Structured Settlement Protection Acts (SSPAs) have been enacted in 48 states to regulate structured settlement factoring transactions -- where individuals sell their rights to future settlement payments in exchange for immediate, but often heavily discounted, lump sum payments.  The majority of these SSPAs contain “anti-split payment” provisions that protect annuity issuers from being forced to send portions of payments to multiple parties.1

For the past few years, a number of structured settlement factoring companies have been seeking to force annuity issuers to use “servicing arrangements” to get around these “anti-split payment” provisions in the SSPAs.  In a typical servicing arrangement, a structured settlement annuity issuer remits to the factoring company the entirety of the structured settlement payment even though only a portion of that payment was purchased by the factoring company.  The factoring company then retains the portion it purchased and remits the balance to the structured settlement claimant.

This practice is permissible if the annuity issuer and other interested parties agree.  However, the practice creates concerns for some annuity owners and issuers.  For example, there is some question about the effect of a factoring company bankruptcy.  Does the structured settlement claimant still get his or her portion and, if not, could the claimant pursue the annuity owner or issuer?  (The answer should be no, but prevailing on that issue in litigation could be expensive.)  Also, because factoring companies sometimes require claimants to agree to rights of first refusal, structured settlement owners and issuers can be dragged into litigation if the structured settlement claimants seek to sell to other factoring companies the portions of the payments that were not sold in the earlier deals.  Thus, annuity owners and issuers often resist the imposition of servicing arrangements, arguing that imposing such arrangements violates the applicable SSPAs and the right of freedom of contract.

In the last few weeks, the first appellate decisions addressing servicing arrangements were published in Texas and California. Those cases are:

  • In Re Rains, No. 07-14-00132-CV, 2015 Tex. App. LEXIS 8219 (Tex. App. Aug. 5, 2015); and
  • RSL Funding, LLC v. Alford, E060421, 2015 Cal. App. LEXIS 714 (Cal. Ct. App. Aug. 18, 2015), modified and reh’g denied, 2015 Cal. App. LEXIS 795 (Cal. Ct. App. Sept. 10, 2015).

In both cases the courts rejected the notion that an annuity owner or issuer can be forced into a servicing arrangement.  These decisions should have far-reaching effects since, as noted above, most SSPAs contain similar “anti-split payment” language and courts in other jurisdictions will likely be guided by these appellate decisions.

In Rains, the Texas Court of Appeals held, under the Texas SSPA, that MetLife, as annuity issuer, could not be compelled to accept a servicing arrangement that was not contemplated by the contracting parties at the time the annuity was issued.  In reviewing the Texas SSPA, the court “found nothing that authorized a trial court to unilaterally modify the terms of a previously existing contract.”  Furthermore, “the trial court had no authority to simply decide to change those portions of the annuity contract obligating Met to pay [the payee]. The terms of the contract regarding Met’s obligation to pay [the payee] were unambiguous and definite; thus, the court was obligated to enforce them as written unless the parties agreed otherwise.”

In RSL Funding, State Farm appealed a trial court order that directed it to split payments between the original payee and RSL’s assignee.  On appeal, RSL (the factoring company) conceded that having State Farm split payments violated the California SSPAs', and proposed that the case be remanded to the trial court to “order a servicing arrangement under which State Farm would send the entirety of the [structured settlement] payments” to RSL’s assignee, so that the assignee could then remit the balance of the payments not purchased by RSL to the claimant.  The court reasoned that the imposition of such a servicing arrangement on State Farm “would put [State Farm] in the position of having to rely on another entity to fulfill its contractual obligations to [the claimant] and would expose State Farm to litigation if, for example, RSL or its assignee sought bankruptcy protection.” 

In both Rains and RSL Funding, the annuity issuers focused on the applicable SSPAs' mandatory prohibition regarding divided payments and argued that the courts had no authority to impose a servicing arrangement that compelled the issuers to pay to the factoring companies monies that the annuity contracts required the annuity issuers to pay to the payee.

In the many states where there is anti-split payment language in the SSPA, these decisions should serve as a useful tool to stop transactions where the factoring company contracts to purchase only a portion of a claimant’s structured settlement payments and the annuity issuer is unwilling to enter into a servicing arrangement.  In short, if the statute prohibits an annuity issuer from being forced to split payments, and a servicing arrangement cannot be forced upon an annuity issuer, a partial payment transaction has no way to proceed.