Set forth below is a summary of a recent unreported California court decision, Memorandum of Decision and Orders Re: Petitions for Transfer of Structured Settlement Payments; Entry of Judgment of Dismissal With Prejudice, Superior Court of California, County of Fresno, Central Division (September 5, 2008), denying multiple petitions for approval of transfers of structured settlement payment rights in the following cases:
In Re Melissa Moua (Case No. 08CECG00111 AMS)
In Re Ericka Goodwin (Case No. 08CECG00165 AMS)
In Re Leonard Vivian (Case No. 08CECG00390 AMS)
In Re Timothy Raney (Case No. 08CECG00493 AMS)
In Re William Bowles (Case No. 08CECG00631 AMS)
In Re Kenneth Cook (Case No. 08CECG00639 AMS)
In Re Pete Castellanoz (Case No. 08CECG00644 AMS)
In Re Raymond Wenstrom (Case No. 08CECG00772 AMS)
In Re Alexander Duran, Jr. (Case No. 08CECG00823 AMS)
In Re Derrick Cox (Case No. 08CECG00847 AMS)
In Re Cynthia Sioteco (Case No. 08CECG00848 AMS)
In this decision, Judge Alan M. Simpson of the Superior Court of Fresno County denied petitions seeking court approval of transfers of structured settlement payment rights by 11 different payees (Payees) to 321 Henderson Receivables (Henderson). In doing so, the court took Henderson and its attorneys to task for their business practices and also concluded that a number of Henderson’s prior factoring transactions may be void, notwithstanding that they were court-approved.
Specifically, in its order, dated Sept. 5, 2008 (Order), the court denied proposed transfers pursuant to the California Structured Settlement Transfer Act, California Insurance Code § 10134, et seq. (California Act), finding that the transfers were not in the Payees’ best interests and that there were numerous deficiencies in the petitions themselves. Significantly, the court took judicial notice of and reviewed more than 100 past petitions filed by Henderson since 2002 in Fresno, Kern and Riverside counties. The court described a “pattern and practice” of deficiencies in those petitions that, according to the court, may render the subject factoring transactions void. The court further concluded that Henderson’s factoring transactions were loans, not sales, and that they were subject to California’s usury law, which limits interest on loans used for personal household purposes to 10 percent.
The following were among the deficiencies in the Henderson petitions specifically noted by the court:
- the underlying settlement agreements, qualified assignments, annuities, and/or minor’s compromise orders barred the transfers because they contained provisions that specifically prohibited the Payees from assigning the payments, such that the transfers contravened other applicable law in violation of § 10137(b);
- complete copies of the underlying annuities, specifically, the pages that contain anti-assignment language, were not attached to a number of Henderson’s petitions, in violation of § 10139.5(c);
- the disclosure statements attached to the petitions were entirely in bold print and in the same type size throughout, thereby failing to provide emphasis on certain terms of the transfer, in violation of §§ 10136(a) and 10139.5(a)(3);
- the disclosure statements did not properly itemize expenses because they merely listed “related expenses” and were so vague as to be meaningless as an “itemization,” in violation of § 10136;
- the transfer agreements contained blank spaces, even after the Payees had signed the agreements, in violation of § 10136;
- verifications containing signed and dated statements made under penalty of perjury were not supplied, in violation of § 10139(a);
- Henderson failed to serve beneficiaries of the annuities and the Payees’ counsel, in violation of §§ 10134(g) and 10139(a);
- Henderson failed to serve the insurers as “interested parties” at their registered addresses, in violation of § 10138(a);
- the Payees represented by the three attorneys identified in the Order were not provided with “independent professional advice” as to the consequences of the proposed sales, in violation of §§ 10136(b), 10136(c)(10) and 10139.5(e).
