Matter of Stratcap Invs. Inc. v Feola (2009 NY Slip Op 51332(U))

Matter of Stratcap Invs. Inc. v Feola

2009 NY Slip Op 51332(U) [24 Misc 3d 1209(A)]

Decided on June 17, 2009

Supreme Court, Bronx County

Ruiz, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

As corrected in part through July 21, 2009; it will not be published in the printed Official Reports.

Petitioners have brought the instant proceeding for an order pursuant to the Structured Settlement Protection Act ("SSPA") codified under General Obligation Law, Title 17, approving the transfer to Stratcap Investments, Inc. of periodic payments otherwise payable to Elvio Feola.

Pursuant to this Court's prior short form Order dated February 18, 2009, a hearing was scheduled wherein the parties were to provide the Court with the following: Petitioner was to provide the fees and expenses, as well as the discount rate (see, General Obligations Law § 5-1707[b]) of the proposed transfer, copies of the underlying matter which is the predicate for the structure (i.e. Elvio Feola's personal injury case which set up the initial structure), legible copies of the structure itself and the current value of same. Petitioner was also directed to serve a copy of the Order upon any and all interested parties involved in the initial action (i.e. obligor, issuer). Mr. Feola was directed to provide the Court with documentary proof, in admissible form, of his financial circumstances (i.e. current mortgage information, principal balance due, current mortgage, delinquency date, certificate of occupancy, zoning for neighborhood in which the house is located, any and all bills for household expenses, credit card statements, utility bills, Income Tax returns for the past five [5] years; pay stubs, current work status and length of current job placement).

Liberty Assignment Corporation and Liberty Life Assurance Co. of Boston, interested parties to this action, did not submit opposition to the Petition and did not appear for this noticed hearing.

As a backdrop to this proceeding, the subject structured settlement arose as a result of a [*2]personal injury action under Index No. 25082/97. Apart from a summons and complaint wherein it appears that Mr. Feola sustained injuries on November 10, 1996, after his motorcycle hit a pothole on the Sheridan Expressway in the Bronx, the Court has scant factual background with regard to the actual injuries sustained by Mr. Feola. This matter was ultimately settled pursuant to a settlement agreement dated October 14, 2005, in the amount of $795,674.00. It appears from Mr. Feola's 2005 income tax returns that he took an itemized deduction in the amount of $220,935.00 which represented medical bills paid pursuant to this lawsuit. As such, the Court is left with the impression that the respondent's injuries were quite serious, presumably resulting in extensive medical care and treatment.

Further, as per the settlement agreement, an annuity was funded in the amount of $204,206.00, with Mutual Insurance Company on September 27, 2005; the liability to make periodic payments thereafter assigned on October 24, 2005, to petitioner Liberty Life Assurance Company of Boston. The periodic payments were to be paid as follows: "$2,000.00 per month, guaranteed for 120 payments, beginning on 12/03/05 with the last guaranteed payment on 11/03/15." However, there is no information relative to the prevailing interest rate as of the initial funding, nor the ultimate guaranteed total amount of this structure in 2015.

Mr. Feola proposes to sell and transfer his structure as follows: eighty seven (87) monthly payments in the amount of $2,000.00 beginning with the payment due on September 3, 2008 through and including the last payment due on November 3, 2015.

The current purchase price of the annuity is $111,552.00; the aggregate amount of the transfer payments is $174,000.00. The discounted present value based upon a rate of 4.2% is $149,608.30. An annual discount rate of 13.1% was utilized in calculating the sale price of $111,553.00. No fees, costs, penalties, or liquidated damages would be assessed and passed along to Mr. Feola. Conspicuously missing from these submissions, however, was an affidavit from a financial expert explaining the current discount rate ranges predicated upon prevailing market place factors (i.e. credit-worthiness of seller, default risks, carrying costs, etc.) and whether the proposed purchase price in the instant transfer is fair, reasonable, and consistent with the applicable market rate. To be fair, the petitioner did fax (though not part of the initial submission) two additional sample structures, utilizing in one sample the applicable rate of return and the costs of purchasing an annuity to produce a similar amount of structure settlement payments which the transferee seeks to purchase.

