Western United Life Assurance Co. v. Hayden ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
8-30-1995
Western United v Hayden
Precedential or Non-Precedential:
Docket 94-3548
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995
Recommended Citation
"Western United v Hayden" (1995). 1995 Decisions. Paper 238.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/238
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 94-3548
____________
WESTERN UNITED ASSURANCE COMPANY
v.
DEBRA ANN HAYDEN; DAVID GERARD HAYDEN;
RELIANCE INSURANCE COMPANY;
UNITED PACIFIC LIFE INSURANCE COMPANY;
WESTERN UNITED ASSURANCE COMPANY
Appellant
____________________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 93-01850)
____________________
Argued: March 9, 1995
Before: HUTCHINSON, ALITO, and SAROKIN, Circuit Judges
(Opinion Filed: August 30, 1995)
____________________
GEORGE M. CHEEVER, ESQ. (Argued)
CATHERINE L. WELSH, ESQ.
KIRKPATRICK & LOCKHART
1500 Oliver Building
Pittsburgh, PA 15222
Attorneys for Western United
Life Assurance Company, Appellant
MARY REITMEYER, ESQ.
JOSEPH R. LAWRENCE, ESQ. (Argued)
1310 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 15219
Attorneys for Debra A. Hayden and
David G. Hayden, Appellees
____________________
1
OPINION OF THE COURT
____________________
2
ALITO, Circuit Judge:
This appeal concerns an adversary proceeding filed by
Debra and David Hayden, who are the debtors in a Chapter 13
bankruptcy proceeding. The subject of the adversary proceeding
is a prior transaction in which Debra Hayden, in return for a
cash payment, purported to assign to Western United Life
Assurance Company her right to receive certain future periodic
payments. In the adversary proceeding, the Haydens maintained
that these periodic payments belonged to the bankruptcy estate
because Debra Hayden's transaction did not constitute an
effective assignment. The bankruptcy court agreed and entered
summary judgment in favor of the Haydens. The district court
affirmed the bankruptcy court's order. We now reverse and remand
for further proceedings consistent with this opinion.
I.
In 1984, Debra Hayden sustained injuries as a result of
allegedly negligent medical treatment. App. 52. She
subsequently filed a malpractice suit against the treating
physicians, the hospital and their respective liability insurance
company (collectively the "medical defendants").0 Id.
0
The settlement agreement to the malpractice action contains a
provision proscribing the Haydens from publicizing the facts or
terms of the settlement. The Haydens have moved this court to
maintain the confidentiality of this agreement. We will
therefore refer to the defendants only as the medical defendants.
3
In February 1988, Ms. Hayden settled her suit with the
medical defendants. Id. She executed a settlement agreement
that stated:
For and In Consideration of the sum of three
hundred ten thousand dollars ($310,000) to me
paid in hand by [the medical defendants]
. . . the receipt of which is hereby
acknowledged,** I, being of lawful age,
hereby fully and forever release, acquit and
discharge the said [medical defendants] . . .
from any and all actions . . . on account of
any and all known and unknown injuries . . .
sustained by me . . . as a result of medical
treatment received by [me] from [the medical
defendants].
** (and the payment of $290,000 to United
Pacific Life Ins. Co. for the purchase of an
annuity contract)
Western's Br. at Exhibit 1. The medical defendants then entered
into a qualified assignment and assumption agreement with
Reliance Insurance Company ("Reliance"). In pertinent part, this
agreement stated:
Whereas, the Settlement Agreement provides
for the [defendants] to make certain periodic
payments to or for the benefit of [Ms.
Hayden].
Whereas, the [defendants] desires to assign
to [Reliance] its liability to make such
periodic payments pursuant to the conditions
of Internal Revenue Code [§] 130(c) . . . .
NOW, THEREFORE, . . . the parties hereto
agree as follows:
1. Liabilities Assigned. The
[defendants] hereby assigns and
[Reliance] hereby assumes all of the
[defendants'] liability to make the
periodic payments to [Ms. Hayden]. . . .
2. Funding of Periodic Payments.
[Reliance] may fund the periodic
4
payments . . . by purchasing a
"qualified funding asset" within the
meaning of I.R.C. [§] 130(d), in the
form of an annuity contract from United
. . . . All rights of ownership and
control of such annuity shall be vested
in [Reliance]. However, for
[Reliance's] convenience, [Reliance]
directs United . . . to make the
payments to . . . [Ms. Hayden] . . . .
