Court: Missouri Court of Appeals; December 12, 2018; Missouri; State Appellate Court
Counsel for the appellants includes Michael Farrell, Samantha Thomas-Bush, and others, while counsel for the appellees comprises Matthew Beatty DeMarcus and Charles Thomas Ezzell. The amicus curiae are represented by Walter L. Sales and Bradley Dale Hamblin, Jr.
Ray Thomas, Jr. settled a workers' compensation claim against his employer, National Union Fire Insurance Company, and subsequently sought circuit court approval to transfer his future periodic payments to DRB Capital, LLC, in exchange for a lump sum payment at a discounted rate. The circuit court approved this transfer under the Kentucky Structured Settlement Protection Act (KSSPA), which is typically applicable to tort claims.
American General Annuity Service Corporation and American General Life Insurance Company appealed this decision, arguing that the transfer violated anti-assignability clauses in the contracts and that the KSSPA does not extend to workers' compensation settlements. The Court of Appeals upheld the circuit court’s approval.
Upon review, the court concluded that the anti-assignment clauses in the underlying contracts are enforceable and that the KSSPA does not govern workers' compensation settlements. Consequently, the court reversed the Court of Appeals' decision.
The factual background includes a Settlement Agreement approved by an Administrative Law Judge, which stipulated a lump sum of $31,000, monthly payments over 20 years, and additional lump sums in 2024 and 2029. The agreement included provisions that prevent any acceleration, deferral, or assignment of the periodic payments. National Union executed a Uniform Qualified Assignment to AGASC, which also included prohibitions against the assignment of periodic payments, establishing AGASC as the sole owner of the annuity policy used for these payments.
The Annuity Policy prohibits any Payee or Beneficiary, including Thomas, from commuting or anticipating income payments, and any attempts to transfer or assign payments are deemed void. Despite Thomas not signing the UQA or the Annuity Policy, the Settlement Agreement allowed for a potential qualified assignment to AGASC, enabling the purchase of an annuity for Periodic Payments. Thomas entered an agreement with DRB to transfer his rights to some Periodic Payments. DRB sought approval under the Kentucky Structured Settlement Protection Act (KSSPA), but American General and AGASC contested the transfer, claiming it violated the Settlement Agreement's terms. The Boyd Circuit Court approved the transfer, stating it complied with KSSPA and was necessary for Thomas's financial needs. This decision was upheld by the Court of Appeals, which found the anti-assignment clauses inapplicable, citing a precedent that allowed for enforceability of such clauses only before a loss occurs. Judge Clayton dissented, arguing that the anti-assignment clause was enforceable since it was created after Thomas had established his claim. Following an appeal by American General and AGASC, the reviewing court noted the distinction between this case and the previous precedent, concluding that the anti-assignment provisions in the Settlement Agreement are enforceable under Kentucky law, consistent with longstanding interpretations of contract law regarding assignability.
A contractual right can be assigned unless: (a) the assignment materially alters the obligor's duties or increases their risk, (b) it is prohibited by statute or public policy, or (c) it is explicitly barred by the contract. Thomas contends that the anti-assignment provisions in his Settlement Agreement are void on public policy grounds, citing the precedent set in Wehr. The language of the Settlement Agreement, the UQA, and the Annuity Policy is clear, with Thomas acknowledging he had no power to assign or anticipate periodic payments, and he consented to National Union's assignment of its liability to AGASC. This anti-assignment provision is undisputedly clear and unambiguous. The Wehr case, which involves an insurance policy's anti-assignment clause, does not apply to Thomas's workers' compensation settlement. In Wehr, a hospital’s assignment of claims against an insurance policy was contested due to an anti-assignment clause. The court evaluated whether such clauses are enforceable when the loss has already occurred, concluding that once a claim ripens, it generally cannot be restricted from being assigned.
