Congress passed the Periodic Payment Settlement Act of 1982 to incentivize structured settlements. The Act sought to encourage tort victims with serious injuries to agree to settlements that offered the best prospect of long-term financial security. But Congress failed to predict the development of a robust secondary market for settlement payment streams: Since the early 1990s, factoring companies have aggressively and unscrupulously purchased billions of dollars’ worth of settlement payments from tort victims, often at great profit. This massive transfer of wealth from injured victims has fundamentally undermined congres­sional policy and left tens of thousands of victims and their dependents without the financial security structured settlements purported to offer.

To regulate the industry, Congress and forty-nine state legislatures developed a legislative scheme that requires state court approval of settlement transfers and limits approval to those found to be in the “best interest” of the tort victim. This Note argues that this legislative scheme has fundamental substantive and procedural flaws that prevent it from achieving its purpose. As a solution, this Note suggests, based on generally accepted contract law principles, that courts recognize that insurance companies charged with dispensing settlement streams have a contractual obligation to object to transfer petitions in certain circumstances. Additionally, this Note recommends that courts and legislatures take steps to increase the transparency and quality of the secondary market. Together, these reforms will help protect tort victims from sordid factoring industry business tactics while also allowing tort victims the opportunity to sell their payment streams at substantively fair prices.

The full text of this Note can be found by clicking the PDF link to the left.


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. 1 See Terrence McCoy, Freddie Gray’s Life a Study on the Effects of Lead Paint on Poor Blacks, Wash. Post (Apr. 29, 2015), https:/‌/‌www.washingtonpost.com/‌local/‌freddie-grays-life-a-study-in-the-sad-effects-of-lead-paint-on-poor-blacks/‌2015/‌04/‌29/‌0be898e6-eea8-11e4-8abc-d6aa3bad79dd_story.html (on file with the Columbia Law Review) [hereinaf­ter McCoy, Freddie Gray’s Life] (describing Freddie Gray and his family’s exposure to lead poisoning and noting that “more than 93,000 children with lead poisoning have been added to [Maryland’s] Department of the Environment lead registries over the past two decades”). In 2010, five years before his death, Gray and his sisters won a settlement against their landlord worth hundreds of thousands of dollars. 2 Id.; see also Terrence McCoy, How Companies Make Millions Off Lead-Poisoned, Poor Blacks, Wash. Post (Aug. 25, 2015), https:/‌/‌www.washingtonpost.com/local/‌‌social-issues/‌‌‌how-companies-make-millions-off-lead-poisoned-poor-blacks/‌‌2015/‌‌08/‌25/‌7460c1de-0d8c-11e5-9726-49d6fa26a8c6_story.html?utm_term=.5c132ee0c9f0 (on file with the Columbia Law Review) [hereinafter McCoy, How Companies Make Millions]. 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. 3 See Jay Romano, Lead Paint: A Ruling for Tenants, N.Y. Times (Dec. 9, 2001), https:/‌/‌www.nytimes.com/‌2001/‌12/‌09/‌realestate/‌your-home-lead-paint-a-ruling-for-tenants.html (on file with the Columbia Law Review) (describing previously fatal hurdles, such as causation, that childhood lead poisoning victims had recently overcome in litigation against 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. 4 See, e.g., Daniel W. Hindert, Joseph J. Dehner & Patrick J. Hindert, Structured Settlements and Periodic Payment Judgments § 1.01 (2020) [hereinafter Hindert et al., Structured Settlements] (defining structured settlements as “the resolution of personal injury cases that are settled by payments over time rather than a single sum” and noting that “[t]hey often involve monthly payments over a claimant’s lifetime”). 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. 5 McCoy, How Companies Make Millions, supra note 2.