Id. at Exhibit 2. With funds provided by the medical defendants,
Reliance then purchased a $290,000 annuity from United Pacific
Life Assurance Company ("United"). Western Life Assurance Co. v.
Hayden, No. 93-1850, 94-517, 94-518, at 2 (W.D.Pa. Sept. 20,
1994); App. 53. The annuity provided for monthly payments of
$2,159.37 for the longer of 30 years or the remainder of Ms.
Hayden's life. App. 63. The annuity designated Reliance as the
owner and Ms. Hayden as the payee. Id. at 60.
In January 1989, the Haydens were experiencing
financial difficulties. In re Hayden, No. 92-2261, Adv. No. 92-
0301, at 3 (Bankr. W.D.Pa. Oct. 13, 1993). To alleviate these
difficulties, the Haydens contacted Donald Bach, who arranged for
at least five loans in various amounts totalling more than
$50,000. App. 53-54. In consideration for these loans, the
Haydens agreed to pay back double the amount of the principal in
60 equal monthly payments. Western at 3.
Despite these loans, the Haydens continued to
experience financial difficulties. In re Hayden at 4. In early
1990, Ms. Hayden asked Bach to consolidate the loans so as to
reduce the monthly payments. App. 54. Bach advised Ms. Hayden
5
that although consolidation was not possible, he might be able to
arrange for the purchase of the annuity contract. Id.
In July 1990, Bach contacted Western United Life
Assurance Company ("Western") to inquire whether Western had an
interest in purchasing Ms. Hayden's annuity. Id. Western
indicated an interest. On July 24, 1990, Western prepared a
letter from Ms. Hayden addressed to Reliance. Id. This letter
stated that Ms. Hayden had entered into an arrangement with
Western and that pursuant to this arrangement she had conveyed
her rights under the settlement agreement, including her right to
receive the monthly annuity payments. Id. at 77. The letter
asked Reliance to request that United change the annuity
beneficiary to Western and to send future payments directly to
Western. Id.
On August 10, representatives of Reliance and Western
spoke. Id. at 55. Reliance informed Western that it would not
honor Ms. Hayden's request. Id. at 79. Reliance explained that
it was the owner of the annuity and that Ms. Hayden had no
assignable rights in the policy. Id. After subsequent
discussions between Reliance and Western, the two settled on the
following mutually acceptable method of executing the assignment.
Although Reliance insisted that the checks remain payable to Ms.
Hayden, it agreed to honor a request from Ms. Hayden to change
irrevocably the address to which the checks were sent to that of
Western. Id. at 81.
In September 1990, the parties executed a series of
documents in an attempt to assign to Western Ms. Hayden's rights
6
to the monthly payments.0 In pertinent part, Ms. Hayden executed
a document entitled "Annuity (Payment) Assignment Agreement." The
document stated:
FOR VALUE RECEIVED . . . [Debra A.
Hayden] does hereby assign, transfer, and set
over to Western . . . all Assignor's right,
title and interest in and to the periodic
payments described below together with
Assignor's existing rights and interest . . .
in and to the following described annuity
contract/policy and related release and/or
settlement agreement . . . .
Western's Br. at Exhibit 5. The document then identified with
specificity the monthly payments, the annuity contract, and the
settlement agreement. Ms. Hayden also directed Reliance to have
United irrevocably change the address to which the checks were
sent to that of Western. Id. at Exhibit 4. Finally, because the
annuity checks remained payable to Ms. Hayden, she executed an
irrevocable special power of attorney empowering Western to
endorse and cash the checks. Id. at Exhibit 6. In return,
Western paid Ms. Hayden $178,395.63, of which $92,420.63 was used
to satisfy the loans. App. 58; Western at 4. Pursuant to these
arrangements, the monthly payments were received and deposited by
Western from the end of 1990 until August 1992. App. 58.
On May 14, 1992, Debra and David Hayden filed a
voluntary bankruptcy petition under Chapter 13 of the bankruptcy
code. Western at 5. Subsequently, the Haydens filed a six-count
adversary complaint against Western, United, and Reliance.0 In
0
Other documents included beneficiary consents by David Hayden
and by Ms. Hayden's daughter and various option agreements. App.
90-93.
0
Count I requested a determination of Western's secured status
pursuant to 11 U.S.C. § 506 or an avoidance of a lien pursuant to
7
this complaint, the Haydens alleged that the September 1990
documents executed by Ms. Hayden did not create an effective
assignment. Thus, the Haydens argued that the annuity checks
were property of the estate and that the court should order
Western to turn over these checks to the estate. Similarly, the
Haydens maintained that Western was only an unsecured creditor of
the estate for a sum equal to the value of its bargain with Ms.
