November 9, 2000. Not For Publication June 7, 2001.
Appeal from Muhlenberg Circuit Court, Honorable David H. Jernigan, Judge, Action No. 99-CI-00284.
Franklin S. Yudkin, William P. Carrell, II, Louisville, Brief for Appellant.
William P. Carrell, II, Louisville, Oral Argument for Appellant.
Stephen R. Price, Sr., Louisville, Brief and Oral Argument for Appellee.
Before COMBS, JOHNSON and KNOPF, Judges.
J.G. Wentworth, S.S.C., Limited Partnership, has appealed from an opinion and order entered by the Muhlenberg Circuit Court on September 28, 1999, that denied approval of Drema M. Sweeney's application for transfer of her structured settlement payment rights under KRS 454.430 et seq. While we agree with Wentworth that the trial court erred in ruling that the phrase "other applicable law" as used in KRS 454.431(1) refers to prohibitions against an assignment contained in a settlement agreement, we, nonetheless, affirm the trial court's denial of the transfer based on the contractual language in the settlement agreement that prohibits assignments.
Kentucky Revised Statutes.
James G. Sweeney entered into a settlement agreement and release on June 24, 1991, to settle a personal injury claim that arose out of the course of his employment with CSX Transportation. Mr. Sweeney died on June 19, 1995, and his widow, Drema M. Sweeney, succeeded him as the recipient of the guaranteed periodic structured settlement payments. Ms. Sweeney contracted with Wentworth to assign to it her right to receive $500.00 per month for 24 months in exchange for a lump-sum payment of $9,641.35. Ms. Sweeney filed a petition in the Muhlenberg Circuit Court pursuant to KRS 454.430, et seq. seeking approval of this assignment. In an order entered on July 9, 1999, the circuit court approved the proposed assignment to Wentworth and found that all of the statute's requirements had been satisfied by Ms. Sweeney. Relying on this order, Wentworth consummated the assignment and paid Ms. Sweeney the full purchase price.
Under this structured settlement agreement, Mr. Sweeney was to receive a lump-sum settlement payment of $182,034.70. In addition, the agreement provided for a series of $1,000.00 monthly payments beginning on July 10, 1991, and continuing for life, or, in case of his death, guaranteed for a period of twenty years. In addition, the agreement provided for guaranteed periodic payments of $25,000.00 each on June 21, 1996, June 21, 2001, and June 21, 2006; $50,000.00 on June 21, 2011; and $100,000.00 on June 21, 2016. CSX assigned its obligation to make the "Periodic Payments" to "structured settlement obligor" Capital Assignment Corporation n/k/a Commonwealth General Assignment Company (Commonwealth). To fund this obligation, Commonwealth, in turn, purchased an annuity policy from its sister corporation, "annuity issuer" Commonwealth Life Insurance Company n/k/a Monumental Life Insurance Company.
However, on July 19, 1999, the appellees filed a motion to vacate the order of approval. On September 28, 1999, the trial court entered an order denying "the application of Drema M. Sweeney for court approval of a transfer of her structured settlement payment rights under KRS [ 454.430 to 454.435]." The trial court stated "that to allow Petitioner to assign her structured settlement payment rights to J.G. Wentworth would breach the bargained for non-assignment clause under the Release, and as such, a transfer would contravene applicable contract law and cannot be approved by this Court pursuant to KRS 454.431(1)." This appeal followed.
No transfer of structured settlement payment rights shall be effective and no structured settlement obligor or annuity issuer shall be required to make any payment directly or indirectly to any transferee of any transfer of structured settlement payment rights unless the transfer has been approved in advance in an order of a court of competent jurisdiction, based on the court's express findings that:
The transfer complies with the requirements of KRS 454.430 to 454.435 and does not contravene other applicable law (emphasis added)[.]
We believe this statute was enacted to further the public policy of ensuring that structured settlements received by tort victims will be used as a secure and continuing source of income to help pay for medical care and living expenses. We further believe that the Legislature by authorizing some transfers recognized that circumstances of "imminent financial hardship" may occur that would necessitate the recipient transferring periodic payments for a lump-sum payment.
The settlement agreement and release signed by Ms. Sweeney contained the following anti-assignment provision:
Claimant acknowledges that the periodic payments cannot be accelerated, deferred, increased or decreased by the Claimant; nor shall the Claimant have the power to sell, mortgage, encumber, or anticipate the Periodic Payments, or any part thereof, by assignment or otherwise.
However, Wentworth is correct when it argues that the modern trend, even in the face of an anti-assignment clause, is to uphold assignments. Wentworth correctly observes that since it is generally recognized that most structured settlements contain language prohibiting the assignment or transfer of payments by the payee, enforcement of the anti-assignment provision would essentially render the statutory scheme that permits transfers useless for most tort victims.
There are no Kentucky cases interpreting KRS 454.430 et seq. which only became effective on July 15, 1998; however, courts from other jurisdictions have addressed the issue of assignment of periodic payments from a structured settlement and have recognized that such an assignment can be barred if any of the three provisions in Section 317(2) of the Restatement (Second) of Contracts applies.
