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American General Life Insurance Co. v. DRB Capital, LLC

Supreme Court of Kentucky

December 13, 2018

AMERICAN GENERAL LIFE INSURANCE COMPANY AND AMERICAN GENERAL ANNUITY SERVICE CORPORATION APPELLANTS
v.
DRB CAPITAL, LLC AND RAY THOMAS, JR. APPELLEES

          ON REVIEW FROM COURT OF APPEALS CASE NO. 2016-CA-000395-MR BOYD CIRCUIT COURT NO. 15-CI-00843

          COUNSEL FOR APPELLANTS: Michael Farrell Samantha Thomas-Bush Farrell White & Legg PLLC Amy B. Boyea McDowell Hetherington, LLP

          COUNSEL FOR APPELLEE DRB CAPITAL, LLC Matthew Beatty DeMarcus Wolnitzek, Rowekamp & DeMarcus, PSC

          COUNSEL FOR APPELLEE RAY THOMAS, JR. Charles Thomas Ezzell

          COUNSEL FOR AMICUS CURIAE NATIONAL STRUCTURED SETTLEMENTS TRADE ASSOCIATION Walter L. Sales William Jay Hunter, Jr. Stoll Keenon Ogden PLLC

          COUNSEL FOR AMICUS CURIAE DEPARTMENT OF WORKERS' CLAIMS Bradley Dale Hamblin, Jr.

          OPINION

          HUGHES, JUSTICE

         Ray Thomas, Jr. (Thomas) settled a workers' compensation claim against his employer and its workers' compensation insurer, National Union Fire Insurance Company (National Union). Less than six months after settling his claim, Thomas petitioned for, and received, the circuit court's approval to transfer his future periodic payments to DRB Capital, LLC (DRB), in exchange for an immediate lump sum payment at a highly discounted rate. The circuit court approved the transfer pursuant to the Kentucky Structured Settlement Protection Act (KSSPA), which by its plain language applies only to structured settlements of tort claims. American General Annuity Service Corporation (AGASC), the entity obligated to make the periodic payments, and American General Life Insurance Company (American General), the issuer of the annuity to fund the payments, appealed the circuit court's transfer approval to the Court of Appeals. A divided Court of Appeals 'upheld the circuit court's approval despite explicit anti-assignability clauses in the underlying contracts, and statutory language limiting the KSSPA to tort settlements. American General and AGASC petitioned this Court for review, which we granted. After careful consideration, we conclude that the underlying contracts' anti-assignment clauses are enforceable and the KSSPA does not apply to workers' compensation settlements. Accordingly, we reverse the Court of Appeals.

         FACTS AND PROCEDURAL HISTORY

         On May 12, 2015, Thomas, represented by counsel, settled a workers' compensation claim against his employer and its workers' compensation insurer, National Union Fire Insurance Company (National Union), pursuant to an Agreement as to Compensation and Order Approving Settlement ("Settlement Agreement"). The Settlement Agreement, approved by an Administrative Law Judge (ALJ), as required by Kentucky Revised Statute (KRS) 342.265, provided for a lump sum payment of $31, 000, monthly payments of $960.23 for 20 years, and additional lump sum payments of $20, 000 in 2024 and $25, 000 in 2029 ("Periodic Payments"). The Settlement Agreement also stated that National Union could make a qualified assignment of its obligation to make the payments to American General Annuity Service Corporation (AGASC), which was permitted to fund the required payments by purchasing an annuity. In the Settlement Agreement, Thomas acknowledged and agreed to the following:

Payee [(Thomas)] acknowledges that the Periodic Payments cannot be accelerated, deferred, increased or decreased by any payee; nor shall any payee have the power to sell, mortgage, encumber, or anticipate the Periodic Payments, or any part thereof, by assignment or otherwise.

         In a section titled "Consent to Qualified Assignment," the Settlement Agreement states that:

Payee [(Thomas)] acknowledges and agrees that [National Union] may make a 'qualified assignment,' within the meaning of Section 130(c) of the Internal Revenue Code . . . of the insurer's liability to make the Periodic Payments set forth above to American General Annuity Service Corporation.

         As the Settlement Agreement allowed, National Union made a Uniform Qualified Assignment (UQA) to AGASC of its obligation to make the Periodic Payments to Thomas. The UQA also prohibits the assignment of the Periodic Payments. The UQA states as follows:

The Annuitant [Thomas] has no rights against the Assignee [AGASC] greater than a general creditor. None of the Periodic Payments may be accelerated, deferred, increased or decreased and may not be anticipated, sold, assigned or encumbered.

