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Owen v. CNA Insurance/Continental Casualty Co.

May 31, 2001


On appeal from the Superior Court, Appellate Division, whose opinion is reported at 330 N.J. Super. 608 (2000).

The opinion of the court was delivered by: Stein, J.

Argued February 26, 2001

This appeal involves a tort victim who brought an action against a liability insurer for a declaratory judgment that the non-assignment clause in a structured settlement agreement was unenforceable. The trial court granted summary judgment in favor of the tort victim, holding that under current law the non-assignment clause was unenforceable. The Appellate Division reversed, concluding that the enforceability of the non-assignment clause depended on its materiality to the primary purposes of the settlement agreement and remanding the matter for further fact finding on that question. One member of the appellate panel dissented, stating that "a holding that the assignment in this case was ineffective has no current legitimate provenance in law." The tort victim appealed as of right based on the dissent below. R. 2:2-1(a)(2). The specific issue is whether the non-assignment clause in the structured settlement agreement at issue is enforceable.


In September 1983, plaintiff Carol Owen (Owen) signed a release in favor of parties she had sued in a personal-injury action arising out of a slip-and-fall accident at a Bamberger's Store in East Brunswick, New Jersey. Owen v. CNA Ins./Continental Cas. Corp., 330 N.J. Super. 608, 611 (App. Div. 2000). In connection with that release, Owen entered into a settlement agreement with the tortfeasor's insurer, Continental Casualty Corporation (Continental). Ibid. Under the terms of the settlement agreement, Owen was entitled to receive an initial lump sum payment of $10,000, attorney's fees of $15,000, and five deferred periodic payments totaling $81,067.24. Ibid. The periodic payments were scheduled as follows: December 21, 1986 - $6,505.48; December 21, 1991 - $9,558.68; December 21, 1996 - $14,044.84; December 21, 2001 - $20,636.48; December 21, 2006 - $30,321.76. The non-assignment provision of the settlement agreement stated:

The claimant shall have the right to change the Contingent Payee at any time during the term of this Agreement by filing written notice with the Company, such change to be effective when accepted by the Company in writing as of the date such notice was signed, except as to any payments made by the Company before such change was accepted.

To the extent provided by law, the aforesaid deferred lump sum payments shall not be subject to assignment, transfer, commutation, or encumbrance, except as provided herein.

Because of mounting medical bills due to illness unrelated to her lawsuit, in December 1997 Owen entered into a "Purchase and Sale Agreement" with Metropolitan Mortgage and Securities Company (Metropolitan) pursuant to which she agreed to "'sell, convey, transfer and assign' to Metropolitan all her 'rights and benefits' under the settlement agreement with [Continental] for $8,520.20." Id. at 611. At the time of the assignment to Metropolitan, Owen was entitled to receive the 2001 ($20,636.48) and 2006 ($30,321.76) payments under the structured settlements. Ibid. However, the parties dispute whether Owen sold both remaining payments or only the 2001 payment to Metropolitan. Id. at 610. Under the assignment agreement, Owen also agreed (1) to defend, indemnify, and hold Metropolitan harmless for any claim that her periodic payments were not assignable and (2) to "order and conduct [her] affairs [so] as to prevent the assertion of any claim that the Benefits were not assignable." Id. at 611-12 (internal quotations omitted).

In January 1998, in furtherance of the assignment, Owen sent Continental a notarized letter directing it to send "all future payments and other mail" to a new address in Syracuse, New York. Continental responded by sending Owen a copy of the settlement agreement and noting that the deferred periodic payments were not subject to assignment. After Owen's attorney wrote three letters to Continental seeking confirmation that Continental had changed the address, Continental in turn requested confirmation that Owen resided at the Syracuse address. Owen's counsel responded by enclosing a draft letter of complaint to the New Jersey Department of Banking and Insurance (Department of Insurance) and indicated that she would file the complaint in the absence of immediate written acknowledgment that Continental had changed Owen's address. In another letter, Owen's counsel indicated that Owen's place of residence was "irrelevant" and demanded again that Continental change the address to which future payments were to be sent. In response, Continental then advised Owen's counsel that

Continental Casualty Company is required to make payments to the claimant. The payments are not assignable by the claimant. Accordingly, the payments are always sent to the claimant's actual address. The Company does not send payments to a street address at which the claimant does not reside.

