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March 16, 2017

Oregon Court of Appeals Enforces Anti-Assignment Language

By Michael J. Miller, Stephen R. Harris and Christopher F. Petillo

The Court of Appeals of Oregon has overturned a trial court’s approval of a structured settlement petition over the objections of the annuity issuer and owner, Metropolitan Life Insurance Company and MetLife Tower Resources Group, Inc. See Johnson v. J.G. Wentworth Originations, LLC, Case No. A156843, -- P.3d --, 2017 WL 767659, 2017 Ore. App. Lexis 280 (Or. Ct. App. Mar. 1, 2017). The decision is significant because, although there are numerous decisions that stand for the proposition that anti-assignment language is valid, there have been fewer such cases lately. A decision such as this, from an appellate court and which applies California law where previously there was uncertainty, is helpful to annuity owners and issuers seeking to maintain their rights. The following outlines the relevant facts and the analysis of the court.

Relevant Facts

In 2006, Marshall Johnson, then a minor, suffered injuries in a car accident and suit was filed on his behalf against the tortfeasor. Mr. Johnson (through his guardian ad litem) resolved the case by entering into a structured settlement agreement (SSA) with State Farm, the liability insurer of the tortfeasor. The SSA provided Mr. Johnson with certain future payments (the “Periodic Payments”). The SSA also contained a forum selection clause, stating it would be “construed and interpreted in accordance with the laws of the State of California.” Finally, the SSA contained an anti-assignment clause that provided, in pertinent part, that Mr. Johnson did not “have the power to sell, mortgage, encumber, or anticipate the Periodic Payments, or any part thereof, by assignment or otherwise.”

As permitted by the SSA, and pursuant to a qualified assignment (the “Qualified Assignment”) under Section 130 of the Internal Revenue Code, State Farm assigned to MetLife Tower the obligation to make the Periodic Payments. The Qualified Assignment, like the SSA, contained an anti-assignment provision preventing Mr. Johnson from transferring his right to receive the Periodic Payments. Notably, the Qualified Assignment permitted a transfer with advance approval of a court, pursuant to Internal Revenue Code Section 5891(b)(2), as long as the transfer “otherwise complie[d] with applicable state law.”

The Trial Court Grants Mr. Johnson’s Petition

In 2013, as an adult resident of Oregon, Mr. Johnson sought to transfer certain of the Periodic Payments to J.G. Wentworth, a factoring company, in exchange for a discounted lump sum payment. Wentworth filed a petition in the Multnomah County Circuit Court to obtain court approval pursuant to Oregon’s Structured Settlement Protection Act and in accordance with the Qualified Assignment. See generally, ORS § 33.850 et seq. (the “Oregon Act”).

As an interested party under the Oregon Act, MetLife filed objections to the transfer on multiple grounds, including split payment and anti-assignment. On April 4, 2014, the trial court held a hearing on the petition and approved the transfer. MetLife appealed.

The Oregon Court of Appeals Reverses the Trial Court

Although MetLife made several objections to the transfer, the analysis of the Oregon Court of Appeals focused exclusively on the right of MetLife to enforce the anti-assignment language in the SSA and the Qualified Assignment.

Preliminarily, the court noted that California law applied pursuant to the forum selection clause in the SSA. The court acknowledged that California law disfavored restrictions on the free transfer of property, but also noted that “a clear prohibition against assignment of money due under a contract will be enforced, if not waived by the obligor.”

As applied to the anti-assignment language in the SSA, the court recognized that an intermediate appellate court in California had previously held that a contractual anti-assignment clause will not bar court-approved transfers of structured settlement rights. See 321 Henderson Receivables Origination LLC v. Sioteco, 173 Cal App 4th 1059, 93 Cal Rptr 3d 321 (2009). The court distinguished Sioteco, however, because the settlement obligor in that case had elected not to enforce the anti-assignment language. Here, because MetLife did seek to enforce the anti-assignment language in the SSA and in the Qualified Assignment, the court concluded “that [MetLife] was entitled to enforce the anti-assignment clause in the structured settlement agreement, barring the transfer.”

The court rejected Wentworth’s counter arguments. First, Wentworth argued that the Qualified Assignment permits a transfer of payments approved by a “qualified order.” Wentworth contended this language demonstrated that the parties contemplated a potential transfer and that, if approved by a “qualified order,” the transfer would nullify the anti-assignment language in the SSA and Qualified Assignment.

The court disagreed because Wentworth’s interpretation did not give meaning to all of the provisions in the relevant contracts under standard principles of contractual construction. In support, the court noted that the SSA prohibited a transfer of the beneficiary’s interest in future payments, “thereby creating an anti-assignment right belonging to the obligor.” Under the Qualified Assignment, MetLife became the obligor under the SSA and, as obligor, MetLife gained the right to enforce the anti-assignment provision in the SSA. Finally, although the court acknowledged that the Qualified Assignment “describe[d] the only set of conditions under which a transfer of the beneficiary’s interest may occur,” it recognized that such conditions were only relevant if MetLife chose not to enforce the anti-assignment clause. Indeed, the court noted that Wentworth’s construction would defy well-understood principles of contract interpretation by “read[ing] the anti-assignment clause out of the settlement agreement….”

The court summarily rejected Wentworth’s second argument that MetLife violated the implied covenant of good faith and fair dealing by objecting to the transfer given that the Qualified Assignment permitted a transfer if done pursuant to a qualified order. The court recognized that the “duty of good faith and fair dealing does not require a party to take action that is inconsistent with the express terms of a contract,” especially given that it found that MetLife could rely on the anti-assignment language to preclude the transfer.

* * * *

This decision is significant because it serves as a reminder, at the appellate level no less, that anti-assignment language is valid and that Structured Settlement Protection Acts require the application of that language at the discretion of annuity owners and issuers. Additionally, because the court applied California law, it squarely addressed the Sioteco opinion, which some factoring companies have argued stood for the proposition that anti-assignment language may not be enforceable if the factoring transaction is approved by a qualified order—an argument the Oregon Court of Appeals specifically rejected. Simply put, Johnson is a new must-cite decision if you seek to challenge a factoring petition on anti-assignment grounds.

To view the court's opinion, click here. If you would like to discuss any of these issues or matters in greater detail, please reach out to your Drinker Biddle contact.

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