Structured Settlement Transfers

Inherent in any structured-settlement transfer transaction is the significant possibility of effectively negating much of the benefit otherwise obtained on behalf of an injured party.

It may be your money, you may want it now, but it’s the court who must determine whether or not there will be a transfer

Most of us have heard these or similar words on television commercials inviting structured settlement beneficiaries to transfer their periodic payment rights; usually provided by way of an annuity, to a factoring company. In exchange, the beneficiaries receive a lump sum payment from the factor. Structured settlements are intended to provide an income stream in order to address the anticipated future medical or living needs of an injured payee, oftentimes including expenses to be incurred by that party’s dependents.

Favorable federal tax treatment facilitates structured settlements in recognition of the fact that they tend to prevent injured parties from later becoming dependent upon public assistance. Because transfer transactions would oftentimes likely result in the otherwise future benefits being quickly dissipated, these are often viewed with disfavor. As such, public-policy considerations have resulted in a requirement that courts approve any such transfers in a special proceeding to ensure their fairness to the assigning payee. Before a transfer is approved, the court must first make certain express findings. A transfer not so approved is void. As set forth below, a very recent case: 321 Henderson Receivables Origination LLC v. Sioteco et al., 2009 DJDAR 6542 (Fifth Appellate District; filed May 6, 2009), would seem to require courts to also make detailed, case-specific factual findings if they are going to deny such transfer petitions.

California’s Structured Settlement Transfer Act

The rules governing such transfers as well as their related special proceedings are found in California Insurance

Code Section 10134 et seq., commonly referred to as the California Structured Settlement Transfer Act (the “Act”). Pursuant to Insurance Code section 10137, courts are empowered to approve applications that comply with the technical requirements of the Act provided they reflect fair and reasonable transfer terms in the transferor’s best interests, according to Douglas Wade, a business lawyer in Newport Beach

Until just a few months ago there had not been any reported cases under the Act. Most recently, in 321 Henderson Receivables Origination LLC v. Sioteco, supra, the Fifth Appellate District reversed a Fresno Superior Court which had, in a lengthy, highly detailed unpublished ruling involving a number of petitions before it, severely criticized practices employed by or on behalf of Petitioner 321, Henderson Receivables Origination LLC, an affiliate of J.G. Wentworth (“Henderson”). In order to better understand these transactions and the court approval process, a review of the Act’s requirements is helpful.

Requirements of the California Structured Settlement Transfer Act

The Act sets forth a number of detailed procedural requirements meant to ensure the court has all of the necessary documents and facts before it so it can properly evaluate the proposed transaction including the following:

  • A separate, written disclosure statement is provided to the payee at least 10 days before the payee executes a transfer agreement. The disclosure shall be in at least the statutorily designated point type size indicating, among other things, the total dollar amount of, and dates of, the payments to be transferred; the present value to be transferred as determined by the applicable federal rate; the effective equivalent interest rate
  • assuming the transaction constituted an installment loan; each expense being deducted; the net amount to be paid to the payee; the necessity for independent professional advice; the necessity of obtaining court approval and the right to notice of the court hearing date; obligation-free cancellation rights at any time prior to issuance of the court Order approving the transaction; continuing jurisdiction of the court to interpret and monitor the terms as justice may require; and, reporting of unfair practices to the local district attorney or state Attorney General (Ins. Code, §§ 10I36(b)-(e);
  • A transfer agreement which com-plies with the statutory requirements and does not contain any prohibited provisions. Prohibited provisions include, among others: a waiver of right or standing to sue; indemnity7 or hold harmless by the payee; waiver of any benefits or rights under law; confidentiality or proprietary rights in favor of the transferee; confession or stipulation for judgment; payment obligation to transferee or its counsel in the event of non-approval; payment of tax liability of anyone other than that of payee as a result of the transfer; deduction of brokerage fees; non- California forum or non-California choice of laws; secured rights of transferee in payee’s benefits beyond the amount of the payments transferred; transferee’s rights of first refusal as to any later payments to which payee may be entitled and which payee may later desire to sell; and any waiver of any statutory7 right (Ins. Code, § 10138);
  • With respect to any payee who is a California resident, a concurrent filing by the transferee with the state Attorney General of a copy of the application
  • along with copies of all applicable documents including the underlying annuity, proof of notice to all interested parties, and a verified statement of statutory compliance (Ins. Code, § 10139). In addition, the application may only be brought in the county in which the payee resides (Ins. Code, § 10139.5(c) (1));
  • Filing with the court and service upon all interested parties, at least 20 days prior to the scheduled hearing, the application which shall include: a notice of the proposed transfer and the application for its authorization; a copy of the transfer agreement; a listing of each of the payee’s dependents, together with each dependent’s age; a copy of the required disclosure form; a copy of the annuity contract; a copy of any qualified assignment agreement; a copy of the underlying structured settlement agreement; notification that any interested party is entitled to support, oppose, or otherwise respond to the transferee’s application; and, notification of the time and place of the hearing and notification of the manner in which and the time by which written responses to the application must be filed which may not be less than 15 days after service of the transferee’s notice in order to be considered by the court (Ins. Code, § 10139.5(c)(2)); and
  • No later than the time of filing the petition for court approval, the transferee shall advise the payee of the payee’s right to seek independent counsel and financial advice and that the transferee shall pay such fees in an aggregate amount not to exceed $1,500 regardless of whether the transfer is approved and regardless of whether the attorney, accountant, or actuary files any document or appears at the hearing on the application for transfer (Ins. Code, § 10139.5).

