Symetra Life Insurance v. Rapid Settlements, Ltd. (657 F. Supp. 2d 795, 2009)

MEMORANDUM AND ORDER

LEE H. ROSENTHAL, District Judge.

This case arises from the secondary market in structured settlement payment rights. The National Association of Settlement Purchasers (“NASP”) intervened in the suit that Symetra Life Insurance Co. and Symetra Assigned Benefits Service Co. (together, “Symetra”) brought against Rapid Settlements, Ltd. In that suit, Symetra sought a preliminary and permanent injunction preventing Rapid Settlements from using arbitration to circumvent the requirements of the state structured settlement protection statutes. On January 10, 2007, 2007 WL 114497, this court preliminarily enjoined Rapid Settlements “from using arbitration to resolve disputes between it and any Symetra annuitant, if that arbitration, directly or indirectly, effects a transfer of all or part of the annuitant’s future-payment stream, unless a state court has approved the transfer as required under the applicable state structured settlement protection act.” (Docket Entry No. 84). This injunction was made permanent on March 31, 2008, 599 F.Supp.2d 809. (Docket Entry No. 240).

NASP also applied for an injunction against Rapid Settlements. NASP sought to enjoin Rapid Settlements from “(1) circumventing state law by effectuating a transfer of structured settlement payment rights through arbitration rather than complying with state transfer statutes, (2) attempting to enforce alleged rights of first refusal and/or security interests in an annuitant’s structured settlement payment rights without first expressly seeking and receiving court approval under an applicable state transfer statute, and (3) attempting to enforce such unlawfully procured rights of first refusal, security interests and arbitration awards against individual NASP members.” (Docket Entry No. 206 at 2-3). Rapid Settlements responded, (Docket Entry No. 228), and NASP replied, (Docket Entry No. 239). This court held a four-day evidentiary hearing on NASP’s injunction application. (Docket Entry Nos. 235, 236, 237, 238). While this case was under advisement, the Fifth Circuit Court of Appeals affirmed the injunction issued against Rapid Settlements’s use of arbitration to circumvent the requirements of the state structured settlement protection acts.

Based on the motions and replies, the record, the parties’ submissions, and the applicable law, NASP’s application for a permanent injunction is granted. The reasons for this ruling are explained in detail in the findings of fact and conclusions of law set out below. A permanent injunction order is separately entered.

I. Background

A The Secondary Market in Structured Settlements

In the secondary market in structured settlements, tort claimants who have settled their claims by entering into structured settlements paid through an annuity transfer some or all of their future-payment rights to a “factoring company” in exchange for a discounted lump sum paid in the present. The legislatures of forty-six states, including Texas, have enacted similar versions of a model statute to regulate these secondary-market transactions. These paternalistic statutes, frequently referred to as “structured settlement protection acts” (“SSPAs”), typically require the factoring company to disclose fully the effects of the proposed transfer and require a state-court judge to decide whether to approve the transfer as in the best interests of the annuitant. The purpose of the SSPAs is to protect annuitants from overreaching by factoring companies and to ensure that the decision to give up future-payment streams in exchange for a present discounted lump-sum payment is informed and voluntary.

The state SSPAs typically require a hearing and court approval of any “direct or indirect transfer of structured settlement payment rights” before the proposed transfer of such rights has any legal effect. See, e.g., Tex. Civ. Prac. & Rem.Code § 141.004. “Structured settlement payment rights” are often defined as “rights to receive periodic payments under a structured settlement.” Id. § 141.002(16). “Transfer” is defined as:

any sale, assignment, pledge, hypothecation, or other alienation or encumbrance of structured settlement payment rights made by a payee for consideration, except that the term does not include the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution, in the absence of any action to redirect the structured settlement payments to the insured depository institution, or its agent or successor in interest, or to enforce the blanket security interest against the structured settlement payment rights.

Id. § 141.002(18).

The SSPAs typically require that the party seeking approval of the transfer serve a written disclosure on the annuitant. See, e.g., Tex. Crv. Prac. & Rem.Code § 141.003. A copy of this disclosure statement must be filed with the court at least twenty days before the scheduled hearing to confirm the transfer agreement, along with a copy of the transferee’s application, a copy of the transfer agreement, and a listing of each of the payee’s dependents and their ages. Id. § 141.006(b).

A court order approving a transfer under an SSPA typically must make “express findings” that:

(1) the transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents;

(2) the payee has been advised in writing by the transferee to seek independent professional advice regarding the transfer and has either received the advice or knowingly waived the advice in writing; and

(3) the transfer does not contravene any applicable statute or an order of any court or other governmental authority.

See, e.g., id. § 141.004. The purpose of the “best interest” finding is to make sure that the annuitant does not give up the right to the future-income stream in exchange for a much smaller present payment without good reason. See Settlement Capital Corp. v. BHG Structured Settlements, Inc., 319 F.Supp.2d 729, 734 (N.D.Tex.2004). “This maintains the purpose and reason for the structured settlement while at the same time allowing for changed circumstances that may warrant exchanging future income for current income.” Id.

In 2002, Congress enacted federal legislation directed at reinforcing the state SSPAs. Under this legislation, the Internal Revenue Code imposes a forty percent federal excise tax on any party that acquires payment rights in a “structured settlement factoring transaction” that does not receive court approval required by an applicable statute. 26 U.S.C. § 5891(a). The statute exempts from the federal excise tax transactions that are approved in advance by a “qualified order.” 26 U.S.C. § 5891(b). A “qualified order” is defined as:

a final order, judgment, or decree which (A) finds that the transfer ... (I) does not contravene any Federal or State statute or the order of any court or responsible administrative authority, and (ii) is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents, and (B) is issued (I) under the authority of an applicable State statute by an applicable State court, or (ii) by the responsible administrative authority (if any) which has exclusive jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.

26 U.S.C. § 5891(b)(2). The Internal Revenue Code exemption requirements dovetail with and implement the two primary requirements for an effective transfer under the state SSPAs: to avoid the excise tax, the proposed transfer must affirmatively be approved by a state court under the applicable state structured settlement protection statute.

