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It’s Time to Liberate the Sale of Structured Settlement Payments in North Carolina

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Federal law

Model state legislation

The following article by KG Funding owner Mike Schaul appeared in the April, 2005, issue of the Campbell Law Observer, which is published by students at the Norman Adrian Wiggins School of Law, Campbell University, Buies Creek, NC. The intended audience was NC lawyers, but it should be instructive to anyone interested in the sale of structured settlements.

This article was an update of an article which appeared in the Campbell Law Observer in Summer, 2000. It contains addenda explaining technical details and new information between the articles.

At present, I am still working with the NC General Assembly to fix the problems discussed in these articles.

A soldier at Fort Bragg called me about four years ago. He had a $30,000 structured settlement payment coming to him about eight months later, but in the wake of a divorce he was about to lose his house and car. Under a law regulating such payment sales passed by the General Assembly in 1999, the restrictions were (and still are) such that no purchaser of these payments could possibly help him. The legal discount couldn't cover the transaction costs, and certainly wouldn’t allow a reasonable rate of return to an investor.

He could have legitimately been considered a California resident, but California at the time also restricted discounts to the point that purchasers couldn’t even cover their transaction costs. The soldier was willing to accept a discount greater than the law in either state allowed. Before the 1999 NC law was enacted, he could have gotten something in the low 20s within weeks and kept his life together. As it was, he was “protected” from saving his tangible property by disposing of his own intangible property at a price that would have been acceptable to him.

The consequences for this soldier were more dire than those for most structured settlement payment sellers, but nonetheless similar. Over the years, many of the people who have come to me to sell payments have been holders of settlements created for them as children. Now, as adults, they have different life plans than those anticipated for them. I’ve had to tell a new bride I couldn’t get her the down payment on a new house. Before the NC law was enacted, I helped a young tradesman who had just moved to the state. He needed to pay his wife’s maternity bills. Then, he still had enough of an income stream remaining that he came back twice in the next few months to sell more payments so he could buy a house and start his own business. None of that could happen in NC today, but, as you’ll see later in this article, it could happen in at least 37 states that ours could easily emulate.

The NC law, like those in other states in the late 1990’s, was inspired by a legitimate consumer protection concern on the part of legislators. Unfortunately, at the time, the voice of the insurance industry, an implacable opponent of payment sales, was far stronger than that of a handful of purchasers. Some states created laws that allowed reasonable discounts but required a court order. Some insurance companies routinely filed lengthy, obfuscatory briefs that were largely irrelevant to the cases in order to drive up petitioner expenses.

I wrote in some detail about the provisions and effects of the 1999 (and still in effect) NC law in the Summer, 2000, issue of the Campbell Law Observer. I had lobbied successfully against a federal bill in 1998, but my involvement with the NC bill started too close to its passage for me to stop it. The fundamental problem is that it sets the allowed discount rate at a level that is too low for the purchasers’ cost of funds. The article, along with some additional explanations and updates can be found at http://www.kgfunding.com/CLO2000.html.

(There have been windows of time when the cost of funds allowed large settlements to be purchased profitably. I was recently told about a $435,000 transaction in progress in North Carolina but smaller deals, i.e., most of them, can’t be done.)

In 2001, the National Association of Insurance Commissioners negotiated compromise model state legislation with both NSSTA (National Structured Settlement Trade Association, the insurers) and NASP (National Association of Settlement Purchasers, the buyers). Federal enabling legislation incorporating the same principles was negotiated, as well. The Federal legislation was attached to The Victims of Terrorism Tax Relief Act of 2001, H.R.2884, which the President signed in January, 2002. It contains a chapter setting uniform procedures for the sale of structured settlement payments, which, among other things, resolved NSSTA’s concern about tax consequences to its members.

The fundamental control in the model state legislation is that a court order is required to satisfy the IRS. In turn, the court order reduces the purchaser’s risk and reduces the discount to the seller (although the court order increases over all transaction costs). Part of the compromise is that no guidance is given to the court other than “best interests” of the petitioner. Fees and the discount rate used are enumerated in most states. Because the petitioner has legal counsel, courts generally assume that the client has received sufficient guidance. Experience shows that purchasers generally control costs, including broker fees, both to be competitive and to assure that courts don’t reject petitions. Insurance companies no longer object. Court orders in these cases have already become routine.

Thirty-seven states have adopted the model legislation. The National Structured Settlement Trade Association (insurance industry) can be counted on to support enactment, whereas in the 1990’s they did whatever they could to block such transactions. As I understand it, there isn’t much room for modifying the model while staying within the federal rules. NC is now the only state with prohibitive legislation. Most of the others that haven’t adopted the model have no legislation, at all.

I believe the time has come for North Carolina to join the 37 states that have simplified the process for the sale of structured settlement payments. We have the mechanism to do it. The model legislation meets the need for consumer protection while expediting sales when they are urgently needed. You can read the federal law at http://www.kgfunding.com/US.HR.2884.as.enacted.htm and the model state legislation that North Carolina needs at http://www.kgfunding.com/Model.state.legislation.htm.

At this writing, the bill hasn’t been submitted, but the right people are interested, and I’m working to get it done. I strongly encourage you to contact your General Assembly representatives to bring it to their attention. I hope that by the time you read this, the bill will have a number, so you can email me at mike@kgfunding.com, and I’ll send the number back to you.

Meanwhile, many of the attorneys reading this article have clients who have asked over the years about selling their payments. I’ve arranged with my funders to offer special pricing on deals submitted before the bill goes into effect. I look forward to providing you professional service at a favorable rate for your clients.

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