Fifth Circuit: Sham Arbitration Cannot Be Used to Perform an Unlawful Transfer

In a one-paragraph opinion, the U.S. Court of Appeals for the Fifth Circuit held that arbitration cannot be used to circumvent procedural requirements of the Texas Structured Settlement Protection Act (“SSPA”) and affirmed the District Court’s refusal to confirm an arbitration award.

In Symetra Life Ins. Co. v. Rapid Settlements Ltd., No. 08-20248, Symetra National Life Insurance Company, (“Symetra”) payor of structured settlement payments, sued Rapid Settlements, Ltd., (“Rapid”) a “factoring company.” Symetra sought to enjoin Rapid from continuing its practice of using arbitration to circumvent SSPA requirements.

This dispute deals with the secondary market in structured settlement rights. Settling defendants purchase annuities from Symetra to fund structured settlements to pay tort claimants. The beneficiaries (Symetra annuitants) then contract with Rapid to exchange their rights to the future periodic payments in exchange for a discounted lump sum paid in the present. Symetra annuitants’ agreements with Rapid contain an arbitration clause whereby the parties agree to arbitrate any disputes arising under the contract.

Symetra challenged Rapid’s practice of executing a contract of sale with the annuitant, then alleging that the annuitant had breached a provision of that agreement, and thereafter invoking the arbitration clause to submit the matter to arbitration. At these “arbitration” proceedings, the annuitant usually appeared by phone without a lawyer. As a result, Rapid would obtain an arbitration award in its favor and seek its confirmation without notice to Symetra. The award would require the annuitant to transfer some of the future income-stream to Rapid, without complying with the SSPA.

The United States District Court for the Southern District of Texas denied Rapid’s motion to confirm the arbitration award. According to the District Court, the transfers violated the SSPA because they failed to comply with the Act’s requirement that a state court approve the transfer based on specific findings that the transfer is in annuitant’s “best interest.” The court further stated that “[o]btaining state-court confirmation of an arbitration award that effects a transfer of future-payment rights does not equate to obtaining state-court approval of the proposed transfers under the state structured settlement protection acts.” See Symetra Life Ins. Co. v. Rapid Settlements, Ltd., 599 F.Supp.2d 809 (S.D. Tex. 2008). Rapid appealed.

Rapid had argued that the Federal Arbitration Act preempts state structured settlement protections acts to the extent that they conflict with the arbitration right set out in the arbitration agreement. But neither the trial court nor the Fifth Circuit were persuaded by Rapid’s argument. The Fifth Circuit adopted Symetra’s position and stated that:

And on matters of insurance regulation, the congressional message of the Federal Arbitration Act comes with the congressional message of the McCarran-Ferguson Act. On that score, no fewer than forty-six states have seen fit to enact statutes exercising that power, to which Congress has consented, to guard recipients of structured settlements against abusive transfers. We are loathe to read the Federal Arbitration Act to provide an end run around this dually secured line of protection.

The Fifth Circuit referred to the reasons stated by the District Court to affirm the judgment and concluded that “[a]rbitral powers do not extend beyond the substantive capacity of the party agreeing to arbitration, and neither Prima Paint nor any other Supreme Court case teaches the contrary.”

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