BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 491| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 445-6614 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ {u u} THIRD READING Bill No: SB 491 Author: Johnston (D) Amended: 4/27/99 Vote: 21 {u SENATE JUDICIARY COMMITTEE u} : 5-2, 4/20/99 AYES: Burton, O'Connell, Peace, Sher, Schiff NOES: Haynes, Morrow NOT VOTING: Escutia, Wright {u SUBJECT u} : Structured settlements: transfers {u SOURCE u} : The California Structure Settlements Coalition American Insurance Association {u DIGEST u} : This bill prohibits, relative to transfers entered into on or after January 1, 2000, the sale of structured settlement payment rights received to settle a tort claim unless the buyer discloses certain financial terms of the purchase to the seller ten days before the contract is signed, and a court approves the sale upon a noticed hearing involving all interested parties and upon its finding that the sale is necessary for the financial welfare of the seller. This bill does not apply to structural settlements which were imposed by law. {u ANALYSIS u} : Existing law permits a personal injury tort damages award, and a workers' compensation award for permanent disability, to be paid in periodic payments (also CONTINUED {u SB 491 u} Page 2 known as a structured settlement) rather than a lump-sum payment. In some cases, such as the installment payment of more than $50,000 in future damages in a medical malpractice action or the installment payment of certain judgments against a state or local public entity, structured settlement payments are required. Existing law does not limit the plaintiff receiving a structured settlement in a tort action from selling the payment rights. However, existing law prohibits the transfer of payments rights received in a workers' compensation claim without the approval of the Workers' Compensation Appeals Board. This bill, on or after January 1, 2000, prohibits the sale or transfer of structured settlement payment rights received in settlement of a tort claim by a California resident or by any other person receiving payments originally funded by a California domiciled insurer, and prohibits payments to a buyer or transferee of the structured settlement payment rights, unless all of the following conditions are met: 1.At least ten days prior to the entering of the transfer agreement, the buyer (or transferee) provides the seller with a written disclosure disclosing all of the following: A. The amount and payment dates of the payments to be transferred. B. The aggregate amount of the payments. C. The gross amount of all expenses. D. The amount paid to the seller, net of all expenses, in exchange for the payments. E. The discounted present value of the payments to be transferred and the discount rate used in determining that discounted present value. F. The quotient (expressed as a percentage) obtained by dividing the net payment amount by the discounted {u SB 491 u} Page 3 present value of the payments. G. A statement that the payee may be subject to adverse federal and state income tax consequences as a result of the offer. 2.A court approves the transfer upon finding all of the following: A. That the transfer is necessary to allow the seller or seller's family to avoid imminent financial hardship, and the transfer would not subject the seller or the seller's family to undue financial hardship in the future. B. The transfer of the payment rights is in the best interest of the seller and is fair and reasonable to all other interested parties (defined to include the annuity company making the periodic payments and the insurer that funded the annuity contract) under all of the circumstances then existing. This bill establishes a procedure for giving notice of the court hearing to all interested parties, who would be made parties to the proceeding and be given an opportunity to support, oppose, or otherwise comment on the proposed transfer. The bill would not apply to structured settlement payment rights in workers compensation cases or where the structured settlement was imposed by law upon a tort claimant. This bill provides that a transfer of structural settlement payment rights is void unless all of the following conditions are met: 1.The transfer is necessary to enable the payee, the payee's dependents, or both, to avoid imminent financial hardship, and the transfer would not subject the payee, the payee's dependents, or both, to undue financial hardship in the future. 2.The transfer of the structured settlement payment rights {u SB 491 u} Page 4 is fair and reasonable and in the best interest of the payee. 3.The payee has received independent professional advice regarding the legal, tax, and financial implications of the transfer. 4.The transfer complies with the requirements of this chapter and will not contravene other applicable law. 5.The transferee provides notice of the proposed transfer to all other interested parties no later than 15 days prior to the effective date of the transfer, unless earlier notice was given, as specified. The bill provides that a contract for the transfer of structured settlement payment rights shall not include any provision where the seller is a California resident. Any inclusion of a prohibited provision shall make the contract void and unenforceable. The bill also provides that: 1.Any provision that waives the seller's right to sue under any law, or in which the seller agrees not to sue, or which waives jurisdiction or standing to sue under the contract. 