As discussed in this post, a federal appeals court has ruled against investors in a structured settlement factoring transaction, reversing a lower court ruling that said they could recover from an investment company that had sold them its putative rights to future structured settlement payments.
The opinion contains some statements that are, at best, difficult to square with applicable law, including prior precedent from the same federal appeals court. Those statements are worth reviewing, and some are looked at more closely below in this post. But first, here is some background.
In Wall v. Corona Capital, LLC, Nos. 17-2275 and 17-2361, 2018 U.S. App. LEXIS 33071 (3rdCir. Nov. 23, 2018), the U.S. Court of Appeals for the Third Circuit ruled against Robert and Linda Wall, reversing the trial court’s decision to grant them summary judgment against Altium Group, LLC.
Altium and the Walls in 2012 had entered into an agreement whereby the Walls were to obtain the structured settlement payment rights. The payment rights originally belonged to an individual personal injury victim, Kenneth Stevens. Stevens could only transfer payment rights if, as required by the Florida Structured Settlement Protection Act, a court reviewed the transfer, found that it complied with applicable law, and issued an order rendering the transfer effective. A court did that, approving a sale of future structured settlement payments to a factoring company, Corona Capital, LLC. According to Third Circuit appeals court’s opinion, Corona then sold the payment rights to Altium – a fact which Altium disputed in its briefing, saying instead that it only sold to the Walls its right to the opportunity to purchase the payment rights from Corona. In any case, under the agreement between Altium and the Walls, the rights to the payments were sold to the Walls, who were identified as the re-assignees in the court order approving the transfer.
But the sale unraveled. It came to light that Stevens did not sign the sales contract with Corona but, instead, his wife had forged his signature – so the court vacated its 2012 order.
The invalidation of the order occurred in April, 2014, two years after the Walls paid Altium more than $150,000 for the rights to the 60 future payments that were scheduled to be paid from June, 2014 to May, 2019.
In vacating the order, the court was essentially making a determination that the payment rights belonged all along to Kenneth Stevens. So, the payments would not be paid to the Walls.
The Walls then sued Corona and Altium. A federal district court dismissed Corona from the lawsuit, on the basis that the court lacked personal jurisdiction over the factoring company. The Walls then prevailed against Altium, winning summary judgment on the grounds that Altium breached their contract with Altium. The court also awarded attorneys’ fees to the Walls.
Last week, the Third Circuit issued its opinion reversing the decision of the U.S. District Court, saying that Altium had not breached the contract between the Walls and Altium. Altium, said the court, had provided the Walls with what it had promised: an order approving the transfer. Further, the court said that the contract did not give the Walls recourse against Altium in the event that the Walls never received those payments.
The terms of the contract are at the crux of the dispute. Either the Walls paid more than $150,000 to Altium for the payment rights and Altium breached the contract, or they paid Altium such an amount for something else and Altium did not. While the district court said the promise was for the payments, the Third Circuit disagreed, and concluded that the promise was to provide the Altiums with a “Closing Package” that included a court order approving the transfer. One question that was not analyzed by the court was whether the invalidation of the order meant that the transfer occurred and then was reversed, or whether it should be viewed as having never occurred. More about that below.
As described above, though, the opinion contains some statements that are difficult to see as consistent with applicable law. These warrant discussion.
- To begin with, the Third Circuit Court of Appeals referred to the transaction as the purchase of an annuity. In a typical situation involving structured settlement like the one at issue in this litigation, however, the individual personal injury victim owns the right to receive structured settlement payments, but does not own the annuity. The annuity is owned by the party with the payment obligation under the settlement agreement – the underlying defendant, or an insurance company or affiliate that takes on the payment obligation under that settlement agreement (and not under the annuity contract, which is a contract between the party with the payment obligation and an insurance company that issues the annuity to fund those payments). This is done to preserve favorable tax treatment for all parties to the structured settlement.
- The first federal appellate opinion to make this distinction clear – that, under a structured settlement, the personal injury victim owns the right to receive the future payments under the settlement agreement, but has no rights under the annuity – also was an opinion from the Third Circuit Court of Appeals, Western United Life Assurance Co. v. Hayden, 64 F.3d 833 (3rd Cir. 1995), written by then-Third Circuit Judge (and current U.S. Supreme Court Justice) Samuel Alito. In Wall v. Corona Capital, the Third Circuit makes no reference to Hayden.
- It is worth noting there are those who trace the development of the factoring industry itself to the distinction made in Hayden.
- The Third Circuit does refer to the Florida Structured Settlement Protection Act (SSPA), Florida Statutes § 626.99296. The Florida SSPA is clear about the property that is being transferred pursuant to its terms: structured settlement payment rights. See Fla. Stat. § 626.99296(3)(a). A review of the SSPA also demonstrates that only a payee can transfer structured settlement payment rights, and that a transfer can only become effective if the court finds that the transfer – based on the evidence before it – is in the best interests of the payee.