Both in his affidavit and in his appearance at the various conference and hearing in Court, Mr. Feola gave three reasons for seeking to sell his structure: 1.) to convert his one family home into a legal two-family income producing property 2.) to pay-off high interest balances on his credit card debt and 3.) to avoid impending foreclosure. Mr. Feola acknowledged that he was advised to seek independent professional advise with regard to the transfer. However, he waived such advice claiming to understand the transaction and the resulting economic consequences. Regrettably this contention, designed no doubt to satisfy the statutory requirements of § 5-1706, is belied by Mr. Feola's financial predicament.

Reasons for Sale1.) Home Conversion: Mr. Feola's home is located in an area of the Bronx, known as the Country Club section. The area is predominantly comprised of single family and some two-family homes, which tend to retain value since they are highly sought after.

The submitted papers include a certificate of occupancy which reflects the zoning district and the house's designation as a one family unit. Also included is a copy of a letter from an architect documenting money received from Mr. Feola and the cost for processing architectural plans presumably, for two-family conversion with the Department of Buildings. Significantly missing from these documents, however, is proof that the zoning district wherein Mr. Feola's house is sited allows for two-family homes.

Assuming arguendo that there is no prohibition to Mr. Feola successfully obtaining a variance, what would the costs be for such a conversion and how much of the $111,553.00 would be used to that end this critical information is not provided.

2.) Credit Card Debt: As of the submission date, Mr. Feola and his wife (who is marginally employed) had between 13 (thirteen) and 16 (sixteen) active credit cards.

The total amount of such debt running between $96,952.00 and $101,875.55. The monthly minimum amount due on the smallest balance is $24.00 and $621.00 on the largest balance. The corresponding annual percentage rates run from 4.9% on only one card, but primarily range from 15.99% to a staggering 29.49%. The monthly household expenses are approximately $7,151.74. That amount when added to his minimal credit card payments, increases to approximately $9,842.87 per month.

3.) Impending Foreclosure: As of the hearing date, Mr. Feola had been delinquent in his mortgage payments since September 1, 2008. His monthly mortgage is in the amount of $4,407.80. His total delinquency, including late charges, is approximately $35,960.00.

In addition to providing the Court with some bills for his monthly expenses, Mr. Feola also provided the Court with copies of recent employment pay stubs, mortgage delinquency notices from his mortgage servicing company (including critical information regarding financial hardship assistance options and foreclosure relief and retention programs) and copies of his state and federal income tax returns.

In an effort to protect recipients of personal injury structured settlements (which were designed to provide future tax-free funds for medical care, education, housing, etc.) from the abuses of finance companies which purchase the future payments in exchange for sharply discounted advances, the New York State Legislature enacted Title 17 of the General Obligations Law ("GOL"), in 2002. Therefore, notwithstanding that the parties to this agreement have both signed on the proverbial dotted line, this Court must ascertain the propriety of this transfer within the framework of the SSPA.

Initially, the Court must consider whether the instant Petition comports with all of the procedural requirements set forth in the SSPA, which reads in pertinent part as follows:

(a) the transfer complies with the requirements of this title;

(b) 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 the findings as outlined in this subdivision, there is no requirement for the court to find that an applicant is suffering from a hardhsip to approve the transfer of structured settlement payments under this subdivision;

(c) the payee has been advised in writing by the transferee to seek independent professional [*4]advice regarding the transfer and has either received such advice or knowingly waived such advice in writing;

(d) the transfer does not contravene any applicable statute or the order of any court or other government authority; and

(e) is written in plain language and in compliance with section 5-702 of this article. (see, GOL § 5-1706).