The SSPAs do not apply to contracts transferring structured settlement future-payment rights that were entered before these laws were enacted. See, e.g., Tex. Crv. Prac. & Rem.Code § 141.007(e) (“Nothing contained in this chapter may be construed to ... imply that any transfer under a transfer agreement entered into before the effective date of this chapter is valid or invalid.”). The federal excise tax does not apply retroactively. Only transfer agreements entered after the effective dates of the SSPAs and federal excise tax are subject to this legislation.

B. The Parties

NASP is a Virginia nonprofit trade association of factoring companies engaged in secondary market transactions. NASP was organized around 1999, when federal and state lawmakers were considering proposals that would regulate or eliminate the structured settlement secondary market industry. NASP participated in extensive research and advocacy efforts at the federal and state levels that were critical to the passage of the SSPAs and the federal excise tax legislation. According to NASP, the legislative balance that it worked to achieve provides protections to annuitants while allowing the structured settlement secondary market industry to continue. (Docket Entry No. 235 at 28-40). NASP has a Code of Ethics that it imposes on its members as a condition of membership. The Code of Ethics requires adherence to the SSPAs and to federal law. It provides:

A) Members shall follow and adhere to all state and federal statutory law applicable to the transfer of structured settlement payments;

B) Members shall not purchase structured settlement payments unless the transaction has been approved in advance by a court or administrative agency;

C) Members shall not knowingly purchase worker’s compensation payments or broker such transactions to a nonmember.

(NASP Binder, Ex. 2; Docket Entry No. 235 at 61-63). There are about two dozen companies in the factoring industry, approximately fifteen of which are NASP members. (Docket Entry No. 238 at 95-96).

Rapid Settlements is a factoring company formed in 2003. (Docket Entry No. 237 at 11-12). Rapid Settlements is not a NASP member. Its business practices led NASP to ask Rapid Settlements not to apply for membership. (Id. at 33-34).

II. The Evidence as to Rapid Settlements’s Practices

At the injunction hearing, NASP presented three witnesses: Robin Shapiro, the president of NASP and CEO of Novation Capital Corp.; David Reape, an executive vice-president of NASP-member J.G. Wentworth, LLC, and of two of the company’s subsidiaries, J.G. Wentworth Subsidiaries and 321 Henderson Receivables (also a NASP member); and Gregory Hall, the sales manager for First Providen, a factoring company and NASP member. Rapid Settlements presented one witness, its president, CEO, and one of its lawyer, Stewart Feldman.

The four-day evidentiary hearing on NASP’s injunction application was in addition to a two-day evidentiary hearing on Symetra’s permanent injunction application, which addressed many of the same issues. Both Symetra and NASP sought to enjoin Rapid Settlements from using arbitration to effectuate transfers of future-payment streams without obtaining court approval under the SSPAs. At the Symetra injunction hearing, the parties presented witnesses and submitted documents relating to annuitants against whom Rapid Settlements had used arbitration to effectuate transfers. At the four-day NASP injunction hearing, the parties agreed that the evidence presented in the Symetra hearing about Rapid Settlements’s use of arbitration to effect transfers of future-payment streams from Symetra annuitants could be used in deciding NASP’s application for injunctive relief. The evidence from the hearing on Symetra’s application for an injunction, and the findings and conclusions based on that evidence, are set out in detail in this court’s March 31, 2008 opinion. (Docket Entry No. 240).

The four-day injunction hearing on NASP’s application included evidence on the arbitration issue but focused primarily on NASP’s challenge to Rapid Settlements’s enforcement of rights of first refusal and security interests acquired in transfer agreements not approved by a state court under the applicable SSPA. The parties also presented extensive testimony and numerous exhibits on Rapid Settlements’s “unclean hands” defense.

A. The Evidence as to Rapid Settlements’s Arbitration Practices

The record shows that Rapid Settlements enters into proposed transfer agreements with annuitants that purport to transfer the annuitants’ future-payment rights to Rapid Settlements in exchange for a lump-sum payment, called an “Assignment Price.” The proposed transfer agreements state that they are “subject to court approval”:

A court must approve Assignor’s sale, assignment, and transfer to Rapid Settlements of the Assigned Payments before such payments can be transferred and the Assignment Price ... paid to Assignor. The Final Order shall state that the court at least has made all findings required by applicable law, and that Annuity Owner and Annuity Issuer are authorized and directed to pay the Assigned Payments to Rapid Settlements, its successors and, or assigns. Assignor and Rapid Settlements agree to proceed in good faith to obtain court approval of this Transfer Agreement.

(Docket Entry No. 228, Ex. A, Preliminary). The Rapid Settlements proposed transfer agreements contain broad arbitration clauses, as follows:

This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. Any dispute or disagreement arising under this Agreement of any nature whatsoever including but not limited to those sounding in constitutional, statutory, or common law theories as to the performance of any obligations, the satisfaction of any rights, and/or the enforceability hereof, shall be resolved through demand by any interested party to arbitrate the dispute and shall submit the same to a nationally recognized, neutral, arbitration association for resolution pursuant to its single arbitrator, expedited rules.... The arbitration decision shall be final and binding in all respects and shall be non-appealable. Any person may have a court of competent jurisdiction enter into its record the findings of such arbitrators for all purposes, including the enforcement of the award. In any event, the parties to this Agreement hereby waive the right to trial by jury in any action or proceeding instituted with respect to this Agreement.

(Id., Ex. A ¶ 11(a)). The transfer agreements also contain a severability clause, which states: “If any provision of this Agreement is found to be invalid or unenforceable, the validity or enforceability of any other provision of this Agreement shall not be affected thereby.” (Id., Ex. A ¶ 11(c)).

The record established in the hearings on Symetra’s and NASP’s applications for injunctive relief shows that Rapid Settlements uses the arbitration clause in its transfer agreements to effectuate a transfer of future-payment rights without state-court approval. If state-court approval of a proposed transfer is not obtained — either because a state trial or appellate court rejects the proposed transfer, or because Rapid Settlements does not seek state-court approval at all — Rapid Settlements invokes the arbitration provision in the proposed transfer agreement, alleging breach of some provision in that agreement. In some cases, Rapid Settlements alleges breach because the annuitant has failed to meet the state court’s conditions for approving the transfer, or because the annuitant cancelled the contract after state-court denial of the transfer. (Docket Entry No. 32, Ex. 2; Symetra Binder 2, Ex. 9.3). In other cases, Rapid Settlements alleges breach because an annuitant fails to repay an “advance” on the transfer agreement Rapid Settlements gave the annuitant before (or in at least one case, after) a state-court proceeding in which approval was denied. (Docket Entry No. 47, Exs. 7, 18; Symetra Binder, Ex. 7.2).

