Bankruptcy court rules on structured settlement

Daily Record (Rochester, NY), May 23, 2002 by Nora Jones

Once upon a Chapter 7 Bankruptcy, there was a debtor who had used a structured settlement agreement to secure a personal loan. Sifting through a multitude of pleadings, motions, and cross-claims, U.S. Bankruptcy Court Chief Judge John C. Ninfo, II found that the debtor's assignment of interest in his settlement did amount to a perfected lien, creating a secured interest for the defendant creditors in the adversary proceeding titled Douglas J. Lustig, as Trustee v. Peachtree Settlement Funding, LLC, and CAN Structured Settlement, Inc.

Background

Robert Chad Chorney (debtor) initiated a Chapter 7 bankruptcy in October 2000. On the required Schedules and Statements he indicated that he was the recipient of a structured settlement payable by CNA Insurance, as a result of a 1990 personal injury settlement. Debtor claimed a $7,500 exemption in regard to the CNA asset.

He also indicated his unsecured creditors held claims totaling $94,849.90, which included a $50,000 claim held by Peachtree Settlement Funding and a $21,000 nondischargeable student loan by Sallie Mae. Debtor was employed as a chemist technician at Eastman Kodak Co., earning approximately $33,000 per year.

In a January 2001 amendment to his Schedules and Statements, debtor added "Secured Claims" for Peachtree Settlement Funding and WebBank.

Objection To Exemption

Peachtree Settlement Funding (Settlement Funding) filed an objection to debtor's $7,500 exemption claim. Detailing the history of the insurance pay out, Settlement Funding noted that structured payment plan included a $10,000 payment in November 1996; a $20,000 payment in November 2001, a $30,000 payment due in November 2006, and a $40,000 payment due in 2011.

In November 1999 the debtor obtained a $12,861.60 loan from WebBank, executing a secured promissory note and security agreement granting WebBank a security interest in certain collateral, including his rights to receive structured settlement payments. Debtor signed a financing statement which described the collateral. WebBank assigned its right, title and interest in the loan to Peachtree Finance, which contracted with Settlement Funding to service the loan.

The objection sought to make debtor's $7,500 exemption claim subordinate to the interests of Peachtree Finance.

Trustee's Complaint

In July 2001, debtor's trustee, Douglas J. Lustig, filed an adversary proceeding against Peachtree Finance and CNA requesting that the court determine if Peachtree Finance had an interest in the structured settlement payments, and seeking an order directing CNA to make future payments to the trustee.

Lustig's complaint alleged that the debtor had sold or assigned $13,365 of each of the November 18, 2001 and November 18, 2006 to WebBank. The trustee argued that the debtor's attempt to transfer, sell or encumber all or any portion of the structured settlement payments was void and of no effect, and that Peachtree Finance did not hold a perfected lien. Further, the complaint asserted that the bankruptcy estate held the right to receive structured settlement payments.

Answer To Trustee's Complaint

Settlement Funding filed an answer in September 2001, asserting that Peachtree Finance held a perfected security interest in debtor's rights to receive the structured settlement payments.

In November 2001, CNA filed its answer and cross-claim, requesting the court to enter an order declaring null and void the alleged secured claim of Peachtree Finance. Among other claims, CNA argued that the court should enter an order directing CNA to make all of the unpaid structured settlement payments directly to the trustee.

Motions For Summary Judgment

The trustee filed a motion for summary judgment in November 2001, alleging, among other details, that the underlying transaction between the debtor and WebBank was an unperfected assignment by the debtor of his right to receive payments.

On behalf of Peachtree Finance, Settlement Funding filed a motion for summary judgment in January 2002, continuing to assert that the debtor granted WebBank a security interest in the structured settlement payments.

A week or two later, CNA filed a motion for summary judgment alleging that the WebBank loan transaction violated the anti-assignment language within the settlement agreement and related contracts. Citing relevant sections of the Uniform Commercial Code, CNA alleged that the transaction between the debtor and WebBank was not a secured loan, but an outright sale by the debtor of his interest in a portion of the structured settlement payments.

A couple days later, the trustee filed an additional memorandum of law, pointing out why former Article 9 did not apply to any attempt to obtain a security interest in the structured settlement payments.

Settlement Funding then filed an additional memorandum of law on behalf of Peachtree Finance, asserting that former Article 9, not the Revised Article 9, applied in this proceeding, and arguing that the Victims of Terrorism Relief Act of 2001 amended the Internal Revenue Code to make it clear that CNA did not suffer any adverse tax consequences as a result of the WebBank Loan.