New federal law protects sellers of structured settlement payments.

Plaintiffs who obtain satisfactory settlements of their legal claims--often after long and arduous negotiations--by agreeing to accept payments over a period of time have won another protracted battle involving these so-called structured settlements.

This time, victory came on the federal legislative front. President George W. Bush recently signed a law that sets forth rules allowing plaintiffs and other parties to safely sell their right to receive a stream of future settlement payments in exchange for a lump sum.

Under the new law, similar to those in many states, any party seeking to purchase a structured settlement's payment stream must first obtain approval from a state court that has determined the transaction is in the best interests of the person who wants to sell. The court must also consider the welfare of the seller's dependents. Transactions that are not court approved are subject to a hefty federal tax: 40 percent of the difference between the total amount of the payments and the lump sum paid for them.

Passed as part of a larger tax relief package for victims of the September 11 terrorist attacks, the legislation was supported by strange bedfellows: trial lawyers, consumer and disability-rights organizations, insurance companies, and the businesses--called factoring companies--that buy structured settlements.

"Nobody was strongly opposed to it," said Terry Taylor, president-elect of the Washington, D.C.-based National Structured Settlements Trade Association (NSSTA). The group represents individuals (including plaintiff attorneys) and groups (including insurance companies) that negotiate or otherwise facilitate structured settlement transactions.

"It was a unique situation to walk into a legislative office and see someone from the defense bar, trial lawyers, and insurance companies all on the same side of an issue," Taylor said.

This wasn't always the case. In the mid- to late 1990s, many trial lawyers and consumer groups criticized the burgeoning settlement-purchase industry, claiming that factoring companies preyed on financially unsophisticated injury victims by persuading them to exchange their right to future settlement payments for a lump sum, often only 50 percent to 80 percent of the payments' present value.

For their part, the factoring companies opposed limits on the transactions, arguing that injury victims whose financial circumstances may have changed after a settlement was negotiated should not be prevented or discouraged from making a deal that would better serve their current needs. (Selling Structured Settlements: Boon or Boondoggle for Injury Victims? TRIAL, July 1999, at 12.)

In the past five years, 30 states have passed consumer protection legislation similar to the new federal law. The factoring companies fought hard against passage of the state laws but ultimately joined the coalition at the federal level, Taylor said. The federal law "was something that was necessary, and all sides of the equation eventually recognized this."

The new law, which took effect in February, will effectively prevent settlement purchases that do not meet the best-interest standard by making them too costly for the buyers. And the cost, or discount rate, to the sellers will probably drop. "I think the rates will change because judges simply aren't going to be approving [the transactions] if the rates remain the same," Taylor said.

The federal law also clarifies the tax consequences of these transactions. Payments made to compensate personal injury losses are tax free, but experts disagreed over whether this would change if the right to receive those payments were sold to a third party.

The law makes clear that the seller will pay no tax on the lump sum, and the buyer will pay no tax on the payments it receives under the original agreement.

Taylor said his organization will continue to push for protective laws in the remaining states and the District of Columbia. A statement issued by NSSTA after the federal law was signed said the push is needed "to establish good public policy as well as to make settlement-buying companies adhere to states' sometimes stricter financial disclosure requirements."