Stream of Payments Shields Some Injury Victims From Unwise Decisions, Maximizes Compensation

Anita Alsabrook was a 20-year-old with an 11th grade education, a mom with two small children whose husband was incarcerated. Her only income was a public assistance check for $225 and a monthly annuity payment of $250, a result of her mother's medical malpractice settlement.

It was at this time in her life when she contacted representatives from a Philadelphia-based limited partnership in response to an advertisement stating that it could buy out the periodic payment settlement for a lump sum in cash. What the ad didn't make clear to this unwary buyer was the radical discount rate used to determine the lump sum she would receive upon sale.

The purchaser, J.G. Wentworth, paid Alsabrook $8,045.04 in November, 1996, in exchange for her 120 monthly payments of $250 covering a 10-year-period or $30,000.

Worse yet, she entered into a second deal with this company, receiving $1,800 in exchange for her annuity payments totaling $24,000. The matter resulted in a legal action filed in 1996 in the Philadelphia County Court of Common Pleas (Case No. 1630), but attorneys for Alsabrook now state that the matter is resolved and the complaint has been withdrawn with no further action contemplated.

Apologizing for not intending to be "vague," one of her attorneys explains that the "resolution" of the matter prevents the lawyers from discussing the terms of the settlement reached, or even if a confidentiality agreement exists, according to Linda Thomasson of Duane, Morris & Heckscher, a Philadelphia law firm.

The story may sound unique, but it's one that may become a common refrain as the burgeoning industry of structured-settlement purchasing continues to grow.

By some estimates, creation of structured settlements is a $4-billion-a-year industry. The term itself may confuse some clients. The principle, however, is actually simple: under these contracts, an insurer - typically a life insurance company - collects a premium from the defendant or its property casualty insurer and then invests that money, profiting from the difference between any return on the invested premium and what it pays out over time to the claimant. Annuities can be purchased for less than ultimately will be paid out, which makes a structured-settlement arrangement cheaper than a lump-sum payout for the defendant or insurer.

On the face of it, the buyout of a long-term investment for cash can be an acceptable financial deal for some people (e.g., lottery winners), but when the deal involves usurious discount rates, particularly where the mentally or financially unsophisticated are involved, it rings of unfairness and totally undermines the original safety net purchased with the initial settlement.

My first experience with structured settlements was in the mid-1970s. As a personal injury attorney, I would find myself seated at a settlement table with the defendants and their insurers. In tow was a structured settlement specialist.

While I have been involved in many structured settlements, they have always been a somewhat suspect commodity in that beneficiaries are not told the entire story regarding the purchase agreement between the defendants, broker and insurers. Anecdotal tales of fishy arrangements are commonplace.

But the purpose has always been the same: to protect a vulnerable plaintiff who needed protection. The spendthrift who haven't given enough thought to the future, the disabled adult who is cognitively unsophisticated, the brain-damaged child who is expected to outlive his parents and require medical attention for many years to come, the poorly educated who don't comprehend or appreciate the importance of periodic payments insuring a steady income over time - all of them require protection and advice of counsel. They need safety, not risk.

The settlement specialists, though, never would disclose the cost of these structured deals on the premise that tax benefits would immediately be revoked because of constructive receipt issues - an excuse that ultimately gave way to truth but became replaced by reports of sweetheart deals and secret refunds. Congress granted the tax breaks in 1982 on the premise that structured settlements perform a public service in keeping those who have been horribly injured off the welfare roles. Now, the constructive receipt issue is back in a different and real way because thepurchase of future structured-settlement proceeds has opened a Pandora's box of tax questions which boil down to whether these brokers are frustrating Congress' intent.

This new cottage industry, born in the 1990s, buys out future payments at a heavy discount. The so-called factoring companies buy at rates ranging from 90 cents on the dollar to as little as 30 cents on the dollar. And since the transactions are set up as purchases and not as financing, the factoring companies can avoid compliance with usury laws as well as many state and federal consumer-protection statutes that are aimed at usurious lending practices. Furthermore, because this "secondary market" effectively is unregulated, disclosure of information is sparse.

This secondary market got its start with lottery winners who generally bought the winning lottery ticket knowing the payments would be over a 20-year period, and then voluntarily elected to take a windfall now rather than wait.

Solicitation of this type of business doesn't seem as calculating or predatory as in the case of personal injury plaintiffs who initially chose a structured settlement for a variety of sound economic reasons. Offering a steady income to a helpless individual or a struggling family, these sometimes economically prudent, safe decisions are undermined by a smooth-talking salesman who can offer instant riches, but with the risk that long-term security is sacrificed for short-term gratification - say, the funds to buy a new Corvette. While I don't totally agree, some insurance industry statistics show that some 90 percent of personal-injury victims squander such lump-sum awards within five years.