The arbitration usually occurs in Houston, Texas, even though the annuitant usually lives in a distant city. The annuitant usually appears by telephone, without a lawyer. The same arbitrators, selected by Rapid Settlements, usually preside. In most arbitrations, Rapid Settlements reaches an agreement with the customer and prepares an agreed award for the arbitrator’s signature. Rapid Settlements drafts the agreed arbitration award to contain language similar or identical to the language found in court orders approving transfers. (Docket Entry No. 213 at ISO-81, 216).

For a period, in arbitration, Rapid Settlements would request the same transfer as in the parties’ proposed transfer agreement. {Id. at 59). Arbitration awards from these older arbitrations have some variation in language, but generally purport to approve the transfer agreement and state that the necessary requirements for approval have been met. In July 2006, after meeting resistance from annuity issuers, Rapid Settlements stopped requesting a transfer of the same payments it would have received under the proposed transfer agreements. Instead, Rapid Settlements termed the relief it sought in arbitration as “damages” for lost profits from the breach of the proposed transfer agreement and attorney’s fees and costs incurred in collecting those “damages.” {Id.). Because Rapid Settlements calculated damages based on the assumption that a state court would have approved the proposed transfer, the lost-profits damages award usually had the same financial effect as if the proposed transfer agreement had been approved under the applicable SSPA. {Id. at 34, 50). Although styled as “damages awards” for breach of contract, Rapid Settlements’s newer arbitration awards required the annuity issuer to pay Rapid Settlements the same payments that Rapid Settlements would have received under the proposed transfer had the necessary state-court approval been obtained under the applicable SSPA.

The arbitration awards that Rapid Settlements obtains contain language asserting that the rights transferred in arbitration comply with the applicable SSPAs:

The transfer of the Assigned Payments ... as described in the petition in this matter complies with all substantive and procedural requirements of the [applicable SSPA] (recognizing that this matter is being heard in arbitration) and does not contravene any applicable law. Notice of this hearing was sent to all interested parties in compliance with [the applicable SSPA]. The transfer also satisfies the Internal Revenue Code Section 5891, and does not contravene any Federal or State statute or the order of any court or responsible administrative authority.

(NASP Binder, Ex. 10 at 5). By this language, Rapid Settlements attempts to obtain the federal income-tax benefits that are linked to state court approval under the SSPAs, despite the fact that such approval has either been refused or simply not obtained. Rapid Settlements then takes the arbitration awards to the state court and seeks confirmation and the entry of final judgment.

This court’s prior opinions discussed Rapid Settlements’s use of arbitration against annuitants Candy Ann Richardson, Paul Patterson, Kenneth Gross, Thomas Remedies, Mary Foreman, Leslie Dean, Robert Hargette, Abigail Dempsey, Robert Ayars, and Troy Walker to effectuate transfers of structured settlement payment rights. (Docket Entry No. 84 at 11-30; No. 240 at 15-22). Rapid Settlements’s use of arbitration against two additional annuitants is consistent with the pattern of which NASP complains.

Lucille Harrod has an annuity issued by Fidelity and Guaranty Life Insurance Company (“F & G Life”) that entitles her to receive $512.05 per month. See Fidelity & Guaranty Life Ins. Co. v. Harrod, No. Civ. CCB-2732, 2007 WL 2847966, at *1 (D.Md. Sept. 27, 2007). In April 2004, Rapid Settlements contracted with Harrod to purchase certain of her future-payment rights. Rapid Settlements advanced Harrod $1,000.00 in cash, secured by a promissory note that granted Rapid Settlements a security interest in all of the annuity payments that Rapid Settlements had contracted to buy from Harrod. According to Rapid Settlements, Harrod then refused to proceed with the transfer agreement. At no time did Rapid Settlements seek court approval of that transfer under the SSPA. Id. at *1. Later in 2004, Harrod entered into an agreement with Settlement Funding, LLC d/b/a Peachtree Settlement Funding (“Peachtree”), to transfer substantially the same payments Harrod had previously agreed to transfer to Rapid Settlements. Peachtree did seek the necessary state-court approval under the SSPA. A Florida state court approved the transfer on October 7, 2004. Rapid Settlements then initiated an arbitration proceeding in Texas against Harrod and F & G Life. Rapid Settlements based the arbitration on Harrod’s failure to pay the $1,000.00 secured by the promissory note and sought as damages all the payments that Peach-tree had contracted to purchase from Harrod. Rapid Settlements sought to compel F & G Life to direct the payments that were to go to Peachtree under the Florida court order to Rapid Settlements. F & G Life filed an interpleader action in Maryland district court to determine its obligations and Peachtree was included as a party. Peachtree was required to litigate for almost a year before prevailing on summary judgment. In April 2008, Peach-tree was still litigating its motions for sanctions and attorneys’ fees against Rapid Settlements. See Fidelity & Guaranty Life Ins. Co. v. Harrod, No. CCB-05-2732, 2008 WL 2246518 (D.Md. Apr. 15, 2008).

NASP also presented evidence as to an annuitant named Bankston. Robin Shapiro testified that in 2007, his company, Novation, “walked away” from a proposed transfer of Bankston’s future payment rights because of a Rapid Settlements arbitration. Rapid Settlements informed Novation that the payments it was about to purchase from Bankston had already been conveyed to Rapid Settlements through an order entered in arbitration, with no court approval under the applicable SSPA. (Docket Entry No. 235 at 59-61).

NASP makes the same arguments that Symetra made about the improper use of arbitration to effect transfers of annuitants’ structured settlement payment rights by circumventing the requirements of the SSPAs. NASP adds to those arguments that by using arbitration in this manner, Rapid Settlements clouds the title to annuitants’ structured settlement payment rights, raises the transaction costs for NASP members who enter transfer agreements with annuitants who have previously entered into transfer agreements with Rapid Settlements, and discourages NASP members from entering into such transactions in the first place. NASP also contends that the practice puts its members, who do comply with the requirement of obtaining state-court approvals of a proposed transfer as in the “best interests” of the annuitants, at a competitive disadvantage. (Docket Entry No. 206 at 3; No. 235 at 14-16). NASP further contends that the Rapid Settlements arbitration practices could prompt lawmakers to institute more restrictive regulations of the entire structured settlement secondary market industry, putting at risk the legislative balance that NASP worked to achieve. (Id.). A growing number of courts have concluded that Rapid Settlements’s use of arbitration violates the SSPAs.

