Opinion
4960/04.
Decided May 21, 2004.
Petitioners Ryan R. Barr (Barr) and 321 Henderson Receivables L.P. (Henderson) bring this proceeding for an order, pursuant to the "Structured Settlement Protection Act" (General Obligations Law, Title 17), approving the transfer of 108 periodic payments of $441.63 each otherwise due to petitioner Barr commencing May 1, 2004 and payable monthly thereafter with the final payment on April 1, 2013.
"The SSPA [Structured Settlement Protection Act] was adopted by the State Legislature in 2002 (L 2002, c 537) to afford greater protection to individuals either entering into a structured settlement agreement or negotiating to sell or transfer a periodic payment thereunder to a third party. As relevant here, the enactment provides for disclosure with respect to the terms and provisions of the proposed transfer, as well as prior judicial approval." ( Matter of Settlement Capital Corp.["Y"], 194 Misc.2d 711).
Procedurally, it appears that the within application is in compliance with the provisions of the SSPA (see GOL § 5-1706(a), (c), (d) and (e)).
However, in addition to an express finding of procedural compliance the Court must additionally find that "the transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependents; and whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable" (GOL § 5-1706(b)).
Thus, two distinct substantive inquiries are required of the court before transfer of a structured settlement can be approved one assessing whether the proposed transfer is in the best interest of the payee and the other assessing whether the transaction is fair and reasonable ( Id.; see, Matter of Settlement Capital Corp. [Ballos], 1 Misc. 3d 446; Matter of 321 Henderson Receivables LP [DeMallie], ___ Misc.3d ___, 769 NYS2d 859; Matter of Settlement Funding of New York LLC [Cunningham], 195 Misc.2d 721).
"Although the statute does not define the best interests of the Payee, developing case law and the intent of the statute suggest the Court should consider: (1) the Payee's age, mental capacity, physical capacity, maturity level, independent income, and ability to support dependents; (2) purpose of the intended use of the funds; (3) potential need for future medical treatment; (4) the financial acumen of the Payee; (5) whether Payee is in a hardship situation to the extent that he or she is in "dire straits"; (6) the ability of the Payee to appreciate financial consequences based on independent legal and financial advise; (7) the timing of the application. (citations omitted)." ( Matter of Settlement Funding of NY LLC [Platt], 2003 NY Misc. LEXIS 1696); Matter of Settlement Capital Corp. [Ballos], supra).
This list of factors has emerged in recognition of the need to address transfer applications on a case-by-case basis "[n]otwithstanding the express legislative intent of the enactment to limit `transfers of structured settlement payments to true hardship cases'" ( Id.).
Although what constitutes a fair and reasonable transaction is also left undefined in the statute, two factors are specifically identified for consideration: the fees and expenses and the discount rate (GOL 5-1706(b)).
As revealed by the published cases, fees have ranged from a low of $0 in many cases to a high of $2,200 ( Matter of Settlement Funding of New York LLC [Asproules], supra. Where fees are imposed on a modest advance payment, doing so results in a dramatic increase to the effective rate of interest if the advance were considered a loan. For example, in Asproules, the 19.82% discount rate jumped to an effective loan rate of 22.49% since the $2,200 in fees reduced Mr. Asproules' gross advance of $16,200 to a net of $14,000.
The discount rates found in the published case law thus far reveals a low of 15.46% ( Matter of Settlement Funding of New York, LLC [Cunningham], supra) to a high of 20.586% ( Matter of Settlement Funding of New York LLC [Platt], 2003 NY Misc. LEXIS 1696 citing Settlement Capital [Miller], unreported. In Cunningham, the 15.46% rate was found neither fair nor reasonable and the petition denied, while in Miller it appears the petition was granted despite the considerably higher rate.
As noted in Matter of 321 Henderson Receivables LP [DeMallie], supra, the discount rate applied is "roughly the same in every case * * * in every case the rate translates into a punishingly high effective rate of interest." In view of same, the value of "basing a determination [of whether a discount rate is fair and reasonable] upon the prevailing interest rates in the industry is dubious" ( Matter of Settlement Capital Corp. [Ballos], supra).
Rather, recognition of the interplay between the best interest standard and the fair and reasonable standard is warranted especially considering the expressed legislative emphasis on need. "The more pressing the need, the more reasonable it may be for a payee to obtain immediate cash at a steep discount rate" ( Matter of 321 Henderson Receivables LP [DeMallie], supra).
