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Wilner: Judiciary ‘dropped the ball’ on structured settlements

ANNAPOLIS – Though the General Assembly enacted a law in 2000 requiring judicial approval before structured settlement proceeds can be sold, until this month the Judiciary provided no procedural rules for judges to follow before granting approval, Alan M. Wilner said.

“Fifteen years ago, we just dropped the ball on this one,” Wilner told the House Judiciary Committee. “We have become much more vigilant since then.”

Wilner spoke of the undue delay as he briefed lawmakers on the Judiciary’s new rules and as legislators prepare to consider legislation aimed at protecting would-be sellers of structured settlements from the types of abuses chronicled in a Washington Post article last August. The Post reported that, despite the 2000 law aimed at preventing abuse, a Baltimore lead-poisoning victim had sold for less than $63,000 her nearly $574,000 structured settlement, which was to be paid out over 35 years.

Such exploitation by some settlement purchasers amounts to “predatory conduct,” said Wilner, who chairs the Judiciary’s Standing Committee on Rules of Practice and Procedure. The Judiciary’s new rule, which went into effect Jan. 1, is intended to prevent the “disturbingly lax manner” in which a judge has approved these sales, added Wilner, who also briefed the Senate Judicial Proceedings Committee on Thursday.

The rule requires reviewing judges to conduct a hearing that must be attended by the would-be purchaser and seller, though the judge may permit them to participate via telephone. The would-be buyers must state why the purchase is, in the words of the 2000 law, “necessary, reasonable, or appropriate [and] in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.”

Legislation pending

With regard to legislation, one pending bill seeks to prevent abuse of alleged victims of childhood lead poisoning by barring buyers of structured settlements from purchasing more than 25 percent of the outstanding funds owed in settlement of the litigation. House Bill 42, which been referred to the Judiciary Committee is sponsored by Del. Keith E. Haynes, D-Baltimore City.

Maryland Attorney General Brian E. Frosh is also drafting legislation he would like to have submitted this General Assembly session to prevent abuse by purchasers of structured settlements.

“The attorney general has been deeply concerned that victims of lead poisoning who may have significant impairments are entering into financial transactions that they may not understand and that may compromise their future,” Frosh’s spokesman, David Nitkin, stated in an email message Thursday. “He is also working on a plan for more comprehensive regulation of the industry, for greater protection of victims.”

The National Association of Settlement Purchasers said this month that it supports the “objective of ensuring that structured settlement transfers are in the payees’ best interest – those involving victims of childhood lead poisoning in particular.” But NASP said the 25 percent cap in Haynes’ proposal is “based on an arbitrary value that does not account for the amount or timing of payments that the payee is seeking to sell.”

Wilner declined to tell the lawmakers what substantive changes, if any, they should make to the 2000 law beyond suggesting that they “change that ‘or’ to an ‘and,’’ thus permitting judges to approve structured settlements if they are “necessary, reasonable and appropriate ….”

Judicial oversight

The Judiciary’s new rule also seeks to prevent structured settlement purchasers from filing purchase petitions in courts thought most likely to approve settlement sales. The rule requires would-be purchasers to file their petitions in courts in the seller’s county of residence.

The petitions must 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 must be provided with the petition.

The rule requires 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 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.

To approve a purchase, 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 rule follows from the Maryland and federal laws, Wilner said.

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.