B. The Defenses Asserted by Rapid Settlements

Rapid Settlements contends that its practice of invoking arbitration to effect transfers of annuitants’ future-payment rights is consistent with the Federal Arbitration Act, which Rapid Settlements alleges preempts the SSPAs. Rapid Settlements also contends that the arbitration awards it obtains are not “transfers” under the SSPAs and therefore are not subject to the requirements of the SSPAs. Finally, Rapid Settlements argues that the SSPAs “seem[] to contemplate the availability of arbitration” and that this court should “give meaning” to this language. (Docket Entry No. 228 at 5). All of these arguments were raised, and rejected, in the proceedings between Rapid Settlements and Symetra. (Docket Entry Nos. 84, 240). These arguments have also been rejected by the Fifth Circuit. (Docket Entry No. 251).

Rapid Settlements also advances an unclean hands defense, arguing that NASP members also have clauses in their proposed transfer agreements that require arbitration of disputes. Rapid Settlements, however, has not alleged or presented any evidence that NASP members have invoked arbitration clauses in transfer agreements not approved by a state court under the applicable SSPA, or used arbitration to effectuate the transfer of future-payment rights in circumvention of the requirement of state-court approval under the applicable SSPA.

Rapid Settlements also asserts that NASP members take legal action to recoup “advances” given to annuitants if a court does not approve the proposed transfer. Robin Shapiro, the current president of NASP and the CEO of Novation, a NASP member, testified at the injunction hearing that his company will sometimes provide advances to annuitants pending court approval of transfer agreements. The advance is contractually documented as an unsecured promissory note that is not part of the transfer agreement. Shapiro testified that if the state court rejects the transfer agreement and the annuitant does not repay the advance, Novation will not sue or seek arbitration against the annuitant to recover the amount advanced. If the annuitant enters a transfer agreement with another factoring company, however, Novation will ask the company for the return of the advance out of the lump sum to be paid the annuitant. (Docket Entry No. 238 at 113-19). Shapiro testified that if the request is denied, Novation does not pursue further action against either the other factoring company or the annuitant. (Docket Entry No. 235 at 75-88). Feldman confirmed in later testimony that Rapid Settlements has accommodated Novation’s requests for repayment of advances on several occasions. (Docket Entry No. 237 at 32-33; Rapid Binder, Ex. 215). No evidence was presented to support the argument Rapid Settlements advanced.

C. The Evidence as to the Use of Rights of First Refusal and Security Interests.

1. NASP’s Evidence

The record shows that Rapid Settlements enters into proposed transfer agreements with annuitants for a portion of the future-payment stream. In those agreements, Rapid Settlements asserts a right of first refusal in the remaining future payments, which are not covered by the transfer. The transfer agreements also include a ten percent penalty if the annuitant does not honor this right of first refusal. The Rapid Settlements right of first refusal clause states:

In consideration of the Transfer Agreement’s execution, Assignor hereby grants and conveys to Rapid Settlements a ten (10) day right of first refusal beginning upon Rapid Settlements’ receiving actual written notification of an offer to purchase or otherwise acquire any Periodic Payments, as follows: If Assignor receives an oral or a written offer to sell, assign, borrow against, pledge or otherwise encumber any Periodic Payments and Assignor desires to enter into a transaction involving the sale, assignment, borrowing against, pledging, or other encumbrance thereof, Assignor agrees to immediately notify Rapid Settlements in writing: (a) that Assignor has received an offer; and (b) describing in detail all terms of said offer along with providing all writings evidencing such. Assignor agrees to direct any other purchaser to directly pay over to Rapid Settlements ten percent of the amount of Periodic Payments transferred by Assignor to a person in violation or breach of this para[graph].

(Docket Entry No. 228, Ex. A ¶ 10).

The Rapid Settlements transfer agreements also claim a security interest in the entirety of the annuitant’s future-payment rights. The agreements provide that this security interest, along with the right of first refusal, persists even if the contemplated transfer is not consummated:

To secure the prompt and complete payment, performance and observance of all of the obligations of Assignor under this Transfer Agreement and regardless of whether such transfer and assignment is consummated and in furtherance of the right of first refusal set forth in para. 10 below, Assignor hereby grants, assigns, conveys, mortgages, pledges, hypothecates and transfers to Rapid Settlements, a security interest (lien) upon all of Assignor’s right, title and interest in, to and under all the Assigned Payments (hereinafter the “Collateral”), to secure payment of the Assigned Payments to Rapid Settlements and Assignor’s other obligations hereunder. Additionally, Assignor hereby irrevocably authorizes Rapid Settlements at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto covering payments due from the Annuity Issuer to secure Rapid Settlement’s rights hereunder and containing any other information required by Article 9 of the Uniform Commercial Code for the filing office’s acceptance of any financing statement or amendment. This Agreement shall function as a security agreement. Rapid Settlements is authorized to direct Annuity Issuer and/or Settlement Obligor to forward any and all of the Assigned Payments directly to Rapid Settlements in furtherance of this agreement.

(Id-, Ex. A ¶ 7).

Rapid Settlements perfects the rights of first refusal and security interests that it obtains by filing UCC financing statements. These filings state, in relevant part:

Debtor’s ability to sell, transfer, or otherwise hypothecate benefits due under the aforementioned annuity contract are subject to certain rights conveyed to Secured Party under the Transfer Agreement ..., as it may be amended from time to time, including but not limited to a right of first refusal to purchase any benefits proposed to be sold and a right to a commission if benefits under the aforementioned annuity are sold hereinafter in whole or in part to someone other than Secured Party. In addition, Debtor has sold certain benefits due under the aforementioned annuity contract to Secured Party or its assigns.

(NASP Binder, Ex. 6).

