Matter of Settlement Capital Corp. v Yates

[*1] Matter of Settlement Capital Corp. v Yates 2006 NY Slip Op 51616(U) [12 Misc 3d 1198(A)] Decided on August 14, 2006 Supreme Court, Kings County Rivera, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on August 14, 2006
Supreme Court, Kings County

In the Matter of the Application of the Petition of SETTLEMENT CAPITAL CORPORATION for the Approval of Transfer of Structured Settlement Payment Rights in accordance with GOL 5-701, Petitioner,

against

Tiffany Yates, Et al., Respondents.



32980/05

Francois A. Rivera, J.

Upon the foregoing papers, petitioner Settlement Capital Corporation (Settlement), having commenced a special proceeding pursuant to the Structured Settlement Protection Act (GOL §5-1701 et seq.), moves for an order approving an agreement to transfer certain structured settlement rights to it from respondent Tiffany Yates (Yates). Specifically, Yates proposes to transfer to Petitioner, 120 monthly payments in the amount of $824.65 each (in the aggregate amount of $98,958.00), out of those certain monthly payments due under the Settlement Agreement and Annuity in the amount of $1224.65 (totaling $134,958.00), commencing August 24, 2011 and continuing on the 24th of each month thereafter through and including July 24, 2021.

BACKGROUND

This proceeding arises out of an infant's compromise reached by the parties to a wrongful death lawsuit that was commenced in Supreme Court, New York County under Index No. 110951/95, bearing the caption Janie Yates Callaham, as Administratrix of the Estate of Leo Williams v F.J. Sciame Construction Co., et al. Pursuant to the terms of said infant's compromise, the defendants therein offered a settlement with a present value in the amount of $250,000 in favor of the Estate of Leo Williams (the Estate). In accordance with the settlement agreement, an annuity was purchased from respondent Allstate Life Insurance Co., which was, and remains, responsible for making all payments due. Of the settlement proceeds, the present value of $163,786.69 was to be paid to Yates, the decedent's non-[*2]marital infant daughter and the sole distributee of the Estate, commencing August 24, 2001, in monthly instalments of $1,261.37. In addition, $13,786.69 was paid up front. The expected annuity payments made to Yates over the course of her life was estimated to be $302,279.00.

Yates was 22 years of age at the time of the commencement of the instant proceeding. She was unmarried and had five children. In her affidavit in support of the contemplated transaction, she stated that she believed that it would be beneficial to herself and her family if she were permitted to transfer and assign her right to receive the subject assigned payments to petitioner in order to enable her to pay off debts and buy clothing and furniture for her children.

In exchange for Yates' agreeing to transfer and assign to petitioner her assigned payments, petitioner agreed to pay Yates the lump sum payment of $21,050.00. The discounted present value of the payments to be transferred is $60,353.37.[FN1] As further agreed upon, Yates would be responsible for the payment of attorneys' fees in the estimated amount of $2500, payable out of proceeds. Accordingly, as disclosed in paragraph 7 of the Disclosure Statement, the net advance payable to Yates was $18,550.00, which amount was determined by applying the specified discount rate to the amount of future payments received by the buyer, less the total amount of future payments received by the buyer, less the total amount of commissions, fees, costs, expenses and charges payable by Yates. Petitioner represents that the discount rate is 15.049%.

Stating that she has been provided with, and that she has read, the disclosure statement, Yates joins in the application herein, and, further stating that the assignment is in her best interests, requests that the court approve same.

DISCUSSION

Personal injury litigation sometimes concludes with the plaintiff (or, as in this case, the distributee of the decedent's estate) becoming entitled to a stream of future payments known as a structured settlement. The payments, which can be over many years, are funded by an annuity contract purchased from an insurance company. However, structured settlement payees sometimes find that their financial needs or desires are inconsistent with the protracted pay-out period. Thus, finance companies often offer such payees the opportunity to sell these payment streams for immediate discounted lump sums. The discount rate can be substantial, usually between eighteen and twenty-five percent, which results in a relatively small payment to the payee. As a consequence, the "Structured Settlement Protection Act" (SSPA), General Obligations Law §§ 5-1701 et seq., was enacted out of concern that structured settlement "payees," such as Yates, are especially prone both to being victimized, and prematurely dissipating their awards (see Matter of Cabrera, 196 [*3]Misc 2d 329, 330 [2003]). The SSPA protects payees from being taken advantage of by businesses seeking to acquire the payees' structured settlement payment rights, discouraging such transfers by requiring would-be transferees to commence special proceedings for the purpose of seeking judicial approval of the transfer (General Obligations Law §§ 5-1705 and 5-1706). Transferees bear the attendant filing fees and costs and may not recoup them if the application is denied (General Obligations Law § 5-1704[c]). Any purported transfer entered into after July 1, 2002 without court approval is unenforceable (General Obligations Law § 5-1706) and payees may not waive their rights under the SSPA (General Obligations Law § 5-1708[a]). Transferees are barred from incorporating certain provisions in the transfer agreements (General Obligations Law § 5-1704) and are required to fully apprise the payee of the terms of the transfer (General Obligations Law § 5-1703).

