Introduction
A single structured settlement often involves multiple areas of law – including tort, tax, contract, Social Security, insurance, to name just a few.
Sometimes laws impacting a structured settlement not only overlap but also conflict thereby creating potential problems and/or confusion. For example, although structured settlement periodic payments generally are excluded from federal income taxation under IRC Section 104(a)(2), they can be considered “unearned income” for purposes of Social Security unless paid into a special needs trust or pooled trust. As a result, structured settlement periodic payments can potentially disqualify a direct recipient from receiving “means tested” government benefits including Supplemental Security Income (SSI) and Medicaid.
Other examples creating potential legal conflicts and confusion include: 1) “qualified assignments,” which involve both tax law and contract law; and 2) “anti-assignment language” which is currently the focus of a case, Cordero v. Transamerica Annuity Service Corp., n/k/a Wilton Re Annuity Service Annuity Corp., being argued before the New York Court of Appeals.
A prior Independent Life article – https://www.independent.life/anti-assignment-language/ discusses “anti-assignment language.” This article explains the difference under contract law between “assigning rights” and “delegating duties” and highlights a related drafting mistake Congress made when it enacted the Periodic Payment Settlement Act of 1982.
IRC Section 130 Qualified Assignments
For tax purposes, a “qualified assignment” is defined in IRC Section 130(c). The tax definition includes the following language: “the term ‘qualified assignment’ means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen’s compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness)” plus several additional requirements.
For contract purposes, the National Structured Settlement Trade Association (NSSTA ) has published Model Agreements (contracts) including a Model Qualified Assignment (Model QA) Agreement and a Model Qualified Assignment and Release (Model QAR) Agreement with Annotated versions of each.
Parties to a structured settlement most often utilize some variation of NSSTA’s Model QAR to accomplish a transfer of a structured settlement periodic payment obligation from one or more defendants, and/or their insurers, to an assignment company. The Model QAR closely follows the terms and conditions of IRC Section 130 including use of the term “qualified assignment” as well as the terms “assignor” and “assignee”.
With IRC Section 130 and NSSTA’s Model QAR and Annotated Model QAR as primary resources, the transfer of a structured settlement periodic payment obligation has become an established industry standard.
Viewed from the perspective of contract law, however, “assignment”, “assignor” and “assignee”, as those terms are used to define the transfer of a structured settlement periodic payment obligation, arguably misname, and therefore mischaracterize, structured settlement’s most fundamental transaction.
Under contract law, transfers of “rights”, such as a plaintiff’s “right” to receive future periodic payments, are “assigned”, whereas “duties”, such as a defendant’s obligation (duty) to make future periodic payments, are “delegated.”
In retrospect, the use of the word “assignment” in IRC Section 130 presumably represents a Congressional mistake. Arguably, IRC Section 130 transfers should properly be designated as “qualified delegations” and the primary parties to a “qualified delegation” agreement should be named “delegator”(defendant) and “delegatee” (assignment company).”
Under contract law, as summarized below, “assignment of rights” and “delegation of duties” are subject to different rules. Mischaracterizing a transactional agreement that represents a “delegation of duties” rather than an “assignment of rights” under contract law might not jeopardize the legal rights and duties of the parties. However, as the following discussion demonstrates, mischaracterizing a transaction can create potential confusion, and perhaps even legal issues, that could arise subsequently if and when parties attempt to define and/or dispute their rights and duties.
Restatement (Second) of Contracts
The remainder of this article discusses the differences between “assignment of rights” and “delegation of duties” as applicable to structured settlements using the Restatement (Second) of Contracts (Restatement) as a reference guide. Published by the American Law Institute, the Restatement is generally recognized as the leading legal authority about the general principles of contract common law. The Restatement is comprised of 16 Chapters each of which includes multiple Topics and Sections.
