When a person settles a personal injury, wrongful death or medical malpractice lawsuit, they commonly enter into a structured settlement in which the injured person receives defined payments on an agreed-upon schedule. Payments may be made for a set number of years, a finite number of lump sum payments or a combination of the two methods.
In some structured settlements, the payments are guaranteed whether the injured party is alive or not when the payments become due. In these cases, the payments pass to a beneficiary until completed. In other structured settlements, all or some of the payments are life contingent and are only payable if the recipient is alive when payments are due.
Once the structured settlement is reduced to a written and signed agreement, the company responsible for making the payments will frequently assign its payment obligation to an insurance company pursuant to a uniform qualified assignment agreement (UQAA). The insurance company will then be responsible for making the settlement payments.
This will only be treated as a qualified assignment if the settlement proceeds for compensatory damages arising from a physical injury or illness are excluded from income taxes under §104a(2) of the Internal Revenue Code. The UQAA will contain language specifying the payments cannot be accelerated, deferred, increased or decreased. Section 130(c) of the Internal Revenue Service, defining qualified assignments, states the periodic payments cannot be accelerated, deferred, increased or decreased and must be fixed and determinable.
The assignee/insurance company obligated to make the structured settlement payments under a UQAA will commonly purchase an annuity — often from a related company known as the annuity issuer — to fund the structured settlement payments. The company purchasing the annuity is usually referred to as the structured settlement obligor or annuity owner. The injured person is the beneficiary of the annuity payments.
Selling Settlements to Factors
Life circumstances frequently change, and someone who initially liked the idea of a structured settlement may have more pressing needs years later causing them to desire a lump sum of cash rather than payments stretching into the future.
In these cases, claimants may approach factoring companies to purchase the structured settlement payments for a lump sum, minus the total amount of the payments being sold. In 49 states, a factoring company must obtain court approval to purchase these payments. In these states, a sale of payments is prohibited without court approval.
A seller of structured settlement payments is required to sign a contract stating the purchase price with the factoring company purchasing those payments. The seller also must sign a disclosure statement, which specifies the aggregate amount of the payments being sold, the discounted present value of the payments (since payments in the future are worth less today) and the gross and net amount being paid to the seller.
Court Approval Required
Frequently, the seller will ask for and receive an advance payment or payments on the purchase price, which will be deducted from the amount to be paid to the seller after the entry of an order approving the sale. Because court approval of the sale of structured settlement payments is not guaranteed — and in light of the highly competitive nature of the industry where sellers will sign contracts with and receive advances from several factoring companies on the same stream of payments being sold — the factoring company must protect itself when making advances.
Factors Must Protect Themselves
To best protect itself, the factoring company must obtain a signed repayment agreement from the seller of the payments containing, at a minimum, the fol-
- Acknowledgment by the seller of the amount of the advance(s) paid
- Promise by the seller to repay the advance(s)
- Choice of law and venue provision
- Prevailing party attorney’s fee language
- Provision for interest in the event of default at the maximum amount allowed by law plus costs
- Waiver of a jury trial
In addition, by wiring advance payments to the seller, a factoring company can obtain potential and important bank account information if it must file a lawsuit as well as obtain and collect on a judgment.
Payments May Be Presold
Before even considering making advances, a factoring company must ensure the payments it is purchasing are available and not previously sold. To start, factors must require the seller to sign a written application providing details regarding all prior sales of structured settlement payment rights. This information can help the factoring company perform court searches for the orders on the prior sales.
Nevertheless, the factor cannot rely simply upon the information the seller supplies, which may be inaccurate or incomplete, and the ability to perform court searches may be limited. However, additional due diligence steps are necessary to confirm the payments being purchased are available for sale.
The factoring company should request a benefits letter from the annuity issuer. This letter will set forth the payments still remaining under the annuity.
Frequently, in conjunction with the final order approving the sale, the annuity issuer will require the parties to sign a stipulation in which the seller warrants she has all right, title and interest in the payments being sold, and the annuity issuer which represents it will send the payments in question to the factoring company at an address designated by the factoring company.
The factoring company can insist on a provision in the final order requiring the annuity issuer to send an acknowledgment letter of compliance with the order within a certain number of days.