According to the court, the “most glaring” irregularity contained in Henderson’s petitions was that Henderson and its counsel failed to advise the court of the existence of approvals of prior petitions filed by Henderson with respect to a given Payee, as well as denials of prior petitions filed by Henderson with respect to a given Payee that were simply re-filed before a different judge on the same court. The court described these practices “as highly unethical and suspicious” and, in significant part because of these practices, took judicial notice of and reviewed more than 100 of Henderson’s past petitions filed in Fresno, Kern and Riverside counties. The court also characterized “as highly irregular, to say the least” Henderson’s attempts to unilaterally dismiss its petitions, sometimes after adverse tentative rulings.
In addition, according to the court, Henderson’s practice “of referring structured settlement payees to certain counsel” for the purpose of providing Henderson with an estoppel letter required by its purchase agreements resulted in the three named attorneys having breached their duties of undivided loyalty and competence to the Payees whom they purported to represent. The court noted that the attorneys were hired “to give Henderson an opinion that Henderson likes, not to competently advise the payee about the sale and potentially financially devastating consequences thereof to the payee/client.” The court further found that Henderson had assumed a fiduciary duty to these Payees because Henderson had provided counsel to them, and that Henderson breached that duty by creating a false appearance of independent counsel. In addition, the court found that the three named attorneys, as well as one of the attorneys representing Henderson in connection with the subject petitions, also breached California Business and Professions Code §§ 6155 and 6068 because they represented that the counsel that they provided to the Payees was “independent.”
With regard to Henderson’s frequent failure to attach complete copies of the annuities to its petitions, Henderson had argued that the omission of all or part of the annuities was of no consequence because: (1) the non-assignment provisions are invalid as a matter of law under the Uniform Commercial Code (UCC); and (2) so long as the parties waive such a provision, it is unenforceable. The court rejected Henderson’s arguments, specifically finding that: (1) the UCC provisions do not apply to life insurance; and (2) the anti-assignment provisions cannot be waived because they are expressions of public policy, and they therefore precluded the subject transfers. The court’s second finding in this regard would seem to be particularly significant, in light of the fact that most settlement agreements, qualified assignments and annuities contain anti-assignment provisions.
The court went on to analyze Henderson’s factoring transactions under Article XV, section 1 of the California State Constitution and related state law prohibiting usury. The court concluded that Henderson’s transactions were loans and not sales, and that they violated California’s usury laws prohibiting interest rates above 10 percent in connection with loans for personal household purposes. According to the court, any transaction that Henderson completed with a payee involving an interest rate in excess of 10 percent is usurious.
Significantly, the court concluded that the consequence of Henderson breaching the provisions of the California Act and contravening other applicable law is that the transactions involved in those petitions may be void, even if previously court-approved.
The cure ordered by the court for Henderson’s (and its attorneys’) various violations was several fold. First, the court ordered Henderson to attach a copy of the Order to all petitions filed by Henderson in Fresno County in the next five years, and to all future petitions filed by Henderson involving any of the more than 100 payees listed in the exhibits to the Order. Second, the court ordered the clerk to provide copies of the Order to the Office of the California Attorney General and to the Office of the Chief Trial Counsel of the California State Bar. Finally, the court ordered Henderson to serve a copy of the Order on each person or entity named on any proof of service for all of the petitions listed in the exhibits to the Order, as well as on the California agent for service of process for each of the involved insurers. The court made it clear that it is requiring such service in order to provide such persons and entities the opportunity to seek to have Henderson’s previously court-approved transactions declared void.
Henderson had argued that it was not afforded due process because the court considered evidence outside of the evidence that Henderson had submitted for the court’s consideration. The court rejected this contention on the grounds that: (1) Henderson had been a party to every proceeding that the court reviewed, (2) Henderson and other factoring companies had been on notice of the court’s concerns as a result of prior proceedings, (3) the court had held three separate hearings in connection with the 11 petitions before it, had issued extensive proposed findings in two orders entered on May 27, 2008, and had considered all of Henderson’s subsequent objections and related submissions to the court.
This decision highlights the importance of monitoring transfer petitions and insisting upon obtaining release and indemnity protections from the payees and the factoring companies by way of signed stipulations. Insofar as any previously court-approved transfers ultimately may be deemed to be void as a result of the Order, further action may be required to ensure that any future payments are directed to the payees rather than to Henderson.