Owen v. CNA Ins./Continental Casualty, 750 A.2d 211 (N.J.Super.A.D. 2000); Piasecki v. Liberty Life Assurance Co., 728 N.E.2d 71 (Ill.App.3d Dist. 2000); Liberty Life Assurance Co. of Boston Keyport Life Insurance Co. v. Stone Street Capital, Inc. James J. White, 93 F. Supp.2d 630 (U.S. Dist.Md. 2000); Johnson v. First Colony Life Ins., 26 F. Supp.2d 1227 (C.D.Cal. 1998); Grieve v. General American Life Insurance Co. Integrity Life Insurance Co., 58 F. Supp.2d 319, 322-23 (D.Vt. 1999); Rumbin v. Utica Mutual Insurance Co., 254 Conn. 259, 269, ___ A.3d ___ (2000).
A contractual right can be assigned unless:
(a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or
(b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or
(c) assignment is validly precluded by contract.
While we are not aware of any Kentucky cases that have applied this section of the Restatement (Second) of Contracts, we find the foreign cases cited above to be persuasive and the Restatement's application to be appropriate here.
We will first address Section 317(2)(a) and the question of whether the assignment materially increases the appellees' tax risk. Wentworth observes that the delegation of duties and the assignment of rights are normally permissible incidents of contracts; and therefore, it contends the assignment does not materially adversely affect the obligor. Wentworth argues that the increased tax risk that the appellees claim to face is "very speculative" so that it does not materially change the duty of the obligor, or materially increase the burden or risk imposed on the obligor by its contract, or materially impair the obligor's chance of obtaining return performance, or materially reduce the contract's value to the obligor.
Based on the holdings from other courts, we do not believe the appellees' concern is based on mere speculation. Rather, we believe the appellees' concern that they might lose their tax benefit under the Internal Revenue Code (IRC) is legitimate and well-founded. IRC Section 130(c)(2) requires that in order to have a qualified assignment of settlement payments there must be a finding that:
Grieve, supra at 323; Liberty Life Assurance Co. of Boston, supra at 636.
(A) such periodic payments are fixed and determinable as to amount and time of payment,
(B) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,
(C) the assignee's obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and
(D) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104(a).
The appellees argue that the parties intended for the settlement to satisfy the requirements of IRC 130(c)(2), and they claim that the anti-assignment provision was placed in the settlement agreement and release to ensure that the Code's requirements were met.
Under IRC Section 130(c)(2)(D), if the appellees are to retain their tax benefit after the assignment, they will have to be able to exclude the payments from their gross income under Section 104(a). This is problematic since Wentworth fails to show how the payments will qualify for this tax benefit under either paragraph (1) or (2) of Section 104(a). Thus, any payments made to Wentworth arguably would fail to be excludable from gross income by Wentworth under Section 104(a), and this failure could potentially cause the appellees to lose their favorable tax treatment. However, even if the appellees received a favorable ruling from the Internal Revenue Service that they would not lose their tax benefit, the appellees should not have to suffer the increased risk of litigating the issue.
Under paragraph (1), the payments must have been received for compensation for personal injury under a workers' compensation act, which is obviously inapplicable. Under paragraph (2), the payments must have been received as damages due to a personal physical injury or physical sickness. Obviously, Wentworth cannot meet this qualification either, since Mr. Sweeney and not Wentworth was injured.
The recently decided U.S. District Court case Liberty Life Assurance Co. of Boston, supra, is directly on point. The Court was confronted with similar facts and arguments and addressed the same tax issue as follows:
While the Court recognizes that the plaintiffs could never predict the tax implications of a structured settlement with absolute certainty, plaintiffs can certainly attempt to structure the terms of a contract to reduce the level of uncertainty to the fullest extent possible. That is clearly what plaintiffs intended to do in this case. Based on the nature and the terms of the contract, the Court is satisfied that the plaintiffs drafted the contract with the purpose of ensuring that they received preferential tax treatment under § 130.
Id. at 636. Liberty Life Assurance Co. of Boston also cites Grieve, supra. The Grieve court held that the proposed assignment would materially increase the burden or risk under 317(2)(a) because of possible adverse tax implications. Grieve at 323.
We believe this reasoning is sound and adopt it as our own. Although it is unclear exactly what the tax implications of the proposed assignment will be, either an increased tax obligation or the added cost incurred from tax litigation would adversely affect the appellee's contractual right by "materially reduc[ing] its value."
Furthermore, we hold that under Section 317(2)(c) of the Restatement (Second) of Contracts the assignment has been validly precluded by contract. Wentworth claims that "the modern trend with respect to contractual prohibitions on assignments is to interpret these clauses narrowly, as barring only the delegation of duties, and not necessarily as precluding the assignment of rights from assignor to assignee [;]" and that this rationale "is derived from the implicit recognition that the obligor, the party obligated to perform, would not suffer any harm by a mere assignment of payments under a contract." In the present case, however, the assignment is more problematic than a mere transfer of payments. As previously noted, this transaction would materially reduce the value of the obligor's asset by subjecting it to potentially unfavorable tax consequences and to the expense of protecting those benefits.