The record shows that Rapid Settlements takes action to enforce its rights of first refusal and its security interests, even for transfer agreements that are not approved by a state court under the SSPAs, when the annuitants with whom Rapid Settlements has entered these agreements attempt to enter into transfer agreements with other factoring companies. Typically, Rapid Settlements learns that an annuitant is about to enter a transaction with another factoring company when that company discovers the Rapid Settlements UCC filing and contacts Rapid Settlements to determine whether it in fact has an interest in the payments the factoring company intends to purchase. (See, e.g., NASP Binder, Ex. 6). Rapid Settlements then threatens the factoring company or the annuitant with legal action or arbitration if the asserted right of first refusal or security interest is not honored. (See, e.g., Docket Entry No. 206, Ex. A-5). This sometimes convinces the other factoring company to walk away from the transaction, or convinces the annuitant to cancel the contract with the other factoring company and enter a transfer agreement with Rapid Settlements. Rapid Settlements sometimes invokes arbitration against the annuitant for “breach” of the transfer agreement, seeking as damages for the alleged “breach” a transfer of the annuitant’s structured settlement payment rights as contemplated under the original proposed transfer agreement with Rapid Settlements, even if it was not approved by a court. Or Rapid Settlements will seek to stay the SSPA state-court approval proceeding between the annuitant and the other factoring company. Rapid Settlements may also intervene in the court approval proceeding between the annuitant and the other factoring company to assert its purported right of first refusal or security interest. (See, e.g., id., Ex. A-8).

NASP submitted evidence in the form of documents and testimony relating to several annuitants who entered into proposed transfer agreements with Rapid Settlements and against whom Rapid Settlements invoked rights of first refusal or security interests. The case law provides several other examples. The facts set out in the record and the case law as to each of the several annuitants are described below.

a. Kenneth Gross

Kenneth Gross holds a Symetra-issued annuity under which he has received or will receive 480 monthly payments of $3,000 per month beginning on October 1, 1996; a lump sum payment of $150,000 payable on September 1, 2006; and a lump sum payment of $250,000 payable on September 1, 2011. In August 2004, Rapid Settlements sought approval in Indiana state court of a proposed partial transfer agreement with Gross. The transfer agreement granted Rapid Settlements a “ten (10) day right of first refusal beginning upon Rapid Settlements’ receiving actual written notification of an offer to purchase or otherwise acquire any Periodic Payments,” and provided that Rapid Settlements would be entitled to a penalty of “ten percent of the amount of Periodic Payments transferred by assignor to a person in violation or breach” of the right of first refusal. (NASP Binder, Ex. 4 ¶ 10). The transfer agreement also stated that Rapid Settlements had a security interest in the entirety of Gross’s payment rights, which would be effective “regardless of whether such transfer and assignment [wa]s consummated and in furtherance of the right of first refusal.” (Id., Ex. 4 ¶ 7). Rapid Settlements filed a UCC financing statement that claimed a security interest in all of Gross’s annuity, along with the right of first refusal and ten percent penalty. The UCC filing identified the secured interest as:

General intangibles of the Debtor including but not limited to those held by the Debtor under that certain annuity contract No. AA075G510 (Safeco Assigned Benefits Service Company and/or Safeco Life Insurance Company) providing benefits thereunder to Kenneth Ray Gross. Debtor’s ability to sell, transfer, or otherwise hypothecate benefits due under the aforementioned annuity contract are subject to certain rights conveyed to Secured Party under the Transfer Agreement originally dated May 28, 2004, as it may be amended from time to time, including but not limited to a right of first refusal to purchase any benefits proposed to be sold and a right to a commission if benefits under the aforementioned annuity are sold hereinafter in whole or in part to someone other than Secured Party. In addition, Debtor has sold certain benefits due under the aforementioned annuity contract to Secured Party or its assigns.

(Id., Ex. 6). The Indiana state court denied approval of the transfer under the SSPA on December 20, 2004. (Id., Ex. 5). Rapid Settlements did not remove the UCC financing statement from the public records after the denial.

Shortly after the state court’s denial of the transfer, Gross approached 321 Henderson LLC, a NASP member, about a partial transfer. On January 6, 2005, 321 Henderson sent Rapid Settlements a letter inquiring about the UCC filing relating to Gross and asking that “[i]f there [wa]s any duplication to what 321 Henderson [wa]s purchasing,” Rapid Settlements contact 321 Henderson with “specifics of [its] purported interest along with all supporting documentation.” (Id., Ex. 6). 321 Henderson’s David Reape testified that Rapid Settlements did not provide supporting documentation to 321 Henderson but did contact Gross to threaten legal action. Gross responded to the warning by exercising his right to terminate his transfer agreement with 321 Henderson. (Docket Entry No. 235 at 137). Rapid Settlements then entered into another transfer agreement with Gross on February 9, 2005. Like the earlier Rapid Settlements transfer agreement, this new agreement contained provisions for a right of first refusal, the ten percent penalty, and the security interest in the entire annuity. (NASP Binder, Ex. 8 ¶¶ 7, 10). Reape testified that 321 Henderson was harmed because the Rapid Settlements threat to seek legal enforcement of its purported right of first refusal prevented 321 Henderson from completing its transaction with Gross. (Docket Entry No. 235 at 134-144).

b. Keith Thurston

Keith Thurston holds an annuity issued by Hartford Life Insurance Company for 132 monthly payments of $1,200 between February 1, 2001 and January 1, 2012; a lump sum payment of $25,000 payable on November 1, 2006; and a lump sum payment of $35,000 payable on November 1, 2011. Around May 2006, Thurston completed an agreement to transfer a portion of his future-payment stream to Rapid Settlements. On May 31, 2006, Rapid Settlements filed a UCC financing statement that claimed a security interest in the entirety of Thurston’s annuity, along with a right of first refusal and a “commission” if Thurston sold the remainder of the annuity to someone else. (Docket Entry No. 206, Ex. A-2). There is no evidence that Thurston’s transfer agreement with Rapid Settlements was approved by a court, as required by the applicable SSPA. On September 19, 2006, Thurston sent a letter to Rapid Settlements stating that he was “exercising [his] rights pursuant to Item # 6 as per The Disclosure Notice Required by Law, to cancel any and all agreements, signed by me to Rapid Settlements.” The letter asked Rapid Settlements to “cancel this Transfer effective immediately due to non-performance of the Contract to date.” (Id., Ex. A-6).