The Court concluded that non-assignment clauses in insurance policies are enforceable before a covered loss occurs but not for assignments made after such an event. It ruled that the anti-assignment provision was unenforceable post-occurrence due to public policy considerations, aligning with previous rulings that challenge contractual restrictions on the transferability of choses in action. The Court of Appeals found that Thomas had a valid claim to periodic payments similar to a creditor in a debtor-creditor relationship, which should not be restricted from alienation. A key distinction was made between enforcing anti-assignment clauses pre- and post-loss; before a loss, such provisions protect the insurer from dealing with a party other than the insured, while post-loss claims represent a fixed liability for the insurer. The dissent highlighted that Thomas's Settlement Agreement, entered into after his loss and resolution of his workers' compensation claim, included anti-assignability language which he accepted willingly. The Court noted that the anti-assignment provisions should be enforced, as Thomas engaged in the Settlement Agreement with an understanding of its terms. Furthermore, the structured settlement agreement was designed to benefit from favorable tax treatment under 26 U.S.C. § 104(a) and § 130, which allows tax-free receipt of workers' compensation payments. However, if Thomas were deemed to have constructive receipt of these payments, the tax exclusion would not apply, and he could be liable for taxation on the income.
26 U.S.C. § 130 outlines that amounts received for a qualified assignment are excluded from gross income, provided they do not exceed the total cost of any qualified funding assets. A "qualified assignment" involves transferring liability for periodic payments as damages, which must meet specific criteria: the assignee must assume liability from a party involved in the original suit or agreement; the payments must be fixed and determinable; they cannot be altered by the recipient; the assignee's obligation must not exceed that of the assignor; and the payments must be excludable from the recipient's gross income under § 104(a).
For AGASC to exclude the received amount from its gross income, the payments to Thomas must remain unaltered. Any transfer of payments could disqualify AGASC from favorable tax treatment under § 130. Structured settlements aim to provide long-term income for injured parties, contrasting with immediate lump-sum payments that could jeopardize their financial stability, particularly in workers' compensation cases.
Recent trends show an increase in structured settlement factoring transactions, where plaintiffs seek lump sums at a discount, undermining the intended benefits of structured settlements for long-term welfare. Most states have responded with regulations to limit these transfers, as they could also affect the favorable tax treatment associated with structured settlements. The Settlement Agreement in Thomas's case requires compliance with the definition of "qualified assignment" under § 130, emphasizing that the periodic payments cannot be altered by the recipient.
The payee must not have actual or constructive receipt or present economic benefit from payments to avoid taxation on the annuity purchased to fund their obligations. If the payee has such receipt, tax benefits under 26 U.S.C. 104(a) are denied. Limitations on control of receipt prevent constructive receipt, with the payee needing no ownership or control of the annuity. Anti-assignment and anti-acceleration provisions in Thomas's Settlement Agreement and related documents restrict his control over payments, safeguarding him from adverse tax implications. If Thomas were allowed to transfer his payment rights, both he and AGASC would incur tax liabilities.
Regarding the citation of Liberty Assignment Corp. v. Bluegrass Capital Group, LLC, Thomas argues it violates Kentucky Rule of Civil Procedure 76.28(4)(c) as an unpublished opinion. However, Liberty Assignment, which involves similar facts, validates the enforceability of anti-assignment clauses to preserve favorable tax treatment for structured settlements, a principle critical for protecting injured parties. Although Thomas asserts that Section 5891 of the Internal Revenue Code undermines this reasoning, which imposes a 40% excise tax on acquiring structured settlement rights, the analysis remains unaffected as it pertains to the enforceability of anti-assignment provisions.
The statute stipulates that structured settlement factoring transactions will not negatively impact the tax treatment for the parties involved, provided they comply with Internal Revenue Code sections 104 and 130 at the time of the agreement. Contrary to Thomas's assertions, section 5891 does not relax these requirements, particularly the necessity for the payee to lack constructive receipt or present economic benefit from the settlement amounts. The Illinois Court of Appeals clarifies that the Victims of Terrorism Tax Relief Act of 2001 merely delineates tax treatment of certain structured settlements without affecting assignability, which remains governed by state law and the settlement agreement’s terms. The attempted transfer in this case is invalid due to violation of anti-assignment provisions.