Where insufficient information is provided as to the specifics of the transaction, and/or the circumstances of the payee, the application is doomed to failure (see, Id.; compare, Matter of Settlement Funding of New York LLC [Platt], supra).
With the foregoing as background, the court turns to the particulars of the within application.
Petitioner Barr is currently 22 years of age.
Upon the May, 1999 settlement of the action brought by Barr, among others, for the wrongful death of his father, Barr received an annuity. The annuity provided for monthly payments of $441.63 for the 10-year period beginning May 1, 2003 and ending April 1, 2013.
As proposed, in exchange for the remaining 108 monthly payments [May 1, 2004 to April 1, 2013], totaling $47,696.04, Barr will receive a lump sum payment of $29,600. No fees or expenses will be charged by Henderson so the $29,600 represents both the gross and net amount to be received by Barr.
In accordance with GOL § 5-1703 Henderson provided Barr with a formal disclosure statement dated February 10, 2004 advising him that, applying the Federal Reserve discount rate of 4.2%, the present value of the $47,696.04 in future payments is $39,503.63. An alternative, less speculative method for fixing the present value of the annuity is also statutorily required and provided. A price quote from the same annuity company handling Barr's structured settlement was obtained for the cost of a replacement annuity as of February, 2004 which would cover the final 108 monthly payments. The cost of such an annuity and hence its true value as of February, 2004 was $42,738.
Petitioner Barr was further advised that Henderson had then taken the present value figure of $39,503.63 and applied the in-house annual discount rate of 321 Henderson Receivables L.P. of 11.59% to arrive at the $29,600 figure he would receive in exchange for the $47,696.04 in annuity payments.
Not provided, although not statutorily required, is calculation of the effective interest rate based upon the alternative, more accurate, present value of the annuity being purchased — $42,738. The effective rate of interest on the $29,600 being received by Barr would, of course, exceed 11.59% if in exchange therefor Barr was giving up an annuity worth $42,738 instead of one worth only $39,503.
Moreover, bearing in mind that the February 10, 2004 disclosure statement provided by Henderson to Barr is now over 3 months old, during which Barr has of course received no payment, the calculations provided, if revised, would yield a still higher de facto interest rate.
Petitioner Barr's rationale for pursuing the transfer is to combine the $29,600 with his $10,000 in savings and use the combined proceeds as follows: pay $25,000 as the downpayment on a new home estimated at $400,000; pay $6,000 to reduce by half Barr's $12,000 in credit card debt; and place the remaining $8,600 in the bank for use toward closing costs, necessary repairs and emergencies (Affidavit of Ryan R. Barr dated March 12, 2004 at ¶¶ 4-5).
Additional details of Barr's personal and financial circumstances are further provided as follows:
"I am 22 years of age. I have been employed for the last two years by Global Home Loans located in Melville, NY. I earned a combined income of $90,000.00 in the last two years in that job I am not married, I have never been divorced, and I have no dependents.
I presently reside at my mother's house, where I make regular contributions to rent and the household expenses of $500.00 per month."
(Affidavit at ¶ 3)
Petitioner Barr indicates that he has consulted with counsel regarding the proposed transaction and is fully familiar with the terms of the proposed agreement.
There are deficiencies in the application presently before the court.
Preliminarily, while the proposed transaction involves the least harsh terms found by the court through its research, the quoted in-house discount rate of 11.59% remains high especially since its manner of calculation understates the true rate.
More importantly, there appears no pressing hardship requiring this young and single individual to cash in his annuity to purchase a home. Petitioner Barr has incurred $12,000 in credit card debt against $10,000 in savings at a time when his $441.63 in monthly annuity payments has been essentially offsetting his $500 in monthly rent and household expenses.
The $375,000 mortgage obligation contemplated by Barr would cost $2,013.08 per month in principal and interest, assuming a favorable 5% rate and a 30-year term. In addition, there would be real estate taxes and homeowners insurance adding perhaps $500-$600 per month in expenses. This five-fold increase in petitioner Barr's monthly overhead expenses would be incurred simultaneously with the loss of the monthly $441.63 annuity payment and would only reduce his credit and obligations by half.
Excluded are considerations of the significant cost of heat, electricity, telephone, general maintenance, and perhaps even food and cable which are presently included within Barr's $500 per month payment toward rent and household expenses.
Thus, in addition to there being no showing of hardship necessitating the proposed sale, to allow the sale would seemingly promote tremendous financial hardship after the immediate thrill of home ownership subsided. This is clearly not in petitioner Barr's best interest.
Accordingly, the within application is denied.
This decision constitutes the order of the court.