Matter of Settlement Funding of N.Y. LLC v Allstate Settlement Corp.
Annotate this CaseDecided on December 4, 2006
Supreme Court, Bronx County
In the Matter of the Petition of Settlement Funding of New York, LLC, Petitioner,
against
Allstate Settlement Corporation ("Settlement Obligor") and Allstate Life Insurance Company of NY (the "Annuity Issuer"), Respondents.
20357/06
Attorney for Petitioner: Cathy S. Chester, Esq.
Alexander W. Hunter, J.
Upon the foregoing papers, the motion by petitioner, by order to show cause, for an order [*2]pursuant to General Obligations Law (GOL) §5-1706, approving the transfer of structured settlement payment rights of Eric Saxton to petitioner is denied.
The structured settlement that is the subject of this application was obtained on February 1, 1994 as a result of a personal injury action involving Eric Saxton. Under the terms of said structured settlement, Mr. Saxton was to receive a lump sum payment of $166,666 held in various savings account, payable to Mr. Saxton upon his eighteenth (18th) birthday; 360 monthly payments each in the amount of $4,500 commencing on August 18, 1997 and increasing 3.00% every twelve (12) payments through and including July 18, 2027, continuing for life thereafter. In addition Mr. Saxton was to receive lump sum payments as follows: $50,000 on August 18, 1997; $50,000 on August 18, 2000; $60,000 on August 18, 2004; $75,000 on August 18, 2009; $100,000 on August 18, 2014; $125,000 on August 18, 2019; $150,000 on August 18, 2024 and $200,000 on August 18, 2029.
Pursuant to an order of the Superior Court of Bergen County New Jersey, dated November 22, 2002, Mr. Saxton previously assigned his interest in monthly payments in the amount of $3,939.75 commencing on November 18, 2002 through and including July 18, 2003, monthly payments each in the amount of $4,370 commencing on August 18, 2003, increasing 3% every year through and including September 18, 2022 and the following lump sum payments: $50,000 due on August 18, 2004; $75,000 due on August 18, 2009; $50,000 of the $100,000 due on August 18, 2014. The current petition does not disclose what purpose those funds were used for.
Mr. Saxton previously made an application in Supreme Court Bronx County to transfer additional settlement payments to the petitioner. That petition was denied by Judge Yvonne Gonzalez in a decision dated February 22, 2006. In his previous application before Judge Gonzalez, Mr. Saxton sought to transfer sixty (60) monthly payments, each in the amount of two hundred dollars ($200), commencing on January 18, 2007 through and including December 18, 2011; one hundred and sixty-six (166) monthly payments, each in the amount of three hundred and fifty dollars ($350) commencing on January 18, 2012 through and including October 18, 2025, in addition to lump sum payments of $50,000 due August 18, 2014 and $125,000 due August 18, 2019. His purported purpose for said transfer was first to purchase a four story building in Bronx County to use as a day care center. However, his business plan indicated an interest in purchasing a UPS or Jackson Hewitt franchise in Ohio. After a hearing before Judge Gonzalez, Mr. Saxton indicated that his proposed purpose for said transfer was to pay child support arrears. Judge Gonzalez found that petitioner failed to show that the transfer was fair and reasonable and she decided that the transfer was not in the best interest of Mr. Saxton. (Petitioner's Exhibit A).
Mr. Saxton once again seeks to transfer certain payments to the petitioner. Specifically, Mr. Saxton seeks to transfer three (3) future lump sum payments as follows: $50,000 due on August 18, 2014; $125,000 due on August 18, 2019; $150,000 due on August 18, 2024. The total payments sought to be transferred are $325,000 and the net advance to be given to Mr. [*3]Saxton in exchange is $46,080.80. In his affidavit attached to the petition, Mr. Saxton states that he intends to use $21,000 of that money to pay off all of his child support arrears and $25,000 to put a down payment on a house "in the Columbus, Ohio area." He states that the price of the house is $90,000. (Petitioner's Exhibit D).