Although the initial legislative intent of the SSPA was to curtail the practice of selling or transferring periodic payments to third parties and limiting same to true hardship cases (see, Matter of Settlement Funding of NY [Asproules], 1 Misc 3d 910(A), [Supreme Court Ontario County, 2003]) that was amended in 2004. Currently, there is no need for the Court to make an initial finding that the payee is suffering a true hardship, if it finds that the transfer otherwise comports with the requirements of the SSPA (see, Matter of 321 Henderson Receivables, L.P. [Lemanski], 13 Misc 3d 526, 530 [Supreme Court, Erie County, 2006]).

A perusal of the submissions reveals that the petitioner properly served all interested parties within the statutory period. Also annexed were: a copy of the transfer agreement which was written in plain language, a disclosure statement, Mr. Feola's affidavit declining to seek independent professional advice and a copy of Stephanie Feola's spousal consent to the transfer. Apart from Mrs. Feola, who appears to be a homemaker, Mr. Feola has no other dependents. Accordingly, this petition is procedurally sound.

As the true hardship criteria is no longer critical in the evaluation of the proposed transfer the next and most important consideration is assessing whether the proposed transfer "would be consistent with the letter and spirit of SSPA" is an critique of the transfer with respect to the best interest of the payee. (see, Matter of Settlement Capital Corp. [Ballos],1 Misc 3d. 446, 448 [Supreme Court, Queens County, 2003]). Therefore, before the Court can approve an otherwise procedurally conforming transfer application, the Court must determine that:

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 amount and the fees and expenses used to determine the net advance amount, are

fair and reasonable.

(see, GOL § 5-1706[b]).

Turning first to the "fair and reasonable" analysis of this transfer: Petitioner annexed the settlement agreement and release, dated October 14, 2005, which reflected the settlement amount of $795,674.00, along with documents reflecting the funding of the subject structure in the amount of $204,206.00 by the respondents. However, since there was no opposition from respondents there is no price quote readily available with regard to the original annuity.

Instead, the petitioner faxed price quotes from two annuity issuers reflecting the cost for purchasing a comparable annuity in the aggregate amount sought to be transferred herein. Those quotes are as follows:

The quote form New York Life Ins. Co. does not list a rate of return and so no projections are set forth with regard to the expected/guaranteed payments. American General lists the rate of return as 4.23% with projected guaranteed payments in the amount of $174,000.00. [*5]

As noted, the disclosure statement sets out that no assessments will be made for costs, fees, or commissions. Therefore, the gross and net amount of $111,553.00 was calculated utilizing 13.1% as the annual discount rate.

However, conspicuously absent from petitioner's submission is an affirmation from a financial consultant setting forth that the subject transfer is fair and reasonable. Significant in this regard would be an analysis of the factors considered by such an expert in arriving at the selected discount rate. For instance: whether the discount rate is within the range of reasonableness as compared to the prevailing marketplace (see, Lemanski, supra, at 533); whether petitioner considered Mr. Feola's credit worthiness. This factor alone may have great bearing on the discount rate since ultimately the purchaser assumes the risk that the seller will not "make good" on any misrepresentations made in the subject agreement (see Matter of Settlement Funding of NY LLC v. Sollivan, 8 Misc 3d 1006(A), [Supreme Court, Kings County, 2005]). Given Mr. Feola's penchant for gambling, his potential foreclosure, and his averment that he understands the transaction absent independent financial advice, such an omission is glaring.

In the absence of such evidence, this Court is unable to make the required statutory finding (see, Matter of Settlement Capital Corp. [Rights of "Y"], 194 Misc 2d 711, [Supreme Court, Rensselaer County, 2003]; Matter of Settlement Funding of NY [Cunningham], 195 Misc 2d 721, [Supreme Court, Rensselaer County, 2003]).

Turning next to the "best interest" analysis of this transfer: While the SSPA does not set forth a definition of best interest, developing case law and the expressed intent of the statute suggest a case-by-case evaluation by the Court of the following factors:

(1) the payees age, mental capacity, maturity level, independent income and ability to support dependents;

(2) purpose of the intended use of the funds;

(3) potential need for future medical treatment;

(4) the financial acumen of the Payee;

(5) the ability of the Payee to appreciate financial consequences based upon independent legal and financial advise; and

(6) the timing of the application.

