Secondary Insurance Market Blog

Other Recent Legislative Developments Among Structured Settlement Protection Acts

In the past year, the big news on the legislative front for the secondary market in structured settlement payments has been out of California, with the passage of the revised California Structured Settlement Protection Act, as described in the posts listed here.

As far as structured settlement protection act changes go, one other noteworthy legislative development occurred in 2009: the enactment of the North Dakota Structured Settlement Protection Act.

As we noted here, North Dakota is the only state whose SSPA makes it a crime to violate the statute.  SeeNorth Dakota Century Code § 32-03.4-12 (stating that "[a]ny transferee that willfully violates" the North Dakota SSPA "is guilty of an infraction" and that a second or subsequent violation is a misdemeanor).

ACLI Proposes the Prohibition of Securitization of Life Settlements

In the boldest move yet against the life settlement industry, the ACLI released a policy statement in which it announced its desire to end the securitization of life settlements.  The ACLI says the move is aimed at protecting seniors from solicitation, as well as preventing stranger-originated life insurance, or STOLI, the growth of which is undoubtedly fueled by investors' desire to find profitable and "uncorrelated" investments.

Where companies bundle life settlements together and sell beneficial interests as securities, it is difficult for those investors to know whether the bundle will include STOLI transactions or not.  At least until the 2008 liquidity crisis, the demand for life settlement-based securities appeared to be high.  That demand, in turn, created a risk that the policies themselves would be created for the purpose of selling them - if not immediately, then immediately upon the end of the two year contestibility period.

The inability to securitize life settlements may slow the momentum of the industry, and help protect seniors from solicitation from secondary market brokers, so that life settlements can again be considered as discreet estate planning events for appropriate individuals, rather than in reaction to overly aggressive sales tactics.

The story of another secondary insurance market may have some relevance to the issue of life settlements securitizations.  In the late 1990s, a secondary market for structured settlement payment rights led to securitized sales of bundles pools of payment rights, notwithstanding the questionable legality of the underlying sales of the payment rights.  Private placement memoranda at the time glossed over the insurers' ability to invalidate the sales by way of anti-assignment provisions or based on other legal grounds, and purchasers reassured investors that the payments could be collected by way of lawsuits, agreed judgments, and garnishments.  Eventually, the secondary market companies took the position that the very securitization of the payments made the transactions valid, and the insurers' challenges to the enforceability of the underlying sales had the potential to "pull the rug" out from the secondary market company as well as the "bona fide" investors.  In time, federal and state legislation regulating the industry was aimed at addressing the concerns of the primary structured settlement industry, as well as others with interests at stake. 

As to life settlements, life insurance companies may be motivated by concerns their representatives have described concerning the possibility that the growth of the life settlement industry is threatening the favorable tax treatment of life insurance, as well as the marketability of the sale of life insurance.  

Legislation proscribing or severely limiting the securitization of life settlements likely would please many regulators,  Many would also view such restrictions as consistent with protection of insurance companies against the risk of fraud, as well as against the burden of trying to detect fraudulent transactions within the contestibility period.

Reviewing The California Structured Settlement Protection Act's 2010 Version

The California legislature last year revised its state's structured settlement protection act (SSPA), the statute that regulates secondary market transactions involving the purchase and sale of structured settlement payment rights.

Secondary Insurance Market Blog has addressed various aspects of the newly-revised California SSPA, in the following recent posts:

• New statute;
• New criteria for the best interest standard and whether itemized fees meet a fair and reasonable criterion;
• Information about child support orders, spouses and other dependents (and see also here, here, here, and here);
• Information prior transfers;
• Information about the circumstances at the time of the establishment of the settlement;
• Notice to the payee's former attorney (and how to track them down); and
• Notice to the California attorney general.

Some of the attention given by the California courts and legislature have, according to some accounts, given more attention to the kind of information that judges wish to have when making a decision concerning a proposed structured settlement payment transfer.  Given the revisions to the California SSPA, it will be interesting to see the way judges apply SSPA in the future.

Connecticut Courts Also Focusing On The Interests Of Dependents

While not limited to situations involving child support orders (as described here and here), courts in Connecticut have also made a point to consider the best interests of the dependents of structured settlement payees who are before a judge in a structured settlement protection act matter, as this 2009 articlefrom my partner, Pete Vodola, points out.

