IN RE: the Application of Livia CABRERA. (2003)

Should the assignment of periodic lottery payments in exchange for a lump sum payoff be judicially authorized on a pro forma basis upon ex parte submissions?   This Court holds that in order to effectuate its legislatively mandated oversight function, a court cannot make this determination absent a full record and without input from all of the affected parties.

Two ex parte applications have been made by a finance company on behalf of and with the consent of two lottery winners seeking judicial approval for their agreement to assign to the would-be lender the periodic lottery payments due them in exchange for a substantially discounted lump sum payoff.

 A judicial order authorizing such assignments is required by statute and court rule.  Tax Law Sect. 1613;  21 NYCRR 2803.11.  A judge's signature is not a pro forma act, as it constitutes judicial approval of the underlying request.   See, e.g., New York State Chapter, Inc., v. New York State Thruway Authority, 88 N.Y.2d 56, 69, 643 N.Y.S.2d 480, 666 N.E.2d 185 (1996);  Application of North Country Legal Services, Inc. 94 Misc.2d 831, 407 N.Y.S.2d 127 (N.Y.Sup., 1978).   The role of the judge in this context is to insure that the agreement reached between the prize winner and the finance company is fundamentally fair.   To thus qualify, the agreement must be an arms length agreement untainted by overreaching and be one that is entered into by the prize winner only after being fully apprised of what the discounted lump sum payment will cost in dollar terms and in the loss of security in the future.

“Recent years have seen the growth of specialty finance or factoring companies, offering lump sum cash payments to injured parties, lottery winners and other claimants, in exchange for a portion, or all, of future annuity or settlement payments ․ [such] factoring companies [often operate in] a largely unregulated field and one which has come under much scrutiny ․ The [assignments] ․ [often] involve ․ large discounts imposed by factoring companies, aggressive advertising and other methods employed by some companies to induce unrepresented settlement recipients to make such transfers, the failure to properly disclose assignment terms, the possible adverse tax consequences for recipients and settlement companies, and the resulting loss of long-term financial security to recipients posed by the transfers.”   Carroll v. XYZ Life Insurance Companies, 9/5/2000, NYLJ 31(col.4) (Supreme Court, Kings County) (Dabiri, J.)

Recently, and in response to some of these concerns, the Legislature enacted the “Structured Settlement Protection Act” (SSPA, General Obligation Law Sections 5-1701 et seq.  As a result of the concern that payees may become victims of predatory lenders and may dissipate their awards, would-be transferees are obligated to commence a special proceeding for the purpose of seeking judicial approval of the transfer.  GOL Sections 5-1705 and 5-1706.  “The heart of the SSPA's protection lies in the courts' independent discretionary determination of [whether] ‘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.”   General Obligation Law Sect. 5-1706(b);  In re Petition of Settlement of New York LLC, 2003 WL21203350 (Sup. Court, Rensselaer Co., NY) Indeed, pursuant to General Obligation Law Sect. 5-1706(c)) “the payee must be advised in writing by the transferee to seek independent professional advice regarding the transfer and has either received such advice or knowingly waived such advice in writing.”

 This Court is of course well aware that the legislative standards set forth above refer to the assignment of structured settlements in personal injury cases.   However, this Court holds that the same concerns that obtain in that area obtain here.

The papers submitted with these ex parte applications, although procedurally compliant, are substantively deficient in that they provide no information about the discount percentages, fees, commissions and or penalties and more importantly, no evidence is provided showing that these fees and rates have been explained to the prize winner and that the prize winner understands how much he or she is paying for the privilege of receiving the discounted sum.   As significantly, the papers do not provide any information about the lender or how the lender solicited these prize winners so as to permit the Court to make an independent determination with regard to possible overreaching.

Accordingly, this Court denies these ex parte applications for said relief and directs that the applications be made by motion on notice to all affected parties for referral to a motion part where these issues may be fully explored.

This constitutes the decision and order of the Court.

This Court was presented with two ex parte petitions by a factor seeking it's permission to purchase a stream of income from two lottery winners in exchange for substantially discounted lump sum payments.   The enclosed decision, which appears to be one of first impression in this State, expresses this Court's view that such petition should not be approved on a pro forma basis, but requires examination of the relevant factors so that it may determine whether such purchase lies within the best interests of the payees.

Plaintiffs were represented by Irwin Tubman, Esq., 350 Fifth Avenue, New York, New York.

H. KRAMER, J.