(see, Matter of Symetra Assigned Benefits Serv. Co. [Mc Guire], 13 Misc 3d 1208(A), [Supreme Court, Suffolk County, 2006]; Matter of Settlement Capital Corp. [Yates], 12 Misc 3d 1198(A), [Supreme Court, Kings County, 2006]; Matter of Settlement Funding of NY, LLC [Ocasio], 11 Misc 3d 1061(A), [Supreme Court, Bronx County, 2006]; Matter of Rapid Settlements, Ltd. [Phillips], 6 Misc 3d 1030(A), [Supreme Court, Cortland County, 2004]; Matter of Barr v. Hartford Life Ins. Co., 4 Misc 3d 1021(A), [Supreme Court, Nassau County, 2004]; Matter of Settlement Funding of NY, LLC [Platt], 2 Misc 3d 872, 876 [Supreme Court, Lewis County, 2003]; Ballos, supra, at 455).

As noted, following the SSPA's 2004 amendment, the requirement that the payee demonstrate hardship or dire straits was eliminated. Indeed, the legislative history reads as follows:

An adult 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 property and affairs, including their structured settlement payment rights, without having to demonstrate or prove hardship,' provided the consumer has been afforded the admonitions to [*6]consult with counsel, the rights of cancellation, and the disclosures required by the 2002 Act. (Assembly Mem in Support of L

2004, ch 480, 2004 McKinney's Session Laws of NY, at 1968).(see, Lemanski, supra, at 528-29).

Mr. Feola is a 58 year old married man who avers that he has no dependents or minor children. He is a unionized plumber who was temporarily unemployed at the time of the commencement of this petition. Since November 2008, he has resumed work as a salaried plumber earning approximately $48.00 per hour straight-time and $96.00 per hour for over-time work. A review of his payroll records reveals that he earned $28,932.90 between mid November 2008 and December 31, 2008. The payroll records for the pay period 2/26/09 to 3/04/09 reflect earnings of approximately $14,755.00, as the year-to-date amount. Extrapolating the year-to-date amount, it is expected that Mr. Feola will receive approximately $153,452.00 by year's end, considering a minimum amount of over-time. While at first blush this appears to bode well for the grant of the instant petition, delving deeper into the various other factors to be considered by this Court, appearances can be deceiving.

Income tax returns proffered by Mr. Feola (2003-2007) denote a married, filing separately status. Mrs. Feola's earnings average less than $2,000.00 per year. So that, Mr. Feola's representation that he has no dependants is belied by his spouse's minimal earnings. His returns for the years 2003 and 2004 are of no moment, however, those subsequent filings for 2005, 2006 and 2007, do cause the Court great concern. They set forth the following financials:

These tax returns are extremely troubling to the Court for several reasons. In the first instance, Mr. Feola has demonstrated a propensity to engage in high stakes gambling. In the parlance of the gambling world, he plays large. While it is one thing to set a limit with a view towards winning back what you have gambled, or preferably, only gambling over and above the break even point. These income tax returns reveal that Mr. Feola has yet to learn:

This failure of judgement with regard to the financial consequences of his actions leads the Court to the conclusion that Mr. Feola's gambling propensity has become an addiction. There is no other explanation which would excuse his failure to make his mortgage payments. Even if Mr. Feola was employed part-time as a plumber in 2007, he certainly had the opportunity to first pay off his mortgage and other living expenses with his gambling winnings, before running the risk of gambling losses.

Moreover, the successive income tax returns were prepared by the same certified public accountant whom the Court must presume advised Mr. Feola of the tax consequences of his filings. No doubt he was advised that the IRS would consider it reasonable to expect losses from gambling for three successive years and thereafter, if no profits were realized in his capacity as a "professional gambler", the presumption that his gambling was a hobby would then take effect and the IRS could then review successive returns and tax his gambling losses.

