Petitioner Novation Capital L.L.C. (Novation) moves for judicial approval to transfer a portion of Jamel Knight's (hereinafter "Knight") structured settlement to Novation. Respondent Knight joins in the application. Novation and Knight appeared before this Court on July 22, 2008 for a hearing on this matter. [*2]

Based on the submissions and this court's own inquiry at hearing this application is DENIED and the petition is DISMISSED.

Procedural and Factual Background

In April 2006, Knight settled a personal injury action for $1.6 million up front and a structured settlement of $400,000 to be paid to Knight at a rate of $1,978.11 per month for the rest of his life, guaranteed for 360 months. After paying his attorneys in the personal injury action, purchasing one home with a "partner" here in Orange County ^[FN1], purchasing a restaurant in the Bronx ^[FN2], starting construction on a new home in Pennsylvania, and giving a significant portion of $1.6 million up front settlement away ^[FN3], Knight finds himself out of cash and requiring additional liquid assets.

Mr. Knight testified that in addition to the monthly payment of $1,978.11 he receives from his structured settlement, he also receives approximately $700 per month in disability payments, and derives an income from his restaurant. Nonetheless, Knight testified that he found himself in debt and is seeking to transfer part of structured settlement in an effort to get his life together.

Knight claims the monies he seeks are to: renovate the Orange County home so that it can be sold; renovate the Bronx restaurant to make it more profitable; finish construction on the Pennsylvania home to move his family into same; and pay off some debt including approximately $25,000 still owed on his truck. Testifying to the Court, Knight explained that he had a "big family...I give my family a lot of money...I took care of my family, my kids, myself, you know, lot."

Knight has five (5) children ranging in age from 1 years old to 17 years old. Three of his children reside with him and will move with him to Pennsylvania. He makes voluntary child support payment to his two oldest children who do not reside with him. He hopes to able to send his oldest child, a seventeen year old son who is now also a father, to college.

After admitting to giving away a significant amount of his monies, Mr. Knight testified that when he gave away the money he was not worried "as long as I was happy, me and my children, that is all I was worrying about", but perhaps having an epiphany, he had now changed his ways stating that "[r]ight now, I am only worried, me and my children." Nonetheless, Mr. Knight testified at times to having savings accounts for his children, and later admitting that he had no accounts in their names and holding [*3]only one bank account with an approximate balance of $15,000.

These parties seek to transfer a portion of his structured settlement payments that Knight is to receive over the next twenty years.

Discussion

Not that long ago, consumers receiving a structured settlement of their tort claims could sell some or all their future payments in exchange for up-front cash, without prior court approval and without being fully apprised about the discount rate used by the purchaser in calculating the exchange.

As a result of concern that structured settlement payees, such as Knight, are especially prone to being victimized, quickly dissipating their awards, and not being fully informed regarding the value of their transfer, in 2002, the New York State legislature enacted the "Structured Settlement Protection Act" ( hereinafter the "Act"), which can be found in General Obligations Law, Article 5, Title 17 ( GOL §§ 5-1701 et seq.).

The intention of the Act is to protect payees from being taken advantage of by businesses seeking to acquire the payees' structured settlement payment rights. The Act discourages such transfers by requiring would-be transferees to commence special proceedings for the purpose of seeking judicial approval of the transfer (GOL §§ 5-1705 and 5-1706)^[FN4]. The Act requires that the transferee must advise the payee "in writing" "to seek independent professional advice regarding the transfer" and the payee must either seek such advice or sign a written waiver of the opportunity to seek independent advice (GOL § 5-1706[c]).

In the instant matter, the petitioner met all of the Act's literal requirements for approval of its petition. Knight even consulted his own accountant regarding the proposed transfer.

