The Dissipation Myth

Law student Jeremy Babener has written an interesting article questioning the basis for the oft-“cited” statistics concerning personal injury plaintiffs “squandering” settlements. As Mr. Babener points out, for a very long time proponents have justified structured settlement’s tax subsidy, and opposed structured settlement factoring, by pointing to the statistic that “90% of personal injury claimants spend their entire payment within 5 years of receipt.” However, it turns out that there is no demonstrable foundation for this “statistic”. It appears to have been just made up. Indeed, as Mark Twain noted, “There are three kinds of lies: lies, damned lies, and statistics."

Structured settlement commentators Patrick Hindert and John Darer have recently commented on Mr. Babener's piece, and I commend their articles to you.  I have a different perspective. 

I find it significant that a fictional statistic has been used for so long by so many. To what end? The clear purpose is to bolster the image of the personal injury claimant as incompetent, unable to care for himself, and obviously unable to make “sophisticated” financial decisions. Therefore, the argument goes, the perfect financial solution is a periodic stream of payments that they cannot alter. This is the rhetoric used to sell structured settlements for years. The argument also highlights why the primary structured settlement brokers are so viscerally opposed to factoring -- it’s really about marketing. If the structured settlement brokers were selling their product to the personal injury claimants, they would embrace the factoring world as the “after market” solution allowing some flexibility in an otherwise inflexible product (much akin to a consumer having the means to resell a car down the road). But, the predominant real market for structured settlement brokers is insurance companies and trial lawyers. To that market, the concept of the incompetent claimant plays well.

The logic of the dissipation myth, at least as a sales tool for structured settlements, is likewise flawed. If a payee is disposed to blow through all his money, does it really matter if it comes in monthly amounts or a factored purchase price? Moreover, many if not most of the structured settlements that I have seen in my 10 years in the business have included lump sum payments. In other words, the structured settlement itself may be set up to pay large lump sums annually, or once every 5 years, etc. These lumps may be in addition to monthly payments, or not. How does that interplay with the dissipation propaganda? Does the check from the insurance company have magical “anti-dissipation” properties that the factoring company check does not?

Structured settlements are a wonderful tool to settle claims. In most cases the payment stream works just fine, particularly when talking about the catastrophically injured (the factoring industry unscientific estimate is that only about 5% of structured settlement recipients ever factor).  However, structures are not spend-thrift trusts, they are not guardianships. Overselling them as such has led to problems and logical inconsistencies.

Do some people get a lump sum of money, either at settlement or via factoring future structured settlement payments, and “blow it”? Sure, just as some people get a paycheck on Friday and it’s gone on Monday.  Its the "solution" to this problem, if there is one, that can lead down an unattractive path.  Paternalism is a dangerous thing, and a difficult genie to put back in the bottle.

By Matt Bracy, General Counsel, Settlement Capital Corporation.  I welcome your comments or questions about this article or structured settlement factoring in general.  You may post comments here, or contact me at mbracy@setcap.com. 

Unequal Rights for Those Injured by the US Government

In the absence of justice, what is sovereignty but organized robbery? ~ St. Augustine

You are driving through an intersection, and you have the green light. Half-way through a car runs the corresponding red light and plows into you, causing severe and life-long injuries. The driver who hit you is working at the time, meaning that his company will be responsible for your damages.

The good news: You survive and are able to settle with the other driver’s employer for a fair amount to compensate you for your injuries. Wisely, you choose a structured settlement and will now have all the wonderful advantages that brings: Predictable and secure payments over time that are tax free. The driver’s employer buys an annuity to make the payments over time.

The bad news: The driver who hit you was a US Postal Worker driving a mail truck. Therefore, you will not have the same rights to your future structured settlement payments as you would have if, for instance, he had instead been employed by Fedex.

How could this possibly be?

The US Department of Justice decided several years ago that it does not like structured settlement factoring, and will not “allow” structured settlements it owns to be factored. Exactly who made that decision, and why, has been hidden behind the “executive privilege”. In resisting attempts to factor payments, the Department of Justice invokes the ancient concept of “sovereign immunity” – the sovereign, or in our case, the US government, cannot be sued unless it has consented to be sued.