Around October 2006, Thurston signed an agreement with First Providen to transfer certain of his future-payment rights. On October 4, 2006, First Providen gave Rapid Settlements notice that it had filed a proceeding in Illinois state court for approval of the transfer agreement. (Id., Ex. A-3). Rapid Settlements responded on October 6, 2006 by sending Thurston a letter threatening to enforce its right of first refusal. The letter stated:

On June 21, 2006, you entered into an agreement with Rapid Settlements, Ltd. (“Rapid”) in which you granted to Rapid a ten (10) business day right of first refusal on subsequent Transfers. The ten (10) day period begins once you notify Rapid of another offer that you desire to undertake for the sale of structured settlement payment rights. On October 5, 2006 we learned that you entered into an agreement with First Providen, L.L.C. to sell certain structured settlement payment rights to First Providen. Based upon the terms of the offer from First Providen, Rapid will and hereby does match the offer by First Providen in the above referenced matter. Please contact Rapid so that we can effectuate same and complete your transfer with a minimum delay and without additional cost to you.

Please note that in the event we cannot resolve this matter amicably, which is our strong preference, the documents that you executed allow for expedited relief through arbitration. We prefer to resolve this matter amiable [sic] and expeditiously.

(Id., Ex. A-5).

On October 31, 2006, Rapid Settlements obtained an arbitration award from a Texas arbitrator enjoining Thurston from proceeding with the transfer with First Providen. (Id., Ex. A-7). Rapid Settlements then intervened in the Illinois state-court approval proceeding between Thurston and First Providen. Despite the fact that the judge had already approved the transfer agreement, Rapid Settlements convinced the judge to stay the transfer to consider the argument that its arbitration award deprived the Illinois court of jurisdiction and precluded the transfer. (Id., Ex. A-8). The Illinois court rejected the arguments made by Rapid Settlements and lifted the stay of the transfer on November 17, 2006. (Id.). First Providers Hall testified that Rapid Settlements delayed the transfer and cost First Providen about $9,300 in attorneys’ fees, much more than the $2,000-$2,500 First Providen typically spends seeking court approval under the SSPAs. (Docket Entry No. 235 at 223-224).

c. Simmie King

An opinion from the Texas Court of Appeals provides another example of how Rapid Settlements uses rights of first refusal. See In re Rapid Settlements, Ltd., No. 14-06-00698, 2007 WL 925698 (Tex. App.-Houston [14th Dist.] Mar. 29, 2007, mandamus denied). Simmie B. King has an annuity under which he is entitled to receive 83 monthly payments of $532.50 between September 1, 2009 and July 1, 2016. On January 5, 2005, Rapid Settlements and King signed an agreement under which Rapid Settlements would acquire all of King’s future-payment rights. The agreement contained a right of first refusal clause and provided for a ten percent penalty if the right of first refusal was not honored. On May 23, 2005, a Georgia state court denied the transfer under the SSPA because it was not in King’s best interest. Id. at *1.

King subsequently entered another transfer agreement with Peachtree. This agreement was approved by a Georgia court under that state’s SSPA on January 12, 2006. When Rapid Settlements received notice of this approval, it asserted its right of first refusal over King’s annuity payments. On January 25, 2006, Rapid Settlements initiated arbitration against King and Peachtree in Texas. In the arbitration, Rapid Settlements sought to void King’s proposed — and approved — transfer agreement with Peachtree and to effectuate the transfer of structured settlement payment rights contemplated under the proposed — and rejected — transfer agreement between Rapid Settlements and King. Peachtree and King sought and obtained a temporary retraining order in Texas state court to stay the arbitration. The state court ultimately denied a motion by Rapid Settlements seeking to compel the arbitration. Id. at *2. Rapid Settlements unsuccessfully sought a writ of mandamus in the Texas Court of Appeals. Id. Peachtree bore the costs of the Rapid Settlements litigation.

d. Tousha Fowler

NASP President Shapiro recounted a 2006 incident in which his company, Novation, sought court approval under the S SPA of a transfer agreement for structured settlement payments belonging to an annuitant named Tousha Fowler in North Carolina. According to Shapiro, a lawyer for Rapid Settlements appeared in court to challenge the transfer. The lawyer stated that Rapid Settlements had obtained the transfer of a part of Fowler’s future-payment stream in Tennessee, with the approval of a state court. This transfer agreement contained a right of first refusal for Rapid Settlements to purchase all of Fowler’s remaining payments. No state court had reviewed or approved the proposed transfer of the remainder of the payments to Rapid Settlements, although Shapiro did not know if the Tennessee court that approved the initial transfer to Rapid Settlements also approved the right of first refusal provision. Nonetheless, the Rapid Settlements lawyer stated that he had already initiated arbitration proceedings in Texas against Fowler to enforce the right of first refusal and prevent him from transferring the rest of the payments to Novation. Shapiro testified that Novation “stepped away” from the deal because “it was simply not worth proceeding with the transaction,” which would have involved multiple-district litigation. (Docket Entry No. 235 at 52-56).

NASP argues that the practice of enforcing rights of first refusal or security interests in transfer agreements not approved by a state court impermissibly circumvents the SSPA requirements. NASP argues that this practice clouds title to annuitants’ structured settlement payment rights, raising the transaction costs for NASP members seeking to contract with annuitants who have previously entered proposed transfer agreements with Rapid Settlements, which in turn discourages NASP members from doing so. NASP argues that its members, which do not engage in such means of circumventing SSPA approvals, are placed at a competitive disadvantage by the use of this practice by Rapid Settlements. NASP also fears that enforcing rights of first refusal or security interests in transfer agreements that were not approved by a state court is likely to prompt state and federal legislators to seek more restrictive legislation, which will harm the ability of factoring companies to continue in business.