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. 6 See, e.g., 66 Am. Jur. Trials 47 § 211 (2020) (“Courts generally frown on lump-sum settlements in childhood lead-based paint poisoning cases, which make the parents the sole custodians of the settlement money until the child comes of age . . . . [M]ost courts will work to ensure that the method of settlement disbursement comes in the form of a structured settlement.”). The structured settlement format surged in popularity in the early 1980s following the introduction of a complex federal tax incentive framework. 7 See I.R.C. §§ 104, 130 (2018); see also Hindert et al., Structured Settlements, supra note 4, § 1.02 (describing the growth in structured settlement annuity premium following the enactment of the Periodic Payment Settlement Act of 1982). 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. 8 See, e.g., Tax Treatment of Structured Settlements: Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways & Means, 106th Cong. 6 (1999) [hereinafter Tax Treatment Hearing] (statement of Rep. Shaw, Jr.) (“Congress enacted structured settlement tax rules as an incentive for injured victims to receive periodic payments as settlements of personal injury claims . . . . Congress was concerned that injured victims would prematurely spend a lump-sum recovery and eventually resort to the social safety net.”); Karen Syma Czapanskiy, Structured Settlement Sales and Lead-Poisoned Sellers: Just Say No, 36 Va. Env’t L.J. 1, 8 n.35 (2018) (“Favorable tax treatment of structured settlements is thought to encourage provident use of tort damage awards by people who might use a lump sum award unwisely, forfeit financial security and risk becoming dependent on public benefits such as Medicaid or Supplemental Security Income.”); Tax Treatment of Structured Settlement Arrangements, Joint Comm. on Tax’n (Mar. 16, 1999), http:/‌/‌www.jct.gov/‌jct_html/‌x-15-99.htm [https:/‌/‌perma.cc/‌F25G-ZNGM] [hereinafter Tax Treatment Document] (discussing the policy foundation of the structured settlement tax subsidy). 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. 9 See Adam F. Scales, Against Settlement Factoring? The Market in Tort Claims Has Arrived, 2002 Wis. L. Rev. 859, 860–61 (“We might question whether our society’s general commitment to alienability of property extends to those rights initially conferred by the State as a matter of corrective justice, and then subsidized by the State in the name of other goals.”). 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, 10 See Patrick J. Hindert, Structured Settlements 2015 – 1, Beyond Structured Settle­ments (Dec. 28, 2015), https:/‌/‌s2kmblog.typepad.com/‌rethinking_structured_set/‌towers-watson [https:/‌/‌perma.cc/‌U9NB-RWWD] [hereinafter Hindert, 2015 Estimates] (“Indus­try experts estimate J.G. Wentworth currently controls between 65–72% of the U.S. secondary structured settlement market.”). quickly became notorious for aggressive business practices that took advantage of the economic precarity of seriously injured tort victims. 11 See Daniel W. Hindert & Craig H. Ulman, Transfers of Structured Settlement Payment Rights: What Judges Should Know About Structured Settlement Protection Acts, Judges’ J., Spring 2005, at 19, 20 (discussing the factoring industry’s history of “exploit[ing]” tort victims). For a discussion of aggressive factoring industry tactics and methods used to circumvent regulatory requirements, see infra section II.A.1. By 2003, the secondary market for structured settlements had reached, by J.G. Wentworth’s own estimate, $1 billion annually. 12 See Laura J. Koenig, Note, Lies, Damned Lies, and Statistics? Structured Settlements, Factoring, and the Federal Government, 82 Ind. L.J. 809, 813 (2007) (citing J.G. Wentworth’s Assistant General Counsel’s estimate “that factoring companies purchased structured settlement payment rights from approximately 4,000 claimants in 2003, totaling $1 billion in assets”). Industry estimates are necessary because industry participants are generally not required to report sales figures. Hindert et al., Structured Settlements, supra note 4, § 16.02[1]. As a result, “the percentage of structured settlements that have been liquidated is unknown and difficult to measure.” Id. 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. 13 See Hindert et al., Structured Settlements, supra note 4, § 1.02[6][b][ii] (“Starting with Illinois in 1997, 49 states have enacted some form of structured settlement protection act.”); Hindert & Ulman, supra note 11, at 20 (discussing the model SSPA and its requirements).

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 14 See McCoy, Freddie Gray’s Life, supra note 1. —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.” 15 In re J.G. Wentworth Originations, LLC, 111 N.Y.S.3d 807, 807 (Sup. Ct. 2018) (describing the policy purpose behind New York’s SSPA). Industry experts estimate judges approve at least ninety-five percent of transfer petitions 16 See Jeremy Babener, Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History, 13 N.Y.U. J. Legis. & Pub. Pol’y 1, 40 (2010) (“Many in the factoring industry report application approvals of 95% or higher.”). —and some SSPAs do not prevent factoring companies from refiling petitions until they find a cooperative judge. 17 See id. at 40–41 (“[E]ven when one’s application is denied, a structured settlement owner can typically re-apply without a waiting period, or disclosing the previous denial to the subsequent court.”); see also infra note 151 and accompanying text. 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. 18 See McCoy, How Companies Make Millions, supra note 2. 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. 19 Id. Reporting by the Washington Post on these transactions led to an investigation by the Maryland Attorney General, who ultimately brought suit against the factoring company, Access Funding, LLC. See infra section II.B.2. 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. 20 See Hindert, 2015 Estimates, supra note 10.

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. 21 See Czapanskiy, supra note 8, at 17 (concluding that “statutes such as Maryland’s Structured Settlement Protection Act do not provide a sufficient basis for justifying the sale of a structured settlement income stream by a seller who cannot generate income substitutes because of childhood lead poisoning”); Alexander L. Ash, Comment, It’s Your Money and We Want It Now: Regulation of the Structured Settlement Factoring Industry in the Era of Dodd-Frank and the Consumer Financial Protection Bureau, 86 Miss. L.J. 151, 181 (2017) (“If the purpose of a structured settlement is to provide for the long-term care of the recipient through a supplemented stream of income, then allowing the person who is providing that long-term care to factor the smaller monthly installments for a large lump-sum payment creates a conflict of interest.”); Michelle M. Marcellus, Note, Resolving the Modern Day Esau Problem Amongst Structured Settlement Recipients, 40 Hofstra L. Rev. 517, 542 (2011) (arguing that, despite protections in New York’s SSPA, courts approve fac­toring transactions at an “alarmingly high rate”). This scholarship, however, has almost exclusively advocated for heightening the standard of scrutiny with which judges evaluate petitions. 22 See Czapanskiy, supra note 8, at 38–39 (considering, in the context of lead poisoned sellers, increasing the standard of scrutiny, but ultimately concluding that lead poisoning victims simply should not have the ability to transfer the rights to their settlement payments); Ash, supra note 21, at 176–80 (arguing for reform of the best interest standard and arguing that the Consumer Financial Protection Bureau (CFPB) has a role to play in regulating the industry); Marcellus, supra note 21, at 545–50 (arguing for reforms to New York’s SSPA, including increasing the standard of scrutiny). 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. 23 See infra section II.B.1 (describing barriers in private litigation); infra section II.B.2 (describing the history of public enforcement efforts against factoring companies). 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. 24 See infra section II.B.1.

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. 25 See infra section I.B.2 (describing why anti-assignment clauses are required); infra section I.C.1 (describing how factoring companies and insurance companies work together to circumvent the clause). While this Note argues that the recognition of contractual obli­gations is best situated under a direct or third-party beneficiary theory, another plausible theory for liability is that the insurance companies have a fiduciary duty to the tort victims. See infra note 215. 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. 26 For a discussion of the plausible scope of insurance company obligations, see infra section III.A.2. 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 27 See infra note 262 and accompanying text. —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. 28 See infra section III.B.

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.