Kentucky Supreme Court Rejects Factoring Of Workers’ Compensation Settlement Payments

Kentucky Supreme Court Rejects Factoring Of Workers’ Compensation Settlement Payments

The Kentucky Supreme Court has reversed a lower appeals court decision involving the Kentucky Structured Settlement Protection Act, and rejected an attempt by a factoring company to effectuate a transfer of workers’ compensation settlement.

In American Gen. Life Ins. Co. v. DRB Capital, LLC, 2017-SC-000329-DG, 2018 Ky. LEXIS 535 (Ky. Dec. 13, 2018), Kentucky’s highest court held that the Kentucky Structured Settlement Protection Act did not apply to workers’ compensation settlement payments.

The matter involved a proposed transfer of structured settlement payment rights.  The structured settlement resolved a workers’ compensation matter.  The factoring company and proposed transferee, DRB Capital, LLC (DRB), filed a petition, invoking the Kentucky Structured Settlement Protection Act, Kentucky Revised Statutes §§ 454.430 through 454.435 (Kentucky SSPA), seeking judicial approval of a transfer of the future payment rights from the worker who settled via the structured settlement, Ray Thomas, to DRB, in exchange for an immediate lump sum.  The Kentucky Circuit Court approved the transfer, and the annuity issuer and structured settlement obligor appealed to the Kentucky intermediate appellate court, the Kentucky Court of Appeals, which affirms the trial level court’s decision.  On further appeal to the Kentucky Supreme Court, the issuer and obligor prevailed, as Kentucky’s high court reversed.

The Kentucky Supreme Court reached several important conclusions, deciding as follows:

  • The contractual anti-assignment provisions in the structured settlement agreement, qualified assignment agreement, and annuity contract, are clear, valid, and enforceable.
  • The anti-assignment provisions are designed to be consistent with the Internal Revenue Code’s tax requirements for structured settlements.
  • Such anti-assignment provisions not only support the public policy goals of the Internal Revenue Code, in favoring structured settlements, but also the policies of the Kentucky Workers’ Compensation Act, in supporting injured workers and their families.
  • The Internal Revenue Code’s section concerning structured settlement factoring, 26 U.S.C. Section 5891, does not change state law concerning whether an assignment is valid or not valid – and only has an impact on the tax treatment of the factoring transaction.
  • The Kentucky SSPA applies only to structured settlements of tort claims, and therefore does not apply to structured settlements of workers’ compensation matters.
  • Because the Kentucky SSPA was inapplicable to the Thomas workers’ compensation settlement, the Kentucky Circuit Court in this case had no authority to approve a transfer.

The Court’s analysis includes some detailed discussions of structured settlements, the Internal Revenue Code provisions that promote structured settlements, the intent of certain contractual anti-assignment provisions, and the language of SSPA and the workers’ compensation act.

The opinion is also in line with prior authorities from appellate courts from other states on the issue of the validity and enforceability of contractual anti-assignment provisions in structured settlement agreements, as well as with the one other state’s appellate court opinion on the inapplicability of a tort-settlement-only structured settlement protection act to workers’ compensation settlements.

The Kentucky SSPA was, at the time it was enacted in 1998, only the second state structured settlement protection act, and the first that required pre-transaction disclosures to payees.  Forty-nine states now have structured settlement protection acts.

The full opinion is available here.

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