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Court of Appeals approves rule to protect sellers of structured settlements

The Courts of Appeal building in Annapolis. (The Daily Record File)

The Courts of Appeal building in Annapolis. (The Daily Record File)

Maryland’s top court on Thursday approved a rule designed to ensure judges protect recipients of structured financial settlements from being exploited if they choose to sell them due to an imminent need for money.

The Court of Appeals’ approval follows documented instances of exploitation, including a Washington Post article in August which found that — despite federal and state laws aimed at preventing abuse — a Baltimore victim of lead paint poisoning had sold for less than $63,000 her nearly $574,000 structured settlement, which was to be paid out over 35 years. The Maryland Judiciary’s rules committee also found instances of structured-settlement purchasers filing purchase petitions in courts thought most likely to approve settlement sales.

To prevent such “forum shopping,” the rule will require would-be purchasers to file their petitions in courts in the the seller’s county of residence.

The rule, which takes effect Jan. 1, will also mandate that certain information be included in the petitions.

Specifically, the would-be buyer will have to state why the purchase is “necessary, reasonable, or appropriate [and] in the best interest of the payee, taking into account the welfare and support of the payee’s dependents,” the rule states, quoting from the Maryland structured settlement protection law.

Some information supplied in the petition will include confidential documents, such as the seller’s medical records and financial statements, and be filed under seal. The purchaser will have the burden to include these documents or, if they cannot be found, state the efforts taken to locate the missing documents.

Petitions will also have to include a consent form by the sellers that contains information about them and their obligations regarding dependents. In addition, the form will have to contain documentation that the sellers received independent advice on the sale from a lawyer or financial professional and that they understand what they are giving up and receiving in return.

An affidavit from the professional adviser will also need to be provided with the petition.

The rule will require the reviewing judge to conduct a court hearing that must be attended by the professional adviser and would-be purchaser and seller, though the judge may permit them to participate via telephone. Judges will also have the authority to appoint a representative for the would-be seller or call for an independent mental health evaluation if they suspect he or she lacks capacity to agree to the sale.

A judge “may not act on a petition … without holding a hearing at which the payee, or any guardian of the payee, shall testify [and] the court shall determine whether the payee’s consent is knowing and voluntary” based on a preponderance of the evidence, according to the rule.

To approve a purchase under the proposed rule, judges will have to make a finding, again based upon a preponderance of the evidence, that the sale is “in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.”

The concern for the payee’s capacity is based on the fact that “many of the assignment agreements have involved structured settlements in lead poisoning cases or other cases in which there is evidence of intellectual or cognitive impairment on the part of the payee, not to the extent of requiring a guardian of the person or property but sufficient to cast some doubt on the payee’s capacity to understand the nature and consequences of the transaction,” stated Alan M. Wilner, chair of the Standing Committee on Rules of Practice and Procedure, in a letter to the Court of Appeals.

The rule follows from the Maryland and federal laws, Wilner added.

Maryland’s structured settlement protection law — Sections 5-1101 to 5-1105 of the Courts Article — requires sellers to receive independent financial advice from an attorney, accountant or similar professional before selling the settlement and requires purchasers to disclose the discounted present value of future payments being assigned.

The federal law, a 2001 addition to the tax code, imposes a 40 percent excise tax on the purchase of a structured settlement unless the sale was approved by a state court and is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.