Petitioner states that the aggregate amount of the structured settlement payments to be transferred is $325,000. The discounted present value of the payments to be transferred at a discount rate of 6.00% is $46,080.80. (Disclosure Statement, Exhibit C). According to the Disclosure Statement which was signed by Mr. Saxton, the discounted present value is "...the calculation of current value of the transferred structured settlement payments under federal standards for valuing annuities..." (Exhibit B). The gross advance amount payable to Mr. Saxton is $46,080.80 and the annual discount rate, compounded monthly, used to determine the gross advance amount is 15.16%. Said discount rate differs vastly from the discount rate of 19.99% that was used in Mr. Saxton's previous application before Judge Gonzalez in February of 2006. In addition, the petitioner has agreed to waive the processing and legal fees which were included in the previous application before Judge Gonzalez.
In his affidavit, Mr. Saxton states that he "carefully reviewed" the Disclosure Statement and he "fully and completely" understands all of the terms of the Disclosure Statement. He further states that he has "thoroughly considered this transaction" and his alternatives and the use to which he will put the proceeds of this sale. (Exhibit D). Mr. Saxton is twenty-six (26) years old and currently resides in Columbus, Ohio. He is employed at "The Limited" and earns $18,000 per year. In addition, he states that he will continue to receive $1,096.26 per month increasing 3% every August from the portion of the settlement payments that he is not transferring to the petitioner. He has one dependent, an eight year-old son for whom he pays child support in the amount of $75 per month. He wishes to improve his standard of living as well as that of his son and believes that this proposed transfer will allow him to do that.
The Structured Settlement Protection Act (SSPA) codified under General Obligations Law , Title 17, was enacted in July of 2002 because of the concern that "...a growing number of factoring companies have used aggressive advertising, plus the allure of quick and easy cash, to induce settlement recipients to cash out future payments, often at substantial discounts, depriving victims and their families of the long-term financial security their structured settlements were designed to provide. Although transfers of structured settlements payments are generally prohibited by contract...factoring companies have built a rapidly expanding business around circumventing these prohibitions." (NY Spons. Memo., 2002 Ch. 537). A determination would be made by a Supreme Court judge as to whether the transfer is "in compliance with applicable law, that key terms have been disclosed, that the transfer meets a hardship standard, and that independent professional advice has been obtained." (NY Bill Jacket, 2002 A.B. 6936, Ch. 537). In 2004, the SSPA was amended in that the hardship requirement was"eliminated as a precondition to transfers and the requirement that disclosures be made at the front end' was added." (NY Spons. Memo., 2004 Ch. 480). [*4]
The procedural requirements that must be met for approval of a transfer are found under General Obligations Law §5-1705. The requirements are that a copy of the notice of petition and petition by order to show cause be served upon all interested parties at least twenty days before the time at which the petition is noticed to be heard, the petition must include a copy of the transfer agreement, a copy of the disclosure statement and proof of notice of that statement as well as a listing of each of the payee's dependents along with the dependents' age. Procedurally, the petitioner herein has met the aforementioned requirements.
Pursuant to General Obligations Law §5-1706, the court must make the following findings before a transfer can be effectuated. These are that: "(a) the transfer complies with the requirements of this title; (b) the transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependants; 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. Provided the court makes the findings as outlined in this subdivision, there is no requirement for the court to find that an applicant is suffering from a hardship to approve the transfer of structured settlement payments under this subdivision; ( c) the payee has been advised in writing by the transferee to seek independent professional advice regarding the transfer and has either received such advice or knowingly waived such advice in writing; (d) the transfer does not contravene any applicable statute or the order of any court or other government authority; and (e) is written in plain language and in compliance with section 5-702 of this article."
In the case at bar, Mr. Saxton was advised in writing to seek independent professional advice, which he sought from an attorney by the name of Craig Allen, Esq., in Steubenville, Ohio. A statement from Mr. Allen, annexed to the petition as Exhibit E, states that Mr. Allen rendered advice to "Mr. Saxon" [sic] concerning the legal and "basic financial implications" of the transfer and "Mr. Saxon" [sic] stated to him that he understood the financial implications involved and he wishes to sell the future rights to the payments in exchange for receiving $46,080.80. However, there is no indication that the attorney discussed any tax implications of the proposed transfer with Mr. Saxton. Moreover, nowhere in his affidavit does Mr. Saxton indicate his awareness and understanding of any legal, tax and financial implications that may be involved in the transfer.
