Let’s Talk About Factoring

About Factoring

Continuing a series of articles previewing selected topics at the upcoming Society of Settlement Planners’ (SSP’s) virtual 2021 Annual Conference, which has already addressed “product suitability” and “mass torts”, this article asks:

“Is it possible to avoid predatory practices in the Secondary Structured Settlement market? And if so how?”

Despite the enactment of IRC Section 5891 and Structured Settlement Protection Acts in 49 states, and myriads of lawsuits, factoring company abuses continue to be a significant problem. During its virtual Fall 2020 Educational Conference, the National Structured Settlement Trade Association’s (NSSTA) then President promised to address “factoring” abuses as his #1 priority. During the same conference, NSSTA’s Legal Committee devoted its entire “Law and Order” panel discussion to factoring abuse cases.

Questioning Industry Strategies

To solve this ongoing abuse problem, multiple sources have begun questioning the viability of traditional industry strategies while suggesting alternatives of their own.

Rhonda Bentzen, the founder and owner of a factoring company, has promised solutions in a Breakout Session titled “Avoiding Predatory Practices in the Factoring Industry & How to Protect Your Clients” which she will lead at the SSP virtual 2021 Annual Conference.

Preceding Ms. Bentzen’s February 24 presentation, two law review articles have appeared each of which offers its own analysis and recommended solution for factoring abuses.

Professor Czapanskiy Article

Writing in the University of Detroit Mercy Law Review (2020), Professor Karen Czapanskiy’s article is titled “Tax Policy, Structured Settlements and Factoring: Making Exploitation Easy and Profitable.”

Professor Czapanskiy predicates her analysis primarily on her study of lead paint poisoning cases in Maryland and assumes more generally:

    • “[m]ost of the tort plaintiffs who sell their streams of income may be vulnerable to commercial exploitation because they are disabled people with significant cognitive, behavioral, and emotional issues.”
    • “… a payee’s loss of a regular stream of income and subsequent impoverishment may affect the people who care for them, mainly their mothers, and the people who care for their dependents, another group of women.”
    • “[m]ost payees live in communities of color characterized by concentrated poverty…”
    • ‘[t]he structured settlement factoring industry knows all of this and uses the overlapping vulnerabilities to strip the payees, their families, and their communities of the only major asset that most of the payees will ever own.”

Professor Czapanskiy’s proposed solution for factoring abuse: repeal the exemption of judicially approved state structured settlement protection act factoring transactions from the confiscatory 40% excise tax imposed by IRC section 5891 (a) which, she argues: 1) is supported by critical tax policy; and 2) would provide a significant disincentive to factoring companies who might otherwise want to purchase periodic payment rights.

James Gordon Note

Among repeated footnote sources cited in Professor Czapanskiy’s article is a Note published in the December 2020 issue of the Columbia Law Review written by James Gordon titled “Enforcing and Reforming Structured Settlement Protection Acts: How the Law Should Protect Tort Victims.”

Like Professor Czapanskiy, Mr. Gordon not only makes considerable reference to Maryland lead poisoning cases but also focuses considerable attention on the well-publicized Freddie Gray case. Mr. Gordon’s recommendations and analysis, however, differ considerably from Professor Czapanskiy.

Whereas Professor Czapanskiy bases her recommendation on “critical tax policy” and her analysis on social economic considerations, Mr. Gordon argues (with extensive footnotes, several of which cite this author) that the state legislative scheme to approve transfer petitions “has fundamental substantive and procedural flaws that prevent it from achieving its purpose.”

Mr. Gordon concludes that: “[i] Improving the monitoring system for individual transactions … will not address the scheme’s consistent failure to protect against the systemic abuse of consumers” because “there are two basic problems underlying the current legislative scheme’s failure to protect tort victims and effectuate the congressional intent of preventing victims from becoming public charges”:

    • The transfer process is “non-adversarial,” and therefore judges don’t have sufficient information to make judgments and are forced to play the role of “paternal guardians.”
    • Lack of market transparency has hidden the majority of factoring abuses from state enforcement agencies and plaintiff attorneys and even when abuses are challenged in court, procedural and jurisdictional hurdles create unreasonable litigation barriers.

As a preferred solution, Mr. Gordon proposes that courts: 1) recognize that personal injury victims are direct or third party beneficiaries of the anti-assignment clauses incorporated in virtually all structured settlement agreements; and 2) require annuity providers (or their assignment companies) responsible for structured settlement payments to exercise their contractual obligation of good faith when choosing whether to waive these clauses.

Mr. Gordon maintains that annuity providers violate their contractual obligation of good faith to a personal injury victim payee when they accept an administrative fee from a factoring company to waive an anti-assignment clause.

Independent Life, with our Payee Protection Policy, is among the examples of “major players in the market” that Mr. Gordon mentions having “already established transfer petition objection policies that both illustrate how these duties could manifest and demonstrate that insurance companies are fully capable of investigating whether a tort victim is being abused.”

While secondary market abuses continue, questions will inevitably, and perhaps increasingly, be asked whether the existing legislative scheme can effectively address the problems. The recent law review article by Professor Czapanskiy and law review Note by James Gordon each argue that a new strategic approach is required. SSP’s 2021 Annual Conference also promises to provide alternative “solutions” – albeit from a secondary market participant. Regardless of whether the National Structured Settlement Trade Association (NSSTA) agrees with any of these proposals, perhaps it’s time for NSSTA to consider an educational program for its own members to discuss secondary market strategic alternatives