"The heart of the SSPA's protection lies in the courts' independent discretionary determination [of] whether . . . the transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependents, and whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable'" (Matter of Settlement Funding of New York, L.L.C. [Cunningham], 195 Misc 2d 721 [2003], quoting General Obligations Law § 5-1706[b]). In this regard, the court notes that "the express legislative intent of the enactment was to limit transfers of structured settlement payments to true hardship cases'" (Matter of Settlement Capitol Corporation [Ballos], 1 Misc 3d 446, 450, quoting Legislative Mem in Support, 2002 McKinney's Session Laws of NY, at 2036), and although General Obligations Law § 5-1706 was amended in 2004 to provide that "a court need not make a finding that an applicant is suffering from a hardship before the court is able to approve the transfer of structured settlement payments," the requirement under General Obligations Law § 5-1706 that a reviewing court ascertain whether the transfer is in the best interests of the transferor necessitates, in this court's view, an assessment of the transferor's current financial deficiencies and needs and his or her probable future financial situation.

Indeed, although New York courts generally have declined to fashion a "best interests" test predicated solely on a finding of economic hardship or "dire straits"(see e.g. Matter of the Petition of Settlement Funding of New York LLC [Platt], 2 Misc 3d 872, 876 [2003] ["Using a more global consideration of best interests, applied judiciously, is preferred here over the sometimes stated desire to limit the application of the law to hardship cases only. Such an interpretation, if it is desired by the legislators, is best left to them"][internal quotation marks and citation omitted]; Matter of the Petition of Settlement Capital Corporation [Ballos], 1 Misc 3d at 455 ["The court . . . declines to limit best interest' to indicia of hardship, and adopts a more global consideration'"), the existence of such hardship weighs heavily in favor of determining that a transfer of structured settlement rights is in the best interests of the payee (see e.g. Matter of Ford, NYLJ, April 14, 2004, at 20, col 1 [approving structured settlement transfer transaction where the assignees' "financial situation may accurately be described as presenting a true hardship case' since their home [*4]is presently in foreclosure with additional outstanding debt of roughly $30,000"]; see also generally Matter of Settlement Funding of New York [Cunningham], 195 Misc 2d at 721 [2003] [noting that "the court recently approved a transfer with an unreasonably high interest rate based solely on the payee's best interest' (where) the payee desperately needed cash to obtain life sustaining medical treatment for a loved one and had no other legitimate means of raising the money"]; Matter of 321 Henderson Receivables Limited Partnership [DeMallie], 2 Misc 3d 463 [2003] ["(t)hose courts who have considered the statute have adopted an interpretation (of "best interest") close to that found in the (SSPA's) sponsor's statement . . . (which) spoke of limiting transfers of structured settlement payments to true hardship cases'"])

Conversely, courts generally will not find that such a transfer is in the best interests of the payee where the payee intends to use the proceeds of the transfer for an investment or purchase (see Matter of Barr v Hartford Life Ins., 4 Misc 3d 1021(A) [2004] [transfer not in best interest of assignee where "there appear[ed] no pressing hardship requiring this young and single individual to purchase a home"]; Matter of Settlement Funding of New York L.L.C. [Cunningham], 195 Misc 2d at 725 [transfer not approved by court where assignee planned to use proceeds of transfer to invest in recording equipment]; Matter of 321 Henderson Receivables Limited Partnership [DeMalllie], 2 Misc 3d at 466 [transfer denied where assignee intended to use the proceeds of the transfer to obtain a mortgage under currently low mortgage rates]) or to ease financial problems which do not rise to the level of "hardship" (see Matter of Talierco v Aetna Casualty & Surety Co., NYLJ, February 20, 2004, at 21, col 3 [transfer not in best interest of assignee where assignee planned to use proceeds of transfer to "pay off some debts and take advantage of existing low mortgage rates"]; Matter of Petition of Settlement Funding of New York, Inc. [Asproules], 1 Misc 3d 910A [2003] [transfer not in best interest of assignee where assignee planned to use the proceeds of the transfer to "pay cash for a used car, pay old debts, furnish his mobile home and open a savings account"]; Matter of Petition of Settlement Capital Corporation [Ballos], 1 Misc 3d at 456 [transfer not in best interest of assignee where assignee intended to use proceeds of transfer "to improve his familial living status, consolidate debt, and provide funeral arrangements for his dying mother-in-law" and where "there [was] no showing of a true hardship', dire emergency or matter of life and death"]). Accordingly, "the best interest' standard under the SSPA requires a case-by case analysis to determine whether the proposed transfer of structured settlement payments, which were designed to preserve the injured person's long-term financial security, will provide needed financial rescue without jeopardizing or irreparably impairing the financial security afforded to the payee and his or her dependents by the periodic payments" (Matter of Settlement Capital Corporation [Ballos], 1 Misc 3d at 455).