Hayden less any prepetition annuity checks it received and
cashed.
The parties moved for summary judgment on the adversary
complaint. In re Hayden at 1. The bankruptcy court entered
partial summary judgment in favor of the Haydens.0 Id. at 14.
The court held that the documents executed by Ms. Hayden did not
create an effective assignment and that the monthly annuity
payments were the property of the bankruptcy estate. Thus, the
court ruled that Western was an unsecured creditor and ordered
Western to surrender the postpetition annuity payments to the
Chapter 13 trustee. Id.
The bankruptcy court subsequently confirmed the
Hayden's Chapter 13 plan. In pertinent part, the plan provided
11 U.S.C. § 522. Count II sought to void, under 11 U.S.C. § 552,
any security interest asserted by Western in the annuity
payments. Count III alleged that Western violated that automatic
stay provisions of 11 U.S.C. § 362. Count IV sought, pursuant to
11 U.S.C. § 542, the turnover of the postpetition annuity
payments received by Western on the ground that they were
property of the bankruptcy estate. Count V maintained that by
receiving the checks Western benefitted from a preference
proscribed by 11 U.S.C. § 547. Finally, Count VI alleged that
Reliance and United, in violation of 11 U.S.C. § 543, disbursed
to Western funds belonging to bankruptcy the estate.
0
The court made no determination regarding counts III and V.
8
that all monthly annuity payments from the commencement of the
case to the date of consummation would be surrendered to the
trustee for distribution to the creditors. Western at 5. For
the first six months after consummation, the Haydens were to
receive the monthly annuity checks, from which $870 would be
given to the trustee for distribution to the creditors. Id. The
remaining portion of the annuity checks for this six-month
period, as well as the full amount of all subsequent annuity
checks, was excluded as a payment reasonably necessary for the
support of the debtor under 11 U.S.C. § 522(d)(10)(E). Thus, the
effect of the bankruptcy court's ruling in the adversary
proceeding and its approval of the plan was that the Haydens
continued to receive the annuity payments while Western received
only a small percentage of the sum it paid to Ms. Hayden for her
purported assignment.
Western separately appealed to the district court the
bankruptcy court's decisions to grant summary judgment and to
approve the plan.0 The district court affirmed the bankruptcy
court's holding that the documents executed by Ms. Hayden failed
to create an effective assignment. The district court focused on
Ms. Hayden's rights under the annuity contract. It explained
that because Ms. Hayden was not the owner of the annuity she did
not possess the legal right to change the designated beneficiary
of the annuity. Western at 8. Therefore, the court concluded,
"it is a simple matter to conclude that she could not assign the
0
Western also appealed a third bankruptcy court decision not
relevant to this appeal.
9
right to receive the annuity payments . . . ." Id. The district
court also affirmed the bankruptcy court's confirmation of the
plan. Id. at 10.
Western then appealed both decisions to this court. The
present appeal concerns only the bankruptcy court's ruling with
respect to the adversary action.0 Western contends that it,
rather than the Haydens' estate, possesses the right to receive
the monthly payments. Western believes that the district court
improperly focused only on Ms. Hayden's rights under the annuity
contract. It argues that Ms. Hayden assigned all her rights
under the annuity contract and settlement agreement and that
these rights included the right to receive the monthly annuity
payments. The Haydens respond by arguing that Ms. Hayden could
not have executed an effective assignment because she did not
have any assignable rights under either document and that even if
she did, Pennsylvania law prevented the assignment of these
rights.0
II.
We exercise plenary review over an appeal from an order
granting summary judgment. Rosen v. Bezner, 996 F.2d 1527, 1530
(3d Cir. 1993). We look to Pennsylvania law to determine whether
0
Western filed two appeals with this court. The present appeal,
No. 94-3548, concerns only the adversary proceeding. Appeal No.
94-3549 challenges the confirmation of the plan. In light of our
holding in the present appeal, we need not, and do not, consider
the merits of appeal No. 94-3549.
0
Western raised several alternative arguments. In light of our
holding, we need not and do not reach these arguments.
10
the documents executed by Ms. Hayden constituted an effective
assignment.0 Under Pennsylvania law, "when interpreting a
contract a court must determine the intent of the parties and
effect must be given to all provisions in the contract." Dept.
of Transp. v. Manor Mines, Inc., 565 A.2d 428, 432 (Pa.