Subsequently, Owen filed a complaint with the Department of Insurance, but the Department took no action.

In April 1998, Owen filed a complaint in the Law Division seeking a declaratory judgment compelling Continental to acknowledge the address change and declare the non-assignment clause in the settlement agreement void and unenforceable, thus permitting her to complete her transaction with Metropolitan. Id. at 612. In response to Owen's motion for summary judgment, Continental filed an affidavit by Susan Goulet, Continental's Vice President, explaining Continental's reasons for including non-assignment provisions in all their structured-settlement agreements. Ibid. The Law Division granted Owen's motion for summary judgment. The Appellate Division reversed and remanded, with one member of the panel dissenting. Id. at 621. Relying on legal commentaries and federal and out-of-state case law, the Appellate Division concluded that the provisions of Article 9 of the Uniform Commercial Code (U.C.C.) did not require that the non-assignment provision of the structured-settlement agreement be invalidated, noting that tort settlement proceeds were encompassed within the express exclusion of tort claims from the provisions of Article 9 that invalidate non-assignment provisions. Id. at 616.

The Appellate Division set forth Continental's reasons for considering the non-assignment clause a "main purpose" of the structured-settlement agreement. Id. at 617. Those reasons included ensuring Owen a continued income stream, preventing dissipation of the settlement proceeds, guarding against the potential loss of the tax-free treatment that accompanies structured settlements, and protecting Continental against the potential tax-reporting obligations that it bargained to avoid. Id. at 617-18 (citing Chelsea-Wheeler Coal Co. v. Marvin, 134 N.J. Eq. 432, 437 (E. & A. 1944) (holding that prohibition against assignment may be disregarded when it is not the "main purpose" of the contract)). The Appellate Division also noted that Continental "has a right to contract in an effort to avoid legitimate risks," id. at 618 n.7, and concluded that "the trial judge improperly granted summary judgment to [Owen] in the absence of further development of both the materiality of the anti-assignment provision and the legitimacy or reasonableness of the risks perceived to flow to [Continental] if the assignment were enforceable." Id. at 619. Accordingly, the Appellate Division remanded the case for further proceedings "relating to the materiality and enforceability of the provision governing the non-assignability of the structured settlement." Id. at 621.

In dissent, Judge Kestin noted that the official U.C.C. comment and the New Jersey Study Comment to N.J.S.A. 12A:9-318(4) make clear that section 9-318(4) was designed to nullify the "old" rule that generally prohibited assignments and to establish instead the "modern" rule favoring assignability whenever possible. Id. at 626 (Kestin, J., dissenting). Taking into account the U.C.C., statutory law, and case law, the dissent concluded that "a holding that the assignment in this case was ineffective has no current legitimate provenance in law." Id. at 627. Moreover, the dissent could find no valid reason for limiting a person's access to the current monetary value of a contractual right due to mature in the future. Ibid. Finally, the dissent rejected the "patronizing or paternalistic justifications" offered to limit the assignment. Ibid.


Although our statutes do not contain specific provisions regulating the transfer of structured settlement rights*fn1, effective January 1, 1963, the Uniform Commercial Code (U.C.C.) became the governing statutory law in New Jersey regulating commercial transactions throughout the State. N.J.S.A. 12A:10-106. A threshold issue is whether Article 9 of the U.C.C. affects the validity of Continental's non-assignment clause. N.J.S.A. 12A:9-318(4) provides:

A term in any contract between an account debtor and an assignor is ineffective if it prohibits assignment of an account or prohibits creation of a security interest in chattel paper or a security interest in a general intangible for money due or to become due or requires the account debtor's consent to the assignment or security interest.

