What Happens When Factoring Companies Ignore Requirements Of Pennsylvania Structured Settlement Protection Act? Recent PSU Report, and Previous Experience In Phillips, Provide Some Examples

What Happens When Factoring Companies Ignore Requirements Of Pennsylvania Structured Settlement Protection Act? Recent PSU Report, and Previous Experience In Phillips, Provide Some Examples

My partner, Kathy Scanlon wrote here and here about a recent Pennsylvania Structured Settlement Protection Act matter, and offered some comments about the statute and relevant judicial rule.  Kathy is admitted to practice in Pennsylvania, and her experience in Pennsylvania structured settlement factoring matters goes back two decades.

One Pennsylvania SSPA proceeding that Kathy won early in the statute’s existence illustrates some of the points she made about the need for careful judicial review of such proceedings.

In the case of In Re: Phillips, 2005 Phila. Ct. Com. Pl. LEXIS 605 (Pa. Ct. Comm. Pleas Jul. 19, 2005), Kathy represented the structured settlement obligor and annuity issuer, who objected to the proposed transfer on the basis that the factoring company failed to comply with the requirements of the then-five-year-old Pennsylvania SSPA, sought to impose burdens on the issuer and obligor that were inconsistent with contract law, and ignored other applicable law.

The court in Phillips agreed with Kathy on all grounds, and rejected the transfer.

One reason for the court’s rejection of the transfer was that the disclosure statement provided to the payee by the factoring company failed to disclose a penalty that was in the factoring company’s proposed contract, despite the SSPA’s requirement that the disclosure statement describe the “amount of any penalty . . . payable by the payee in the event of any breach of the transfer agreement by the payee.”

For another, the proposed contract (or proposed “transfer agreement”) was just that – a proposed contract only, and the factoring company violated the SSPA when it included in the proposed contract “provisions that purport to bind [the payee,] Ms. Phillips . . . even before any court acts on the Petition, and even if a court were to deny the Petition, in violation of 40 Pennsylvania Statutes § 4003, which provides that transfers are not effective without court approval, and in violation of Pennsylvania Statutes § 4006(b), which provides that a payee may not incur any liability to the proposed transferee where the transferee fails to comply with the statutory requirements . . . .”

In addition, the factoring company did not comply with the SSPA of the State of Washington, which also applied to the proposed transfer and required that the factoring company meet additional requirements, including those regarding the life-contingent nature of some of the payments that would have been transferred.

The court said that, as a matter of law, the transfer agreement was void because the factoring company failed to comply with the SSPA in these ways.

The court also found that the proposed transfer was not in the payee’s best interests “because, among other things, (a) the proposed transfer contravenes the Pennsylvania Structured Settlement Protection Act and other applicable law, and (b) the proposed transfer agreement contains unconscionable terms . . . .”  Those “unconscionable terms” including a provision in the proposed contract that purported to give the factoring company the right to make unspecified and unlimited deductions.

Importantly, the court said that the proposed transfer “would materially change the duty” on the annuity issuer and structured settlement obligor or “materially increase the burden or risk imposed” on them, and “therefore precluded by contract law.”

Factoring companies, over the years, have at times sought to impose burdens and risks on issuers and obligors.  Kathy, in this case, argued that the violations of the SSPA and other terms of the proposed transfer would have resulted in those materials increases in burdens and risks – and the court agreed.

For more about the PSU case, please see the recent Secondary Insurance Market Blog posts:

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