1989)(citations omitted). If a written contract is clear and
unambiguous, then the court construes the contract as a matter of
law by its contents alone. Id.; Allegheny International v.
Allegheny Ludlum Steel Corp., 40 F.3d 1416, 1424 (3d Cir. 1994).
If, however, the contract is ambiguous, then "in order to
ascertain th[e intention of the parties], the court may consider
the surrounding circumstances, the situation of the parties, the
objects they apparently have in view and the nature of the
subject-matter of the agreement." International Organization
Master, Mates and Pilots of America, Local No. 2 v. International
Organization Master, Mates and Pilots of America, Inc., 439 A.2d
621, 624 (Pa. 1981).
A.
We begin our inquiry by considering whether the annuity
assignment agreement executed by Ms. Hayden in September of 1990
created an effective assignment. According to the language of
that document, Ms. Hayden agreed to "assign, transfer, and set
over to Western . . . all [her] right, title and interest . . .
0
All parties agree that Pennsylvania law governs this case. We
agree. We note that the relevant documents were executed in
Pennsylvania and that the Haydens reside in Pennsylvania.
11
in and to the . . . annuity contract/policy and related release
and/or settlement agreement . . . ." Western's Br. at Exhibit 5.
We find that this language inescapably and unambiguously
expresses an intent by Ms. Hayden to assign to Western all her
rights under the annuity contract and the settlement agreement.
The Haydens argue that despite this clear language, the
document is not an assignment. Rather, they contend that the
document is merely a contract to transfer funds to be received in
the future. Under the Restatement (Second) of Contracts § 330, a
contract to make a future assignment of a right or to transfer
proceeds to be received in the future is not an assignment.
Our review of section 330, however, convinces us that
the September 1990 document created an effective assignment.
Section 330 distinguishes between, on the one hand, an obligee's
intention to bind himself contractually to make a future
assignment and, on the other, an intention to make a present
assignment. See Restatement (Second) of Contracts § 330,
comments a-b. The former is merely a contract, but the latter is
an assignment. The test is whether the obligee manifests an
intention to transfer present ownership of the right. Id.; see
also Melnick v. Pennsylvania Co. for Banking and Trusts, 119 A.2d
825, 826 (Pa. Super. 1956)(in banc)(finding that the statement "I
. . . hereby authorize and empower you . . . to . . . assign" was
not an assignment because "these words indicate[d] no present
intent to transfer or divest oneself from the right to demand
possession of the [subject matter of the agreement]."); Daymut v.
Commonwealth Dept. of Public Welfare, 410 A.2d 1318, 1319 (Pa.
12
Cmwlth 1980)(finding document not to be an assignment because it
did not "indicate a present intent of the obligor to divest
himself of any right to demand possession of [the subject matter
of the agreement].")0
In the present case, the document executed by Ms.
Hayden used the present tense and stated that Ms. Hayden "does
hereby assign . . . ." We believe that this language clearly
indicates an intent to make a present assignment. Thus, we find
that this document was intended to create an effective assignment
and not a contract to make a future assignment. We conclude,
therefore, that the September 1990 documents executed by Ms.
Hayden created an effective legal assignment of Ms. Hayden's
rights under the annuity contract and settlement agreement. This
conclusion does not end our inquiry, however, because we must
determine exactly what rights Ms. Hayden was empowered to assign
under these two agreements. We next turn to this issue.
B.
To determine whether Ms. Hayden had assignable rights
under the annuity contract or the settlement agreement, we must
consider each of these documents. With respect to the annuity
contract, Western concedes that Ms. Hayden did not have a legally
assignable right under this contract.0 Western's Br. at 15.
0
Although Pennsylvania courts have not explicitly adopted § 330,
we believe that Melnick and Daymut indicate that Pennsylvania
does follow this section.
0
Although Western concedes that Ms. Hayden did not have a legally
assignable right, it argues that Ms. Hayden's assignment of her
expectancy interest in the annuity payments is enforceable in
13
Western and the Haydens agree that Reliance is the undisputed
owner of the annuity. Id. As owner, the annuity contract vests
Reliance with the right to change the payee and to direct the
annuity payments to whomever it desires. App. 65. Because Ms.
Hayden did not have an enforceable right to remain as the annuity
payee, Western concedes that she could not assign a right to
receive those payments. Western's Br. at 15, 27. Thus, we
consider Ms. Hayden's rights under the settlement agreement.
