Since the enactment of Section 5891 of the Internal Revenue Code and the various structured settlement protection acts (“SSPAs”), the volume of structured settlement factoring transactions has soared.  Indeed, over the course of the past fifteen years or so, factoring companies have processed literally tens of thousands of transfer petitions and enjoyed a surprisingly high court approval rate.  Even when insurers have elected in particular instances to challenge factoring transactions, convincing courts to deny those transactions on best interest grounds is often difficult.1

The judicial tide, however, has been turning.  Trial courts in New York routinely require factoring companies to meet a relatively high bar to establish that their factoring transactions are in the best interests of payees and their dependents.  See, e.g., Lee v. Cebsco, No. 1991/3, 2014 WL 2216160 (N.Y. Sup. 2014) (denying a petition with an 17.78 percent discount rate after finding, inter alia, that the transaction was not in the payee’s best interest).  Following New York’s lead, in the last two years, trial courts in at least eight other states have issued opinions establishing high bars in connection with the best interest standard. See, e.g., In re: Jackson Holdings (D.Kimberly), No. 2014-CV-900060.00 (Jefferson Cnty., Ala. Cir. Ct.) (entered Feb. 7, 2014) (denying a petition after finding that the transfer was not in the payee’s best interest).

Now at least one prominent appellate court has weighed in and confirmed that the trial courts setting a high best interest bar are right.  Indeed, the bar set on August 5, 2015, by the Texas Court of Appeals in In re Rains, No. 07-14-00132-CV, 2015 WL 4647779 (Tex. App. 2015) is one of the highest yet, putting the factoring companies on notice that their glory days may be drawing to a close.  In any event, it has become increasingly clear that factoring companies must satisfy a high burden of proof to establish that transfers of structured settlement payment rights are in the “best interest[s]” of payees and their dependents under the SSPAs.2

In Rains , Metropolitan Life Insurance Company brought an appeal following the trial court’s approval of a J.G. Wentworth factoring transaction involving payee Jamie Rains.  The basic terms of the transaction were an exchange of $48,600 in future periodic payments for an immediate lump sum of $24,000 based on a discount rate of 17.4%.

The court’s decision began with a reference to the Biblical passage about Esau selling his inheritance to Jacob for a bowl of lentil soup, signaling the court’s understanding that factoring companies often get the better of payees.3  The court then explained that the judiciary is vested with the paternalistic role of protecting payees against factoring company exploitation, and that the judiciary must ensure that this protection “exists in fact, not merely in word.”  The court also identified and considered no less than 18 non-exclusive factors in connection with the best interest analysis and found the evidence before it lacking. 

According to the court, the record failed to include evidence about the payee’s household income, the payee’s education and business acumen, her current and prospective financial needs and those of her family, the nature of her alleged proposed home addition, the extent of her husband’s education and financial experience, and what effort was made to investigate alternatives to selling a portion of the payments.  The court further noted that the payee failed to obtain independent financial or legal advice about the transaction, and the factoring company failed to meet its burden of justifying the 17.4 percent discount rate.  In the end, the record was deemed inadequate to permit the trial court to determine whether the transfer was in the payee’s and her dependents’ best interest, and whether “the payee fell victim to the abuse or exploitation of a factor.”

In addition to reversing the trial court’s approval on best interest grounds, the court ruled that the applicable SSPA (the Texas Structured Settlement Protection Act, Tex. Civ. Prac. & Rem. Code Ann. § 141.001 et seq.) expressly prohibited the factoring company from compelling the annuity issuer to divide payments.4  The court also held that the factoring company could not get around this issue by forcing the annuity issuer to send the factoring company the entire amount of the monthly payments (including the assigned portions), and to then rely on the factoring company to remit the unassigned portions to the payee.

This opinion should assist trial courts in their effort to implement SSPAs.

1 SSPAs typically require that a court of competent jurisdiction make an express finding that “the transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.”  See, e.g., NY CLS Gen Oblig § 5-1706.
2 Rains is the only appellate decision to consider in depth the proof required to satisfy the “best interest” standard, and to reverse a trial court’s decision to approve a factoring transaction on “best interest” grounds.
3 As explained by the court:  “Esau sold his inheritance to Jacob for a bowl of lentil soup.  Apparently, no statute existed at the time requiring a court to decide whether that transaction was in Esau’s best interest.  Such a statute exists today and regulates the sale of interests in structured settlements to factors.”  The court also described the specifics of the factoring transaction using a reference to “Popeye’s rotund friend Wimpy,” explaining that Wimpy would “gladly pay you $48,600 tomorrow for $24,000 today.”
4 Approximately 29 SSPAs have similar language protecting insurers from having to split payments.