The advent of structured settlements in the U.S. in the 1970s led, perhaps inevitably, to the development of a market process for the sale of structured settlement payments by the annuity beneficiaries. In this report attorney Matt Bracy discusses the role of courts in the sale of structured settlements.
Bracy believes that the problem with trying to characterize the proper role of courts in overseeing the sale of structured settlements comes from “the vagueness of the Structured Settlement Protection Act.” Every transaction for the sale or transfer of structured settlement payments has to be approved by a court—usually in the county where the transferor lives.
In every case, the supervising court has two tasks. One of those is to assure that the technical requirements of the Act have been complied with. For example, if the transferor must be given notice a certain number of days before the transaction, and the notice must be in a specific large type size, the court must assure that the requirements have been met. If there is a requirement of notice to interested parties, the court must assure that notice has been given.
The second requirement is that the transfer must be in the “best interest of the payee” per 26 USC § 5891(b)(2)(A)(ii). But “best interest” is not further defined, Bracy explains, so courts must struggle with what the term means. That is why some commentators have described the court’s role as being like that of a parent. In other words, should a court substitute its judgment for that of the person who wants to sell the benefits? Bracy says that the ambiguity in the “best interest” standard is purposeful. This permits a judge familiar with the circumstances in any given locale to “decide what is right.”
Some courts, in their oversight of transfers, have been described as “auction houses.” Bracy explains that this is what happens when a judge goes beyond inquiring what offers have been received for the transfer of structured settlement benefits and presses the transferor to seek more offers or asks counsel for the factoring companies to inquire whether the companies are willing to offer more money. Bracy opines that this goes beyond a court’s proper role, which is “to consider the transfer, consider the agreement . . ., and whether on balance in the [transferor’s] best interest.
Some observers have suggested that courts are nothing more than “rubber stamps,” approving whatever is put before them. Bracy says that, if there’s a rubber stamp courts are using, the stamp probably says “denied.” He points out that everyone who comes to court seeking to transfer structured settlement payments does so for what that person believes to be a good reason. People who want to sell their benefits “deserve respect, they deserve a chance in court to make their case, and to state why” they need to sell the settlement payments. Every case should be decided on its merits.
Another description of the court’s role is that of a gatekeeper, and Bracy thinks that is a proper function for a court. State statutes on protecting structured settlements have assigned these functions to courts, and properly so, says Bracy. Judges have to determine what is best based on what they know about their own counties and what they can determine about the needs of the transferor.
Matt Bracy is a partner in Scheef & Stone, L.L.P., Dallas, Texas, representing businesses and business owners in the areas of general business law, contract negotiations and drafting, business formation, transactions, collections, commercial litigation and government relations. Over his career he has represented diverse businesses and individuals in private practice, and in-house as General Counsel and Director of Government Relations for multi-million dollar companies. The Factoring Channel is a featured network of the Sequence Media Group.