Western argues that under the settlement agreement Ms.
Hayden had a legally assignable right to receive the monthly
payments. Western interprets this agreement as requiring
Reliance, as the medical defendants' assignee, to pay Ms. Hayden
the periodic payments from the annuity or from another source.
Western's Br. at 29. Because the agreement created a right to
receive the periodic payments, Western argues that Ms. Hayden
could assign this right to receive the payments.
The Haydens, however, contend that Ms. Hayden had no
assignable rights under the settlement agreement. Although their
exact interpretation of the settlement agreement is unclear, they
appear to argue that it required only the purchase of an annuity
for the benefit of Ms. Hayden and nothing more. The Haydens
reject Western's claim that the settlement agreement created a
contractual obligation to make the periodic payments independent
of the purchase of the annuity. Ms. Hayden, they observe,
released the medical defendants from liability in consideration
equity. Western's Br. at 28. In light of our holding, we need
not and do not consider this issue.
14
of a cash payment and "the payment of $290,000 to United Pacific
Life Ins. Co. for the purchase of an annuity contract . . . ."
Western's Br. at Exhibit 1. Thus, the Haydens maintain that
because the settlement agreement did not require more than the
purchase of an annuity and because the annuity was purchased, Ms.
Hayden did not have any remaining assignable rights under the
agreement.
We believe that the language of the settlement
agreement is ambiguous and could support either of these
interpretations. The ambiguity arises from the fact that the
literal language of the agreement does not define the
relationship between Ms. Hayden and the annuity. Thus, one can
imply various relationships between them. We offer a few
illustrative examples: (1) the medical defendants must purchase
the annuity and assign it to Ms. Hayden; (2) the medical
defendants must purchase the annuity and irrevocably name Ms.
Hayden as payee; (3) the medical defendants must purchase the
annuity and use it as security for their obligation to Ms.
Hayden; or (4) the medical defendants must purchase the annuity
but need not use it even as security for their obligation to Ms.
Hayden.
Because the language of the settlement agreement is
ambiguous, to determine the intent of the parties we look to the
surrounding circumstances, the situation of the parties, and the
objects they apparently have in view. International Organization
Master, Mates and Pilots of America, 439 A.2d at 624. Western
argues that when these factors are considered, it is clear as a
15
matter of law that the medical defendants, Reliance, and Ms.
Hayden intended to enter into a "structured settlement" in
accordance with §§ 104(a)(2) and 130 of the Internal Revenue Code
("I.R.C."), 26 U.S.C. §§ 104(a)(2), 130. Western further
maintains that a structured settlement would require Ms. Hayden
to retain a right to periodic payments under the settlement
agreement. Thus, contends Western, the parties to that agreement
intended to vest Ms. Hayden with an assignable right to receive
the payments under the agreement. We consider each prong of
Western's argument in turn.
Structured settlements are a type of settlement
designed to provide certain tax advantages. In a typical
personal injury settlement, a plaintiff who receives a lump-sum
payment may exclude this payment from taxable income under I.R.C.
§ 104(a)(2) (providing that the amount of any damages received on
account of personal injuries or sickness are excludable from
income). However, any return from the plaintiff's investment of
the lump-sum payment is taxable investment income. In contrast,
in a structured settlement the claimant receives periodic
payments rather than a lump sum, and all of these payments are
considered damages received on account of personal injuries or
sickness and are thus excludable from income. Accordingly, a
structured settlement effectively shelters from taxation the
returns from the investment of the lump-sum payment. See Rev.
Rul. 79-220, 1979-2 C.B. 74. See also Sen. Rep. No. 97-646, 97th
Cong., 2d Sess. reprinted in 1979 U.S.C.C.A.N. 4580, 4583
16
(explaining that Pub. L. No. 97-473, 96 Stat. 2605, codified Rev.
Rul. 79-220 at 26 U.S.C. § 104(a)(2)).
A key characteristic of a structured settlement is that
the beneficiary of the settlement must not have actual or
constructive receipt of the economic benefit of the payments.
Rev. Rul. 79-220. In a structured settlement, the settling
defendant's "purchase of a[n] . . . annuity contract from the
other insurance company [is] merely an investment by [the
settling defendant] to provide a source of funds for [him] to
satisfy [his] obligation to [the plaintiff]." Id. The
arrangement is "merely a matter of convenience to the [defendant]
and d[oes] not give the recipient any right in the annuity
itself." Id. (emphasis added). Because the recipient never had
actual or constructive receipt of the lump-sum amount, the
recipient need not include the investment yield on that amount as
taxable income. Id. Thus, the exclusion applies to the full
amount of the annuity payments because the full amount is
received as damages on account of personal injuries. Id.
