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321 Henderson Receivables Origination LLC v. Sioteco

May 6, 2009


APPEAL from a judgment of the Superior Court of Fresno County. Alan M. Simpson, Judge. (Super. Ct. No. 08CECG00848).

The opinion of the court was delivered by: Ardaiz, P.J.


[And 10 other cases.]*fn1



Petitioner, 321 Henderson Receivables Origination LLC (hereinafter Henderson) appeals from a final consolidated Order Denying Petition for Approval of Transfer of Structured Settlement Payment, contending that the superior court committed multiple legal errors. For the following reasons, we reverse.*fn2


A. General Background

Henderson, an indirect subsidiary of J.G. Wentworth, LLC, is a factoring company. Factoring companies deal with people who receive structured settlements. "Structured settlements are a type of settlement designed to provide certain tax advantages. In a typical personal injury settlement, a plaintiff who receives a lump-sum payment may exclude this payment from taxable income under I.R.C. [Internal Revenue Code] § 104(a)(2) (providing that the amount of any damages received on account of personal injuries or sickness are excludable from income). However, any return from the plaintiff‟s investment of the lump-sum payment is taxable investment income. In contrast, in a structured settlement the claimant receives periodic payments rather than a lump sum, and all of these payments are considered damages received on account of personal injuries or sickness and are thus excludable from income. Accordingly, a structured settlement effectively shelters from taxation the returns from the investment of the lump-sum payment. [Citations.]" (Western United Life Assur. Co. v. Hayden (3rd Cir. 1995) 64 F.3d 833, 839-841 (Western).)

"Before 1983, the utility of structured settlements was diminished by the credit risk that the recipient would have to assume. [Citation.] Because the annuity was merely a matter of convenience and did not give the recipient any right in the annuity, in the case of the settling defendant‟s default the plaintiff could not seek redress from the annuity issuer. [Citation.] This presented a problem if the settling defendant‟s general credit risk was high." (Western, supra, 64 F.3d at p. 840)

"Congress addressed this problem by enacting I.R.C. § 130. [Citation.]. [S]ection 130 allows a tax-neutral transaction in which the settling defendant assigns and a third party assumes the obligation to make periodic payments under most section 104(a)(2) structured settlements. When the third party assignee. has a credit rating superior to that of the settling defendant, such an assignment and assumption agreement benefits a plaintiff. by allowing her to rely on the assignee‟s superior credit. [Citation.]" (Western, supra, 64 F.3d at p. 840.)

"A key characteristic of a structured settlement is that the beneficiary of the settlement must not have actual or constructive receipt of the economic benefit of the payments. [Citation.]" (Western, supra, 64 F.3d at pp. 839-840.) Moreover, until January 2002, the third party assignee or structured settlement obligor could exclude the cost of a "qualified assignment" from its gross income only if the annuity provided that the periodic structured settlement payments "cannot be accelerated, deferred, increased, or decreased by the recipient of such payments." (Int.Rev. Code, § 130, subd. (c)(2))B).) Thus, prior to January 2002, explicit anti-assignment provisions in the annuity contract or settlement agreement were required in order for the payees and obligors to receive federal tax benefits from structured settlements.

The periodic structured settlement payments are locked in at the time of settlement based upon the settlement agreement and the annuity contract. However, sometimes, the structured settlement recipient or payee requires immediate cash because of changes in personal circumstances. In these cases, payees sometimes sell some or all of their future payments to factoring companies for an immediate cash payment. Thus, a factoring transaction partially or fully destroys the "structured" aspect of a structured settlement because it permits the payee to convert some or all of the periodic payments into a lump-sum payment.

Partially to ensure that a transfer of a structured settlement payment has no adverse tax impact on any of the persons involved in a factoring transaction, in January 2002, Congress amended the Internal Revenue Code by adopting section 5891 to expressly sanction a tax-free transfer of structured settlement payments. Court-approved factoring transactions were encouraged by the imposition of a 40 percent excise tax on unapproved transactions. In California, the court approval process is governed by the Structured Settlement Transfer Act, (hereinafter SSTA), that requires: (1) disclosures to the transferor of the structured settlement payment rights, (2) notice to the Attorney General, and (3) court approval. (See Ins. Code, §§ 10136 et seq.)

The court-approval process requires the factoring company to file a petition in the county in which the transferor resides for approval of the transfer, attaching copies of the petition, the transfer agreement, the disclosure form, the annuity contract, any qualified assignment agreement and the structured settlement agreement, a list of the names and ages of the transferor‟s dependents, notice of the court hearing date, and notice of a right to respond. (Ins. Code, § 10139.5, subd. (c).)