Although that provision invalidates contractual non-assignment provisions, N.J.S.A. 12A:9-104(k) provides that Article 9 does not apply "[t]o a transfer in whole or in part of any claim arising out of tort." Because the meaning of "any claim arising out of tort" is not explicitly defined in the statute, whether or not section 9-104(k)'s exclusion applies to the proceeds of tort claims has become a highly controversial issue. The Appellate Division determined that the exclusion in N.J.S.A. 12A:9-104(k) also applied to the proceeds of tort claims. Owen, supra, 330 N.J. Super. at 616. However, no clear majority rule exists concerning the application of Article 9 to tort claim proceeds. Barclays Bus. Credit, Inc. v. Four Winds Plaza Partnership, 938 F. Supp. 304, 308 (D.V.I. 1996).

Barclays sets forth the arguments that support each side of the issue. The Barclays court recognized that courts have drawn a distinction between a tort claim and the proceeds from a settlement of that tort claim, suggesting that "whereas § 9-104(k) excludes transfers of tort claims, it does not exclude tort settlement proceeds." Id. at 308 (emphasis omitted). Judge Brotman explained that the philosophy underlying that view is that "a right to payment that derives from a tort claim" is contractual in nature, and therefore is analytically distinguishable from the tort claim itself. Ibid. The court also cited an analysis of the issue by Professor Harold R. Weinberg, who observed that

[i]n the typical sequence of events, settlement occurs at some point after suit is filed but prior to judgment. In the settlement a tort victim obtains a contractual right to payment from the tortfeasor, or his insurer, which constitutes a new form of intangible personal property derived from the original tort claim. When the tortfeasor or his insurer issues a check to satisfy this obligation another form of derivative property has come into existence--the victim-payee's rights on the check. Still another intangible derivative right is produced when the check is cashed or deposited--the rights in the fund. While the security assignment of the original tort claim is not within the scope of Article Nine, derivative settlement rights are excluded only if they are 'claim[s] arising out of tort.' Therefore, these rights could constitute original collateral within Article Nine. [Id. at 308-09.]

In contrast, other legal commentators have concluded that "[b]asic principles of statutory construction lead to the conclusion that section 9-104(k)'s exclusion applies not only to tort claims, but also to the proceeds of such a claim." Amanda K. Esquibel, An Article 9 Primer Regarding Uninsured Collateral Destroyed by a Tortfeasor, 46 U. Kan. L. Rev. 211, 214 (1998).

Putting to one side the Article 9 debate and focusing instead on New Jersey assignment law, we note that N.J.S.A. 2A:25-1 provides that "all judgments and decrees recoverable in any of the courts" in New Jersey are assignable. Thus, New Jersey law generally permits the assignment of settlement proceeds unless the parties have expressly agreed otherwise. Chelsea-Wheeler Coal Co. v. Marvin, 134 N.J. Eq. 432 (E. & A. 1944), established the common-law doctrine that a contractual provision that prohibits the assignment of rights under a contract may be disregarded when it is not the main purpose of the contract. Id. at 437. In Chelsea-Wheeler, Arthur Parker purchased a life insurance policy in 1923 that provided that the proceeds were to be paid to his daughter, if his wife were not living on his death. Id. at 433-34. The "designation of beneficiary" provision of the policy stated: "No beneficiary or assignee hereunder shall have the power of commutation, alienation or assignment of the installments or any of them unless by written permission of the insured . . . ." Id. at 434 (internal quotations omitted). That designation also provided that the proceeds were to be paid to the beneficiary in monthly installments over a period of years. Ibid.

When Parker and his wife were killed in a common accident in 1939, Parker was indebted to Chelsea-Wheeler Coal Company. Ibid. His daughter also was executrix of her father's estate. Id. at 433. Chelsea-Wheeler sued the daughter alleging dissipation of the estate's assets and obtained a judgment against her. Id. at 434. Chelsea-Wheeler also filed a petition to have the daughter removed as executrix. Ibid. Under the pressure of the judgment and litigation, the daughter agreed to assign her monthly payments under her father's life insurance policy to Chelsea-Wheeler to satisfy the judgment. Id. at 434-35. The insurance company challenged the assignment.

In considering the enforceability of the assignment, the Court of Errors and Appeals observed that "[e]ven though a contract may prohibit assignment, such prohibition may be disregarded where it is not the main purpose of the contract, but is a mere incident to such main purpose." Id. at 437. The Court then applied that standard to the ...

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