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Enforcing an “anti-assignment” clause in a structured settlement, a federal judge has ruled that an insurer is not obligated to make payments to a company that purchases judgments and that a Washington state court judgment in favor of the judgment purchaser is null and void. In his 22-page opinion in CGU Life Insurance Co. of America v. Metropolitan Mortgage & Securities Co. Inc., U.S. District Judge J. Curtis Joyner ruled that such a non-assignment clause is valid and enforceable where it was required to secure favorable tax treatment for the insurer. “Under Section 130 of the Internal Revenue Code, insurance companies . . . who assume the liability to make periodic payments on account of a personal injury are eligible for favorable tax treatment if certain conditions (one of which is non-assignability of the periodic payments) are satisfied,” Joyner wrote. “In the absence of the favorable tax treatment, however, [the insurer] may have to immediately report as income all of the funds which it received . . . to fund the purchase of the annuity and would not be entitled to deductions until they subsequently made the periodic payments,” Joyner wrote. “Thus, in this case, the potential for increased tax liability is the risk which the anti-assignment clause was designed to protect against. . . . Accordingly, we conclude that a sound and valid reason existed and continues to exist for the anti-assignment clause to be included in the settlement agreement,” Joyner wrote. In the underlying suit, Lester E. Lytle was paid a lump sum of $225,000 and was promised monthly payments of $1,200 that would begin in November 1997 and last until May 2023 — as well as two more lump payments of $5,000 each in October 2001 and October 2009 — for a total payout of more than $600,000. The settlement was between Lytle and the Home Insurance Co., acting on behalf of David P. Eddy and Delaney Moving Inc. But the settlement also said that Home would make a “qualified assignment” of its liability to make the periodic payments to CGU Annuity Service Corp. and that CGU Annuity would have the right to purchase an annuity policy to fund the obligations to make the payments from the CGU Life Insurance Co. Home executed a “Uniform Qualified Assignment” of its liability to make the periodic payments to Lytle to CGU Annuity which then purchased an annuity from CGU Life providing for the payments agreed upon. The annuity documents specified that the owner of the annuity was CGU Annuity Service Corp., the annuitant was Lytle and the beneficiary was his estate. In August 1998, Lytle apparently found himself in need of a large amount of cash sooner than expected and sold his right to receive some of the periodic payments in exchange for a lump-sum payment of $20,000 from Woodbridge Sterling Capital LLC. As part of this transaction, Lytle entered into an agreement with Woodbridge, which subsequently assigned its rights to Metropolitan Mortgage & Securities Co. For some period of time, however, Lytle evidently stopped forwarding to Metropolitan the periodic payments which he had sold, and Metropolitan brought suit against him in the Superior Court of Washington. Lytle never appeared in the state court suit, and in November 1999, judgment was entered against him and in favor of Metropolitan for $4,331. As part of its judgment in that case, the Washington Superior Court ordered that the agreement between Woodbridge and Lytle and the subsequent assignment to Metropolitan were valid and enforceable and that Metropolitan was entitled to collect the $650, payments due and owing to it from Lytle directly from Commercial Union. But CGU’s lawyer, Stephen R. Harris of Stradley Ronon Stevens & Young, filed suit in U.S. District Court in Pennsylvania seeking a declaration that the assignments between Lytle and Woodbridge and between Woodbridge and Metropolitan were void and unenforceable and that the judgment of the Washington state court was null and void. Metropolitan’s lawyer, Jeffrey S. Saltz, argued that the assignment should be upheld because CGU lacked standing to invoke an anti-assignment provision that appears solely in a contract to which it is not a party. Saltz also argued that the anti-assignment clause in the settlement agreement is unenforceable under the Uniform Commercial Code and CGUs’ contention that an assignment could cause them adverse tax consequences is contrary to 3rd Circuit law. Joyner quickly rejected the standing argument. “Pennsylvania has long held that when two or more writings are executed at the same time and involve the same transaction, they should be construed as a whole. If the writings pertain to the same transaction, it does not matter that the parties to each writing are not the same,” Joyner wrote. “This general rule also applies where several agreements are made as part of one transaction even though they are executed at different times,” Joyner wrote. In Lytle’s case, Joyner found, the settlement agreement, the qualified assignment and the annuity “were all made within several weeks of one another and all clearly were made as part of one transaction as none of these documents would have been executed save for the others.” Looking at all three documents and the context in which they were executed, Joyner said, “it appears obvious to this court that the settlement agreement contemplated that Mr. Lytle would receive a structured settlement within the meaning of the Internal Revenue Code and that he understood and agreed that Home Insurance Company would assign its rights under the settlement agreement to CGU Annuity Service Corporation, which, in turn, would purchase an annuity from the CGU Life Insurance Company to fund the payment of his periodic monthly payments.” Joyner also found it was clear that Lytle had no ownership or other rights or interest in the annuity itself other than to the receipt of the payments. “Thus, to the extent that any assignments could be made under the annuity, the only party which could make such an assignment was CGU Annuity Service Corporation, as its owner,” Joyner wrote. As a result, Joyner found that the settlement agreement, the uniform qualified assignment and the annuity “are all valid and enforceable contracts.” The standing argument failed, Joyner said, because “where an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of his rights.” Metropolitan also argued that the anti-assignment provision is unenforceable pursuant to Section 9-318(4) of the Uniform Commercial Code. But CGU argued that Article 9 of the UCC is inapplicable to sales transactions such as the one between Lytle and Woodbridge and the transaction is exempt as a matter of Pennsylvania law which provides that Article 9 does not apply “to a transfer of an interest or claim in or under any policy of insurance, except as provided with respect to proceeds (Section 9306) and priorities in proceeds (Section 9312).” Joyner agreed, saying, “Although annuity contracts differ in important respects from life insurance policies, the Pennsylvania statutes governing insurance place annuity contracts under the authority and jurisdiction of the Insurance Department. Thus, we find that Article 9 of the Uniform Commercial Code does not apply in this case.”

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