Given that 2007 marks the first indication in his tax returns that he considers himself a professional gambler for tax purposes, then the Court assumes (since it does not have the 2008 returns) that Mr. Feola will continue his gambling pattern of losing as much as two million [*8]dollars per year, until the end of 2009.

1.) Home conversion: As set forth above, there is no documentary proof nor admissible evidence before the Court to suggest that this is a viable option for Mr. Feola.

2.) Credit Card Debt: Had Mr. Feola sought professional financial advice with regard to the soundness of this transaction no doubt he would have been informed of other options to reduce his credit card debt. His predicament is also shared by tens of thousands of other Americans who were lured by "come-ons" from credit card companies. In many instances pre-approved credit cards with "teaser rates" were mailed to consumers in the hopes that less credit-savvy consumers would retain them. Most consumers never read the very"fine print" which reflected the true interest rate following the expiration of the "come-on" period. If he is so inclined Mr. Feola is encouraged to seek financial counseling from Bronx Legal Services located at 329 East 149th street, Bronx, NY 10451, (718) 233-1384, (see also, New York State Division of Housing and Community Renewal web site, http://nysdhcr.gov/programs/foreclosure prevention/counselinglisting.htm, for a list of financial counselors) or any other financial counselors who provide these services either "pro bono", free of charge or on a sliding scale. Otherwise, Mr. Feola has failed to demonstrate to the Court, what if any steps he has taken to remedy this predicament.

3.) Risk of Foreclosure: In support of this fear, Mr. Feola includes several notices from his mortgage servicer, including a delinquency letter and more important for the Courts edification, details with regard to foreclosure prevention and homeowner retention programs. As of the date of the instant application, Mr. Feola was not in foreclosure but merely delinquent.

Notwithstanding that Mr. Feola is significantly delinquent in his mortgage payments he has a Federal Housing Administration ("FHA") backed loan, which is insured by the U.S. Department of Housing and Urban Development ("HUD"). In response to the mortgage foreclosure crisis, 2008 ushered in federal and state foreclosure prevention programs. In an effort to stave off the rippling economic effects of vast numbers of foreclosures, both HUD and the FHA have instituted incentives for lenders who offer "work-out" plans to borrowers at risk of foreclosure and financial penalties for those who fail to offer assistance. Since the FHA owns 100% of the risk of loss for the mortgages it insures, it requires its loan servicers to engage in loss mitigation (see, "Homeowner Affordability and Stability Plan, 2009" at ;also see, Department of Housing and Urban Renewal, "Servicing and Loss Mitigation Frequently Asked Questions," at ).

Since Mr. Feola was temporarily unemployed and continues to demonstrate an income stream, both in the form of a salaried paycheck and the subject annuity, he qualifies for a variety of foreclosure retention options. Such as: special forbearance, streamline refinance, loan modification, or even a partial claim where HUD would pay up to 12 months of arrears and take a junior lien on the home in the amount of the partial claim. These are all avenues to be explored by Mr. Feola without actually experiencing foreclosure.

Considering the "totality of the circumstances" (see, Lemanski, supra, at 531), and the previously enumerated factors which the Court should take into account in its best interest analysis of the proposed transfer, at least four of the six factors raise red flags against a sale.

1. Purpose of the intended use of the funds - as noted, there is no evidence with regard to a [*9]variance for the proposed two-family conversion nor any documentary proof of the likely costs for same. As already set forth, Mr. Feola is an ideal candidate for loss mitigation of his mortgage.

2. Potential need for future medical treatment - since no evidence has been submitted with regard to the gravity of his injuries sustained in 1996 the court hesitates to allow the use of funds which the payee may very well later need to pay for future medical care.

3. The financial acumen of the payee - Mr. Feola, the self-proclaimed professional gambler, has demonstrated a failure of judgement with regard to the priority of his financial responsibilities.