2.Any provision that requires the seller to indemnify and hold harmless the buyer, or to pay the buyer's costs of defense, in any claim or action brought by the seller or on the seller's behalf contesting the sale for any reason. 3.Any provision that waives benefits or rights conferred by law with respect to garnishment of wages. 4.Any provision providing that the contract is confidential or proprietary, belonging to the buyer. 5.Any provision in which the seller stipulates to a confession of judgment. 6.Any provision requiring the seller to pay the buyer's {u SB 491 u} Page 5 attorney's fees and costs if the purchase agreement is not completed. 7.Any provision requiring the seller to pay any tax liability arising under the federal tax laws, other than the seller's own tax liability, if any, that results from the transfer. 8.Any provision providing for brokerage fees incurred in the contract to be included in the purchase price. 9.Any forum selection provision providing for jurisdiction to be in a court outside of California for any action arising under the contract. 10.Any choice-of-law provision that provides for controlling law to be other than California law in any action arising under the contract. This bill provides that provisions of the bill may not be waived by agreement of the parties. This bill contains the following definitions: 1."Discounted present value" means the fair present value of future payments, as determined by discounting those payments to the present using the most recently published applicable federal rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service. 2."Expenses" means all broker's commissions, service charges, application or processing fees, closing costs, filing or administrative charges, legal fees, notary fees and other commissions, fees, costs, and charges that a payee would have to pay to transfer the structured settlement payment rights of a structured settlement agreement or that would be deducted from the gross consideration that would be paid to the payee in connection with the transfer of the structured settlement payment rights of a structured settlement agreement. 3."Independent professional advice" means advice of an {u SB 491 u} Page 6 attorney, certified public accountant, actuary, or other licensed professional adviser who meets all of the following criteria: A. He or she is engaged by a payee to render advice concerning the legal, tax, and financial implications of a transfer of structured settlement payment rights. B. He or she is not in any manner affiliated with, or compensated by, the transferee of the transfer. C. His or her compensation for rendering the advice is not affected by whether a transfer occurs or does not occur. 4."Interested parties" means, with respect to a structured settlement agreement, the payee, any beneficiary designated under the annuity contract to receive payments following the payee's death, the annuity issuer, the structured settlement obligor, and any other party who has continuing rights or obligations under the structured settlement agreement. 5."Payee" means an individual who received tax-free payments pursuant to a structured settlement agreement. 6."Structured settlement agreement" means an arrangement for periodic payment of damages established by settlement or judgment in resolution of a tort claim in which the payment of the judgement or award is paid in whole, or in part, in periodic tax-free payments rather than a lump-sum payment. 7."Structured settlement payment rights" means rights to receive periodic payments, including lump-sum payments, pursuant to a structured settlement agreement, whether from the settlement obligor or an annuity issuer. 8."Transfer" means any sale, assignment, pledge, hypothecation, or other form of alienation or encumbrance made for consideration. 9."Transfer agreement" means the agreement providing for {u SB 491 u} Page 7 the transfer from the payee to the transferee of structured settlement payment rights of a structured settlement agreement. 10."Transferee" means any person receiving structured settlement payment rights resulting from a transfer. {u Background u} According to news accounts, {u US News and World Report u} , January 25, 1999, more than $5 billion in structured settlements are awarded each year. This bill was introduced at the behest of a coalition of insurance and annuity companies for the stated purpose of protecting injured consumers. These sponsors say that consumers who received a structured settlement to compensate them for tort injuries are being preyed upon by unscrupulous "factoring companies" (or structured settlement purchasers) that seek to purchase the payment rights at a deep discount, as much as 50% to 75% of present value in some cases, thus causing financial hardship for the consumer when the lump sum buyout is spent. While true, a more plausible reason for their sponsorship of this bill is their fear that these buyouts threaten the favorable tax treatment given to the parties (particularly the insurance and annuity companies) under a structured settlement if the periodic payment rights are sold to another. In opposition, the structured settlement purchasers allege that the