Nonetheless, the inquiry does not end merely because Novation and Knight have followed the procedural mandates of the Act. Judicial approval of these proposed sale should not be the equivalent of a rubber stamp. It was the legislature's intention to have the courts examine the various statutory criteria and determine whether the proposed sale would (1) truly serve the best interest of selling payee and (2) whether the transaction is fair and reasonable. Thus, at the center of the Act's protection, is the Court's power to make an independent discretionary determination upon express findings whether or not:

the transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependants; 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. Provided the court makes [*4]the findings as outlined in this subdivision, there is no requirement for the court to find that an applicant is suffering from a hardship to approve the transfer of structured settlement payments under this subdivision; (GOL§ 5-1706[b]).

Is the Transaction Fair and Reasonable

In determining whether the proposed transfer is "fair and reasonable" it is necessary to examine the effective annual discount rate, as well as the fees and charges associated with the proposed transaction.

In the instant matter the proposed transfer is for payments that would total $258,720 over the next twenty (20) years in exchange for $100,000 cash now. The proposed transfer would reduce his monthly settlement payments from $1,978.11 to $900 per month through and including March 19, 2028. According to the submission this equates to a 11.17% discount rate.

The discount rate in the instant matter is lower that any reported case this Court could find, the lowest being 15.46%. See, Matter of Settlement Funding of New York, LLC [Cunningham], 195 Misc 2d 721, 761 N.Y.S.2d 816 (Sup. Ct., Rensselaer County, 2003)^[FN5].

Additionally, there are no fees or charges from Novation associated with the proposed transfer, nor any penalties or damages in the event the proposed transfer is not approved.

Based on the foregoing, this Court finds that the proposed transfer is "fair and reasonable".

Is The Proposed Transfer In The Best Interest Of The Payee

There is, as yet, no reported appellate authority applying the Act and therefore no appellate guidance on what would constitute a finding that the proposed transfer was in Mr. Knight's "best interest".

Lower courts have applied the "best interest" to the specific facts of each case and have paid particular attention to certain factors:

the payee's physical age and level of maturity, and physical and mental capacity; the payee's ability to earn a living and to provide for his or her dependants; the payee's intended use of the proceeds of the transfer; the need for medical or other professional treatment; whether the payee is suffering from a hardship; whether the payee has obtained independent legal and financial advice about the consequences of the transfer, and whether he or she demonstrates an appreciation of them. In re 321 Henderson Receivables Origination, LLC, 2008 WL 2661958, 2 (Sup. Ct., Kings County, 2008), citing, Matter of Symetra Assigned Benefits Serv. Co. [Mc Guire], 13 Misc 3d 1208 [A], 2006 NY Slip Op 51732[U], 2 (Sup. Ct., Suffolk County, 2006); Matter of Settlement Capital Corp. [Yates], 12 Misc 3d 1198[A], 2006 NY Slip Op 51616[U], 6 (Sup. Ct., Kings County, 2006); Matter of Settlement Funding of NY, LLC [Ocasio], 11 Misc 3d 1061[A], 2006 NY Slip Op 50332[U], 1 (Sup. Ct., Bronx County, 2006); Matter [*5]of Rapid Settlements, Ltd. [Phillips], 6 Misc 3d 1030 [A], 2004 NY Slip Op 51844[U], 1 (Sup. Ct., Cortland County, 2004); Matter of Barr v. Hartford Life Ins. Co., 4 Misc 3d 1021[A], 2004 NY Slip Op 50980 [U], 1 (Sup. Ct., Nassau County, 2004); Matter of Settlement Funding of NY, LLC [Platt], 2 Misc 3d 872, 876, 774 N.Y.S.2d 635 (Sup. Ct., Lewis County, 2003); Matter of Settlement Capital Corp. [Ballos], 1 Misc 3d 446, 455 (Sup. Ct., Queens County 2003).