- Without analysis of the SSPA, the order approving the transfer, or the vacatur order, it appears that the court in Wall v. Corona Capital misconstrues what’s at issue, due to the lack of acknowledgment of the distinction between the sale of structured settlement payment rights and the sale of an annuity. It may be, though, that the court used such terminology based on statements made by the parties.
- In any event, when the Third Circuit said Altium is the company that “sold the annuity” to the Walls, it misidentified the property being sold. Altium entered into an agreement concerning the sale of the right to future structured settlement payments. Those rights first belonged to the original personal injury victim, Kenneth Stevens. He did not own the annuity that funded the structured settlement payments, but only owned the right to receive the payments – and that is the only property could have been sold in this transaction to Corona, or Altium, or the Walls (or pursuant to the Florida Structured Settlement Protection Act). This is an oft-repeated misconstruction in the opinion, as reflected by the following statements in the opinion: (1) the matter involved “purchase of a structured settlement annuity that Altium had listed on its website”; (2) Corona was a “prior seller of the structured settlement annuity”; (3) Corona “obtained the annuity from Kenneth Stevens”; (4) Stevens “received the annuity”; (5) the “parties dispute whether Altium ever obtained title to the annuity from Corona”; (6) further events occurred “[t]wo years after Altium sold the annuity to the Walls; (7) Stevens “challenged the original transfer of the annuity”; (8) the Florida court had approved “the transfer of the Stevens annuity” to Corona; (9) then Corona “sold the annuity to Altium, which, in turn, sold it to the Walls”; (10) the U.S. District Court made decisions about “the contract between Altium and the Walls for transfer of the Stevens annuity”; and (11) “Altium sold a structured settlement annuity to the Walls in a contract . . . .”
- At one point in the opinion, the Third Circuit states as follows: “The problem for the Walls, of course, was that even assuming that the Walls received title to the annuity, a reasonable assumption if we accept, as we do, that Altium, as the Walls claim, previously had held title to the annuity, the validity of the title was not guaranteed.” Again, the “title” that would pass was to the payments, not the annuity – as title to the annuity never passed, or would have passed, to Altium.
- The Third Circuit also stated that “[t]he original seller of the asset, presumably Stevens’ wife, transferred the annuity to Corona pursuant to a court order obtained through fraud . . . .” Even assuming that the word “annuity” could be replaced with “structured settlement payments”, this is, at best, questionable, since the property (the right to receive the payments) appears to have belonged solely to Stevens, and his wife thus could not have transferred the asset, notwithstanding the terms of an order. In other words, if a court order says that Party 1 has sold Property A to Party 2, but Party 1 never owned Property A, then the order may have had no legal effect, based on fraud, impossibility, or any number of other grounds.
A number of those statements reflect the Third Circuit’s view that the property being sold transferred from Stevens to Corona to Altium to the Walls. Again, Altium disputed this, saying it never had title to the property. Either way, there are additional questions that the opinion raises.
For instance, the order could be seen as rendering the transfer void ab initio. If so, then the transfer was void from the start, and vacatur could be seen as an adoption of the view that the transfer never occurred. The Third Circuit does not address this, and while it is possible that the appellate record does not definitively establish that the Florida court order was void ab initio, the facts regarding the wife’s fraudulent actions suggest that this view may have warranted consideration.
Then there is another curious statement about the vacated order. Keep in mind that Kenneth Stevens apparently never agreed to sell the payments; his wife forged his signature, and when that fact came to light, the Florida court vacated the order approving the transfer. The Third Circuit recognizes this when it said that “”[f]raud in the initial transfer was the underlying reason the Florida state court rescinded its order approving the transfer to the Walls.” Yet the Third Circuit also said that”for all we know”, the annuity issuer is “still making the annuity payments as the Florida state court directed and will continue to do so . . . .” Thus, without explanation, the Third Circuit appears to be saying that the annuity issuer could still be making payments pursuant to a “rescinded” court order. There appears to be no factual or other basis for this statement about the possibility that a party would continue to abide by the terms of a vacated order. The statement, again, is curious – to say the least.
The holding, concerning the terms of the Walls-Altium agreement, may be one that’s consistent with governing contract principles and other law. But the court’s opinion contains a number of statements that a difficult to square with applicable law.
A previous post about the Third Circuit’s opinion, Appellate Court Deals Setback To Couple Trying To Recover More Than $150,000 Invested In Structured Settlement Factoring Transaction That Later Unraveled, here.
The full opinion is available here.