real aim of the sponsors is to protect their present ability to use structured settlements to settle cases with fewer outgoing dollars instead of having to pay lump sum amounts. Opponents allege that their recent increased activities to purchase structured settlement payment rights has had the side effect of educating consumers about the real worth of structured settlements, thereby making injured consumers less likely to accept a structured settlement and making it more difficult for an insurer to settle a case for cheaper dollars. The opposition also disputes that any tax advantages would be lost, pointing to a private opinion. {u SB 491 u} Page 8 For their part, the opposition believes it is providing consumers with a valuable alternative and wishes to continue its business undisturbed. In an actual sales agreement provided to staff by the sponsors, the agreement between the tort claimant seller and the payment rights buyer stipulated all of the following: 1.Seller has received independent tax and accounting advice and legal representation, or has waived legal representation. 2.Seller agrees to forego favorable tax treatment and acknowledges that sale may result in increased income taxes paid by the seller. 3.The purchase agreement is confidential proprietary information belonging to the buyer. 4.The seller agrees not to sue and expressly waives jurisdiction and standing to bring suit under the contract, and further agrees to indemnify and hold harmless the buyer if any suit is brought by the seller or on the seller's behalf contesting the sale for any reason (including fraud). (News account report cases where the seller also stipulates to a confession of judgment.) 5.The seller is responsible for paying the buyer's attorney's fees and costs if the purchase agreement is not completed, after a three-day cooling-off period, because the seller later changes his or her mind. 6.Brokerage fees paid by the buyer shall be added to the purchase price for purposes of calculating the seller's rate of return or the discount rate applied to the transaction. (The effect is to distort the net cash benefits to the seller, making it appear as if the seller were netting a higher return in the sale.) 7.Exclusive jurisdiction for any action is vested in New Jersey federal court. 8.The parties stipulate New York law to be the controlling law. {u SB 491 u} Page 9 {u FISCAL EFFECT u} : Appropriation: No Fiscal Com.: No Local: No {u SUPPORT u} : (Verified 5/3/99) State Attorney General's Office Association of California Life and Health Insurance Companies Pacific Life Insurance Company Transamerica Occidental Life Insurance Company {u OPPOSITION u} : (Verified 5/3/99) National Association of Settlement Purchasers {u ARGUMENTS IN SUPPORT u} : The California Structure Settlements Coalition, sponsors of this bill, asserts that the sale of payment rights may jeopardize the special tax rules adopted by Congress to encourage and govern structured settlements. The proponents contend that a claimant's unilateral selling of payment rights takes the structure out of the "structured settlement," without the knowledge of other parties who may be affected, and jeopardizes the tax benefits for all. {u ARGUMENTS IN OPPOSITION u} : Opponents assert that the proponents' tax fears are without merit. In support, they cite a February 25, 1999, PricewaterhouseCoopers tax opinion which states that the sale/transfer of structured settlement payment rights for a lump sum payment does not affect the tax status of the insurance company funding the annuity contract. Nor does a sale cause the loss of tax benefits to the annuity payment company or affect the tax exempt status of the income for the person selling the rights. Of relevance, the opinion opined that a person receiving a lump sum payment for structured settlement payment rights is not in "constructive receipt of the present value of the damages" (which would void the tax benefits) since the person does not have the unfettered ability to demand payment of the present value of damages from the annuity company. (In fact, any lump sum payment negotiated with another party only obtains a sum which is {u SB 491 u} Page 10 discounted below the present value.) Also, the opinion cites {u Western United Life Assurance Company v. Hayden et al u} .64 F.3d 833 (3rd Cir. 1995), wherein the court rejected an argument by debtors in a bankruptcy proceeding that once payment rights are assigned, the payments were no longer excludable from income by the transferee and thus annulling the annuity company's tax exclusion. While that ruling occurred in a bankruptcy context, the legal reasoning appears valid as a general proposition. Finally, the opinion ventured that it would be poor tax policy to allow the unilateral acts of one party, the seller of payment rights, to alter the tax liability of the annuity payment company many years after the creation of the settlement. The National Association of Settlement Purchasers (NASP) opposes SB 491, contending that it is unbalanced in requiring disclosures when the payment rights are being sold, but not requiring disclosures when the rights are first being established in the settlement or judgment. Consumers would also benefit from meaningful disclosures at the "front-end," asserts NASP. {u u} RJG:cm 5/5/99 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****