BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 510
Senator Corbett
As Amended April 13, 2009
Hearing Date: April 28, 2009
Insurance Code
ADM:jd
SUBJECT
Structured Settlements: Payment Transfers
DESCRIPTION
This bill would strengthen and refine the provisions of
California's Transfers of Structured Settlement Payment Rights
Act (TSSPRA) in order to better protect consumers who wish to
transfer to a financial entity their structured settlement
payment rights, i.e., periodic payment rights, for a lump sum
payment. A structured settlement is a financial arrangement
that a plaintiff accepts in settlement of a personal injury
action. The TSSPRA requires, among other things, that the
transfer be in the best interest of the payee (the person who
received tax-free payments pursuant to a structured settlement
agreement), be fair and reasonable, and be approved by the
court.
This bill would require the court, in determining whether a
transfer is in the best interest of the payee and is fair and
reasonable, to consider the totality of the circumstances,
including specified factors.
This bill would require every application for approval of a
transfer to contain certain specified information. This bill
would specify notice and disclosure requirements that would have
to be complied with prior to a transfer.
(This analysis reflects author's amendments to be offered in
committee.)
BACKGROUND
(more)
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A structured settlement is generally defined as a financial or
insurance arrangement, including periodic payments, that a
claimant (plaintiff) accepts to settle a personal injury action
or to compromise a statutory periodic payment obligation. A
structured settlement is used as an alternative to a lump sum
settlement in order to provide for a claimant's medical,
financial, personal, and familial needs over time. Structured
settlements usually are funded by single-premium annuity
contracts held by the party, the "structured settlement
obligor," that has the continuing periodic payment obligation to
the payee under a structured settlement agreement.
Structured settlements are favored as a means of assuring
continuing financial support to injury victims and minimizing
the risk that lump sum recoveries will be dissipated, leaving
injury victims to turn to public assistance to meet their
medical and financial needs.
Beginning in the early 1990s, a secondary market, commonly
referred to as structured settlement factoring companies, began
to emerge. According to the sponsor, Consumer Attorneys of
California (CAOC), these factoring companies aggressively
advertised (and continue to do so) to convince those with
structured settlements to transfer or sell future payments for
present cash. "Many payees who dealt with factoring companies
were exploited. By fashioning transactions as purchases of
future payment rights or as loans originated in states with
generous usury laws, factoring companies often charged sharp
discounts to payees who were ill equipped to appreciate the
value of their future payments or to understand the onerous
terms of factoring agreements. In some cases, factoring
companies charged discounts equivalent to annual interest rates
as high as 70 percent." (Transfers of Structured Settlement
Payment Rights: What Judges Should Know About Structured
Settlement Protection Acts (Spring 2005) Number 2, Volume 44,
Spring 2005, American Bar Association, the Judges Journal, 19
(Transfers of Structured Settlement Payment Rights); see also
J.G. Wentworth S.S.C. v. Jones (2000) 28 S.W.2d 309, 315 ["[i]n
the four cases here the rate of return to Wentworth varied
between 36 and 68 percent per year"]; Windsor-Thomas Group, Inc.
v. Parker (2001) 782 S.2d 478, 480 ["from a functional
viewpoint" a factoring company's 'Fund Acquisition Agreement'
with a payee "was a 'secured promissory note with an annual
interest rate of approximately 100 percent'"].)
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As a result of the emergence of the secondary market and its
concomitant problems and negative effects on consumers, many
states, including California, enacted structured settlement
transfer protection acts that require that a transfer be in the
best interest of the payee, be fair and reasonable, and be
approved by the court. (SB 491 (Johnston, Ch. 742, Stats.
1999); Ins. Code Sec. 10134 et seq.)
In addition, in 2001, Congress enacted federal law intended to
work as a deterrent to transfers that are not in the best
interest of a payee or are not fair and reasonable. The
transfer of a structured settlement is protected for tax
purposes under federal law. Federal law defines a structured
settlement as "an arrangement, which is established by suit or
agreement for the periodic payment of damages excludable from
the gross income of the recipient ? ." (26 U.S.C.A. Sec. 5891.)
The Internal Revenue Code provides, in part, that specified
federal taxes do not apply to a structured settlement factoring
transaction in which the transfer satisfies the best interest
test, will not contravene applicable law, and is approved in
advance by court order. If a transfer fails to comply with
Section 5891, the transfer is subject to a 40 percent excise
tax.
