On July 12 I wrote about predatory structured settlement purchasers who buy out periodic payments to the disabled–those who need the funds over their lifetime–for 30-40 cents on the dollar. On July 16, the New York Times published a story entitled, “After N.F.L. Concussion Settlement, Feeding Frenzy of Lawyers and Lenders.” The article describes predatory sales pitches to former NFL players “who stand to receive checks from the largest legal settlement in sports history, a pool of money that may top $1 billion for retirees who sued the league for lying to them about the dangers of concussions as they got their heads pounded on the field.”
The stench of $1 billion has attracted lenders offering tens of thousands of dollars that would be paid back from the settlement payouts–commonly called “lawsuit loans” or “pre-settlement funding.” All they ask in return is 40% interest, which can completely consume any recovery from the settlement, according to the article.
Lawsuit lending is the “before” equivalent of structured settlement purchases, and often preys on a person’s desire for immediate gratification, or worse, their need of funds for healthcare or other essentials, even though there may be far more financially sound solutions.
The New York attorney general filed suit against RD Legal Funding, LLC, a lawsuit lending company based in New Jersey who allegedly targeted NFL players with “severe neurological disorders.” Reporting by the New York Times explains:
This type of lending against a settlement payout is part of a legal but largely unregulated business focused mostly on victims in personal injury cases. The loans, though, have potentially devastating trapdoors, most notably the high interest rates that kick in immediately after money is advanced, and can cut deeply into the sum a player might ultimately receive in a settlement.
Some financial watchdogs accuse the lenders of preying on people who are sick or who, in the case of the N.F.L. retirees, have memory problems or other cognitive ailments that could mean they cannot fully grasp the terms of the loans, which often require the players’ lawyers to provide consent.
Whether before a settlement or after, there are numerous companies waiting to prey on those in the greatest need, and those who are least able to protect themselves. Sadly, it works.
We recently handled a fraud and consumer protection case against two structured settlement purchasers that settled in about four months, one for a confidential amount and one for a several hundred thousand dollar gross recovery. While I cannot yet go into case specifics, below are some words of caution about a predatory and insular industry operating within Washington courts for settlements originating all over the country.
The vast majority of plaintiffs spend their settlement funds in the blink of an eye, relatively speaking. Numbers vary depending on the study, but generally about 90% of settlement beneficiaries dissipate most or all of a lump sum settlement within five years. Sometimes clients spend the money wisely. But because almost no one is accustomed to receiving a large chunk of money all at once–larger than any amount they have ever seen–more often than not a significant portion is blown on frivolous stuff.
For this reason, many lawyers negotiating large claims discuss with clients the need to plan ahead. We are not financial advisors, but we encourage clients to explore their opportunities with appropriate experts.
One of the most common avenues lawyers mention is a structured settlement (“SS”). In a SS, the defense insurer agrees to pay a lump sum to purchase an annuity that makes periodic payments on a schedule chosen by the settlement beneficiary, usually over decades, including interest. A SS affords significant tax benefits under 26 U.S. Code § 130 and 26 U.S. Code § 104(a). Many lawyers believe a SS protects the beneficiary’s funds over the long term.
Unfortunately, for every smart financial move there is a business willing to take advantage of it. 26 U.S. Code § 5891 allows “factoring transactions,” or sales, of structured settlement benefits. Thanks to these businesses, for a lump sum “advance” your client can sell some or all of his benefits for 30-40 cents on the dollar, or the equivalent of a 15-20% interest rate (like a college student’s first credit card) on a totally secure transaction (like a high equity home mortgage).
Washington’s Structured Settlement Protection Act (“SSPA”), RCW 19.205, offers some protections. The SSPA requires that any proposed transfer be approved by a judge with findings that the “transfer is in the best interest of the payee,” and that the “transfer does not contravene any applicable statute or the order of any court.” RCW 19.205.030. None of the Act’s provisions may be waived, and complying with the SSPA is “the sole responsibility” of the SS purchaser. RCW 19.205.060(1) and (6).
Like many laws, however, the SSPA is only as good as the information applied to it. SS purchasers that petition for these sales often do little or no investigation before certifying that the transfer does not contravene the order of any court and is in the best interest of the SS beneficiary. Worse, some willfully ignore and conceal contrary information to obtain court approval, such as the SS beneficiary’s disability or a minor settlement order in another state placing permanent restrictions on the transfer of funds. Some SS purchasers then have the gall to argue that the enforceability of a fraudulently obtained transfer order is subject to an arbitration clause, and is outside the jurisdiction of the court signing the order.
Remember that like Washington, other states provide jurisdiction for SS sales on settlements originating elsewhere. A Washington SS could be sold in another state based on inadequate investigation and/or concealment by the purchaser. Even within Washington courts, the system could improve. For example, in King County LCR 40.1 sets all minor/disability settlement approvals before Ex Parte/Probate, whereas LCR 40(b)(14) puts structured settlement transactions under RCW 19.205 before Chief Civil. The judges deciding what to do with minor/disability settlements, and why, may not be able to foresee how a proposed sale is determined, and the judges deciding on a proposed sale may not be as intimately familiar with the unique interests and options of minor and disability settlements.
For any structured settlement involving a minor or disabled person, you should consider whether or not restrictions on sale/transfer are appropriate. If so, the settlement agreement and any court order approving settlement should contain language that the beneficiary “shall not have the power to transfer or sell benefits,” either at all or except under very specific conditions or circumstances. Some jurisdictions require this disempowerment language rather than language merely prohibiting sale.
Common conditions on sale include that the “advance” be used only to fund education, or for compelling financial need. I would also recommend that a settlement order prohibit any sale exceeding a specific “discount rate,” any sale accompanied by an arbitration agreement, and any sale in a jurisdiction other than the court approving the original settlement.