As most of the nation’s courts are closed, and the gears of civil justice grind to halt, there will be unique effects throughout the civil justice machine. Lawyers are getting agreements in place for court reporters not to be in the same location as witnesses; depositions are happening on Zoom, and judges overseeing their dockets are permitting video depositions, but not mandating them.
Let’s take a look at some of the factors that you should think about if you are considering settlement, or working toward one: the insurance industry has to have approved claim budgets in order to make payment on claims, and as with every financial crash, the investment divisions of the major property and casualty companies will have taken losses, like the rest of the world, these last few weeks. That is going to have an effect on the rate of settlements within civil justice, and that’s for the cases that are fully worked up, or are ready for settlement, mediation, or trial. Some of the most challenging cases never settle until a few days before trial. So, with trials postponed, there will be significantly fewer settlements this year.
Qualified settlement funds
If trial lawyers are able to achieve a settlement for a client, and they want to consider complex planning for their client, a standard practice among sophisticated trial lawyers is to use a qualified settlement fund in order to secure payment of the case, release and tax deductions for payments by defendants/tortfeasors or their insurers. These QSFs require an order of a court (see regulations here) for lawyers looking for a larger window of time to either consider a fee deferral or more maturity in the current calendar tax year to evaluate how much income or revenue the firm will have closer to year end. QSFs are valuable in giving trial lawyers and managing partners of firms extra decision-making time.
Additionally, there are a host of benefits to families in litigation if their cases are settled into a QSF. The family now will have the time to consider all their settlement options, which may involve or require the evaluation of a special needs trust, the use or validity of a domestic asset protection trust, the necessity and evaluation of the Medicare trust fund and Medicare set-asides, resolution of liens, and planning for the preservation of government benefits. These benefits far outweigh the nominal costs and procedural steps for using a qualified settlement fund. Our firm only charges a flat fee of $2,500 for most of our QSFs; or, we take the interest earnings on the deposits as our fee, making the QSF comparable to an attorney trust account or IOLTA.
Milestone operates a national master qualified settlement fund, which allows lawyers settling cases now, to ajoinder to the existing QSF, alleviating the issue of having to get a court order in their particular case or inventory of cases. Although we did not foresee any of the issues ongoing in the court system when we established this national fund a few years ago, its utility cannot be overstated in this environment.
Tax-free earnings or growth on settlements
Plaintiffs have the ability to create structured settlements or periodic payments, which carry a lifetime exemption on taxation of earnings, income, dividends, and capital gains if established properly. This tax exemption in the context of the current environment is an incredibly valuable consideration. But DO NOT assume that this means it MUST be an annuity. The IRS has issued various rulings regarding equities or investments to back these periodic payments, while preserving the tax exemption. For this reason alone, all settlements over $250,000 should be paid to a qualified settlement fund. Families will need time to coordinate with their settlement planner and devise a strategy for the money. With fixed annuities yielding below 2%, it is imperative that trial lawyers understand these complex planning tools, the interplay between QSF and periodic payments, and how leveraging these advanced planning techniques can make clients’ settlements 2x as valuable.
Consumer litigation finance or pre-settlement funding, litigation finance, lawsuit loans
The drag on resolution is going to drive up demand in this industry, which, at the interest rates most lenders or funders charge, compounded by the time delay to resolution, will exacerbate the effect any litigation finance has on a settlement in the future.
Most litigation funders (although typically not regulated to disclose) charge anywhere from 40% to 200% compounded interest annually. Or, they have schedules of repayment that would equate to a 50% APR if it were a bank loan. Trial lawyers will be hard pressed given the financial stress the entire world is going through now, to talk their clients out of these quasi-payday loans or litigation loans. Many of the companies hungry for deals will market aggressively in the coming months to deploy capital, and they benefit from the financial duress people are going through.
Our Bairs Foundation is currently the only 501(c)(3) public charity that specifically operates in the consumer litigation finance sector. It was recently mentioned in the New York City Bar report on litigation finance found here. Our current rate structure is 12% simple interest.
Liens and lien resolution
As a reminder, many aspects of our settlement services processing are reliant on third parties. With the federal and state governments increasingly suggesting that Americans shelter-in-place, we are starting to notice significant response delays from third parties, crucial to a lawyer’s ability to complete settlements, including:
- CMS for Medicare liens
- Various state and government agencies for Medicaid, VA, Tricare, Indian Health Affairs, FEHBA
- Lienholders and subrogation vendors such as Rawlings, Humana, Equian and others for private group health plan liens including Medicare Part C and ERISA plans
- Court orders and rulings in connection with bankruptcies, probate, minors and other incapacitated individuals, Bankruptcy trustees, estate administrators, guardians ad litems
- Medical record retrieval companies who are reliant on responsiveness from physicians offices, hospitals and healthcare facilities who are busy responding to COVID-19
It may be important to address lien holdbacks and partial payments to clients and payment of attorneys fees at the time of settlement.
Attorney fee deferral, or structured attorney fees
Law firms will be advised to consider capturing some of their fees in a QSF and/or attorney fee deferral that will allow them to manage their year-over-year cashflow and potentially leverage money they would pay in taxes in April 2021 to running their law firms next year. Small to midsize law firms may benefit the most from these practices. Our attorney fee program allows for the investment in treasuries. With no upfront fee, it makes deferring just to next year a reality, whereas in decades past, all deferrals were done using annuities making distributions in a few short year highly impractical.
The aspects of settlement planning change with the challenges that lawyers face in their underlying cases in these uncertain times. It’s all that more wise to consult with expert settlement planners well in advance of settlement or mediation.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).