In Proposed Structured Settlement Factoring Transactions, Child Support Orders Are Part Of The Equation

To transfer an individual's rights to receive structured settlement payments on the secondary market, a court must approve the transfer.

Each of the 47 state structured settlement protection acts(SSPAs) requires such court approval in order for a secondary market transaction of structured settlement payments to occur.  SSPAs typically also provide that court approval can occur only where the judge can find that the transfer is in the best interests of the payee (meaning the individual originally scheduled to receive the payments), taking into consideration the interests of the payee's dependents.  SSPAs additionally generally require the court to determine that the proposed transfer does not contravene any other court order.

While California has recently revised its SSPA to provide a detailed list of considerations that court's are to review when making the "best interest" determination, and that list includes some specific information about child support orders, California is not alone in requiring courts to take into account such orders, as the Colorado SSPA makes clear.

Even without the kind of express reference to child support orders that appears in the California and Colorado SSPAs, however, child support orders are nearly always part of the equation under SSPAs.  This is because the judge in an SSPA case must (1) determine what's in the best interest of the payee, taking into consideration the interests of the payee's dependents, and (2) decide whether the proposed transfer would contravene another court order -- including any relevant child support order.

When would child support orders not be relevant?  Not that often, but there may be times, such as when the payee has no children, and the court has been provided sufficient evidence of that fact.

California, Colorado, Child Support and the Secondary Market For Structured Settlement Payments

California is not the only state whose structured settlement protection act (SSPA) contains an express recognition of the interests of a structured settlement payee's dependent children.  In fact, most state SSPAs expressly require the judge who is reviewing, and deciding whether to approve or deny, a proposed transfer of structured settlement payment rights to consider the interests of the payee's dependents.  Only the California SSPA, however, contains a statutory description of the information about child support orders, and similar obligations, that the judge shall consider when reviewing an SSPA request.

One other state's SSPA also has an express provision concerning child support orders.  The Colorado SSPAsays that notice must be provided by the factoring company (meaning the purchasing company or "transferee", in the language of the SSPA) to interested parties that include, as per the statute's definition, a governmental "child support enforcement unit" where such a unit is "enforcing a payee's legal obligation to support his or her dependent children . . . ."

Judges May Be Wary Of Structured Settlement Payees Who Seek To Sell Payments But Owe Child Support

While California has become the first state to include express provisions in its structured settlement protection act relating to a court's obligation to review child support obligations, California judges are by no means the only judges that take such matters into consideration when deciding whether to authorize a sale of structured settlement payment rights.

A year and a half ago, Rhode Island's judiciary cast its gaze on structured settlement payees who may have past-due child support obligations, as this story from the Providence Journal pointed out.

New York Insurance Department Provides Guidance On Interim Life Settlement Transactions

New York will begin regulating life settlements, effective May 18, 2010. In the interim, the New York Insurance Department ("NYID") has provided a revised booklet concerning how life settlements may be compliant with applicable regulations prior to the effective date.  The NYID's website also includes a new page concerning the state's recently-enacted life settlements regulation. 

To read more about New York's regulation, click here.

Selling Securities Without A License, and a Secondary Market Investigation That Preceded the Convictions

In an opinion from November, 2009, the Tennessee Supreme Court reversed an intermediate court of appeals decision and reinstated the convictions and sentences of a criminal defendant who had been found to have wold securities without registering with the state based on the sale of shares of a corporation.  The connection to secondary insurance markets?  The defendant previously had been investigated for selling unregistered securities in the form of viatical settlement rights:

[Robert] Heisse, a former examiner in the Securities Division of the Tennessee Department of Commerce and Insurance] had previously led other investigations into the Defendant's business practices on behalf of the Securities Division.  He testified that the Defendant, as the sole owner of Middle Tennessee Trust . . . was involved with the sale of unregistered securities in the form of viatical settlements.  Upon completion of that investigation, the Department issued a cease and desist order directing Middle Tennessee Trust to discontinue its sale of the unregistered securities and to stop acting as a broker-dealer or broker-dealer agent until registering with the state.  Heisse acknowledged that Middle Tennessee Trust complied with the cease and desist order.

