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Be Careful When Purchasing Interests in Structured Settlement Payments

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  • Posted on: Mar 24 2023

By Jonathan H. Freiberger

Structured settlement annuities are frequently used by courts and litigants to provide a stream of payments to, inter alia, injured parties and/or their families in personal injury and/or wrongful death cases.  Due to abuse at the hands of unscrupulous factoring companies, the New York Legislature, in 2002, enacted the Structured Settlement Protection Act (”SSPA”).  As the court in In the Matter of Petition of 321 Henderson Receivables Origination LLC, 19 Misc.3d 504 (Sup. Ct. Queens Co. 2008), stated:

The Structural [sic] Settlement Protection Act (General Obligations Law § 5–1701 et seq.) was enacted in 2002 as a result of factoring companies using “… aggressive advertising, plus the allure of quick and easy cash, to induce settlement recipients to cash out future payments, often at substantial discounts, depriving victims and their families of the long-term financial security their structured settlements were designed to provide” (N.Y.S. Legis. Memo. Ch. 537, 2002; McKinney’s 2002 Session Laws of N.Y., at 2036). Under this law, such transfers are now prohibited unless approved by a court based upon express findings required by General Obligations Law § 5–1706 (a)–(e).

In the Matter of Petition of 321 Henderson, 19 Misc.3d at 505 (hyperlinks added).  

The procedures for transferring an interest in a structured settlement are clearly set forth in GOL § 5-1705.  Among other things, in order to effectuate such a transfer, a special proceeding brought on by order to show cause must be commenced.  GOL § 5-1705(a).  Further, the SSPA provides that direct or indirect transfers of structured settlement payment rights will not be effective “unless the transfer has been authorized in advance in a final order of a court of competent jurisdiction based upon express findings by such court that,” inter alia: “the transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependants [sic]; and whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable. Provided the court makes the findings as outlined in this subdivision, there is no requirement for the court to find that an applicant is suffering from a hardship to approve the transfer of structured settlement payments under this subdivision….”  GOL § 5-1706; GOL § 5-1706(a).  Finally, as relevant here, GOL § 5-1708(d) provides that “[n]o payee who proposes to make a transfer of structured settlement payment rights shall incur any penalty, forfeit any application fee or other payment, or otherwise incur any liability to the proposed transferee or any assignee based on any failure of such transfer to satisfy the conditions of this title.”

The March 22, 2023, decision of the Appellate Division, Second Department, in Pinnacle Capital, LLC v. O’Bleanis, describes the SSPA and illustrates the pitfalls of failing to abide by its terms.  The defendants in Pinnacle were trustees of a trust that had an interest in structured settlement annuity payments (“SSAPs”).  The Complaint alleged that: defendants agreed to sell to Bentzen Financial, LLC, the trust’s interest in the SSAPs; Bentzen filed an order to show cause seeking court approval of the agreement; plaintiff received a copy of what it believed was a valid court order approving the agreement; and, plaintiff paid defendants $280,000 in anticipation of Bentzen receiving the structured settlement payments.  When plaintiff and defendants subsequently learned that the approval order was forged, “plaintiff sought from the defendants either a return of the $280,000 or cooperation in obtaining a valid court approval of the agreement, but the defendants refused.”

Plaintiff, seeking the return of its money, sued defendants under various theories of recovery.  Alternatively, plaintiff sought a declaration that the agreement was valid and/or the defendants could retain the payment upon the issuance of a court order approving the agreement.  Defendants appealed supreme court’s denial of their motion to dismiss.

On appeal, the Second Department reversed because the “plaintiff’s claims are prohibited by the SSPA.”  The Court recognized that:

the purpose of the SSPA, as reflected in the legislative materials, was to establish “procedural safeguards for those who sell settlements that are awarded as a result of litigation,” due to a recognition that “[m]any of the people who receive such settlements are being compensated for very serious, debilitating injuries, and have been unfairly taken advantage of in the past by the businesses that purchase their settlements” (Mem in Support, Bill Jacket, L 2002, ch 537 at 5).

The Court reiterated that, pursuant to GOL § 5-1706, transfers of SSAPs are “prohibited unless approved by a court of competent jurisdiction based upon express findings, inter alia, that the transfer is in the best interest of the payee and that the discount rate, fees and expenses used to determine the net amount advanced are fair and reasonable.”  (Citations and internal quotation marks omitted.)  Additionally, as noted by the Court, “[i]n circumstances, such as here, where payment for a structured settlement transfer is made to the payee prior to the court’s approval of the transfer, whether intentionally or due to a mistaken belief that the transfer had already been approved, a proposed transferee must seek nunc pro tunc approval of the transfer, and such approval is not guaranteed.”  (Citations omitted.)

Thus, the Court concluded that supreme court “should have granted the defendants’ motion pursuant to CPLR 3211(a) to dismiss the complaint, as it is barred by the provisions of General Obligations Law §§ 5-1708(d) and 5-1705.”

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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