2. The Defenses Asserted by Rapid Settlements

Rapid Settlements responds that its practices with respect to rights of first refusal and security interests do not violate the SSPAs because these statutes do not apply to transfers of such rights and interests. Rapid Settlements also advances an unclean-hands defense, arguing that NASP members engage in many of the same practices and that the present suit is driven by anticompetitive motive. Feldman testified that the right of first refusal and security interest provisions of which NASP complains are provisions that Rapid Settlements “extracted ... from contracts of competitors,” including NASP members, when drawing up its form documents after going into business in 2003. (Docket Entry No. 235 at 20).

a. Rights of First Refusal and Security Interests in NASP Transfer Agreements

At the injunction hearing, Rapid Settlements offered into evidence transfer agreements drafted by NASP members containing language about rights of first refusal and security interests similar to language found in Rapid Settlements’s transfer agreements. One such example appears in a post-SSPA transfer agreement between NASP member SSC Settlements, LLC (“Stone Street”) and annuitant Tiffany Henderson, signed on September 15, 2005. (Rapid Binder, Ex. 197). Under the transfer agreement, “Periodic Payments” were those purchased by Stone Street under the transfer agreement, and “Settlement Payments” were those “not sold to [Stone Street] pursuant to this Agreement and remaining to be paid after the date after the date of this Agreement.” (Id., Ex. 197, recital B). The transfer agreement contained a right of first refusal clause that purported to remain effective even if the underlying transfer agreement were cancelled:

Seller agrees that during the Term, Seller will not sell, assign, borrow against, pledge, or otherwise encumber any one or more of the Settlement Payments not included in the Periodic Payments assigned to Purchaser without giving Purchaser written notice of the terms of any such proposed loan or sale .... If, within ten business days of receiving such notice, Purchaser informs Seller that it elects to match the terms of any such proposed loan or sale, then Seller shall execute all documents necessary to consummate such transaction with Purchaser on those terms. The foregoing right of first refusal shall survive the exercise of any right of cancellation or rescission that Seller or Purchaser may have under this Agreement, or applicable law.

(Id., Ex. 197 ¶ 11.15). The transfer agreement also asserted a security interest in all of Henderson’s payment rights under the annuity:

As may be required by law to effectuate a transfer of the Periodic Payment Rights, and as security for the performance of all of the Seller’s obligations under this Agreement, Seller hereby irrevocably and unconditionally assigns, pledges and grants to Purchaser a continuing security interest in the Periodic Payment Rights, the Remaining Settlement Payments and the proceeds of the same (collectively the “Collateral”). Purchaser’s assignment, pledge and grant is coupled with an interest and shall continually exist until all Periodic Payment Rights have been received, and the Remaining Settlement Payments have been paid in full.

(Id., Ex. 197 ¶ 4.3). Rapid Settlements represented that this transfer agreement was approved by a state court, but did not attach a copy of the order granting approval. (Docket Entry No. 236 at 52-53).

A post-SSPA transfer agreement between NASP member R & P Capital Resources Inc. and annuitant Patrick Davis, signed on June 29, 2006, contains similar provisions. (Rapid Binder, Ex. 198). The agreement stated that R & P Capital had a “right of first refusal to purchase or otherwise obtain any Payments which have not previously been assigned, Transferred, or conveyed.” The right of first refusal would “survive the exercise of any right of recision that either You or We may have under the terms of this Agreement.” (Id., Ex. 198 ¶ 10). The transfer agreement also took a security interest in all of Davis’s payment rights under the annuity. (Id., Ex. 198 ¶ ll). The record does not show whether court approval of this transfer agreement was ever sought or obtained.

A post-SSPA transfer agreement between NASP member First Providen and annuitant Michael Alan Luster, signed June 15, 2007, also contained similar provisions. (Rapid Binder, Ex. 200). The agreement was for the purchase of a portion of Luster’s future-payment rights. The agreement contained a clause that claimed a “right of first refusal to purchase or otherwise obtain any Payments which have not previously been assigned, transferred or conveyed” that would “survive the exercise of any right of rescission that either You or We may have under the terms of this Agreement.” (Id., Ex. 200 ¶ 11). The agreement also took a first priority security interest in “any and all money due or to become due under the Annuity.” (Id., Ex. 200 ¶ 13). The record does not show whether court approval of this agreement was ever sought or obtained.

A post-SSPA transfer agreement between NASP-member Novation and annuitant Eric G. Deadmon for the purchase of part of Deadmon’s future-payment rights also contained similar language. The agreement, dated August 19, 2002, claimed a right of first refusal that would be effective for 36 months after the date of the transfer agreement. This right would “survive the exercise of any right of cancellation or rescission that Seller or Purchaser may have under this Agreement or applicable law.” (Rapid Binder, Ex. 230-A ¶ 4.9). The agreement also took a first-priority security interest in “all of Seller’s right, title and interest in any and all money due or to become due under the Settlement Agreement and/or the Annuity.” (Id., Ex. 230-A ¶ 4.2). Rapid Settlements also submitted Novation’s court petition for approval of the transfer agreement, which did not mention the right of first refusal or the security interest. (Id., Ex. 230). The record does not show whether a court approved the transfer.

Shapiro, the president of Novation, conceded that for a period after the S SPAs were enacted, Novation’s transfer agreements included “vestigial” right of first refusal and security interest provisions carried over from pre-SSPA agreements. According to Shapiro, these provisions were removed from Novation’s transfer agreements around 2005. Shapiro pointed to a subsequent transfer agreement with annuitant Deadmon, dated February 18, 2005, which gave Novation a security interest only in the assigned payments and only “subject to the court’s approval of the sale.” (Rapid Binder, Ex. 246 ¶ 13; Docket Entry Nos. 236 at 33, 238 at 60-61). The agreement also provided that if “the court does not approve the sale ... no payments will be transferred from you, no monies will be paid to you, you will have no further obligation to Novation, and Novation will have no further obligation to you.” (Rapid Binder, Ex. 246 ¶ 19). Gary Hall of First Providen similarly testified that it had also included “vestigial” rights of first refusal in post-SSPA transfer agreements. These provisions were removed, but appeared as recently as 2007. However, First Providen did not enforce those provisions after the SSPAs were enacted. (Docket Entry No. 235 at 222-25; Rapid Binder, Ex. 200).

Rapid Settlements also introduced into evidence other NASP-member transfer agreements containing security interests that are more limited than those found in the Rapid Settlements agreements but that do apply to payments beyond those purchased. One such agreement is a postSSPA transfer agreement between Peach-tree and annuitant Sharita Banks, dated January 2, 2004. (Rapid Binder, Ex. 231). The transfer agreement purported to take a security interest, “to the extent permitted by law,” in all of Banks’s annuity payments, although under the transfer agreement, Peachtree purchased only some of those payments. The clause stated:

Under this Agreement and only to the extent permitted by law Assignee and I intend to create a security interest under Article 9 of the Uniform Commercial Code ... in my rights to an interest in payments due to me under the Settlement Agreement, which rights have been assigned to Assignee as General Intangibles under Article 9 of the Uniform Commercial Code ....