The two most important components of the SSPA are whether or not the transaction, including the discount rate and the amount of fees and expenses, is fair and reasonable and whether the transaction is in the best interest of the payee. The trial courts have ruled on what is determined to be fair and reasonable and whether the transfer is in the best interest of the payee on a case by case basis viewing the totality of the circumstances. Matter of Settlement Capital Corp. v. Yates, 12 Misc 3d 1198(A) [2006].
In the case at bar, the discount rate of 15.16% is significantly less than the 19.99% rate offered in Mr. Saxton's previous application before Judge Gonzalez in February of 2006. The affidavit of Anthony Mitchell, the Chief Operating Officer of Peachtree Settlement Funding, [*5]LLC, annexed to the petitioner's papers, points out the differences between structured settlement transfers and loan transactions. Mr. Mitchell states that "a comparison of discount rates to mortgage rates or similar loans is not a fair comparison." (Mitchell Affidavit, p. 2, para. 7). He states inter alia that a typical seller has poor credit quality which is a risk borne by the petitioner and a factor considered when setting the discount rate. He further discusses the factors that influence discount rates and states that "Currently in the marketplace the discount rate for transfers range from 15.5% - 25% per annum, with the majority of transactions falling within the range of 18% - 23% per annum." (Mitchell Affidavit, p. 3, para. 7-8).
Mr. Mitchell states that the discount rate used to calculate the purchase price that petitioner has offered Ms. Saxton is fair, reasonable and consistent with the market rate applicable to these assets. The discount rate offered to Mr. Saxton of 15.16% is more reasonable than the 19.99% rate previously offered to him in February of 2006. In addition, it is laudable that petitioner has agreed to waive all processing and legal fees. However, even though that rate is considerably low, it is not fair and reasonable when taking into account the fact that the net advance amount payable to Mr. Saxton represents only 32.90% of the present value of the payments to be sold. Courts have found that discount rates of as low as 15.16% where the consumer would be receiving 58.94% of the discounted present value of the payments (Matter of 321 Henderson Receivables, 13 Misc 3d 526 [2006]) and 15.46%, where the consumer would be receiving 47.95% of the discounted present value (Matter of Settlement Funding of NY (Cunningham), 195 Misc 2d 721 [2003]) were unreasonable. Accordingly, this court does not find that the proposed transaction is fair and reasonable.
Moreover, when determining whether or not the transfer is in the best interest of the payee, the court must consider the totality of the circumstances including what the payee proposes to use the funds for. This court does not find that the proposed transfer is in the best interest of Mr. Saxton or his son. Mr. Saxton has thus far received considerable sums of money from the settlement, including monthly payments from the settlement. Even more disturbing is the fact that Mr. Saxton already transferred a sizeable portion of his future settlement payments to the petitioner in 2002 to his detriment and that of his son and it is not known what he did with the money he received from that transfer.
Furthermore, Mr. Saxton contends that he wants to use a portion of the money he receives to put a large down payment on a $90,000 house which would allow him to build equity and permit him to save money on taxes. However, other than informing the court that the house is in the Columbus, Ohio area, Mr. Saxton does not provide the court with any information with respect to the house he has located nor has he determined whether or not he can even obtain a mortgage for the purchase of said house, which may be difficult if he has poor credit. The transfer of $325,000 from Mr. Saxton's future settlement payments in exchange for only $46,080.80 is not in the best interest of Mr. Saxton or his son.
Since this court finds that the proposed transfer is not fair and reasonable and would not be in the best interest of Mr. Saxton, taking into account the welfare and support of his son, the [*6]motion for this court's approval of the proposed transfer of a portion of Mr. Saxton's future lump sum payments, is hereby denied.
A copy of this decision and order shall be attached to any future applications by Mr. Saxton to transfer his structured settlement funds.
This constitutes the decision and order of the court.
Dated December 4, 2006
J.S.C.
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