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Owen v. CNA Insurance/Continental Casualty Company

330 N.J. Super. 608, 750 A.2d 211 (App. Div. 2000)

ASSIGNMENTS; STRUCTURED SETTLEMENTS—Assignment of a structured tort settlement may be barred by the terms of the agreement.

A settlement agreement resulting from a tort claim provided that “[t]o the extent provided by law, the aforesaid deferred lump sum payments shall not be subject to assignment, transfer, commutation or encumbrance, except as provided herein.” The claimant entered into an agreement with a financing company wherein she would receive a lump-sum payment in return for the financing company’s right to collect the final two payments of the settlement agreement. She gave the financing company power of attorney to accept, sign, and indorse, with her name and on her behalf, all checks made payable to her order and sent it with the agreement to the financing company. She sent the insurance company a notarized letter directing it to send “all future payments and other mail” to an address in New York. The insurance company responded by sending her a copy of the settlement agreement and noting that the deferred lump sum payments were “not subject to assignment ... .” An action was commenced on behalf of the claimant seeking to strike the non-assignment provision of the settlement agreement. In the action, the claimant contended that Article 9 of the UCC made ineffective any prohibition against assignment of an account. Article 9 of the UCC, however, does not apply to “[t]o a transfer in whole or in part of any claim arising out of tort.” Although the lower court held otherwise, the Appellate Division refused to distinguish between proceeds that result from a tort claim and the tort claim itself. Therefore, the Court concluded that Article 9 does not prohibit the non-assignment provision because Article 9 expressly excludes tort claims and the exclusion includes the proceeds of a tort claim. Having reached that conclusion, the Court then addressed whether the non-assignability provision of the settlement agreement was otherwise enforceable under New Jersey law, which generally permits the assignment of settlement proceeds. By statute, all judgments and decrees recovered in New Jersey courts are assignable unless the parties expressly agree otherwise. Further, a prohibition on assignment “may be disregarded where it is not the main purpose of the contract, but is a mere incident to such main purpose.” The insurance company contended that one main purpose of the settlement agreement was to guarantee payment to the claimant or her heirs over time rather than in a lump sum, in light of the claimant’s circumstances. “To ensure a continued income stream at five year intervals, and to protect it from dissipation or attachment by creditors prior to the receipt of each periodic payment, the settlement agreement contained non-assignment language designed to achieve that very result.” According to the Court, “[t]here can be nothing more central to a structured settlement than the structure itself. In its absence, it is just a plain settlement ... .” The Court took particular notice that the non-assignment provision implicated the Internal Revenue Code. If a tort plaintiff receives a lump sum and invests the money, the earnings on the lump sum are taxable. By receiving deferred payments, the claimant enjoys a tax-free gain that, had the claimant invested the money himself or herself, would have been taxable income. Consequently, if rights to periodic payments were freely assignable, transferrable, or able to be accelerated, the claimant could lose the tax-free benefit. Further, the party making the payments could face tax-reporting issues it bargained to avoid. Because, under the settlement agreement, the payments were tax-free to the claimant, the payor did not have to report any portion of the payment as income to the claimant. Absent a restriction on assignment, the payor could have the obligation to report the earnings contained in each future payment. Further, the payment, under the circumstances, might be deemed to be subject to withholding and subject to backup withholding. According to the Court, protecting both the claimant and the payor (the insurance company) from such adverse tax consequences would have been a main purpose of the non-assignment provision of the settlement. Under the Restatement (Second) of Contracts, Section 317(2)a (1981), a contractual right can be assigned unless the substitution of an assignee for the assignor would materially change the duty of the obligor or materially change the burden of risk imposed on the obligor. Giving all of that as its reasoning, the Court remanded the matter to the lower court for further proceedings relating to the materiality and enforceability of the provision governing the non-assignability of the structured statement. It also suggested that, in future cases, the impact of a non-assignability provision should be spread on the record at the time the settlement is entered, and the non-assignability clause should be enforced as written unless the record suggested otherwise.

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