After consideration of the petition and its attached documents, any written support or opposition by interested parties, and any evidence presented at the hearing, the court grants or denies the petition. In order to grant the petition for approval, the court must expressly find: (1) the transfer is in the best interest of the transferor, taking into account the welfare and support of the transferor‟s dependents; (2) the transferor has been advised in writing to seek independent professional advice and either has received that advice or knowingly waived it; (3) the transferor has received the disclosure form; (4) the transfer agreement complies with Insurance Code sections 1016 and 10138; (5) the transfer does not contravene any applicable statute or court order; (6) the transferor reasonably understands the terms of the transfer agreement and disclosure form; and (7) the transferor understands his or her right to cancel and does not wish to do so. (Ins. Code, § 10139.5, subd. (a).)

The transfer agreement is effective only upon approval in a final court order. (Ins. Code, § 10139.5, subd. (a).) The court that approves the transfer retains "continuing jurisdiction to interpret and monitor the implementation of the transfer agreement.." (Ins. Code, § 10139.5, subd. (f).)

Since 2002, Henderson has obtained judicial approval of more than 2,000 structured settlement payment transfers throughout California, including factoring transactions made in Fresno County. However, beginning in March of 2008, several superior court judges in Fresno County issued tentative rulings denying petitions brought by factoring companies other than Henderson. The judges cited concerns that such transfers were barred by anti-assignment provisions in the annuity contracts and underlying settlement agreements, and could contravene orders approving a minor‟s compromise. The tentative rulings also criticized documentation provided by the petitions, accused the factoring companies and their lawyers of willfully omitting material facts and documents, directed the clerk to serve the order on the Attorney General and State Bar, and requiring the factoring companies to attach the order to future petitions filed in Fresno County.

B. Instant Petitions

Henderson filed the petitions involved in this appeal in February and March 2008. No interested parties opposed the petitions.

Judge Simpson heard the petitions on the following dates: Moua and Goodwin - March 27, 2008; Bowles - April 2, 2008; Castallanoz and Wenstrom - April 10, 2008; Vivian - April 23, 2008; Raney, Sioteco, Cook, Cox and Duran - April 29, 2008. Judge Simpson had not issued any tentative rulings before the hearings on the petitions. During the hearings, Judge Simpson did not indicate how he would rule on the petitions. Instead, after hearing argument of counsel and, in some cases, questioning the payees, Judge Simpson took the petitions under submission.

On April 29, 2008, a Fresno County Superior Court judge issued a tentative ruling in a pending Henderson petition proceeding (In re David Fleming, 08CECG0098 (Fleming)). The tentative ruling denied the petition for approval because it found that Henderson had not complied with the requirements of the SSTA. The tentative ruling criticized Henderson for omitting material information and documents from the petition for court approval, and voiced the concerns about the anti-assignment provisions in the annuity contract and underlying settlement agreement. In addition, the tentative ruling found that Henderson had a pattern and practice of referring lawyers to the transferors in violation of the SSTA‟s independent counsel requirement and directed that the Fleming order be served on the Attorney General and State Bar, and attached to certain future SSTA petitions.

Although the Fleming tentative order did not explicitly void prior court approvals of SSTA petitions, the tentative order concluded that errors similar to the ones that the court found in the Fleming petition, such as the failure to include required documentations with the petition and to comply with the independent counsel requirement, would void any prior court approval of SSTA petitions. In addition, the tentative order stated that Henderson was not entitled to the structured settlement payments that were transferred and that Henderson could not recover the lump sum payments that it made to the transferors. The tentative ruling required Henderson to serve the order on each person who had transferred payments to Henderson in the approximately 100 Fresno and Kern County petition cases as well as the insurers in those transactions.

Before similar orders could be issued in the special proceedings on appeal, on May 5, 2008, Henderson filed requests for voluntary dismissal with prejudice of its pending 11 petitions before Judge Simpson. The superior court, however, did not enter any of the dismissals. Rather, between May 19, and May 27, 2008, Judge Simpson issued virtually identical orders in 10 of the 11 cases.

In the orders, Judge Simpson denied the respective petitions and ordered the matters dismissed with prejudice. Judge Simpson denied Henderson‟s unilateral requests for voluntary dismissal because he held that Henderson could not dismiss the petitions under Code of Civil Procedure section 581 (because Henderson was not a "plaintiff") or under Code of Civil ...

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