Destination: BLJMar2004

03/25/2004 Buffalo Law Journal: Assigning Structured Settlements and  Other Claims: Commercial Law

Courts have struggled with whether anti-alienation provisions in structured settlement agreements are enforceable. Singer Asset Finance Company v. Bachus, 294 A.D.2d 818, 741 N.Y.S.2d 618 (4th Dep’t. 2002), and In Re Chorney v. Peachtree Settlement Funding, LLC, 277 B.R. 477 (Bankr. W.D.N.Y. 2002), decided recently, emphasize the intellectual discord in this area of commercial law. Besides differing as appellate and trial decisions, in the state and federal system, prohibiting and allowing, respectively, alienation of structured settlement payments, Singer and Chorney diverge in other important respects.

Since Congress enacted in 1983 the Periodic Payment Settlement Act ("PPSA")—which established more favorable tax treatment for structured settlements as compared to lump sum settlements—the use of structured settlement agreements has increased. Funding companies often acquire structured settlement payments through secured loans or irrevocable assignments to allow the recipient of the structured settlement payments an opportunity to obtain all or a portion of the settlement amount before all payments comes due. Structured settlement agreements, however, often contain anti-alienation prohibitions. Consequently, these prohibitions have raised doubts as to the enforcement of the secured loans and irrevocable assignments. Section 9-318(4) of the Former Article 9 was frequently invoked to neutralize anti-alienation terms in the structured settlement agreements but with varying success.

In both Singer and Chorney, the original carrier for the tort defendant had purchased an annuity from a separate entity to remit the actual structured settlement payments. In Singer, the Fourth Department, ignoring the purchase of the annuity by State Farm, found that State Farm’s obligations under its structured settlement agreement could not be an "account" under Former Section 9-106. In Singer, the Fourth Department found that the alienation of the structured settlement agreement was an absolute and irrevocable assignment despite the annuitant’s execution of a promissory note and security agreement. The Fourth Department cited various non-New York authority to conclude that Article 9, including former Section 9-318(4), cannot apply to an absolute assignment, thereby preventing Section 9-318(4) from negating any prohibition against assignment.

Curiously, there is an additional impediment to application of Former Section 9-318(4). The Fourth Department found that, notwithstanding any agreement between the debtor and the creditor, if the debtor has no rights in the collateral, no security interest in that collateral comes into existence. The Fourth Department, however, extrapolates from that accepted interpretation of Former Section 9-203(1)(a) that "because assignment of the periodic payments is validly barred by the structured settlement agreement, no security interest may be created in those payments," and, hence, there can be no application of Article 9. (Id. at 820, 741 N.Y.S.2d at 620). The Fourth Department is on stronger grounds when it precludes the application of Article 9 based on recipient’s absolute assignment of his remaining structured settlement payments for a one time lump sum payment by Singer’s predecessor.

In Chorney, decided the day before Singer, the bankruptcy court found the advances secured by the structured settlement payments to be loans despite the references to the "November 1, 1999 Sale of Structured Settlement" and "November 1, 1999 Assignment of Structured Settlement." (277 B.R. at 478.) In a more expansive decision than Singer, the bankruptcy court begins Chorney by rejecting application of Revised Article 9 to a bankruptcy case filed October 26, 2000 and the efficacy of security interest perfected still earlier.

Although the Fourth Department in Singer concluded there was no security interest in any "general intangibles" (294 A.D.2d at 820),the bankruptcy court in Chorney concluded that "the Debtor intended to and did, in fact, grant [the Funder] a security interest in the Debtor’s right to receive the Structured Settlement Payments, a right and asset which is a general intangible under the Former Article 9."(277 B.R. at 488). In Chorney, the bankruptcy court found the existence of a security agreement telling (unlike the Fourth Department in Singer).

The application of Article 9, coupled with the rejection of application of Revised Article 9, allowed the critical application of Former Section 9-318(4) in Chorney. By applying Former Section 9-318(4), the bankruptcy court rendered ineffective the anti-alienation term of the structured settlement agreement allowing attachment of a security interest therein. (Id. at 488-89).

The original carrier that purchased the annuity for Mr. Chorney also tried to argue that certain other sections of Former Article 9 statutorily prohibited application of the Article to this pre-petition transaction. The bankruptcy court rejected application of Former Section 9-104(g) on the basis that the Debtor granted a security interest in the structured settlement payments, a contractual right that is separate from "an interest or a claim in or under any policy or insurance or contract for annuity," to which Former Article 9 would not apply under its Section 9-104(g). Id. at 487 (quoting the contract).

Similarly, the carrier argued that Former Section 9-104(k) prevented the application of Former Article 9 where there is a "transfer in whole or in part of any claim arising out of a tort." After noting the split of authority on this question, the bankruptcy court noted that the Debtor’s claim against the carrier would not be in tort but in contract, because any "personal injury tort claim, for purposes of Former Article 9, Section 9-104(k) was extinguished and it was replaced by the contractual obligation of" the carrier.

Litigation regarding security interests (as opposed to irrevocable assignments) in structured settlement payment perfected after the July 1, 2001 effective date of Revised Article 9 should be less disharmonious because of the addition of Section 9-406(h). While Revised Article 9, Section 9-406(d) still generally treats as ineffective terms restricting assignment, subsection (h)(2) does not treat as ineffective terms restricting an assignment of "a claim or right to receive compensation for injury or sickness as described in 26 U.S.C. §104(a)(1) and (2)." Thus, for purported secured loans against structured settlement payment perfected after July 1, 2001, neither Chorney nor Former Section 9-318(4) provide a means to render ineffective the typical anti-alienation provision within the structured settlement agreement itself.

Just as commercial lawyers are seeing more assignments of structured settlement payments, we are also seeing increased security interest in, and assignments of, lawsuits and the settlement proceeds thereof.

The scope of Article 9 of the UCC has been modified by the addition of the concept of a commercial tort claim in revised Section 9-102(a)(13). As so defined, assignability of the commercial tort claim is, under Revised Section 9-401, governed by generally applicable law. Where no such generally applicable law prevents alienation, Revised Section 9-109 allows Revised Article 9 to bring commercial tort claims but not any other assignment of a tort claim within the purview of Article 9. The Court of Appeals decision below, Citibank v. Prime Motor Inns (98 N.Y.2d 743), however, dealt with a security interest in a settlement payment perfected under Former Article 9.

In Prime Motor Inns, Citibank took its judgment against Martin W. Field before Joseph and Tremain Selig took their judgment. Field granted the Seligs a security interest in his settlement payment due from Prime Motor, which interest attached before Citibank levied on Prime Motor Inns, but which was not perfected until after the levy. In this turnover proceeding by Citibank, the trial court and both appellate courts agreed that the priority of the levy against the security interest would be determined under the UCC and that, under Former Section 9-301(1) thereof, the Seligs unperfected security interest was subordinate to the rights of Citibank, as Citibank became a lien creditor before the perfection of the Selig’s security interest.

Considering Chorney and Prime Motor Inns, where a suit (even for tort) becomes extinguished and replaced by a contractual obligation for settlement payments, Article 9 will apply under either Former Section 9-102, Policy and Subject Matter of the Article, or revised Section 9-109, Scope. During litigation, however, Article 9 will only apply to security interest in pending actions sounding in contract or falling within the new definition of commercial tort claims.