In regard to the "fair and reasonable" element of the analysis, there has been little agreement as to what constitutes a proper discount rate or what amount of fees and costs are allowable. As noted in Matter of Settlement Funding of New York, LLC (Platt), 2 Misc 3d at 877: [*5]

The proper discount rate is . . . elusive. There have been reported cases in which it was held some rates used were not fair and reasonable with rates of 18.621% (In re Settlement Capitol Corp. for Approval of Transfer of Structured Settlement Payment Rights of "Y", 194 Misc 2d 711); 15.591% (Matter of Settlement Capitol Corp. [Ballos], 1 Misc 3d 446 [2003]); and 15.46% (Matter of Settlement Funding of NY (Cunningham), 195 Misc 2d 721 [2003]) being rejected. Approval by a sister state has been given for 17.964% for a knowledgeable borrower with a strong present cash need, and a preserved future payment (In re Spinelli, 353 NJ Super 459, 803 A2d 172 [2002]). Case law has referenced academic discussion of the concept (Scales, Against Settlement Factoring? The Market in Tort Claims Has Arrived, 2002 Wis. L. Rev. 859), but no concrete guideposts. Petitioner has submitted unreported cases in this state with rates of 19.93% (Settlement Funding [Huggins], Sup. Ct, Bronx County, June 9, 2003); 20.586% (Settlement Capital [Miller], Sup. Ct, St. Lawrence County, May 15, 2003); 19.95% (Settlement Funding [Curkendall], Sup Ct, Chemung County, April 22, 2003); and 19.99% (Settlement Funding [Jordan], Sup Ct, Erie County, April 1, 2003).

Courts have also reached different conclusions in regard to the fairness and

reasonableness of the fees and costs associated with the transaction (see Matter of Settlement Funding of New York, L.L.C. [Cunningham], 195 Misc 2d at 724 [court found that counsel fee of $2000 charged by transferee was unreasonable]; accord Matter of Petition of Settlement Funding of New York, LLC, 1 Misc 3d at 910; but see Matter of Petition of Settlement Funding of New York [Platt], 2 Misc 3d at 878 ["legal fee of $2000 and costs of $200 are well within the parameters allowed for document preparation, research, and other aspects of the legal work involved in these proceedings"]). Additionally, "the payee's willingness [to engage in the transfer] has no bearing on the courts' determination of whether the [transaction] is fair and reasonable'"(Matter of Settlement Funding of New York, L.L.C. [Cunningham], 195 Misc 2d at 724).

One consideration that has emerged, however, as a factor in determining the fairness and reasonableness of the transaction is, once again, the level of financial, or other, hardship affecting the assignee (see generally Matter of Barr, 4 Misc 3d at 1021[A] [noting that "recognition of the interplay between the best interest standard and the fair and reasonable standard is warranted especially considering the expressed legislative emphasis on need"). Accordingly, "the more pressing the need, the more reasonable it may be for a payee to obtain immediate cash at a steep discount rate" (Matter of 321 Henderson Receivables L.P. [DeMallie], 2 Misc 3d at 465). Finally, the SSPA also requires that the transferee advise the payee "in writing" "to seek independent professional advice regarding the transfer" and the payee must either seek such advice or sign a written waiver of the opportunity to seek independent advice (General Obligations Law § 5-1706[c]). However, consultation by the payee is not a requirement thereunder. In the instant case, Yates, although duly advised of her rights to consult such an advisor, waived her right to do so. [*6]

This court believes that the "best interest" standard under the SSPA requires a case-by-case analysis to determine whether the proposed transfer of structured settlement payments, which were designed to preserve the injured person's long-term financial security, will provide needed financial rescue without jeopardizing or irreparably impairing the financial security afforded to the payee and his or her dependents by the periodic payments. Specific consideration should be given to the payee's age; payee's ability to show sufficient income that is independent of the payments sought for transfer; payee's capacity to provide for the welfare and support of her dependents; and the demonstrated ability of the payee to appreciate the financial terms and consequences of the proposed transfer based upon truly independent legal and financial advice (see In re Settlement Capital Corp. [Ballos], 1 Misc 3d 446 [2003]; see also Matter of Settlement Funding of New York L.L.C [Platt], 2 Misc 3d 872, 876).