CHANGES TO EXISTING LAW
1. Existing law provides that a transfer of structured
settlement payment rights is void unless: 1) the transfer is
fair and reasonable and in the best interest of the payee; and
2) the transfer complies with the TSSPRA, will not contravene
other applicable law, and is approved by the court. Existing
law provides that the court retains jurisdiction to interpret
and monitor the implementation of the transfer agreement as
justice requires. (Ins. Code Secs. 10137, 10139.5(f).)
Existing law requires that for a transfer of structured
settlement rights to become effective, the transfer must be
approved in advance in a final court order based on express
written findings that:
(a) the transfer is in the best interest of the payee,
taking into account the welfare and support of the payees
dependents;
(b) the payee has been advised in writing by the transferee
(any person receiving structured settlement payment rights
resulting from a transfer) to seek independent professional
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advice regarding the transfer and has either received that
advice or knowingly waived that advice in writing;
(c) the transferee has provided the payee with a disclosure
form and a transfer agreement that complies with applicable
law;
(d) the transfer does not contravene any applicable statute
or the order of any court or other government authority;
(e) the payee reasonably understands the terms of the
transfer agreement, including a specified disclosure
statement; and
(f) the payee reasonably understands and does not wish to
exercise the payee's right to cancel the transfer
agreement. (Ins. Code Sec. 10139.5(a).)
This bill would require the court, in determining whether a
transfer is in the best interest of the payee, to consider the
totality of the circumstances, including all of the following:
(a) the reasonable preference of the payee in light of the
payee's age, mental capacity, maturity level, or financial
or legal knowledge;
(b) the stated purpose of the transfer;
(c) whether the periodic payments of the structured
settlement were intended to cover future income loss or
future medical expenses;
(d) the potential need for future medical treatment;
(e) whether the transfer is in the best interest of the
payee's dependents;
(f) whether the payee has means of support aside from the
structured settlement, if the transfer is allowed to
proceed, to meet his or her obligations for care,
treatment, and future maintenance and support of dependents
including, but not limited to, child support obligations;
(g) whether the offered discount rate is in line with the
market rate for similar transfers and is considered
conscionable taking into account, among other factors, the
availability of alternate financial instruments, the amount
and sources of payee's monthly income and financial
resources, and, if presently married, the amount and source
of the monthly income and financial resources of the
payee's spouse;
(h) whether any previous applications pertaining to funds
that are the subject of the pending application or that
were a part of the original structure have been submitted
in any jurisdiction, including any applications that have
been submitted but later withdrawn before court
determination;
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(i) whether the payee is in a hardship situation; and
(j) whether the payee has received independent legal and
financial advice so as to appreciate the financial
consequences of the proposed transaction.
This bill would require every application for approval of a
transfer of structured
settlement payment rights to include all of the following:
(a) the payee's name, address, and age;
(b) the payee's marital status, and if married or separated,
the name of the payee's spouse;
(c) the names, ages, and place or places of residence of the
payee's minor children or other dependents, if any;
(d) the payee's monthly income and sources of income, and, if
presently married, monthly income and sources of income of
the payee's spouse; and
(e) whether the payee is currently obligated under any child
support or spousal support order, and, if so, the names,
addresses, and telephone numbers of all individuals who are
the beneficiaries of the orders and of all agencies that
have jurisdiction over the orders or payments.
2. Existing law requires that an application for approval of a
transfer of structured settlement rights be made by the
transferee and brought in the county in which the payee
resides. Existing law requires the transferee, not less than
20 days prior to a hearing on an application, to file with the
court and serve on all interested parties a notice of the
proposed transfer and the application for its authorization.
(Ins. Code Sec. 10139.5(c)(d).)
This bill would provide that, for purposes of Section
10139.5(d), "interested parties" would include, but not be
limited to, any agency charged with enforcing the child
support, the payee's attorney of record as of the time of the
creation of the structured settlement at the attorney's
current address on file with the State Bar, and the payee's
current attorney.
3. Existing law requires the transferee to advise the payee of
his or her right to seek independent counsel and financial
advice in connection with the transferee's petition for court
approval of the transfer agreement. Existing law also
requires the transferee to advise the payee that, if the payee
retains counsel, an accountant, or an actuary, the transferee
pays for the attorney, accountant, or actuary up to $1,500
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total. (Ins. Code Sec. 10139.5(e).)
This bill would require the notification required by Section
10139.5(e) to include a conspicuous specified written
statement regarding the payee's right to seek independent
legal and financial advice before entering into a transfer
agreement.