Leaving aside whether sovereign immunity itself is out-dated, worn out, and has no proper place in modern society, what is it about structured settlement factoring that gives rise to the doctrine to begin with? After all, no one in the court ordered factoring process is “suing” anyone, let alone the owner of the annuity (in this case, the US). The government has contended in lawsuits over this issue that a factoring approval order impacts its rights as the owner of the annuity, by directing to whom the payments will go. That’s it. The government technically owns the annuity, but has no rights to the payments (they belong to the former plaintiff). Courts reviewing this, sadly, have decided that this thin thread of ownership over the annuity itself is sufficient to implicate the sovereign immunity doctrine. Being thus implicated, and there being no law wherein the United States has expressly consented to be “sued” in this way, sovereign immunity bars any such factoring transaction.

John Darer calls this “the great thing about structured settlements from the US Department of Justice.”  (Mr. Darer's May 21, 2009 article is here). Great for whom? Not great for the structured settlement recipient who wanted to sell payments to pay for his daughter’s wedding, but couldn’t because he had been run over by a National Guard truck, instead of by a bus. Not great for the widow of a man who had been hit by a Postal truck instead of a Fedex truck, and was therefore told she could not sell future payments when she needed. Just who is this “great” for? These are real examples of real people who have been treated differently in trying to conduct a commercial transaction – the sale of some future payments to which they are entitled – exclusively because of who had caused their injuries, how ever many years ago.

You cannot choose your tortfeasor. In contract and business disputes, you choose to do business with a certain person or entity, the federal or state government for instance, and limits on your ability to sue and recover in the case of a breach come into the category of caveat emptor (not exactly, but close). Not so in personal injury cases. Moreover, the fact that this unselected defendant injured you or your family member years ago, and because of the mere identify of that defendant you are now precluded from enjoying the same rights to factor payments if and when needed (with court approval, etc.), is ludicrous. Why should these former tort victims and their families be discriminated against?

And the big question: Why does the government care? Transfers of payment rights have absolutely no impact on the government. It’s not their money, and such transfers require them to do absolutely nothing. Why is the Department of Justice so opposed, and why is this a “great thing”? I think it is an outrage.

As always, we appreciate your comments or questions about this article, or structured settlement factoring in general.  You may post comments here, or contact the author, Matt Bracy, General Counsel for Settlement Capital Corporation at mbracy@setcap.com. 

47th State Enacts Structured Settlement Transfer Law

North Dakota became the newest state to add a structured settlement factoring law to its books, with the enactment of HB 1205.  Signed by Governor John Hoeven on March 24th, the new transfer law will apply to all North Dakota factoring contracts entered into after July 31, 2009. 

Click here for the full text of HB 1205.

North Dakota's structured settlement factoring law is substantially based on the model act adopted by the National Conference of Insurance Legislators (NCOIL).  The sponsors of the bill, Representatives Keiser and Wald, along with Senator Klein, are all members of NCOIL.  NCOIL adopted its first model structured settlement transfer act in July 2000.  The present version, which now forms the basis for 37 state transfer laws, was adopted by NCOIL in 2004. 

Wisconsin, Vermont and New Hampshire remain the only states without structured settlement transfer statutes.  However, residents of these states can sell some or all of their future payments pursuant to the state transfer laws in effect in the state where their annuity issuer or owner reside, as indicated in Internal Revenue Code § 5891(b)(3). 

We welcome questions or comments about this story or structured settlement factoring in general.  You may comment here, or send your comments to Matt Bracy at mbracy@setcap.com. 

Part 2 on Attorney's Fee Loans -- But Not Just for Attorneys

As mentioned in the last posting, Settlement Capital is now able to make loans to attorneys with structured fees.  In the video interview, I mention in passing that this product is not limited to attorneys, but really is open to anyone who has a "non-qualified" structure -- that is, anyone who receives payments over time from an annuity and the payments are taxable.  Today, this includes people who structure employment discrimination settlements, punitive damages, non-physical injury settlements, commercial settlements, etc. 

I encourage any settlement planners, attorneys and financial planners who have clients with structured payments to consider this option, and take another look at the video.  If you don't know what non-qualified structures are, or have any questions about structuring non-personal injury damages, contact a settlement planner or structured settlement broker.

I welcome your comments or questions on this article.  Feel free to comment here, or privately to me via email at mbracy@setcap.com.   