Wonsey v. Life Insurance Co. of North America Insurance Co. of North America, 32 F. Supp.2d 939, 943 (E.D.Mich. 1998).
Wentworth also argues that the contractual prohibition on assignment is unenforceable since the provision did not expressly state that an assignment would be void or otherwise unenforceable. Wentworth relies upon cases from other jurisdictions that require that the word "void" or "invalid" be included in an anti-assignment clause for it to be effective. In Rumbin and Bel-Ray Co., Inc., the Courts relied upon Section 322 (2)(b) of Restatement (Second) of Contracts and held that the anti-assignment provision at issue did not render the assignment of the annuity ineffective, but, instead, gave the annuity issuer the right to recover damages for breach of the anti-assignment provision. The Court in Rumbin stated as follows:
Rumbin v. Utica Mutual Insurance Co., supra at 276; Bel-Ray Co., Inc. v. Chemrite (PTY), Ltd., 181 F.3d 435, 441-42 (3d Cir. 1999).
Section 322(2)(b) states: "A contract term prohibiting assignment of rights under the contract, unless a different intention is manifested, . . . gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective [emphasis added][.]
In interpreting anti[-]assignment clauses, the majority of jurisdictions now distinguish between the assignor's "right" to assign and the "power" to assign (modern approach). For example, in Bel-Ray Co. v. Chemrite (Pty.) Ltd., 181 F.3d 435, 442 (3d Cir. 1999), the United States Court of Appeals for the Third Circuit recognized that numerous jurisdictions followed the general rule "that contractual provisions limiting or prohibiting assignments operate only to limit [the] parties' right to assign the contract, but not their power to do so, unless the parties manifest an intent to the contrary with specificity." (Emphasis added.) The court concluded, however, that the "assignment clauses [did] not contain the requisite clear language to limit [the] `power' to assign" and, therefore, held the assignment valid and enforceable. Id., 443. The court acknowledged that contracting parties could limit the power to assign by including an "assignment provision [that] generally state[s] that nonconforming assignments (i) shall be `void' or `invalid,' or (ii) that the assignee shall acquire no rights or the nonassigning party shall not recognize any such assignment." Id., 442. Without such express contractual language, however, "the provision limiting or prohibiting assignments will be interpreted merely as a covenant not to assign . . . . Breach of such a covenant may render the assigning party liable in damages to the non-assigning party. The assignment, however, remains valid and enforceable against both the assignor and the assignee." Id.
Rumbin, supra at 268-69.
However, the Court in Henderson v. Roadway Express, rejected the argument that an anti-assignment clause must explicitly state "void" or "invalid." The Court held that the parties' intention manifested in the anti-assignment language of the contract, as well as the parties' intention that the contract qualify for federal tax benefits, clearly made the anti-assignment provision fully enforceable. The provision in Henderson, that was very similar to the one at issue herein, stated:
720 N.E.2d 1108 (Ill.App. 1999); See also Johnson, supra; Grieve, supra.
"Plaintiff [Henderson] acknowledges that the Periodic Payments cannot be accelerated, deferred, increased or decreased by the Plaintiff; nor shall the Plaintiff have the power to sell, mortgage, encumber, or anticipate the Periodic Payments, or any part thereof, by assignment or otherwise" (emphasis added).
Id. at 1109.
The Court in Henderson reasoned as follows:
Under the circumstances of this case, any general policy of enabling persons to transfer property freely does not outweigh the parties' contractual intentions and the public policy of providing steady income and tax-favorable treatment to claimants of structured settlements[.]
Id. at 1113.
We hold in the case sub judice that since the anti-assignment provision clearly restricted the payee's "power" to assign his interest, such language is sufficient to establish an intent to prohibit an assignment and is enforceable.
Finally, Wentworth claims that the anti-assignment provision is invalid under Section 9-318(4) of the Uniform Commercial Code. KRS 355.9-318(4), provides:
A term in any contract between an account debtor and an assignor is ineffective if it prohibits assignment of an account or prohibits creation of a security interest in a general intangible for money due or to become due or requires the account debtor's consent to such assignment or security interest.
Under KRS 355.9-106 "general intangibles" are defined as, "any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, investment property, and money." Other jurisdictions that have held that UCC 9-318 does not apply to settlement agreements such as the one before us and we are persuaded by those decisions.
Grieve, supra at 324 ("Section 9-318(4) of the Uniform Commercial Code therefore does not apply to the annuity contract. . . [n]or can it apply to the Settlement Agreement."); Wonsey, supra at 941-42 (Section 9-318(4) may not operate, in and of itself, to nullify the settlement agreement's prohibition on assignments.); Liberty Life Assurance Co. of Boston, supra at 638 ("After reviewing the relevant statutes and case law, the Court finds that § 400.9-318(4) clearly does not enable defendants to avoid the anti-assignment provision in the Settlement Agreement.).
Thus, while we do so for different reasons, we affirm the order of the Muhlenberg Circuit Court denying approval of the transfer of structured settlement payments.