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Factoring Company’s Attempt to Collect ‘Advance’ Was an Impermissible ‘End Run’ Around Lottery Assignment Statute, Says Appeals Court

By statute, when someone wins the Massachusetts lottery and is entitled to receive the lottery winnings over time, the winner can sell the rights to the future payments only if an “appropriate judicial order” enters regarding the sale.

So, what happens if a lottery winner enters into an agreement with a factoring company to sell future payment rights, and the company provides an “advance payment” to the lottery winner – but then the company fails to obtain an “appropriate judicial order” and then tries to collect the amount of the “advance payment” (plus interest) form the future lottery payments?  Would such a practice be permissible, given the terms of the statute?

No, an appeals court recently ruled, saying: “If permitted, this would vitiate the careful protections drafted by the legislature to protect lottery winners from predatory practices.”

The case is Seneca One, LLC v. Geulakos, No. 14-P-1106 (Mass. App. Ct. Oct. 1, 2015).  The court described the facts as follows:

Seneca [One, LLC] is a limited liability company organized in Maryland and registered with the commission to transact business in Massachusetts.  It ‘is engaged in, among other things, the business of purchasing assignments of lottery prize payments in exchange for a discounted lump-sum payment.’  On April 1, 2009, [Paul] Geulakos won a $1 million lottery prize, payable in twenty $50,000 annual installments.  In August, 2011, he executed a demand promissory note to Seneca in the principal amount of $40,000 (note), as part of a ‘Lottery Prize Assignment Agreement’ (agreement) between Seneca and Geulakos, ostensibly pursuant to G. L. c. 10, § 28(4).  Under the terms of the agreement, Seneca would pay Geulakos a lump sum of $154,722.81 in exchange for the assignment of ten lottery payments, each in the amount of $20,202.21, and seven lottery payments in the amount of $50,000 each over a period of years, beginning in 2012 and ending in 2028, when the prize money ran out.

In January, 2012, Seneca filed a ‘Petition for Court Order Approving Voluntary Assignment of Lottery Prize Payments’ in Superior Court in Norfolk County seeking approval of that assignment as required by the statute.  The petition did not reveal that Seneca already had advanced Geulakos $40,000 under the note.  In May, 2012, the petition was dismissed by stipulation of the parties, with prejudice and without an order approving the assignment.  Seneca then filed a separate action in October, 2012, in Superior Court in Middlesex County, seeking to enforce the note.  In July, 2013, in the Middlesex County case, Seneca obtained summary judgment against Geulakos for approximately $49,000 (including costs and attorney’s fees).  In September, 2013, Seneca filed this action against Geulakos and the commission in Superior Court in Hampden County.  The complaint referenced the judgment obtained in Superior Court in Middlesex County, but, in its request for relief, sought a new judgment against Geulakos for $49,132, and an order of trustee process against the commission.  Seneca served the commission with a trustee summons seeking to attach the annual payments due Geulakos until the debt (including interest and costs) was satisfied.  The commission filed an opposition to the motion for approval of the trustee process attachment claiming, inter alia, sovereign immunity.  By a decision dated December 24, 2013, after a hearing, the judge allowed Seneca’s motion for an order of attachment by trustee process against the commission.  The commission timely appealed.

The statute at issue provides that “[t]he right of any person to a [lottery] prize drawn is not assignable except under . . . limited circumstances.” Mass. Gen. Laws chapter 10, § 28.  Other provisions of the lottery assignment statute describe the circumstances under which “[p]ayment of any prize drawn may be made to a person under a voluntary assignment of the right to receive future prize payments.”  A significant number of conditions are specified, and the judge “may issue an order approving a voluntary assignment and directing the commission to make prize payments in whole or in part to the designated assignee, if the court finds that all of [those] conditions have been met . . . .”  Said the court: “This subsection serves to safeguard the rights of the lottery winner and to assure, as far as possible, that no unfair advantage is taken by predatory lenders or others.”

The court analyzed the issue of whether Seneca One could sue the Commonwealth of Massachusetts to recover the “advance”, an issue that hinged in part on whether the Commonwealth waived sovereign immunity to allow itself to be sued.  Turning to prior judicial opinions, the court said the waiver applied because Seneca One’s collection efforts fell within an exception – exceptions which assumed were “independent” of the lottery assignment statute.  That was not the case in the Geulakos matter,  obtaining of an “appropriate judicial order”:

In fact, this debt arose specifically out of an attempted assignment of a lottery prize and for that reason cannot reasonably be described as “independent . . .”

The court also took note of the the lottery commission’s argument that subjecting it to process actions by creditors of prize recipients “puts an undue burden on the commission’s and Commonwealth’s resources, the type of harm that sovereign immunity is designed to forestall.”

The appeals court also said the case was unlike a decades-old case involving waiver of sovereign immunity based on facts that included an embezzling defendant.

In this case . . . there are no such compelling facts.  [T]his action in fact arose from an attempt at an assignment of approximately $550,000 in lottery payments in return for a lump sum advance of $154,722.81 (and perhaps also the undisclosed $40,000 advance).  Seneca’s tactics essentially constitute an ‘end run’ around the required process by first failing to disclose the $40,000 advance in the ultimately-abandoned Norfolk County action pursuant to [Massachusetts] G. L. c. 10, § 28, and dismissed in May, 2012, and then seeking to attach the lottery payouts by forcing the commission to make payments directly to it in what it now describes as an unrelated action.  If permitted, this would vitiate the careful protections drafted by the legislature to protect lottery winners from predatory practices.

The collection attempt did not result in an “appropriate judicial order” and therefore the appeals court reversed the trial court’s order.

The full opinion is available here.

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