BILL ANALYSIS
SB 510
Page 1
Date of Hearing: June 30, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 510 (Corbett) - As Amended: June 24, 2009
As Proposed To Be Amended
SENATE VOTE : 24-13
SUBJECT : Structured Settlements: Payment Transfers
KEY ISSUE : SHOULD THE STRUCTURED SETTLEMENT TRANSFER LAWS BE
REVISED?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill reflects the consensus reached between the Consumer
Attorneys of California and the trade associations representing
companies that purchase structured settlement payment rights
from injured parties, including the National Structured
Settlements Trade Association (NSSTA), National Association of
Structured Settlement Purchasers, and Association of Settlement
Companies. Structured settlements are established to distribute
law suit proceeds over time, rather than in a lump-sum, through
the purchase of an annuity - typically to benefit vulnerable
victims, such as children, the elderly and person with
disabilities, frequently in order to meet future medical
expenses and basic living needs. These payment streams are
valuable, and a market has therefore developed for companies to
purchase these rights from the injured person or a successor in
interest. Because the injured person is potentially subject to
being preyed upon by more sophisticated entities using sharp or
unscrupulous practices, existing law establishes certain rights
and procedures if a structured settlement is to be transferred
by the injured person, including obtaining court approval after
a determination that the proposed transfer is in the best
interest of the payee. This bill is intended to increase court
oversight over the sale of structured settlement rights while
simultaneously narrowing application of the law in some respects
and relieving proposed purchasers of settlement payment rights
from certain obligations. As proposed to be amended, the bill
SB 510
Page 2
has no opposition.
SUMMARY : Revises the structured settlement approval laws.
Specifically, this bill :
1)Limits application of the transfer approval statute to
transfers where the payee (person selling settlement payment
rights) is domiciled in California at the time the transfer
agreement is signed by the payee or the payee is not domiciled
in California at the time the transfer agreement is signed and
the state where the payee is domiciled does not have a
structured settlement transfer statute, but either the
structured settlement obligor or annuity issuer is domiciled
in California.
2)Limits the class of beneficiaries who are entitled to court
notice of a proposed sale of structured settlement rights to
only those beneficiaries irrevocably designated in the
underlying annuity agreement.
3)Provides new notice of the proposed transfers to the payee's
former attorney if the payee sells his or her structured
settlement rights within five years of the date of the
structured settlement agreement.
4)Provides new notice and disclosure to proposed payees.
5)Further specifies the factors and circumstances the court must
consider before approving the transfer.
6)Provides that every application for approval of a transfer of
structured settlement payment rights shall contain specified
information including notably, for the first time, whether the
payee completed previous transactions involving the payee's
structured settlement payments and the timing and size of the
previous transactions, and whether the payee was satisfied
with any previous transaction, as well as whether the
transferee attempted previous transactions involving the
payee's structured settlement payments that were denied or
that were dismissed or withdrawn prior to a decision on the
merits, within the past five years, and whether the payee is
currently obligated under any child support or spousal support
order.
7)Exempts proposed purchasers of settlement rights (transferees)
SB 510
Page 3
from providing certain documentary evidence to the court if it
is unavailable, subject to a contractual non-disclosure
requirement, or if it is provided to the court orally.
EXISTING LAW :
1)Defines a "structured settlement agreement" as an arrangement
for periodic payment of damages established by settlement or
judgment in resolution of a tort claim in which the payment of
the judgment or award is paid in whole, or in part, in
periodic tax-free payments rather than a lump-sum payment.
(Insurance Code section 10134.)
2)Provides that no transfer of structured settlement payment
rights shall be effective by a payee (i.e., an individual who
received tax-free payments pursuant to a structured settlement
agreement) domiciled in this state, or by a payee entitled to
receive payments under a structured settlement funded by an
insurance contract issued by an insurer domiciled in this
state or owned by an insurer or corporation domiciled in this
state, and no structured settlement obligor or annuity issuer
shall be required to make any payment to a transferee unless
the rights described below are satisfied. (Insurance Code
section 10136.)
3)Establishes a set of rights in connection with transfers of
structured settlement payments, including the following:
a) 10 days before the execution of the transfer agreement,
the person shall receive a written disclosure statement of
the terms of the transfer agreement including:
i) disclosing that the person is selling his or her
right to receive the payments under a structured
settlement
ii) the total dollar amount of payments the person is
selling
iii) the present value of the amount the person is
selling
iv) the net amount that will be paid to the person
v) the interest rate that would be charged if the
person borrowed the amount
vi) the total expenses being charged
vii) notification that the person should obtain
independent professional advice to determine if the
transfer is a good idea for him or her, and that the
SB 510
Page 4
person should get independent professional advice from an
accountant or lawyer experienced in tax matters about any
income tax consequences from selling his or her
structured settlement payments. (Insurance Code Section
10136.)
b) Requires that a court approve the transfer agreement.
(Insurance Code Section 10139.5.)
c) Allows the payee the right to cancel the transfer
agreement without cost before court approval. (Insurance
Code Section 10138.)
d) Prohibits the transfer agreement from containing
language that waives the right of the seller to sue, that
requires the seller to indemnify and hold harmless the
buyer, and other specific legal protections. (Insurance
Code Section 10138.)
COMMENTS : According to the sponsor, Consumer Attorneys of
California:
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
SB 510
Page 5
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
Background on Structured Settlement Transfers . A structured
settlement is generally defined as a financial or insurance
arrangement, including periodic payments, that a 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.
SB 510
Page 6
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'").)
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. 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.
Author's amendments. The author very recently completed
negotiations on further amendments reflected in the attached
mockup.
Related Pending Legislation . AB 982 (Tran) is a
structured-settlement industry sponsored bill which, when heard
by this Committee, revised the definition of "interested
parties" (i.e., persons who get notice of a proposed transfer of
structured settlement payment rights) to narrow the class of
"other parties" who have continuing rights or obligations under
the structured settlement agreement to include only those whose
continuing rights or obligations "could be affected by the
proposed transfer;" clarifies that the existing rules regarding
venue, choice of forum and choice of law apply only if the payee
is domiciled in California at the time the transfer agreement is
signed. That bill is currently pending in the Senate.
SB 510
Page 7
REGISTERED SUPPORT / OPPOSITION :
Support
Consumer Attorneys of California (sponsor)
California Alliance for Retired Americans
California Judges Association
Congress of California Seniors
Consumer Federation of California
Opposition
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334