Matter of 321 Henderson Receivables Origination LLC v Windom

[*1] Matter of 321 Henderson Receivables Origination LLC v Windom 2007 NY Slip Op 51400(U) [16 Misc 3d 1112(A)] Decided on July 20, 2007 Supreme Court, Albany County Devine, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 July 20, 2007
Supreme Court, Albany County

In the Matter of the Petition of 321 Henderson Receivables Origination, LLC, Petitioner, -and

against

Geoffrey Windom, Prudential Insurance Company of America and Prudential-LMI Commercial Insurance Company,



3670-07



APPEARANCES:

NAPIERSKI, VANDENBURGH & NAPIERSKI, L.L.P.

SHAWN T. NASH ESQ., of counsel

for the Petitioner

Eugene P. Devine, J.

By Notice of Petition dated May 11, 2007 and Petition with supporting papers and exhibits, petitioner moves this Court pursuant to General Obligations Law §5-1701 (the Structure Settlement Protection Act) for an order approving the transfer of a portion of certain structured settlement payment rights vested in Geoffrey Windom.

Mr. Windom's current structured settlement provides for the following payments:

—Starting September 1, 2009 he will receive $1,250 per month, for the rest of his life.

On April 24, 2007, Geoffrey Windom entered into a transfer agreement with the petitioner to sell the rights to the future payments of 212 monthly life contingent payments each in the amount of $1,050 commencing on October 1, 2009 and concluding on May 1, 2027. The total amount of payment being transferred, assuming Mr. Windom lives until the conclusion of [*2]the agreement, is $222,600. In exchange for the rights to that $222,600 Mr. Windom is to be paid a lump sum of $42,365. Although the contract states the selling price is $68,753, the actual amount Mr. Windom is set to receive is only $42,365. Petitioner is charging Mr. Windom $25,753 in order for petitioner to obtain a life insurance policy on Mr. Windom. Petitioner is also charging Mr. Windom $635 in fees in order to process the transaction. Subtracting the $25,753 life insurance policy and the $635 in fees from the original lump sum of $68,753 brings the final total to $42,365.

Applying the Federal standards most recently published discount rate of 5.8% the discounted present value of the payments transferred is $122,605.96. Petitioner has applied an effective annual discount rate of 19.97%, compounded monthly to determine the agreed upon sale price of $42,365. The quotient obtained by dividing the net payment by the discount present value is 34.6%.

Based on the information obtained in the petition and supporting papers, Mr. Windom is a 48 year old, single male with three children. He is currently employed by Picolte Company as a custodian, earning approximately $22,000 per year. He plans to use the proceeds from the sale to purchase an automobile, pay for home improvements, and pay off credit card and other miscellaneous debt.[FN1] A copy of a letter from Bruce S. Bandes, confirms that Mr. Windom has consulted with a third party attorney concerning his agreement with the petitioner, as required by law.[FN2] The affidavit of David Reape, Senior Vice President of 321 Henderson Receivables, states that because of the expenses involved in acquiring payment rights, the effective discount rates charged to sellers is between 12% and 24%.[FN3] Consequently, Mr. Reape states that the discount rate of 19.97% charged to Mr. Windom is within industry standards and that the agreement with Mr. Windom would pay him fair market value for his structured settlement.[FN4]

General Obligations Law § 5-1706. Approval of transfers of structured settlement payment rights provides as follows: "No direct or indirect transfer of structured settlement payment rights shall be effective and no structured settlement obligor or annuity issuer shall be required to make any payment directly or indirectly to any transferee of structured settlement payment rights unless the transfer has been authorized in advance in a final order of a court of competent jurisdiction based upon express findings by such court 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 [*3]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;" (emphasis added)

Several trial courts have addressed the issues raised by these types of transfers. These courts have noted that the Legislature intended for the courts to protect a payee's long-term financial security and prevent them from being victimized by the structured settlement sale industry.[FN5] Due to the predatory nature of this industry the Legislature intended the "Structured Settlement Protection Act" to be protective of payees, not a mere rubber stamps for proposed structured settlement sales.[FN6] The statutory criteria requires the Court to examine the proposed structured settlement sale and determine if it is in the best interest of the payee, and if the terms are fair and reasonable.

Determining what is in the payee's best interest the Courts have abandoned the requirement that there be a finding of severe economic hardship or "dire straits".[FN7] Instead the Court now uses a more global consideration of best interest, taking in the totality of the circumstances when determining whether to allow the sale of a structured settlement.[FN8] Although no longer required, a showing of hardship or emergency, would be strong evidence that it is in the best interest of the payee to go forward with the sale.[FN9] Courts generally will not find sales of structured settlements to be in the best interest of payees when the express purpose of the sale is to ease relatively minor financial burdens (paying back loans, credit card debt, purchasing a new car, home improvements, etc.).[FN10] The Court does not want payees to be lured into giving up their future financial security in order to pursue a "quick fix" lump sum payment. Often times there are other, much less costly alternatives for payees to obtain money while still preserving their structured settlements.

Although Mr. Windom might genuinely need to get a new vehicle, make necessary home repairs and pay down his debts, these needs are not so great as to put his financial future in jeopardy. Mr. Windom's financial history has shown that in years past he has sold other portions [*4]of his structured settlement to the petitioner for money up front and still finds himself in debt. These monthly payments, starting in September 2009, are all that remains of his structured settlement and would provide much needed financial security. Consequently it would not be in Mr. Windom's best interest for this transfer to go forward.