Before 1983, the utility of structured settlements was
diminished by the credit risk that the recipient would have to
assume. William Winslow, Tax Reform Preserves Structured
Settlements, 65 Taxes 22, 24 (1987). Because the annuity was
merely a matter of convenience and did not give the recipient any
right in the annuity, in the case of the settling defendant's
default the plaintiff could not seek redress from the annuity
issuer. Id. This presented a problem if the settling
defendant's general credit risk was high.
17
Congress addressed this problem by enacting I.R.C.
§130. See Sen. Rep. No. 97-646, 97th Cong., 2d Sess. reprinted
in 1979 U.S.C.C.A.N. 4580, 4583. As we detail in subsection C of
this opinion, section 130 allows a tax-neutral transaction in
which the settling defendant assigns and a third party assumes
the obligation to make periodic payments under most section
104(a)(2) structured settlements. When the third party assignee,
such as Reliance, has a credit rating superior to that of the
settling defendant, such an assignment and assumption agreement
benefits a plaintiff, such as Ms. Hayden, by allowing her to rely
on the assignee's superior credit. Winslow, supra.
In the instant case, it is apparent that Ms. Hayden,
the medical defendants and Reliance structured the settlement to
conform with the requirements of sections 104 and 130. Indeed,
the parties to the present case agree that the assignment and
assumption agreement was designed to "follow[] the road map laid
out in I.R.C. § 130 . . ." and that the annuity was purchased as
part of a structured settlement agreement. See Hayden's Br. at
19, 28; Western's Br. at 4. The language of the assignment and
assumption agreement confirms this.0 The agreement expressly
0
Although Ms. Hayden was not a signatory to this the assignment
and assumption agreement, this agreement provides evidence of her
intent in executing the settlement agreement. When construing an
ambiguous contract which by necessary implication refers to
another document, the court may look to such document as
additional evidence in order to ascertain the intention of the
parties. International Organization Master, Mates and Pilots,
439 A.2d at 625. Moreover, as we explain below, under
Pennsylvania law when two or more writings are executed as part
of one transaction they should be construed together. Finally,
we also observe that in the assignment and assumption agreement,
the medical defendants "warrant[ed] that [Ms. Hayden . . .
18
stated that it was intended to create an assignment pursuant to
the conditions of section 130. Moreover, the assignment and
assumption agreement complied with the requirements of a section
104(a)(2) structured settlement. The agreement stated that
Reliance may fund the periodic payments . . .
by purchasing a[n] . . . annuity contract
from United . . . . All rights of ownership
and control of such annuity shall be vested
in [Reliance]. However, for [Reliance's]
convenience, [Reliance] directs United to
make the payments to . . . [Ms. Hayden]
. . . .
Western's Br. at Exhibit 2 (emphasis added). Thus, the agreement
explicitly complied with the Revenue Ruling by stating that the
annuity was merely a convenient method by which Reliance could
fund the obligation and that Reliance, and not Ms. Hayden,
exercised ownership and control over the annuity.
Our conclusion that the medical defendants, Reliance
and Ms. Hayden intended to enter into a structured settlement
clarifies the scope of Ms. Hayden's rights under the structured
settlement. As previously explained, under a structured
settlement the obligor has a continuing obligation to pay the
periodic payments to the recipient. The annuity is merely a
convenient funding mechanism and does not alter this obligation.
Thus, we believe it is clear as a matter of law that under the
settlement agreement the medical defendants had a continuing
obligation to pay Ms. Hayden the monthly payments.
consented to the assumption of [the] obligation as direct
obligation of Reliance . . . and in substitution of the
Assignor." Western's Br. at Exhibit 2. The Haydens do not argue
that Ms. Hayden did not consent to the agreement as warranted.