COMMENT
1. Stated need for the bill
The sponsor, CAOC, writes:
While current law requires that the transfer of structured
settlement payment rights be in the best interest of the
payee, current law does not specifically enumerate the factors
a court should consider in determining whether a transfer is
in the best interest of a payee and his or her dependants, if
any. This bill would enumerate the factors a court would be
required to consider in a best interest analysis. Under SB
510, the required best interest analysis would include
consideration of the reasonable preference of the payee; the
purpose of the transfer; whether the structured settlement was
intended to cover future income loss and/or medical expenses;
the intention of the periodic payments; the potential need for
future coverage of medical treatment; whether the payee has
others means of support; whether the periodic payments are in
the best interest of the payee's dependents; whether the payee
is in a hardship situation; and whether the payee has received
independent legal and financial advice.
Consideration of the above factors would give the court
concrete information upon which to make an informed best
interest analysis and decision. In addition, to qualify for
the exemption from the 40 percent federal excise tax, a
structured settlement factoring transaction must be found to
be in the "best interest of the payee taking into account the
welfare and support of the payee's dependents."
2. This bill would require the court to consider, as part of
its determination of whether a transfer is fair and
reasonable, whether the discount rate offered by the
transferee meets certain standards
Current law also requires that a transfer be fair and
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reasonable. However, as with the best interest test, current
law does not specify what the court should consider in
determining whether a transfer is fair and reasonable. This
bill would provide some guidance for the court, including
requiring it to consider whether the offered discount rate is in
line with the market rate for similar transfers and is
considered conscionable taking into account, among other
factors, the availability of alternate financial instruments and
the income and financial resources of the payee and his or her
spouse.
A key reason to provide the court some guidance is that in
evaluating the terms of a transfer for purposes of making a
finding regarding the fairness and reasonableness of a transfer,
courts have been troubled by the discount rates commonly charged
in factoring transactions. Those rates have been variously
characterized as "punishingly high," "exorbitant," and
"unconscionable and overreaching." (See, e.g., In re 321
Henderson Receivables Ltd. Partnership (DeMallie) (2003) 769
N.Y.2d 859, 861 [payee would effectively be paying 18 percent
interest, which the court considered a "punishingly high rate of
interest" and "clearly a very high rate for a secured
investment"].)
3. The Fresno cases; an illustration of the need for SB 510
Beginning in 2008, "several superior court judges in Fresno
County began to deny petitions for court approval of structured
settlement payment transfers based upon actual or perceived
misconduct on the part of factoring companies ? ." The main
factoring company involved was Henderson, an indirect subsidiary
of J.G. Wentworth, LLC. (321 Henderson Receivables Origination
LLC v. Judith Red Tomahawk (2009) 172 Cal.App.4th 290; 321
Henderson Receivables Origination LLC v. Lisa Ramos (2009) 172
Cal.App.4th 305.) In the Henderson cases a question arose about
court nullification of prior transfers based upon misconduct by
the factoring companies. While the appellate court reversed the
trial courts, the cases provide a good illustration of why the
courts need more guidance for evaluating structured settlement
transfers before approving them.
4. Author's amendments
On page 2, lines 32-33, delete: "and the current statutory usury
rate of interest, as defined by statute."
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On page 2, line 32, insert after the word "instruments:"
the amount and sources of payee's monthly income and financial
resources, and if presently married, the amount and source of
the monthly income and financial resources of the payee's
spouse.
On page 3, line 32, delete the word "transferee" and insert the
word "payee."
The author, the sponsor, CAOC, and the National Structured
Settlements Trade Association (NSSTA) are considering whether
some of the bill's provisions should be subject to privacy
protections, such as the requirement that every transfer
application include the names, ages, and places of residence of
the payee's minor children or dependents and income and other
financial information. Committee staff also notes that the
author, CAOC, and the NSSTA have been engaged in and will
continue to engage in discussions regarding amendments to the
bill as it moves forward.
Support : Congress of California Seniors; Consumer Federation of
California; California Alliance for Retired Americans
Opposition : None Known
HISTORY
Source : Consumer Attorneys of California
Related Pending Legislation :
AB 982 (Tran) would revise the definition of "interested
parties" for purposes of the TSSPRA; would provide that the
provisions regulating the transfer of structured settlement
payment rights would apply to transfers if either of two
conditions are met relating to whether the payee is or is not
domiciled in California; would prohibit specified void and
unenforceable provisions relating to choice of forum and
choice-of-law if the payee is domiciled in California at the
time the transfer agreement is signed by the payee; and would
make specified changes to the requirements regarding the court's
written findings, the county for filing the transfer approval
applications, and the documents to be include with the notice.
This bill was heard in the Assembly Insurance Committee on April
22, 2009, Noes 10, Ayes 0.
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Prior Legislation : None Known
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