Based on Facts in Two Cases, Appeals Court Says Later Orders Did Not Contravene Earlier Decrees That Included Servicing Arrangements

Based on Facts in Two Cases, Appeals Court Says Later Orders Did Not Contravene Earlier Decrees That Included Servicing Arrangements

Two Texas payees each sold structured settlement payment rights in a series of transactions to two factoring companies – creating situations that led to disputes between the factoring companies and, recently, to parallel opinions, in cases arising from Texas Structured Settlement Protection Act (SSPA) proceedings, from the Texas Court of Appeals.

In those opinions, J.G. Wentworth Originations, LLC v. Freelon, No. 01-13-00059-CV (Tex. Ct. App. Aug. 12, 2014), and J.G. Wentworth Originations, LLC v. Perez, No. 01-13-000264-CV (Tex. Ct. App. Aug. 12, 2014), the appeals court concluded that orders approving later transfers to one factoring company did not contravene earlier orders that approved transfers to another company.

At the crux of the disputes were the “servicing arrangements” as those arrangemetns were set forth in the terms of the earlier orders.

Both payees (Freelon and Perez) entered into two transactions each with 321 Henderson Receivables Origination, LLP, a J.G. Wentworth (JGW) affiliate.  Courts, pursuant to the Texas SSPA, approved a 2009 transfer and a 2011 transfer from each payee to JGW.

In all of these 2009 and 2011 transactions, 321 Henderson purchased a portion of monthly payments, meaning that each month, the payee would continue to receive an unassigned cut of the payment rights since those rights continued to belong to the payee, while JGW was to receive the portion of payments.

The payees and JGW had agreed to what has become known in the structured settlement factoring business as a “servicing” arrangement.  In a servicing arrangement, a payee agrees to sell only a portion of each payment in a payment stream, while retaining ownership of the rights to the other portion of each payment – but the entire payment is sent to the factoring company, which keeps the portion it purchased while “servicing” the remainder by sending it to the payee.

The servicing arrangements became issues in the Freelon and Perez matters because another factoring company purchased payments, and the serviced portion was then to be paid to that subsequent factoring-company-purchaser instead of to the payee – an arrangement that JGW objected to.

In particular, the payees in Freelon and Perez – after having done their two deals each with JGW – entered into subsequent transfers with RSL Funding, LLC.

JGW moved to intervene and object to the transfers with RSL.  In its papers, JGW “asserted that it had a justiciable interest in the transaction based on its objections under the Servicing Arrangements made pursuant to the 2009 and 2011 . . . Orders” which, said JGW, would be contravened by the RSL transactions.

The trial courts in each case approved the transfers to RSL, and the courts issued orders requiring JGW to distribute the payments that it received from the annuity issuer to RSL’s assignee, rather than to the payee.  In one of the cases, Perez, JGW was to send the payments to RSL’s assignee, which was then to retain the portion purchased by RSL (and assigned to the assignee) while then further servicing the payments by sending an unpurchased portion to the payee.

On appeal, JGW argued that the trial court orders approving the RSL transfers required JGW to “act differently” than as directed in the orders approving the JGW transfers, and therefore the RSL orders contravened the earlier orders.  Because the Texas SSPA (like most SSPAs) provides that a court is authorized to approve a transfer only if it finds that the transfer does not contravene any court order, JWG argued that the trial courts’ orders were not authorized by the SSPA.

The appellate court disagreed.  Citing the trial court’s finding that the subsequent orders did not contravene the earlier orders, the appellate court likewise concluded (in the following passage from Perez, which is nearly identical to a section of the Freelon opinion) that there was no contravention:

While the SSPA provides a specific protection for . . . structured-settlement obligors and annuity issuers from having to divide payments between the payee and any transferee, or between two or more transferees, it does not provide a similar protection for transferees who enter into ‘servicing arrangements,’ such as the the one JGW entered into . . . .

Moreover, nothing in the SSPA precludes Perez from transferring additional portions of the remaining portions of her structured-settlement payments to RSL.  Indeed, the SSPA appears to anticipate that payees may later transfer additional payments.  It provides that ‘[f]ollowing a transfer of structured settlement payment rights under this subchapter . . . any further transfer of structured settlement payment rights by the payee may be made only after compliance with all the requirements of this chapter.’  Id. (emphasis added).  Nothing in the SSPA provides that a first transferee, like JGW, may not honor subsequent transfers, even if they are to be made to competing factoring company transferees.

We further note tha the 2013 RSL-Perez Order, in effect, also ‘protects’ JGW in the sense that it recognizes and reaffirms JGW’s right to first receive Perez’s structured-settlement payments and retain its portion of the payments . . . before remitting the remaining portion of the payments to RSL’s assignee . . . .  In this way, the county court . . . validated the 2009 and 2011 JGW-Perez Orders, rather than contravening them.”

The appellate court did not address every question concerning servicing arrangements, and it remains to be seen whether different facts would lead courts to reach different conclusions about servicing arrangements.

Nonetheless, servicing arrangements have sometimes been the focus of contention – as they have in these cases – and may continue to create complications.

The full opinions in Freelon and Perez are available here and here.

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