Do Maryland revisions on structured settlement cash flow sales raise issues of suitability?
"Structured settlements" have recently gotten back in the news through a series of articles by Terrence McCoy in the Washington Post. The stories covered the lead paint cases arising in Baltimore, Maryland. The tragic death of Freddie Gray has also brought the lead paint litigation issue and the widespread use of structured settlements to resolve personal injury litigation to the forefront, as it turned out that Gray was a lead paint victim. The stories discussed problems which arose long after his settlement and structured settlement were put in place and involved the purchase of his future structured settlement payments at a discount of their present value for cash.
The issue that brought structured settlements into the news was the purchase of structured settlements by companies that engage in the business of factoring, or purchasing future cash flows at a discount in return for a lump sum. Many of these purchases discussed in the Post story were made of victims of the Baltimore lead paint cases. Children who ingested the paint had filed claims against landlords and building owners who had failed to re-mediate the properties that had lead paint in them. Many of the lead paint victims had severe cognitive problems as a result, something that is common in almost all lead paint injuries, leading to the wide spread use of structured settlements at the time of settlement to pay out their damages over a period of years. This fact and the contention that “A lot of them can barely read.” is the topic of interest I cover in this video commentary for The Legal Broadcast Network.
The articles in the Washington Post prompted the Maryland Court of Appeals to adopt some new rules regarding the purchase and sale of structured settlements. Which, like 47 other states, has in place a structured settlement protection law which requires the involvement of an independent professional advisor and court approval in the sale of the settlement benefits for cash. However, what came to light in the investigation appeared to be the rubber stamping of proposed structured settlement sales through essentially the same professional advisor on almost all of the cases, with what the courts in retrospect feel was less than rigorous analysis whether the sale would be in the best interests of the structured settlement payee. However, it is still to be determined if the parties involved in those sales were doing anything less than what the law required in order to obtain court approval.
While this apparently lax approval of process in selling benefits in the courts, as well as aggressive sales tactics used by representatives of factoring companies, has been the primary focus of the articles and the primary structured settlement industry. Yet for me the troubling issue not being discussed in these cases is that many, if not all, of these child or young adult plaintiffs apparently had mental or cognitive disabilities at the time of settlement. These plaintiffs clearly had the same mental problems when the structured settlements were put in place at settlement.
Look, the job of trial lawyers is to get the largest possible settlement for their clients based upon the facts of the case and the economic recovery possible given insurance overages and the assets of the defendants. From all reports that was clearly done by the attorneys in these cases. However, once the settlement distribution process was locked into the use of structured settlements due to the impaired mental and cognitive capacity of these clients a decision had to be made as to whether an irrevocable fixed payment program was going to adequately address the future needs of the victim. If, as is contended, these plaintiffs were not so impaired as to require a Guardianship or incompetency hearing, should not at least a suitability assessment as to the use of a structured settlement annuity program have been done to determine if they might not be better served by a managed settlement preservation trust account? If you sell an annuity to a senior citizen in most states in the US you are required to do a full suitability assessment, as the presumption of potential Elder Abuse by recommending long term, low liquidity investments is high on regulators radars. There are civil and criminal penalties if those annuities turn out to be unsuitable for seniors, but in the settlement profession we are under no similar guidelines when it comes to the use of structured settlement annuities.
Under the new standards adopted by the Maryland Courts just the other week, Independent advisors on the sale of the cash flows now must appear before the court, explain their business relationship with the purchaser and also be willing to address the cognitive, educational and comprehensive ability of the person selling their payments. This is clearly a higher standard, one that makes sense, however my concern is if this standard is now going to be used on the liquidation of cash flows, plus we have state laws on annuity sales suitability, how much longer is it going to be before structured settlements experts on the front end of the process are swept under these exact same standards. I believe that most independent advisors are incapable of making decisions and assessments on competency and cognitive ability of a client and would be foolish professionally to even attempt that analysis. So who is going to make that decision going forward and what is that process going to look like? Only time will tell.
In conclusion, if structured settlement payees were being taken advantage of in these court-approved sales of their future cash flows, the solution to the correct solution to that problem is better oversight by the courts involved, which appears to be how this is going to resolve. However, before the primary structured settlement tears a rotator cuff patting itself on the back we might want to prepare ourselves for what I feel is going to be heightened oversight and analysis of the cognitive abilities of these and many other structured settlement clients on the front end. I have no doubt that once the dust settles that factoring companies will start pushing to apply the same oversight at the beginning of the process, when structured settlements are being considered and put into place. Structured settlement companies are not presently required to do a suitability assessment for the sale of the annuities that make up structured settlements, I fear that won't be the case for too much longer and experts are going to need to prepare and upgrade their standards.