Express written findings required for court approval

Before the court may grant the transfer application, the court must make the following express written findings:

  • That such transfer is in the best interest of the payee taking into account, as applicable, the welfare and support of the payee’s dependents;
  • That the payee has been advised in writing by the transferee to seek independent professional advice regarding the transfer and has either received that advice or knowingly waived same in writing;
  • That the transferee has provided the payee with a statutorily complying and fully completed disclosure form and transfer agreement;
  • The transfer does not contravene any applicable statute or the order of any court or other government authority;
  • That the payee reasonably under-stands the terms of the transfer agreement, including the terms set forth in the disclosure statement; and
  • That the payee reasonably under-stands and does not wish to exercise payee’s right to cancel (Ins. Code, § 10139.5).

The factor’s conduct of concern to the 327 trial court

The trial court in 321 had reviewed a great many petitions filed by Henderson and was concerned by certain practices employed by it and by counsel associated with its various applications. As a result of its concern regarding the manner in which the transactions were structured, and the manner in which the petitions were presented, the trial court noted disapprovingly the following:

  • The factoring company failed to include in the court filings and notices complete copies of the underlying annuities or other instruments and specifically deleted those pages which included assignment prohibition clauses;
  • The factoring company took the position that assignment prohibition clauses were unenforceable pursuant to the Uniform Commercial Code. The trial court determined the UCC inapplicable to the underlying insurance contracts;
  • The factoring company took the position that the assignment prohibition clauses could be waived by the payees. The trial court determined these clauses could not be so waived as a matter of public policy;
  • The factoring company placed language other than the required notices in boldface and/or specific type size reserved for the notices thereby, in the trial court’s view, effectively rendering necessary notice language indistinguishable from the remaining text in the documents;
  • The factoring company failed to itemize expenses as statutorily required;
  • The factoring company had payees sign transfer agreements which included blank spaces;
  • The factoring company failed to include transferee’s required verified statements of compliance;
  • The factoring company failed to serve and provide the required notice to the beneficiaries of the annuities and their counsel;
  • The factoring company failed to serve and provide notice to all interested parties including the insurers as to the underlying annuities;
  • The factoring company referred payees to counsel who represented numerous payees so referred and who the court concluded represented only the transferee’s interests; and
  • The factoring company withdrew7 petitions after unfavorable tentative rulings and then filed “new” petitions without disclosing earlier judicial action in order to have the matters assigned to and decided by different judicial officers pursuant to the court’s random assignment process.

