Anomalous: One Way to Describe Kentucky Intermediate Appellate Court’s 2-1 Opinion in Structured Settlement Protection Act Case

Anomalous: One Way to Describe Kentucky Intermediate Appellate Court’s 2-1 Opinion in Structured Settlement Protection Act Case


“Anomalous” is, according to the, an adjective that has several meanings.  One “deviating from or inconsistent with the common order, form, or rule; irregular; abnormal.”  A second definition is “not fitting into a common or familiar type, classification, or pattern; unusual.”  And a third is “incongruous or inconsistent.”

An opinion released by the Kentucky intermediate appellate court can be described as anomalous.  There are no other appellate opinions like it, and the those that address similar issues – even an opinion from the same court – reach a different conclusion.

The opinion is American General Life Ins. Co. v. DRB Capital, LLC, No. 2016-CA-000395-MR, 2017 Ky. App. LEXIS 36 (Ky. App. Ct. June 9, 2017), which addressed an appeal by American General Life Insurance Company from an order approving a transfer of structured settlement payment rights by a Kentucky payee, Ray Thomas, Jr., to a proposed transferee, DRB Capital, LLC.  The case turned on whether the contractual anti-assignment provision was enforceable to preclude the transfer, where the parties with the payment obligations asserted their contractual rights.  The appeals court said that the anti-assignment provisions did not preclude a transfer, apparently because based on the idea that the insurable event – which occurred before the anti-assignment provisions in the structured settlement contracts came into existence – had already happened.

Thomas became entitled to receive future settlement payments when he entered into a structured settlement to resolve a workers’ compensation claim.  Subsequently, he entered into an agreement to sell certain structured settlement payments to DRB.  DRB filed a petition, requesting that the Kentucky Circuit Court approve the transaction pursuant to the Kentucky Structured Settlement Protection Act.  The Kentucky SSPA, like all 49 state SSPAs, provides that transfers of structured settlement payment rights from a payee to a transferee for compensation must be reviewed by a court, and can only become effective if the court approves the transfer.  Approval usually involves a determination that the transfer complies with applicable legal requirements – such as that the payee receive SSPA-mandated disclosures about the terms of the transfer – and that the transfer is in the best interests of the payee.

American General Annuity Service Corporation, the structured settlement obligor, and American General Life Insurance Company, the annuity issuer, objected on the basis that the Kentucky SSPA did not apply to the proposed transfer, since the SSPA provided that it only applied to settlements of tort claims.  The obligor and issuer (collectively, “American General”) objected also on the grounds that the proposed transfer contravened the contractual anti-assignment provisions in the governing instruments (namely, the settlement agreement, the qualified assignment agreement, and the annuity contract), all of which prohibited a transfer.

The Circuit Court approved the proposed transfer from Thomas to DRB, and American General appealed.

On appeal, the three-judge panel of the Kentucky intermediate appellate court split, 2-1.  The majority first took the view that the Kentucky SSPA “does not displace common law contract principles.”  On this point, the majority’s view is in line with every state appellate court that has opined on a state SSPA.  Indeed, a recent Secondary Insurance Market Blog post describes a view such opinions, here.  As the post points out, there are other states whose courts have addressed the issue – including Kentucky’s intermediate appellate court, in an unpublished opinion from 2013, a case which followed the general rule set forth in another Kentucky intermediate appellate decision on the topic, Wentworth v. Jones, 28 S.W.3d 309 (Ky. App. Ct. 2000), which also upheld contractual anti-assignment provisions in structured settlement agreements, albeit before the enactment of the Kentucky SSPA.

However, the two-judge majority then veers into anomalous territory.  The appellate court, in its latest opinion, did not attempt to distinguish Jones, but simply concluded that another judicial opinion (Wehr Constructors, Inc. v. Assurance Co. of America, 384 S.W.3d 680 (Ky. 2012), which did not have to do with structured settlement agreements) was more persuasive.  Said the two-judge majority:

The Wehr decision considered the enforceability of an anti-assignment clause in an insurance policy that required the insured to obtain prior written consent from the insurer before assigning a claim under the policy.  Our Supreme Court held ‘that a non-assignment clause in an insurance policy, while certainly enforceable prior to an occurrence of a covered loss, is not enforceable for assignments made after the occurrence.’  Wehr Constructors, Inc., 384 S.W.3d at 688.  The Supreme Court further stated that it adopted this rule in the spirit of its ‘prior holdings adverse to contractual provisions tending to restrain the alienability of choses in action[.]’  Id.  Earlier in the opinion, the Supreme Court characterized a ‘chose in action’ as a type of personal property that ‘may not, ordinarily, be restrained from alienability.’  Id. at 685.

Here, despite American General’s attempts to distinguish this case from Wehr by arguing Mr. Thomas did not have a personal property right in the settlement proceeds, we are persuaded by the reasoning provided in Wehr.

Accordingly, said the majority, the anti-assignment provision was unenforceable.

The majority did not address what would qualify as the “occurrence of a covered loss”, what event occurred to eliminate the rationale for enforcement of the covered loss, or why these principles would be applicable in a matter involving long-term payment obligations under a structured settlement, rather than in a more common insurance contract involving protection against future losses.

The dissenting judge, however, pointed out such differences, and took issue with the reasoning of the majority.  Said Judge Donna J. Dixon:

I agree with the majority that the Kentucky Structured Settlement Protection Act does not displace common law contract principles.  The only issue before us, then, is whether the anti-assignment clause is enforceable.  It is.  The anti- assignment clause was created after Mr. Thomas prevailed on his workers’ compensation claim and after damages had been assessed.  As public policy only prohibits enforcing an anti-assignment clause that was created before the chose in action arose and before the claim had been asserted and settled and before damages had been assessed, Mr. Thomas’ chose in action was never restrained from alienability, and the anti-assignment clause can be validly enforced pursuant to common law contract principles.

The majority opinion reads too broadly the holding in Wehr Constructors, Inc. v. Assurance Co. of America, 384 S.W.3d 680 (Ky. 2012) by holding that the instant anti-assignment clause violates public policy.  In Wehr, the Kentucky Supreme Court had to determine whether an insurance contract’s anti-assignment clause, which pre-existed a covered loss, could be enforced after the loss occurred.  The Court ultimately held that public policy would be violated if parties were allowed to contract away the assignability of a claim before that claim arose. In stark contrast stands the instant case, where the anti-assignment clause was created after the covered loss occurred, after Mr. Thomas prevailed on his claim, and after damages had been assessed.

* * *

It was only after Mr. Thomas obtained his property right to the damages – after his chose in action was resolved – that an anti-assignment clause entered the scene.

Judge Dixon calls Jones opinion “instructive” and pointed out that the Kentucky Court of Appeals in the Jones opinion said structured settlement annuities were “of a unique character and, therefore, distinguishable from all other species of contracts – especially with respect to the issue of assignability.”

The full opinion, including the dissent, is available here.

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