The most relevant sections of the Restatement applicable, or potentially applicable, to the transfer of a structured settlement periodic payment obligation are:
- Section 280 Novation
- Section 317 Assignment of a Right
- Section 318 Delegation of Performance of Duty
- Section 328 Interpretation of Words of Assignment; Effect of Acceptance of Assignment
This article reviews relevant portions of each section as this writer believes those sections might apply to a transfer of a structured settlement periodic payment right and/or obligation. In the excerpts that follow from each Restatement section, traditional structured settlement language is added [in brackets in bold print]. A “Discussion” following each Restatement Section includes this writer’s comments and analysis.
Section 317 Assignment of a Right
Section 317 provides in relevant part:
- “An assignment of a right [to receive periodic payments] is a manifestation of the assignor’s [structured settlement recipient’s] intention to transfer it [right to receive periodic payments] by virtue of which the assignor’s [structured settlement recipient’s] right to performance by the obligor [assignment company] is extinguished in whole or in part and the assignee [factoring company] acquires a right to such performance.
- “A contractual right [to receive periodic payments] can be assigned unless … (b) the assignment is forbidden by statute [IRC 5891 or state protection laws] or is otherwise inoperative on grounds of public policy, or (c) assignment is forbidden by contract [anti-assignment provisions].
Discussion: Section 317 appears in Chapter 15 of the Restatement (“Assignment and Delegation”) under Topic 1 (“What Can Be Assigned or Delegated”).
Upon review, it appears impossible to effectively transpose alternative bracketed language to make Section 317 applicable to a Section 130 structured settlement periodic payment transfer.
In fact, as the bracketed language indicates, Section 317 more precisely describes what we know as a transfer (assignment) of periodic payment “rights” (i.e. factoring) by a structured settlement recipient (plaintiff). Under contract law, therefore, Restatement 317 clearly demonstrates “assignment” is the wrong word to describe the transfer of a structured settlement periodic payment obligation. Just to be certain, however, let’s also consider Restatement Section 328.
Section 328 Interpretation of Words of Assignment; Effect of Acceptance of Assignment
Section 328 provides in relevant part:
- “Unless the language or the circumstance indicate to the contrary, as in an assignment for security, an assignment of ’the contract’ [the settlement agreement] or of ‘all my rights under the contract’ [all my rights under the settlement agreement] or an assignment in similar general terms is an assignment of the assignor’s [plaintiff’s] rights and a delegation of his [plaintiff’s] unperformed duties under the contract.
- “Unless the language [of the settlement documents or transfer documents] or the circumstances [general structured settlement industry practices] indicate the contrary, the acceptance by an assignee [transfer company] of such an assignment [IRC 5891 Transfer] operates as a promise to the assignor [plaintiff] to perform the assignor’s [plaintiff’s] unperformed duties, and the obligor [defendant] of the assigned rights is an intended beneficiary of the promise.”
Discussion: Section 328 appears in Chapter 15 of the Restatement (“Assignment and Delegation”) under Topic 2 (“Mode of Assignment or Delegation”).
Some readers initially may attempt to substitute alternative structured settlement language in the brackets believing this Section might support assignment of duties. In fact, the only Comment to Section 328 is titled “Assignment of duty.”
The Comment, however, reads in relevant part: “A duty cannot be ‘assigned’ in the sense in which ‘assignment’ is used in this Chapter. The parties to an assignment, however, may not distinguish between assignment of rights and delegation of duties. A purported ‘assignment of duties’ may simply manifest an intention that the assignee shall be substituted for the assignor.”
A careful reading of Restatement Section 328, including the words “an assignment of ‘the contract’ or of ‘all my rights under the contract’” as well as the Comment, therefore demonstrates this section is not applicable to a transfer of an IRC Section 130 transfer. As with Section 317, Section 328’s meaning more clearly applies to factoring transactions – transfers of periodic payment “rights.”
Section 318 Delegation of Performance of Duty
Section 318 reads in its entirety:
- “An obligor [defendant] can properly delegate the performance of his duty [to pay periodic payments] to another [assignment company] unless the delegation is contrary to public policy [conditions set forth in IRC Section 130] or the terms of his promise [the terms of the settlement agreement].
- “Unless otherwise agreed, a promise requires performance by a particular person [defendant] only to the extent that the obligee [plaintiff] has a substantial interest in having that person perform [pay the future periodic payments] or control the acts promised.”
