Introduction
Before Freddie Gray died in police custody, igniting national scrutiny of law enforcement violence, he was one of thousands of victims of childhood lead paint poisoning in Baltimore.
In 2010, five years before his death, Gray and his sisters won a settlement against their landlord worth hundreds of thousands of dollars.
The settlement was representative of a significant victory for lead poisoning victim plaintiffs, who had only recently overcome considerable legal hurdles in imposing liability on landlords.
The tort system’s apparent self-correction resulted in a structured settlement that was designed to help support Gray’s family for decades through a series of periodic payments.
Nonetheless, within three years, Gray had forfeited his rights to the settlement. In late 2013, Gray and his siblings sold, with court approval, $435,000 of settlement payments for an immediate $54,000 lump sum, which amounted to less than twenty percent of the settlement’s present value.
Freddie Gray’s transaction is typical of the robust but—as this Note argues—poorly regulated secondary market for structured settlements. Tort victims with long-term injuries, including childhood victims of lead poisoning, often negotiate structured settlements as opposed to settling claims with single lump-sum payments.
The structured settlement format surged in popularity in the early 1980s following the introduction of a complex federal tax incentive framework.
The incentives reflect the congressional policy concern that tort victims with serious injuries are necessarily less likely to have the ability to support themselves and that, when a lump-sum settlement is spent too quickly, support for these victims and their medical care is left to taxpayers in the form of public benefits.
Despite this concern for the long-term economic security of tort victims—and arguably in direct contradiction of it—the right to a structured settlement payment stream is a transferable asset.
And those rights present an enormous opportunity for profit for the companies—known as “factoring” companies—that purchase them.
The factoring industry, of which the most prominent player is J.G. Wentworth,
quickly became notorious for aggressive business practices that took advantage of the economic precarity of seriously injured tort victims.
By 2003, the secondary market for structured settlements had reached, by J.G. Wentworth’s own estimate, $1 billion annually.
In response, state legislatures intervened. Since 1997, forty-nine states have passed some version of the Model Structured Settlement Protection Act (SSPA), which, among other reforms, requires state judges to approve settlement transactions only if the court finds that the transaction is in the “best interest” of the tort victim.
As illustrated by Freddie Gray’s case—which, again, involved a childhood lead poisoning victim with serious neurological injuries forfeiting eighty percent of his most significant asset
—the requirement of court approval has largely failed to accomplish its goal of “protect[ing] the recipients of long-term structured settlements from being victimized by companies aggressively seeking the acquisition of their rights.”
Industry experts estimate judges approve at least ninety-five percent of transfer petitions
—and some SSPAs do not prevent factoring companies from refiling petitions until they find a cooperative judge.
In Maryland, for example, one factoring company filed almost two hundred petitions for structured settlement transfers in a two-year span, of which three-fourths involved childhood lead poisoning victims and of which the average transaction offered a third of the settlement’s value.
A single judge received 160 of those petitions—nothing in Maryland’s SSPA prevented factoring companies from forum shopping—and approved about ninety percent of them.
By 2015, an estimated 84,000 tort victims nationwide had surrendered about $13 billion worth of settlements in exchange for $5 billion in immediate cash.
The limited scholarship on secondary structured settlement market regulation acknowledges that routine court approval of structured settlement transfers demonstrates the flaws in existing state law and that the lack of adequate protection both undermines the goals of the tort system and contravenes the stated policy goals of Congress and the forty-nine state legislatures that have passed SSPAs.
This scholarship, however, has almost exclusively advocated for heightening the standard of scrutiny with which judges evaluate petitions.
While legislative reform is necessary, this Note argues that merely changing how courts evaluate individual transactions would not address the current petition process’s failure to check systemic abusive practices in the secondary market and thus would not accomplish the system’s goal of limiting sales to those actually in the best interest of the seller.
There are two fundamental problems underlying the current legislative scheme. First, the lack of adversarial proceedings resulting from the agreement between the factoring company and the seller forces courts into the unfamiliar responsibility of engaging in investigative factfinding and the uncomfortable role of exercising discretion on behalf of tort victims. Judges are inevitably left uninformed about the circumstances underlying individual transactions, which systemically obscures abusive factoring industry tactics that often accompany petitions. Second, while private litigation and public enforcement against factoring companies might serve an essential role in protecting vulnerable tort victims from abusive practices, litigation efforts against factoring companies have historically been rare because of the market’s opacity.
Moreover, even when illegal factoring company practices have been challenged in court, questionably applied procedural and jurisdictional barriers have frequently prevented victims from receiving a remedy.
To address both of these issues, this Note recommends, based on current industry practices and basic contract law principles, that courts recognize that tort victims are direct or third-party beneficiaries of the anti-assignment clauses that accompany structured settlement agreements and, as a result, require that the insurance companies charged with dispensing structured settlement payments exercise their contractual obligation of good faith when choosing whether to enforce or waive these clauses.
The recognition of this claim will provide both an adverse party during the petition proceedings (when the insurance company finds that its obligation of good faith requires it to contest the petition) and, in the event that the insurance company did not exercise those obligations properly, a cause of action and potential remedy for victimized sellers.
Additionally, this Note suggests that legislatures take steps to improve the transparency and quality of the secondary market, either by creating a state-managed auction to serve victims who desire to sell their settlements—by, for example, modeling them after the auctions that facilitate tax deed sales in most states
—or by having courts funnel prospective sellers to alternative market participants, such as the list of qualified brokers that is already managed by the DOJ.
This Note proceeds in three parts. Part I describes the history of structured settlements, documents the rise of the factoring industry, and provides an overview of the legislative response to the industry. In addition to offering an explanation for why this legislative response has failed to accomplish its goals, Part II surveys litigation and public enforcement efforts challenging abusive factoring industry practices and explains why litigation has historically been rare. Part III elaborates on the solutions described above.