Additionally, the Kentucky Structured Settlement Protection Act (KSSPA) does not apply to workers' compensation settlements. The Court emphasizes that the KSSPA’s language indicates its relevance only to tort settlements, as defined in KRS 454.430. The KSSPA encompasses provisions only relevant to claims resolved through tort, whereas workers' compensation settlements are statutory recoveries and do not qualify as tort claims. Thus, the KSSPA's scope does not extend to such settlements, affirming that workers' compensation involves a compromise between employers and employees, distinct from tort liability frameworks.
Workers' compensation serves as an exclusive recovery method for injured workers, focusing solely on the work-related nature of injuries rather than employer negligence, as outlined in KRS Chapter 342. Thomas contends that Kentucky law categorizes workers' compensation settlements as "tort claims" under a different statutory framework, referencing the case Dix, Associates Pipeline Contractors v. Key. The court in Dix explained that workers' compensation coverage extinguishes potential tort liability, effectively settling the employee's tort claim with compensation. The court reiterated that workers' compensation is a distinct statutory system that compensates injured workers without requiring proof of fault, contrasting with tort claims where the claimant must establish duty, breach, causation, and damages.
Additionally, KRS 342.180 prohibits the assignment of workers' compensation claims to protect injured workers and ensure their benefits cover essential needs. Thomas refers to the KSSPA definition of "qualified assignment agreement" and suggests it pertains to structured settlements that comply with the Internal Revenue Code. However, the statutory language of KRS 454.430 explicitly restricts the KSSPA to tort claims, requiring that any settled claim must be pending in a Kentucky court, thus excluding workers' compensation settlements.
Thomas also cites the Internal Revenue Code, which includes "compensation under any workmen's compensation act" in its definition of "qualified assignment agreement." However, it is noted that while the Code encompasses workers' compensation in states with structured settlement protection acts, Kentucky's KSSPA explicitly does not apply to such settlements. The legislative history of the KSSPA further clarifies its applicability solely to tort claims, reinforcing the conclusion that it does not extend to workers' compensation settlements.
The statute in question is clear, negating the need for external interpretation aids; however, legislative history supports the conclusion that the Kentucky Structured Settlement Protection Act (KSSPA) initially included workers' compensation settlements, which were later excluded, restricting the statute to tort claims. The circuit court lacks jurisdiction to approve transfers of structured settlement payment rights from workers' compensation claims, contradicting Kentucky Employers' Mutual Insurance v. Novation Capital, which had previously asserted such jurisdiction. This earlier ruling is overruled, as the KSSPA applies solely to tort settlements. Furthermore, the Settlement Agreement, UQA, and Annuity Policy explicitly prohibit the assignment of periodic payments. Thomas agreed to these anti-assignment provisions, which are enforceable, given the unique nature of structured settlements in workers' compensation cases that safeguard tax benefits and support for injured workers. Consequently, the Court of Appeals' decision is reversed, and the case is remanded to the circuit court for proceedings consistent with this opinion. Thomas's agreement with DRB involved the sale of rights to 120 monthly payments and a lump sum due in 2024.
DRB agreed to pay Thomas $35,086.64 in exchange for transferring payment rights amounting to $77,627.60. Once an insured event occurs, the insured's claim becomes a "chose in action," a form of personal property that is generally transferable, despite the presence of anti-assignment clauses in the Settlement Agreement and two other contracts (the UQA and the Annuity Policy). The majority view supports the transferability of the post-occurrence claim, while the minority view maintains that anti-assignment clauses should be strictly enforced. The Settlement Agreement specifies that all payments are classified as damages for personal injuries under Section 104(a)(1) of the IRC. To address concerns about factoring transactions, 44 states have enacted structured settlement protection acts, influenced by model legislation from the National Structured Settlements Trade Association.
The Department of Workers' Claims administers compensation claims under the Workers' Compensation Act, employing Administrative Law Judges (ALJs) to conduct hearings, review agreements, and approve claims per KRS Chapter 342. Circuit courts have limited jurisdiction to enforce approved agreements or benefit awards, with appeals from ALJ decisions going to the Workers' Compensation Board, and further appeals possible to the Court of Appeals. Thomas's injury resulted from workplace pressure, illustrating the distinction between tort claims and workers' compensation claims, as there is no tortfeasor involved. Courts interpret statutes to reflect legislative intent, considering the actual language, legislative reports, prior drafts, and unpassed bills for context.