The trial court also closely examined the substantive structure of the transactions, specifically the repayment provisions which made the payee liable for the full amount of future payments if the payee failed to take the actions deemed necessary by the transferee in order to ensure repayment of the amounts advanced, cited by Los Angeles business litigation lawyer from the Nakase Law Firm. Relying upon authority in the credit and loan area, the trial court determined the subject transactions were, in actuality, loans.

The trial court further reasoned that since the dis-counts represented an equivalent interest rate in excess of the safe harbor rate of 10 percent for loans intended primarily for personal or household purposes, the transactions were usurious (Cal. Const., art. XV, § 1). Finding the proposed transfers neither complied with the Act nor other applicable law7 as required by the Act, it held them void. In a number of cases, the petitions were denied with prejudice thereby precluding their resub-mission.

Lastly, in order to ensure that the allegedly wrongful acts were not repeated, the trial court also required, pursuant to Insurance Code section 10139.5(f), that the court’s Order be attached to certain future petitions filed by the same petitioner. As set forth below, the appellate court disagreed with much of the trial court’s findings and reversed.

The appellate opinion in Henderson v. Sioteco

In summary’, the appellate court in 321 held, according to a small business lawyer in San Diego, that: 1) notwithstanding the small pool of attorneys ultimately referred to the beneficiaries by other than a referral service or agency’ operated by a state or local bar association, these attorneys were not necessarily failing to act independently; 2) the factoring company had not engaged in systematic violation of the independent-counsel requirement by requiring form estoppel letters confirming that the beneficiaries had been provided independent professional advice even though the letters failed to confirm the clients had received advice on the advisability of entering into the transactions in the first place, ^whether or not there were adverse tax consequences associated with receiving lump sum payment and/or whether such receipt might affect entitlement to governmental benefits such as SSI, Medicare or Medicaid; 3) by also placing language other than the required disclosures in 14- point bold type, the factoring company had not failed to comply with the Act’s disclosure requirements as to the language which was required to be so presented; and, 4) a knowing, written waiver ; of the independent advice requirement could be utilized in supplementing earlier petitions which failed to initially include same thereby disapproving denials with prejudice in this context.

However, as to the remaining deficiencies noted by the trial court, the appellate court agreed that they were sufficiently serious to support denial of the petitions without prejudice leaving it to the trial court to address its concerns upon remand.

It would seem that of greatest significance in 321 wars was the appellate court’s reversal of the trial court’s finding that given assignment prohibitions in certain of the underlying documentation, the payment rights could not be so assigned. Despite what would appear to be comprehensive anti-assignment clauses in both the annuity instruments themselves and the settlement agreements, the appellate court noted the absence of such anti-assignment language in the underlying court orders approving the compromises.

The appellate court further stated that the UCC evidences a public policy7 not against, but in favor of, court-approved factoring transactions. In addition, the transactions were not deemed usurious since it reasoned, that they were sales transactions pursuant to the UCC and not loans. Furthermore, although as a practical matter objections to such petitions would likely never be asserted by any interested parties, it was the appellate court’s opinion that in the absence of any such written objections, the right to receive payments could be transferred.


Inherent in any structured-settlement transfer transaction is the significant possibility of effectively negating much of the benefit otherwise obtained on behalf of an injured party. The typical absence of any adversarial input to assist the court in ferreting out deficiencies in the requests, combined with the very real potential for abuse in the area, require that courts do everything reasonably possible to ensure that the transaction’s terms are fair and reasonable and in the payee’s best interests.

Pursuant to 321 it is incumbent upon the trial court presented with any such transfer petition to conduct a sufficiently detailed inquiry to confirm that the Act’s requirements have been fully satisfied. As for courts who approve structured settlements which might someday be the subject of transfer petitions, the inclusion of assignment prohibition language in the court orders approving such com-promises should be considered.

Furthermore, given the technical requirements of the California Structured Settlement Transfer Act, courts and the public might be well-served to have all such orders approving of the settlements, and all petitions seeking approval of transfers of rights therein reviewed by or at least with the assistance of judicial officers intimately familiar with the Act’s requirements. Only then will the protection of structured settlement beneficiaries’ rights provided by the Act be ensured.