- “Unless the Obligee [plaintiff] agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor [defendant] by the person delegated [assignment company] discharges any duty or liability of the delegating obligor [plaintiff]”.
Discussion: Section 318 appears in Chapter 15 of the Restatement (“Assignment and Delegation”) under Topic 1 (“What Can be Assigned or Delegated”).
A Comment titled “Delegation and novation” states in part: “An obligor [defendant] is discharged [from the obligation to pay periodic payments] by the substitution of a new obligor [assignment company] only if the contract [assignment agreement] so provides or if the obligee [plaintiff] makes a binding manifestation of assent, forming a novation…. Otherwise, the obligee [plaintiff] retains his original right [to receive periodic payments] against the obligor [defendant], even though the obligor [defendant] manifests an intention to substitute another obligor [assignment company] in his [defendant’s] place and the other [assignment company] purports to assume the duty [obligation to pay the periodic payments].”
For purposes of IRC Section 130 Qualified Assignment nomenclature, Section 318 differentiates between a Qualified Assignment with and without a Release. To obtain a release for an obligor/defendant from the obligation to pay periodic payments, the parties must effectuate a “novation.”
Section 280 Novation
Section 280 reads in its entirety: “A novation is a substituted contract [assignment agreement] that includes as a party one [assignment company] who is neither the obligor [defendant] nor the obligee [plaintiff] of the original duty [obligation to pay the periodic payments].”
Discussion: Section 280 appears in Chapter 12 of the Restatement (“Discharge by Assent or Alteration”) under Topic 2 (“Substituted Performance, Substituted Contract, Accord and Account Stated”).
The Comment to Section 280 adds in relevant part:
- “The effect of a novation is to discharge the original duty [defendant’s obligation to pay the periodic payments], “so that the breach of the new duty [assignment company’s duty] gives no right of action on the old duty [defendant’s duty].”
- “A novation is subject to the same requirements as any other contract, including that of consideration…. Consideration to support the discharge of the original [defendant’s] duty can usually be found in the [assignment company’s] promise to undertake a new duty.”
- “Assent of the obligee of the original duty [plaintiff] and of the obligor of the new duty [assignment company] is always necessary.”
Although NSSTA’s Model QAR Agreement uses IRC Section 130 “assignment” language, as it must to satisfy IRC Section 130, NSSTA’s Model QAR nonetheless appears to satisfy all of Restatement Section 280’s requirements for effectuating a novation.
CONCLUSION
When Congress enacted IRC Section 130 as part of the Periodic Payment Settlement Act of 1982, it codified the term “Qualified Assignment” instead of “Qualified Delegation”, the correct legal term under contract law. That decision describing the transfer of an obligation to pay periodic payments apparently was an unintentional mistake. NSSTA’s Model QA and Model QAR Agreements are consistent with IRC Section 130. These Model Agreements use the terms “assignment”, “assignor” and “assignee” without noting any conflict with contract law in their Annotated versions. To date, this writer is not aware of legal repercussions resulting from these conflicts.
The Congressional mistake, however, does impact a critical structured settlement Internal Revenue Code section as well as the structured settlement industry’s most important legal documents. Discussion of the potential issues this legal conflict creates has been largely unexamined within the structured settlement industry – as least as part of its educational programs. The reasons these issues have not been discussed appear to be less purposeful than insular. Optimistically, this article might stimulate more creative/courageous thinking about other topics that have been largely overlooked by structured settlement educational planners.
For examples, with a surfeit of educational programs addressing tax law and factoring, what about other areas of law impacting structured settlements and emerging structured settlement products? When structured settlement “industry standards” conflict with, or fall short of, competing industry standards, such as “best interest” product suitability or “compensation disclosure”, shouldn’t those issues represent priority industry educational topics? With three national trade associations (NSSTA, AASC and SSP) again offering in person educational conferences, and with NSSTA revitalizing its CSSC/MSSC programs, multiple educational options are now available to explore emerging industry issues and to selectively re-examine existing practices and standards.