19
The Haydens' arguments to the contrary are
contradictory. While conceding that the parties followed the
"roadmap laid out in I.R.C. § 130" and that the annuity "was
purchased as the most significant part of a very specific
structured settlement agreement," the Haydens argue that the
annuity contract was not merely an accommodation to Reliance and
that Reliance has no obligation to make periodic payments
independent of the annuity. Hayden's Br. at 19, 28. The Haydens
argument reveals a misunderstanding of structured settlements. If
the parties intended to structure the transaction pursuant to
I.R.C. §§ 104 and 130, then they must have intended that the
annuity be merely an accommodation and that Reliance have a
general obligation to make the periodic payments. Furthermore,
the Haydens' interpretation would
render the assignment and assumption agreement meaningless. If
the sole obligation under the settlement agreement was to
purchase the annuity, there would be no point to inserting
Reliance into the transaction; the medical defendants could have
purchased the annuity themselves and thereby fulfilled all their
obligations. It is thus apparent that the defendants executed
the assignment because under the settlement agreement they had a
continuing obligation that they wished to assign, namely, the
obligation to make periodic payments. We conclude, therefore,
that the settlement agreement gave Ms. Hayden a legal right to
receive monthly payments of $2159.37. We next consider whether
this right was assignable.
20
C.
A contractual right to receive a future stream of
payments is typically assignable. E. Allan Farnsworth,
Farnsworth on Contracts §11.2 (1990). The Haydens argue,
however, that even if the settlement agreement vested Ms. Hayden
with a legal right to receive the monthly payments, this right
was not assignable. The Haydens support this assertion with two
arguments.
First, the Haydens argue that the parties to the
structured settlement must have intended impliedly to restrict
the assignment of Ms. Hayden's right to receive the monthly
payments. They premise this argument on their belief that an
assignment by Ms. Hayden would cause negative tax consequences
for Reliance and that to avoid such a result the parties must
have intended to restrict the assignment of the payments.
According to the Haydens, in order for Reliance to exclude from
income the amount it received for agreeing to the assignment, the
periodic payments it agreed to make must be excludable from the
payee's gross income under section 104(a)(2). See I.R.C.
§ 130(a),(c)(2)(E). Thus, they conclude that the agreement must
impliedly restrict assignments because the payments are
excludable only if Ms. Hayden is the payee.
We consider the operation of section 130 for the
limited purpose of assessing whether the parties intended
impliedly to restrict assignments. The Internal Revenue Code
defines gross income broadly to include "all income from whatever
source derived . . . ." I.R.C. § 61. Under section 130(a),
21
however, an assignee may exclude from gross income "[a]ny amount
received for agreeing to a qualified assignment . . . to the
extent that such amount does not exceed the aggregate cost of a
qualified funding asset." A qualified assignment is one that
satisfies certain criteria, one of which requires that the
periodic payments assigned must be excludable from the
recipient's gross income under I.R.C. § 104(a)(2). See I.R.C.
§130(c)(2)(E). Furthermore, a qualified funding asset is an
annuity contract meeting certain requirements and purchased by
the assignee within 60 days of the assignment. See I.R.C.
§130(d).
When an assignee receives an amount for agreeing to a
qualified assignment, the assignee may use that amount to
purchase an annuity that satisfies the criteria of a qualified
funding asset. I.R.C. § 130(a). If the assignee does so, the
assignee can exclude the amount used to purchase the annuity from
income. Because this amount was excluded, the basis of the
annuity is then reduced by that amount. I.R.C. § 130(b). In the
future, the income from the annuity is offset, presumably by a
business expense deduction, when these payments are distributed
to the payee. See C.C.H. Standard Federal Tax Reports ¶ 7383
(1994). See generally I.R.C. §§ 61, 162.0
0
An example may be helpful. Assume a settling defendant pays a
third party $100,000 for its agreement to assume an obligation to
make periodic payments under a structured settlement. Assume
further that the assignment is a qualified assignment under
I.R.C. § 130(c). If the third party purchases an $95,000
qualified funding asset then it has $5000 of income. The basis
of the annuity is reduced to $0. All future income from the
annuity is taxable income, which presumably is offset by a
22
In the present case, Reliance presumably exercised its
section 130 exclusion when it assumed the medical defendants'
obligation. The Haydens would have us conclude that Reliance
would retroactively lose this exclusion if Ms. Hayden assigned
her right to receive the periodic payments under the settlement
agreement. Thus, they would have us infer that, upon Ms.
Hayden's assignment of the payments, the original cost of the
annuity less the annuity payments already received as income by
Reliance becomes income to Reliance and the basis of the annuity
is increased accordingly. The Haydens, however, do not cite, and
our research has failed to reveal, any support for this novel
proposition. We are therefore unpersuaded by the Haydens theory,
and we decline to infer that the settlement agreement was
intended to limit assignment of Ms. Hayden's right to receive the
periodic payments.