Texas has proposed an outright ban on the sale of structured-settlement payments. Illinois tried to be at the forefront of protecting with the passage last year of one of the first laws in the country to regulate the firms that offer buyouts.

Savvy corporate executives from the factoring companies are now trying to turn lemons into lemonade in their public endorsement of the law, attempting to turn it into an acknowledgment - perhaps even an acceptance - of what they do. House Bill 1410, as it was known when the legislature passed it and Governor Edgar signed it, took effect on Jan. 1.

It requires approval by the state's circuit courts for all lump-sum payments made by third-party settlement purchasers to recipients of personal-injury damage awards. The strategy behind the factoring companies' endorsement of the law is twofold: it "certifies that the settlement purchasing industry has a legitimate role to play while making it much more difficult for certain unscrupulous independent parties and investors who've entered the business to operate," according to Kiplund R. Kolkmeier of Sidley & Austin. J.G. Wentworth, which according to industry estimates accounts for about 75 percent of all settlement resales in this country, has even gone so far as to hire Sidley & Austin to help lobby to keep the industry lucrative.

Kolkmeier's unsuccessful lobbying strategy includes attempting to elicit the support of the Illinois Trial Lawyers Association, in "refining" the Illinois law. Joining in that effort was the National Association of Settlement Purchasers, an industry-created trade association, formed in July, 1996.

In tandem, they called for several amendments "designed to clarify the law and provide still greater protection to beneficiary-claimants of such payments," according to a press release issued late last year by the latter organization. Both have stated they would rather see beneficiaries consult an attorney before signing a lump-sum contract with a third-party buyer, not seek court approval, under the guise that a court may not have approved the initial settlement in the first place. That's chutzpah!

Another "clarification" the factoring companies seek is that the law be limited to Illinois-domiciled beneficiaries, not to the broader category of payments made by Illinois-domiciled insurers. Is someone trying to avoid insurance regulation here?

But what these lobbyists neglect to mention is that the factoring companies oftentimes recommend local settlement attorneys who merely witness the signing of the contracts by the beneficiaries and who give minimal advice on the terms of the contract itself. These attorneys are, in turn, paid by the companies, not the individual, making it clear as to exactly whose interests they are representing in the sale and who is the real client. It has also been reported that these same factoring companies even have paid attorneys for "referrals."

These companies are ingenious when it comes to finding potential clients. Some radio and television advertisements tell potential clients to dial 1-888-WHY-WAIT. Other ads offer inducements such as trips to faraway vacation places such as the Bahamas when a particular funding company or broker are used. Another commercial features a grey-haired "Mr. Wentworth" who talks about financial rescue; reportedly, no such person exists. It's not uncommon to find factoring company agents combing court records in search of personal injury plaintiffs, particularly minors or the disabled, who might be in line for a hefty settlement following a tragic accident. They monitor them and then follow up on these cases with the "hard sell" months, even years, later, undermining the very protection these people originally bought.

These companies are even contacting attorneys through the Internet - my office has received solicitations from companies claiming that they "pay cash now."

And these sales pitches apparently are paying off. It's no wonder that the once modest limited partnership, J.G. Wentworth, founded in 1992, has plans to go public later this year. And it's becoming a fiercely competitive market.

These companies justify their actions using spin doctors who make them out to be knights in shining armor, coming to the rescue of poor plaintiffs who might suddenly find themselves financially strapped when unforeseen circumstances arise, such as educational or housing expenses. However, most attorneys I know who advise structured settlements take these milestones into account and will pay out a greater amount at these junctures in a person's life. Selling out even part of a settlement at a steep discount rate is a radical solution for these kinds of problems.

The issue was the subject of a recent front-page story in The Wall Street Journal (Feb. 25), headlined "Thriving Industry Buys Insurance Settlements From Injured Plaintiffs." A cascade of subheads informed that "J.G. Wentworth Pays Cash for Monthly Payments," "The Price: 21% Interest," and "Bobbie Jean Begs by the Road." The lengthy story described how 26-year-old Bobbie Jean Sweeney of Dundee, Fla., lost a leg in a tractor accident at the age of 11. Some eight years after the $2,500 a month annuity payments started, she sold one-third of her remaining payments to Wentworth for a lump sum of $63,000. Had she continued to receive the full amount for the next 13 1/2 years, the share she traded away would have brought her $206,644.68.

The story goes on to explain how the settlement purchasers keep their transactions a secret from the annuity companies (it is generally believed that the annuity contracts can't be sold or assigned, or a breach occurs) by securing change-of-address forms from the beneficiary to a post office box or bank account controlled by the factoring company. Then, with a signed power of attorney, the firm cashes the checks.

In Sweeney's case, broke and unable to support herself and her year-and-a-half old daughter, the annuity company discovered the sale and the matter became tied up in litigation. Sweeney was forced to panhandle at roadsides in her wheelchair.

I represent many people who are hurt or disabled through no fault of their own. They are victimized once in an accident.