Selling Structured Settlements: The Uncertain Effect of Anti-Assignment Clauses

Abstract

It is relatively common for tort claims to be resolved through settlements under which compensation to the injured plaintiff is paid out over time in installments, rather than in a single lump sum. Such settlements are generally termed "structured settlements" and, for a variety of reasons, can be advantageous to both the plaintiff and the defendant.

It has become an increasingly widespread practice in recent years, however, for plaintiffs who enter into structured settlements to later attempt to assign some or all of their deferred payment rights to a finance company in exchange for a lump sum. In effect, those plaintiffs seek to undo the deferred payment feature of their settlements, and often such plaintiffs are willing to do this at a rate that is substant-ially discounted from the face value of the payment rights. A number of "factoring companies" have come forward to accommodate this desire. This development gave rise to some opposition calling for limitations on such assignments. This opposition is based in part upon paternalistic concern for the long-term welfare of structured settlement recipients, but is also encountered by perceived threats to the insurance industry's current five-billion-dollars-a-year business of selling annuities to tort defendants for the purpose of paying structured settlements. These concerns have led to legislative enactments in a number of states that impose purchaser disclosure obligations and prior judicial consent limitations on these assignments. They have also led to as-yet-unsuccessful federal efforts to sharply restrict such assignments through the imposition of large tax penalties on factoring companies.

Even apart from such statutes, however, this growing practice of assigning structured settlement payment rights raises difficult legal questions. The structured settlement agreements and subsequent annuity contracts entered into by plaintiffs, defendants, and insurance companies, involved in funding and overseeing the payment arrangements, almost always contain provisions prohibiting the plaintiff from assigning his right to receive the payments to a third party. The issue of the effectiveness of such assignments in the face of an explicit anti-assignment clause is currently being litigated in a number of jurisdictions, with little consistency in outcomes or rationales. This Article will review the recent case law in this area, attempt to identify the central issues that are presented by those cases, and then offer suggestions on the proper resolution of these issues.