At a hearing conducted on March 21, 2006, Yates testified that she was a student at Taylor Business Institute and although not employed at that time, was promised a job after graduation in June of 2006. She stated that she was forced to borrow funds from her grandmother in order to pay rent on her apartment, a public housing unit located in the Red Hook section of Brooklyn with a monthly rental of $256, and that her sole source of incomethe $1224 per month she received as a result of the infant's compromise was insufficient. She indicated, both in her affidavit and at the hearing, that she wished to use the money to buy furniture and clothes for her children.

Based upon the record before it, and after consideration of all of the foregoing factors, the court is unable to find that the contemplated transaction, whereby Yates would surrender a guaranteed source of income that would extend well into the future in exchange for a heavily discounted lump sum payment, serves her or her family's best interests. None of the proposed uses for the payment proceeds appears compelling at this time. Although the court can well appreciate the financial challenges of raising five children, and commends Yates' success in her struggle to escape homelessness, unemployment and poverty by obtaining an education and securing an apartment in public housing, the record demonstrates that at the time of the making of the application and of the hearing, her circumstances, although strained, were on the verge of improving. Indeed, Yates' source of income, even while she was unemployed, not only covered her monthly rent, but provided her and her family with a monthly surplus of over $900. Thus, unlike situations where approval was granted because there was no sufficient or alternative source of income to avert foreclosure (see Matter of Ford, NYLJ April 14, 2004 at 20, col. 4; see also Rumbin v Utica Mutual Ins. Co., 254 Conn 259 [2000] [approving, "in the best interests of the plaintiff," the proposed assignment to avert pending threat of foreclosure on plaintiff's home]), Yates fails to adequately demonstrate either pressing hardship (see Matter of Taliercio, NYLJ February 20, 2004 at 21, col 3), or a level of understanding of the financial ramifications that an immediate sale of the future stream of payments under the proposed terms, in exchange for a short-term windfall, would pose to her future and that of her family (cf. Settlement Funding of New York, L.L.C. v Transamerica Annuity Service Corp., 11 Misc 3d 1061(A) [2006] [transfer [*7]approved by court where payee, a gainfully employed individual who had recently resumed work after extended layoff and who needed funds to avoid eviction and repossession of his vehicle, demonstrated understanding of nature of the transaction]). Clearly, the best interests of Yates and her family are more appropriately served by denying the sought-after transfer of the stated portion of the structured settlement.

As part of its review, the court is also required to make a finding that the proposed 15.049% discount rate used to determine the gross advance amount is fair and reasonable (see General Obligations Law § 5-1706[b]). The court notes that while there is no statutory guidance, and very little consistent case law, concerning the fairness and reasonableness of the discount rate and related costs and fees utilized in transfers of structured settlement, courts have rejected proposed transactions with similar discount rates as unreasonable (see Matter of 321 Henderson Receivables v Martinez, 11 Misc 3d 892 [2006] [16.39%]; Matter of Settlement Capital Corp. [Ballos], 1 Misc 3d 446 [2003] [15.591%]); In re Settlement Capital Corp. for Approval of Transfer of Structured Settlement Payment Rights of "Y", 194 Misc 2d 711 [2003] [18.621%]); Matter of Settlement Funding of NY (Cunningham), 195 Misc 2d at 724 [2003] [15.46%])). The court similarly finds that the discount rate utilized by petitioner, fail to pass muster as fair and reasonable. [FN2]

Finally, the court finds that the context of the instant proposed transaction, the imposition of an attorneys' fee in the amount of $2500.00 is unreasonable on its face, and notes that while the court is responsible, under General Obligations Law § 5-1706 [d] for determining the reasonableness of the attorneys' fee, petitioner fails to provide an affidavit in support of said charge (see Matter of Settlement Funding of New York L.L.C. [Cunningham], 195 Misc 2d at 724).

Under the circumstances, this Court finds that petitioner has failed to meet its burden of establishing that the transaction in is the best interest of Tiffany Yates and that the terms of the transaction are fair and reasonable. Accordingly, the petition is denied.

The foregoing constitutes the decision, order and judgment of this court.

E N T E R,

J. S. C.

Footnotes

Footnote 1: The discounted present value is the calculation of current value of the transferred structured settlement payments under federal standards for valuing annuities. In this transaction, the rate is 4.6%. It is not the rate used to calculate the purchase price

Footnote 2: Petitioner has not demonstrated that these loans are, in practice, riskier than other types of secured loans and basing a determination upon consideration of "the nature of this industry" is dubious (see In re Petition of Settlement Funding of New York L.L.C., 195 Misc 2d 721).