The Haydens present a second reason why they believe
that even if Ms. Hayden had a legal right to receive the monthly
payments, this right was not assignable. They contend that the
settlement agreement must be read together with the annuity
contract and that a provision of the annuity contract prevents
the assignment of Ms. Haydens' rights under both that contract
and the settlement agreement.
Under Pennsylvania law,
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
business expense. See generally C.C.H. Standard Federal Tax
Reports ¶ 7383.03 (1994).
23
does not matter that the parties to each
writing are not the same.
Black v. T.M. Landis, Inc., 421 A.2d 1105, 1107 (Pa. Super.
1980)(citations omitted). This general rule also applies where
several agreements are made as part of one transaction even
though they are executed at different times. Neville v. Scott,
127 A.2d 755, 757 (Pa. Super. 1956).
In the present case, the Haydens maintain that
Pennsylvania law requires the settlement agreement and the
annuity contract to be read together. Both documents were
executed as part of the structured settlement. The settlement
agreement specifically referred to the purchase of an annuity
from United. Although Ms. Hayden was not a party to the annuity
contract, she was the annuitant and the payee of the contract.
Furthermore, the settlement agreement and the annuity contract
were executed within two weeks of each other. Because Western
agrees with this argument, we will assume that the two documents
should be read together. See Western's Reply Br. at 4. Thus, we
turn to consider whether the annuity contract contained a clause
proscribing assignments by Ms. Hayden.
The Haydens contend that the following clause in the
annuity contract proscribed assignments by Ms. Hayden:
Protection from Creditors -- The Annuity
payments will not be subject to the debts,
contracts or engagements of any person
entitled to such payments by the terms of the
Contract. Nor will any such payments be
subject to any judicial process to levy or
attach them. This protection is given to the
extent allowed by law.
Id.
24
For at least three reasons, we reject the Haydens'
argument. First, the plain language of the clause refers only to
involuntary attachments. As the title of the clause implies, the
clause acts to protect the payee from creditors by preventing
them from attaching the annuity payments. The clause, however,
does not expressly bar a voluntary assignment. If the parties to
the annuity contract intended to proscribe voluntary assignments,
it would have been simple to add a clause to accomplish that
purpose. See Bank of New England v. Standlund, 529 N.E. 394, 395
(Ma. 1988)(interpreting clause, which stated: "no income or
principal . . . payable to any beneficiary . . . shall be
attachable, trusteeable or in any manner liable for or to be
taken for any debts, contracts or obligations of . . .
beneficiary," to restrict only involuntary alienation because
there were no "words that indicate[d] . . . [an] inten[t] to
prohibit . . . beneficiaries from voluntarily assigning their
interests in the [trust].")
Second, other provisions of the contract imply that
this clause does not prevent voluntary assignments. The annuity
contract explicitly states that "the owner may assign an interest
in th[e annuity] contract." Western's Br. at Exhibit 3. The
owner can also be the payee. If the protection-from-creditors
clause prevents an assignment by "any person entitled to such
payments by the terms of the [c]ontract," then it would prevent
assignments by the owner when the owner was also the person
entitled to such payments. Thus, reading the protection-from-
creditors clause to bar voluntary assignments would contradict
25
the owner's right to assign an interest in the annuity when the
owner was also a payee.
Third, even if the annuity contract's protection-from-
creditors clause proscribed the payee from voluntarily assigning
her rights to receive payments under the annuity, this would not
imply that in the instant case it prevents Ms. Hayden from
assigning her rights to receive periodic payments under the
settlement agreement. Reading the annuity contract and the
settlement agreement as a whole, it is clear that the protection-
from-creditors clause of the annuity applies only to the annuity
payments. The clause plainly states that it applies to "[t]he
[a]nnuity payments." We find no evidence to support the
proposition that this clause was intended also to apply to
payments made under the settlement agreement. Consequently, we
reject the Haydens' argument that Ms. Hayden's right to receive
periodic payments under the settlement agreement was not
assignable.
III.
For the reasons stated we hold that, as a matter of
law, the documents executed by Ms. Hayden in September 1990
constituted an effective legal assignment to Western of her right
to receive the periodic payments provided for in the settlement
agreement. Thus, unlike the concurrence, we hold that Western
now has a right to receive the periodic payments from Reliance
and that Ms. Hayden no longer has a right to receive these
payments. In light of this holding we must reverse the order of
26
the district court in the adversary proceeding. We need not and
do not consider the additional arguments raised by the parties.
Rather, we remand this case for further proceedings consistent
with this opinion.
27