The Act "assume[s] ... that the payee's decision, even if freely entered into, is not always one a reasonable person might make, and the court is in effect asked to protect an individual from himself or herself." Matter of 321 Henderson Receivables LP [De Mallie], 2 Misc 3d 463, 464, 769 N.Y.S.2d 859 (Sup. Ct., Monroe County 2003). Nonetheless, the legislative history of the 2004 amendments to the Act invites a non-paternalistic approach stating that an adult payee "who has not been adjudicated incompetent or incapable of handling his or her own affairs is generally capable of determining what is in their own best interests with regard to their property and affairs". (Assembly Mem in Support of L 2004, ch 480, 2004 McKinney's Session Laws of NY, at 1968).

Additionally, while the 2004 amendments to the Act made clear that no finding of "hardship" was necessary in order to approve the transfer, whether hardship exists does influence the approval. In other words, "[t]he more pressing the need, the more reasonable it may be for a payee to obtain immediate cash at a steep discount." Matter of 321 Henderson Receivables, LP [De Mallie], 2 Misc 3d at 465.

Therefore, while Mr. Knight need not show "hardship", this Court must nonetheless be convinced the proposed transfer is in his best interest while taking into account the welfare and support of Mr. Knights five (5) unemancipated children.

This Court finds this proposed transfer is not in Knight's "best interest" nor in the best interests of his dependents. After reviewing the submission, and in particular hearing from Mr. Knight personally, this Court is convinced that this transfer is neither prudent nor necessary.

Of particular concern to the Court is that Mr. Knight has already dissipated the approximately $1 million net settlement funds that he received in 2006 without making any provision for the future of his five (5) unemancipated children. Mr. Knight gave $600,000 away to various relatives from the net settlement, but set aside nothing for his children ^[FN6].While Mr. Knight's wishes to move his family to Pennsylvania, where he claims their cost of living will be decreased, sell his Orange County home, and upgrade the facilities of his restaurant are all laudable, Mr. Knight was unable to explain where approximately $40,000 of the $100,000 he would receive from this transfer would go. Mr. Knight alluded to his accountant recommending some investments, but could not state with certainty what these investments were, or if these purported investments [*6]would give Mr. Knight a better rate of return than if he just left the remaining $40,000 where it is, in the structured settlement fund.

While Mr. Knight insisted the Orange County home could not be sold without $20,000 in renovations, he could not articulate what the nature of these renovations were or how these renovations were made necessary in the short period of time he has lived in the home with his family.

As a final matter, the Court is not convinced that Mr. Knight fully appreciated the financial terms and consequences of the proposed transfer and was approaching the proposed transfer as a "quick fix" to his current financial situation.

When the Court inquired what Mr. Knight intended to do with the proceeds of the proposed transfer, Mr. Knight alluded to making investments and that his "CPA" was "going to set something up". Yet, when the Court inquired whether Mr. Knight had invested any of his original settlement monies, Mr. Knight stated that he had "put $400,000 into the annuity", referring to structured settlement at issue herein. There is no indication on this record that the amorphous investment Mr. Knight's CPA was recommending would garner a greater return for Mr. Knight that his structured settlement.

Although Mr. Knight might genuinely need to make necessary home repairs, upgrades to his restaurant and pay down his debts, these needs are not so great as to put his financial future in jeopardy. Mr. Knight's financial history since receiving his settlement does not demonstrate an acuity for financial management. Despite the sizeable net settlement sum he received "up front" he still finds himself in debt. The monthly payments from the structured settlement seems to be the only financial security he retains.

Simply stated, the Court finds that it is not in his children's best interest to further dissipate his funds, nor is the Court satisfied that the proposed transfer is in Mr. Knight's best interest.

On account fo the foregoing, the Petition is DENIED.

Dated: Goshen, New York

July 29, 2008

HON. WILLIAM J. GIACOMO, J.S.C.

cc:

Mr. Jamel Knight

41 Main Street

Sparrowbush, New York 12780

MassMutual Life Assignment Company [*7]

421 South 9th Street, Suite 222

Lincoln, Nebraska 68508

Massachusetts Mutual Life Insurance Company

421 South 9th Street, Suit 222

Lincoln, Nebraska 68508