         AGASC is the sole owner of the Annuity Policy that was purchased to make the Periodic Payments. Under the Annuity Policy, American General makes the Periodic Payments to Thomas. The Annuity Policy states

No Payee [(Thomas)] or Beneficiary, of this policy shall have the power to commute or anticipate income payments. To the maximum extent permitted by law, payments will not be subject to:
1. Transfer (any attempt to make such transfer is void); or
2. Assignment (any attempt to make such assignment is void)

         Further, the Annuity Policy contains a non-assignability clause which states that a[n]o Payee or Beneficiary of this policy has the power to assign any payments or benefits of this annuity policy. Any attempt to make an assignment is void." Although Thomas did not sign the UQA or the Annuity Policy, as outlined above, the Settlement Agreement expressly contemplated the possibility of a qualified assignment to AGASC and subsequent purchase of an annuity to fund the Periodic Payments.

         Thomas sought to secure a lump sum payment in lieu of future annuity payments and entered into an agreement with DRB to transfer his rights to some of the Periodic Payments.[1] Citing the Kentucky Structured Settlement Protection Act (KSSPA), KRS 454.430 et seq., DRB filed an Application for Approval of a Transfer of Structured Settlement Payment Rights. American General and AGASC opposed the settlement transfer, arguing that the transfer is void as a matter of law based on the express terms of the Settlement Agreement, the UQA and the Annuity Policy. On February 9, 2016, the Boyd Circuit Court entered an order approving the transfer to DRB. The circuit court stated that the transfer complied with the requirements of the KSSPA, was in Thomas's best interest, and was necessary to enable Thomas to avoid imminent financial hardship.

         On American General and AGASC's appeal of the transfer approval, the Court of Appeals affirmed in a 2-1 decision. Because Kentucky Employers' Mutual Insurance v. Novation Capital, LLC, 361 S.W.3d 320 (Ky. App. 2011), had applied the KSSPA to a workers' compensation settlement, the Court of Appeals' opinion briefly addressed the applicability of the KSSPA and then focused on the anti-assignment provisions in the agreements. Persuaded by this Court's holding in Wehr Constructors, Inc. v. Assurance Co. of America, 384 S.W.3d 680 (Ky. 2012), that a non-assignability clause in an insurance policy is enforceable prior to a covered loss, but not after, the Court of Appeals determined that the anti-assignment clause in the Settlement Agreement (and the other two contracts) was unenforceable.[2] The Court of Appeals concluded that Thomas had a personal property interest in the Periodic Payments and such an interest cannot be restrained from alienability.

         In her dissent, Judge Clayton insisted that the majority read Wehr too broadly. Judge Clayton distinguished Wehr from Thomas's case, noting that the anti-assignment clause in his case was created after a loss occurred (his workplace injury), after Thomas prevailed on his claim, and after damages had been assessed. Thomas chose to enter the Settlement Agreement, with the anti-assignment provision, after he obtained a property right to the damages.

         American General and AGASC petitioned this Court for discretionary review. Having granted the petition, we conclude the anti-assignment provision in the Settlement Agreement and the facts of this case are distinguishable from Wehr.

         ANALYSIS

         I. The Anti-Assignment Provisions in the Agreements Are Enforceable.

         We begin with whether the anti-assignment provision in the Settlement Agreement executed by Thomas is enforceable under Kentucky law.[3] "[A] written agreement duly executed by the party to be held, who had an opportunity to read it, will be enforced according to its terms." Schnuerle v. Insight Communications Co., L.P., 376 S.W.3d 561, 575 (Ky. 2012) (quoting Conseco Fin. Servicing Corp. v. Wilder, 47 S.W.3d 335, 341 (Ky. App. 2001)). Kentucky law has long held that anti-assignment clauses in contracts are enforceable. See Pulaski Stave Co. v. Miller's Creek Lumber Co., 128 S.W. 96, 101 (Ky. 1910). ("[I]t seems to be well settled that a contract is generally assignable, unless forbidden by public policy or the contract itself . . . ."). This is consistent with general contract principles as reflected in the Restatement (Second) of Contracts § 317 (1981):

(2) A contractual right can be assigned unless
(a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or
(b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or
(c) assignment is validly precluded by contract.

         Despite these black-letter law principles, Thomas[4] now argues that the anti-assignment provisions in the Settlement Agreement and accompanying contracts are void as a matter of public policy, relying on Wehr. Before turning to that contention, we examine the language of the relevant contracts.

         A. The language in the Settlement Agreement, UQA, and Annuity Policy is clear and unambiguous.

         In the Settlement Agreement that Thomas signed, he expressly agreed that he had no "power to sell, mortgage, encumber, or anticipate the Periodic Payments, or any part thereof, by assignment or otherwise." He further agreed that National Union could make a qualified assignment of its liability to make Periodic Payments to AGASC, and that AGASC could fund its liability to make the Periodic Payments through purchase of an annuity from American General. Thomas agreed, with the advice of counsel and acknowledgement from the ALJ, that signing the Settlement Agreement was in his best interest and that he understood the resulting legal implications. The Settlement Agreement he signed has a clear, unambiguous anti-assignment provision, a fact Thomas does not contest. The anti-assignment provisions in the UQA and the ...


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