4. The ability to appreciate the financial consequences of this sale - clearly he chose not to obtain any independent legal or financial advise on such an important matter. It is precisely because he fails to appreciate his financial predicament that he now makes the within application.

(see, Structured Asset Funding, LLC v. Taylor, 14 Misc 3d 1230(A), [Supreme Court, Bronx County, 2007]).

Although it has been found that hardship, "weighs heavily in favor of determining that a transfer of structured settlement rights is in the best interest of the payee" (see, Yates, supra). Nonetheless, not all professed claims of desperate financial circumstances result in the approval of transfers. Petitions have been dismissed where there was no unforeseeable need for housing or showing that the payee was incapable of self-support (see, Matter of 321 Henderson Receivables, International Partnership [DeMallie], 2 Misc 3d 463, 467 [2003]). Nor was the Petition of a disabled payee who lived at home with his mother, seeking to sell his structure to pay off debts, buy a used car and get a job, sufficient proof of desperate circumstances justifying approval of the transaction (see, Asproules, supra). Similarly, payees who intended to improve their financial circumstances by: selling their structures to take advantage of low mortgage rates, reduce credit card debts, or even purchase a truck for professional use, were denied their petitions upon their failure to explore or exhaust other options for resolving their financial constraints (emphasis supplied) (see, Barr, supra; Phillips, supra; Matter of 321 Henderson Receivables v. D'Amore, 9 Misc 3d 1110(A), [Supreme Court, Kings County, 2005]). These courts found that allowing such sales would have promoted future financial hardship, which ultimately was not in the "best interest" of any of the payees.

Additionally the Court in Demallie noted that the payment structure "was presumed to be the best compensation for the payee's injuries at the time of the . . . settlement. To overcome this presumptive validity . . . there must be a showing, by clear and convincing evidence, of an unforeseeable change in circumstances that would justify the sale of rights to future payments" (see, DeMallie, supra, at 468).

Indeed, as reflected in the Legislative Memorandum in Support of Laws of 2002 (ch 537) the SSPA was promulgated because:

Structured settlements are well-recognized means of compensating personal injury victims and workers' compensation claimants. They are negotiated between the injured person s counsel and the other parties to a personal injury action or workers' compensation claim. The structuring of a settlement enables the settlement recipient to receive secure tax-free income over a course of years or a lifetime to provide for future medical care, housing, education, etc. In this way, the proceeds from an award are not dissipated or lost by individuals unaccustomed to managing large

sums.

(see, 2002 McKinney's Session Laws of NY, at 2035, 2036). [*10]

As such, this Court is not taking a paternalistic approach to this application, but rather, it is strictly guided by the intent of the legislature when it enacted this law.

Even if the court were to find, which is does not, that the instant discount rate were in compliance with the statutory mandate "the fair and reasonable test should not be governed solely by whether the amount offered is within the range of the marketplace, but also weighed against whether the transaction is in the best interest of the payee." (see, Lemanski, supra, at 534). Moreover, the payee's willingness to pay the subject discount rate, is of little significance in the Court's assessment of the fairness or reasonableness of said rate. (see, Ballos, supra, at 458).

Further is cannot be said that the petitioner has demonstrated any compelling reasons warranting this Court's approval of this proposed transfer. Such approval would not comport with this Court's mandate "to protect recipients of structured settlement awards from aggressive factoring companies who promise instant cash to the detriment of the long-term security that structures often provide," (see, Matter of Taliercio v. Aetna Casualty & Surety Co., NYLJ 2/20/04 p. 21 col. 3).

Accordingly, the Court finds that the petitioner has failed to meet its burden of establishing that the within transfer is in the best interest of Mr. Feola and that the terms are fair and reasonable. Petitioner is free to renew if, and when, Mr. Feola has demonstrated that he has sought financial assistance with regard to his credit card debt and engaged in loss mitigation through HUD/FHA approved foreclosure counselors and has found such options to be of no avail in the resolution of his current circumstances. The instant petition is denied.

DATED: June 17, 2009