(Id., Ex. 231 ¶ E). Rapid Settlements introduced a similar Peachtree transfer agreement with annuitant Simmie King, dated September 22, 2005. (Rapid Binder, Ex. 191). The record does not show whether a court approved these transfer agreements.

Another transfer agreement between Stone Street and annuitant Brian Napier dated October 13, 2008 contained a provision that would require Napier to subordinate his rights to the remaining payments to Stone Street’s right to be made whole if Napier’s full future-payment rights were reduced by the annuity company. (Rapid Binder, Ex. 241 ¶ 11.15). The agreement asserted a security interest in the remaining payments “as a security for the performance of all of the Seller’s obligations under this Agreement.” (Id. ¶ 4.4). Counsel for Rapid Settlements acknowledged that the transfer had been approved by court order but did not introduce this order into the record. (Docket Entry No. 236 at 74). Similarly, a Stone Street transfer agreement signed with annuitant Rosa A. Contreras on May 21, 2007, asserted a security interest only in the assigned payments, but provided that if Contreras’s structured settlement payments were reduced, “the reduction [would] first [be] taken from any payments that we did not purchase.” (Rapid Binder, Ex. 195 ¶ 14). The record does not indicate whether a court approved this transfer.

b. Enforcement of Rights of First Refusal and Security Interests

NASP argues that the language used in its members’ transfer agreements — much of which is a “vestige” from pre-SSPA days — is far less important than efforts to enforce rights of first refusal and security interests. According to NASP, the SSPAs prohibit the enforcement of such provisions to effectuate transfers not approved by a state court under the applicable SSPA. Rapid Settlements counters that NASP members have, in fact, attempted to enforce the rights and interests asserted by such language, without court approval. Rapid Settlements contends that, for example, NASP members have filed UCC financing statements that claim a right of first refusal and security interest in annuitants’ entire future-payment stream, rather than simply the payments purchased, an action that clouds title to annuitants’ future-payment rights. Rapid Settlements submitted as evidence a UCC financing statement filed by Stone Street connection with a March 6, 2004 transfer agreement with annuitant Sherneice N. Brown. The UCC filing identified Brown’s entire payment rights as collateral and stated:

The Debtor has entered into a contract with the Secured Party pursuant to which the Debtor has given the Secured Party an irrevocable right of first refusal option to purchase and/or lend against the collateral set forth herein. In addition to securing other contract rights, the Debtor has given the Secured Party a security interest in the collateral set forth herein to secure the Debtor’s obligations under the right of first refusal option. This Financing Statement is also being filed for the purpose of evidencing the Secured Party’s security interest in the above referenced collateral pursuant to the right of first refusal option.

(Rapid Binder, Ex. 242). Stone Street filed a UCC financing statement with similar language in connection with its February 21, 2004 transfer agreement with annuitant John Bracewell. (Id.). The record does not show whether the transfer agreements associated with these UCC filings were approved by a state court under the applicable SSPA.

Rapid Settlements also contends that NASP members have attempted to enforce broad security interests not approved by a court under the applicable SSPA against Rapid Settlements. Rapid Settlements submitted a June 15, 2005 letter it received from NASP-member Settlement Capital. The letter is in response to a June 6, 2005 letter inquiry from Rapid Settlements, not included in the record, in which Rapid Settlements informed Settlement Capital that it intended to buy a portion of annuitant Michael D. Chisom’s future-payment stream. Settlement Capital attached a December 19, 2003 Illinois state court order approving the transfer of part of Chisom’s annuity payments to Settlement Capital. (Rapid Binder, Ex. 205). The court order did not mention a security interest. The letter stated:

SCC owns $610.00 of each $1,220.00 monthly payment commencing November 20, 2003 and continuing through August 30, 2012; $610.00 of each $1,500.00 monthly payment due and payable September 30, 2012; and $11,500.00 of each $12,500.00 annual payment commencing September 30, 2004 continuing through September 30, 2006 under the structured settlement in question. Moreover, SCC has a security interest in all payments due under the structured settlement. Attached hereto is a copy of Exhibit “A” to the Purchase Agreement showing the transfer by Mr. Chisom, and the court order we obtained.

Further, a court order directs that all payments due under this structured settlement and annuity are to be sent to and serviced by SCC.

(Id.). Rapid Settlements introduced similar letters from Settlement Capital relating to post-SSPA partial transfer agreements with annuitants Gaylord LaTray and Meatia Goodman. The court orders approving these transfers did not refer to the security interest that Settlement Capital claimed. (Rapid Binder, Exs. 184, 207). None of these letters from Settlement Capital threatened legal action, but Feldman testified that, as the CEO of Rapid Settlements, he understood these letters to indicate that “there may be a fight at some point in time” if Rapid Settlements went forward with the transfers. (Docket Entry No. 237 at 59).

First Providen’s Gary Hall testified that First Providen does not enforce rights of first refusal in post-SSPA transfer agreements, even though some of these transfer agreements state that the right of first refusal remains effective even if the transfer is not consummated. Hall admitted, however, that First Providen does not tell customers that the rights of first refusal will not be enforced unless the customers specifically ask. Nor does First Providen threaten enforcement. Instead, First Providen salespeople are instructed to tell the customers simply that First Providen “would like [them] to come back to [First Providen]” if they want to do another deal. (Docket Entry No. 235 at 230).

Rapid Settlements also introduced into evidence examples of NASP members taking legal action to enforce rights of first refusal and security interests in transfer agreements entered before the SSPAs were enacted, although the parties vigorously dispute whether enforcement of preS SPA agreements is relevant to the unclean hands issue. Rapid Settlements introduced into evidence a March 7, 2005 letter from J.G. Wentworth to Rapid Settlements that threatened legal action to enforce a pre-SSPA security interest in all of annuitant Walter Bridges’s annuity payments. The security interest was acquired in two transfer agreements dated August 14, 1997 and August 11, 1999. (Rapid Binder, Ex. 239). The March 7, 2005 J.G. Wentworth letter stated that “[w]e intend to litigate our rights under our contract with Mr. Bridges and will seek from him any damages we incur as a result of his breach of our contract.” (Id.). The letter also stated that “we regard these actions of Rapid