State v. Casper, 297 S.W.3d 676 (Tenn. 2009).  The opinion also includes a description of viatical settlements as "contracts under which third-party investors purchase either an entire life insurance policy or stake in a life insurance policy that has been sold by the policyholder prior to his or her death; when the original policyholder dies, the investor, as the legal beneficiary, receives the death benefit from the policy."  Id.  According to the examiner who testified in the case, "viatical settlements are securities under the Tennessee Securities Act of 1980."  Id.

Court's Approved Bidding Process for Life Settlements Sale May Reveal Too Much

The court in Quilling v. Trade Partners, Inc., 2010 WL 188284 (W.D.Mich. Jan. 16,2010) recently approved the receiver's motion for approval to sell $6,000,000 worth of life insurance policies administered as part of a receivership in effect since 2003. 

According to the approved terms of bidding, any interested bidder will have access to the private records of each of the underlying insureds simply by signing a confidentiality agreement.  None of the underlying insureds will have notice of the disclosure of their information in this manner.  Nor are there any provisions that prohibit the successful purchaser from further disclosing the private information, including the identity of the insured, in the future. 

The court described the bidding process as follows:

the Receiver intends to adhere to the following procedures to secure the highest and best price for the entire Remaining Portfolio “as is, where is” and without representations and warranties:

a) Solicit interest from potential purchasers in a commercially reasonable manner, post the inventory of the Remaining Portfolio available for sale

b) Obtain a confidentiality agreement from each potentially interested purchaser;

c) Upon receipt of a signed confidentiality agreement, each potential interested purchaser will be given to access to the policy records and data for the Remaining Portfolio in order to perform due diligence;

d) On or before a date certain to be set by the Receiver, but at least 30 days after Court approval of the Bid Procedures (Exhibit 1 to Dkt. 1823), any Qualified Bidder (as that term is defined in the Bid Procedures) wishing to make a bid for all of the Remaining Portfolio must submit a sealed written bid to the Receiver. All bids must be on an all-cash basis in a single lump sum of “immediate funds” and each bidder must state in writing its willingness to place one hundred thousand and no/100 dollars ($100,000.00) in the Receiver's escrow account upon written notification by the Receiver that it is the highest bidder, while Court approval is obtained. The Receiver will supply each potential purchaser who is given access to the Remaining Portfolio, with a form on which to submit its written bid substantially in the format set forth in Exhibit 2 to Dkt. 1823;

e) Upon receipt of the last bid prior to the bid deadline, the Receiver and the Examiner will rank the bids according to the amounts thereof and

f) Assuming the highest bid is acceptable to the Receiver, a Purchase and Sale Agreement (in substantially the form attached as Exhibit 3 to Dkt. 1823) by the party submitting such highest bid (“Initial High Bidder”) will be submitted to the Court for hearing and approval;

g) The Receiver will then provide proper and sufficient notice to all interested parties and investors of the Hearing date and provide all interested parties an opportunity to be heard;

h) All losing bidders and any other Qualified Bidders interested in making a higher bid than the one submitted to the Court for approval will be free to attend the Hearing and present a higher offer at an auction conducted by the Receiver, with Court supervision. The auction will continue until the highest and final bid is determined and the winning purchaser declared (“Purchaser”);

i) Each bid made at the time of the auction must be made in at least $50,000 increments greater than the amount of the most recent bid, commencing with the amount bid by the Initial High Bidder;

j) If the Initial High Bidder is not successful in purchasing the Remaining Portfolio because of a subsequent higher bid, the Initial High Bidder will be entitled to a break-up fee (the “Break-Up Fee”) equal to 25% of the difference between the amount bid by the Initial High Bidder and the bid

k) Within 3 business days following the Hearing, the Purchaser will be required to execute a Purchase and Sale Agreement with the Receiver in form substantially similar to the one executed by the Initial High Bidder.

Quilling v. Trade Partners, Inc., 2010 WL 188284, 2 -3  (W.D.Mich., Jan. 18, 2010) (emphasis added).  While considering "commercially reasonable" procedures to maximize the return to the estate, no party in this case appeared to consider the moral hazard issues inherent in the sale of life insurance. 

New York's recent life settlement regulation, for example, requires that only a licensed life settlement provider may purchase a policy, and to the extent that that purchaser later sells the beneficial interest in that policy to an investor, the identity of the insured may not be revealed.  You may review our discussion of the New York legislation here.