Mr. Windom could potentially borrow $42,365 for ten years, with interest compounding at 8%, and have monthly payment of $514.00. If he wanted to reduce the number of years and pay the loan off in five years he would have a monthly payment of $859.01. These payments would be manageable at his current income and are well below the $1,250.00 per month he is scheduled to begin receiving in September 2009. If Mr. Windom chose to take out a loan for $42,365 for 10 years at 8% interest he would end up paying a total of $61,680.52, if he chose to get the loan for only five years he would pay a total of $51,540. These figures are mere fractions of the $222,600 in future payments that he would give up in this agreement, which is patently unfair and over-reaching.

Another requirement of the Structured Settlement Protection Act is that the terms of the sale be fair and reasonable. This standard is usually used when examining the effective annual discount rate for the transaction, as well as the fees and charges associated with the transaction.[FN11] Determination of what is fair and reasonable is case specific and involves examination of the totality of the circumstances [FN12].

The Court is mindful that the petitioner is involved in a business and that Mr. Windom agreed to the terms. However, the Court finds that the annual discount rate of 19.97% charged to Mr. Windom to be both unfair and unreasonable.[FN13] The fact that this rate may reflect "industry standards" is not persuasive because it is the practices and standards of this industry that are the target of the Structure Settlement Protection Act. The Court realizes that the more pressing and urgent the need, the more reasonable it may be for a payee to obtain an immediate lump sum at a steep discount rate.[FN14] In emergency situations the Court has been willing to approve transfers of structured settlements at very high rates.[FN15] The needs of Mr. Windom in this case do not rise to the level of urgency that would persuade this Court to approve a transfer with an annual discount rate as high as 19.97% and have Mr. Windom giving up the rights to $222,600 in exchange for [*5]$42,365.[FN16]

In addition to the unfair rate, Mr. Windom is also expected to pay $25,753 for a life insurance policy with the petitioner as the beneficiary, along with $635 in fees. The life insurance policy alone amounts to over 37% of the $68,753 purchase price that the petitioner is paying for the structured settlement. Consequently this transfer agreement not only has Mr. Windom giving up his future financial security, it also has him giving up a large percentage of his current financial security in order to ensure that the petitioner receives a good return on their investment. This agreement is so blatantly unfair and unreasonable that is boarders on unconscionable and is precisely the kind of agreement that the Legislature was trying to prevent when they enacted this legislation.

Having evaluated Mr. Windom's other options, financial history, and individual needs this Court holds and determines that this transfer is not in his best interest, nor are the terms fair and reasonable. Accordingly, petitioner's application for an Order approving the transfer of the structured settlement payments should be and the same is hereby denied and dismissed without costs.

This Memorandum shall constitute both the Decision and Order of the Court. This Original DECISION/ORDER is being sent to petitioner's attorney. The signing of this DECISION/ORDER shall not constitute entry or filing under CPLR § 2220. Counsel for the petitioner is not relieved from the applicable provisions of that section with respect to filing, entry and notice of entry.

SO ORDERED

ENTER

Dated:Albany, New York

July, 2007

EUGENE P. DEVINE, J.S.C.

cc: Geoffrey Windom

Papers considered:

1. Notice of Petition, dated May 11, 2007

2. Petition, with exhibits and supporting documents, dated May 11, 2007. Footnotes

Footnote 1:Affidavit of Geoffrey Windom, ¶ 10

Footnote 2:Petition Exhibit B, Letter from Bruce S. Bandes, see General Obligation Law § 5-1706(c)

Footnote 3:Affidavit of David Reape, ¶ 6

Footnote 4:Affidavit of David Reape, ¶ 10

Footnote 5:see, e.g. 321 Henderson Receivables, L.P. v. Fontana, 13 Misc 3d 1216 (2006)

Footnote 6:Id.

Footnote 7:Matter of Settlement Capital Corp. v. Yates, 12 Misc 3d 1198, 3 (2006)

Footnote 8:see, e.g. Matter of Settlement Funding of New York [Platt], 2 Misc 3d 872, 876 (2003)

Footnote 9:Matter of Settlement Capital Corp v. Yates,12 Misc 3d at 3

Footnote 10:see, Matter of Settlement Funding of New York [Asproules], 1 Misc 3d 910 (2003); Matter of Settlement Capital Corp. [Bellos], 1 Misc 3d 446 (2003)

Footnote 11:see, e.g. Matter of Settlement Capital Corp. v. Yates, 12 Misc 3d 1198 (2006)

Footnote 12:Id.

Footnote 13:see also, Matter of Settlement Funding of New York [Cunningham], 195 Misc 2d at 724 (Petitioner failed to show 15.46% was reasonable even though it is consistent with the market rates and had been consented to by the payee)

Footnote 14:Matter of 321 Henderson Receivables Ltd Partnership [DeMallie], 2 Misc 3d 463, 465 (2003)

Footnote 15:see generally, Matter of Settlement Funding of New York [Cunningham], 195 Misc 2d 721 (2003)

Footnote 16:see generally, Matter of Settlement Capital Corp.,194 Misc 2d 711 (2003)(18.621% held unreasonable); Matter of Settlement Capital Corp. [Ballos], 1 Misc 3d 446 (15.591% held unreasonable);see also, Matter of Settlement Funding of New York [Cunningham], 195 Misc 2d at 724 (15.46% held unreasonable, suggested that a rate of 8% would be fair and reasonable, so long as attorney fees were not deducted from the amount given to the payee)