"It’s the Interest Rate, Stupid" – An Outside Counsel’s Perspective

We are pleased to have another article from guest author Mike Green, an attorney from Philadelphia.  Mike represents several structured settlement factoring companies in Pennsylvania and New Jersey.  The views expressed herein are solely those of the author.

It’s the Interest Rate, Stupid – An Outside Counsel’s Perspective

on Cutting Through the Morass of Financial Information

on the Disclosure Statement at a Structured Settlement Transfer Hearing

I blogged last year about my perspective on the court approval process for structured settlement transfers. With this article, I’d like to dig deeper into the financial/best interest analysis. This is an area which confuses many individuals and judges not familiar with the process.

Each state which has a structured settlement transfer statute requires that a Disclosure Statement be issued. While the required disclosures vary slightly from state to state, most Disclosure Statements must indicate some or all of the following:

Click to read more ...

Guest Speakers and Record Attendance Make the 4th Annual NASP Conference the Best Yet

The National Association of Settlement Purchasers (“NASP”) held its 2008 annual conference in late October in Las Vegas. By most estimates this was the best conference yet, and certainly the best attended with around 110 attorneys and business professionals at the 2 day conference.

Click to read more ...

Let's Be Careful Out There

One of my favorite TV shows from the 80s, or ever really, was “Hill Street Blues.” If you're old enough to remember it, you may recall Sgt. Esterhaus at the end of each day’s briefing sternly but grandfatherly telling all the cops "let's be careful out there." As we all try to figure out how the current “Wall Street Blues” will shake out, I think this is sound advice, particularly for people who have structured settlements or are contemplating entering into structured settlements.

Hysteria and panic are generally bad bases for making financial decisions. All indications are that the backbone of the American insurance industry remains strong and stable. Effective state insurance laws that closely regulate the type and diversity of assets that insurers can hold (that back-up the insurance obligations) are working. Consider for instance the largest and most prominent insurance company, AIG. Headlines scream that AIG is “in trouble” and so forth. Read further and you will see, almost mentioned in passing, that the insurance business units at AIG, particularly the life insurance companies, seem to be sound. The fact that potential buyers are clamoring for AIG’s insurance lines should tell us all something.

The insurance business is unique. In our otherwise generally laissez-faire economy, insurance is excruciatingly and minutely controlled by state regulators. Details concerning what can be sold and to whom, and how payment obligations and risks are planned for and capitalized are all subject to strict rules and review. By all accounts at this point, the system is working, even at AIG.

Some insurers have failed in the past to be sure. But to echo remarks made by Messrs. Darer and Cravenho, these are few and far between. The largest “failure” that I know of is Executive Life of New York (ELNY). In 1991 ELNY was taken over by the State of New York and has been in “rehabilitation” ever since. To date, all policies have been paying as planned. Recent news was made when regulators from New York determined that there might be a shortfall in 12-15 years unless corrective action is taken now. Let me summarize: This “failed” insurer has been able to pay 100% of its obligations for the past 17 years, and while ELNY is likely to need its own bailout/rescue from New York regulators, it appears that individual payees of ELNY structured settlement annuities should fair well in the ultimate resolution of this company. To be sure, the projected shortfall needs to be addressed, and I think it will be, but individual payees should take comfort from this example of a “failure.”

AIG is not only one of the largest insurers, but is one of the largest structured settlement annuity issuers. Structured settlements remain a very viable and useful means of settling personal injury lawsuits, providing long-term financial security for tort victims. Predictable and reliable monthly or yearly tax-free income is a great boon for these former plaintiffs and their families, and all indications are that nothing in this current economic turmoil will diminish those benefits. Structured settlement recipients and their advisors should think twice about trying to “dump” this asset in the face of generally bad economic news. The “best interest” standard given in the federal tax code and in most state transfer laws still applies, and a decision to liquidate all of one’s future structured settlement payments in a factoring transaction because of bad news in the press is probably a bad one. Moreover, liquidating solely because of fear and uncertainty relative to the financial circumstances of AIG or any other annuity issuer would likely not meet the best interest standard required for court approval of a transfer.

However, if a structured settlement recipient does have a real need to sell future payments, structured settlement factoring companies can help. But, in this and all things, “let’s be careful out there.”

If you would like to discuss this or any other matter, please contact me at mbracy@setcap.com. I welcome comments to this and all articles, either here on the blog, or privately to me via email or phone.