sparks], (Sup. Ct. Jefferson Cty., Aug. 26, 2010) (17.37% annual discount rate).
[vii] Matter of Prudential Ins. Co. of Am. [Davis], 2010 N.Y. Slip Op 51677U (Sup. Ct. Steuben Cty., Sept. 27, 2010) (Bradstreet, J.) (finding discount rate of 16.89%, reduced from 19.18%, was still unreasonable, particularly in light of the fact that the payee was receiving less than 18% of the annuity’s discounted present value); Matter of J.G. Wentworth Originations, LLC [Arce], 2010 N.Y. Slip Op 32899U (Sup. Ct., Queens Cty. Sept. 23, 2010) (Satterfield, J.) (finding discount rate of 20% was unreasonable); Matter of Allstate Settlement Corp. [LoBello], 28 Misc.3d 1203A (Sup. Ct., Cortland Cty., June 3, 2010) (finding discount rate of 19.06% was unreasonable).
[viii] Matter of Settlement Funding of New York, LLC [Williams], 2010 N.Y. Slip Op 52103U (Sup. Ct. Queens Cty. Dec. 7, 2010) (Markey, J.); Matter of Settlement Funding of New York, LLC [Point Du Jour], 2010 N.Y. Slip Op 52102U (Sup. Ct. Queens Cty. Dec. 7, 2010) (Markey, J.); Matter of Settlement Funding of New York, LLC [Hiciano], 2010 N.Y. Slip Op 33207U (Sup. Ct. New York Cty. Oct 20, 2010); Matter of Settlement Funding of New York, LLC [Crotty], 2010 N.Y. Slip Op 32180U (Sup. Ct. Queens Cty., Aug. 3, 2010) (Satterfield, J.) (finding that legal fees of $2000.00 and “processing fee” of $200.00 were unreasonable).