§ 1206.Disposition of proceeds of claim of infant, judicially declared incompetent or conservatee

This section is derived from CPA § 980-a. Several changes have been made. The scope of the rule encompasses all claims of an infant or incompetent and not merely those connected with personal injuries.

Subparagraph 1 increases the amount of property which may be held for the use and benefit of the infant or incompetent by a person with whom he resides or who has some interest in his welfare from five hundred to one thousand dollars. A one thousand dollar maximum, while arbitrary, is more realistic.

Subparagraph 2 is patterned after the second and third sentences of subdivision 1 of CPA § 980-a except that it eliminates the necessity of a guardian of the property or a committee. Adequate protection of the ward’s interests is secured by the fact that the money may only be withdrawn upon order of the court. No monetary limit has been imposed on the amount of money which may be deposited or invested in the prescribed manner since the use of this procedure is discretionary with the court. The court order must specify the place where the deposit or investment is to be made. The words “one or more” are used to make possible more than one deposit or investment when the money held for the ward exceeds the maximum amount insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation.

Subparagraph 3 is new and grants to the court additional freedom in directing how a ward’s property shall be held. Under this provision a court could direct the money to be invested in indebtedness of the United States of America as is permitted under subdivision 1 of CPA § 980-a.

If a court does not wish to exercise the discretion granted to it in subparagraphs 1 through 3, a guardian or committee of the property must be appointed to hold the ward’s property.

1988 Recommendations of the Law Revision Commission:

I. Introduction .

Section 1206 of the Civil Practice Law and Rules (McKinney’s 1988 [pocket part]) and Section 2220 of the Surrogate’s Court Procedure Act (McKinney’s 1988 [pocket part]) presently govern the disposition of proceeds of claims by infants incompetents and conservatees. 1. The texts of these statutes are attached as Appendices A and B. The statutes are similar in substance and provide a number of methods by which to accomplish such distribution, but do not provide for structured settlement as an alternative form of distribution. 2. An excellent explanation regarding the distinctions and interplay between the CPLR and SCPA provisions can be found in Matter of Curry, 128 Misc 2d 760, 763 (Surr Dutchess Co 1985). Since structured settlements, which involve the payment of liability on an installment basis rather than in a lump sum, constitute a fairly new concept, that absence is understandable. Nevertheless, the increasing frequency of the use of structured settlements in the tort field demands that they be considered as potential settlement methods.

II. Structured Settlements .

During recent years, there has been a dramatic increase in the use of “structured settlements” when compromising and settling tort claims. These settlements are “an arrangement to compensate a claimant over time rather than with a single lump sum. The term means that the claimant will not receive compensation all at once, but will receive instead a promise from some entity to make future payments according to an agreed schedule” (Hindert, Dehner and Hindert, Structured Settlements and Periodic Payment Judgments, § 1.01 [1986]).

The arrangements have become increasingly popular 3. It has been estimated that structured settlements have grown into a $2 billion industry in recent years (see, McKinney, understanding Structured Settlements, 66 Mich BJ 610 [1987]). because of their potential advantages to both parties, including tax-free income for the claimant (Hindert, § 1.04[1], [5]).

The relevant settlement statutes, which pre-date the advent of structured settlements as a common compromise arrangement, contain no provisions for court approval of such settlements. This lack of statutory direction has led to considerable confusion among the courts when presented with petitions for approval of such settlements.

In the case of Livigni v. Robinson (128 Misc 2d 345 [Sup Ct New York Co 1985]) the court expressly rejected a structured settlement because it is not among the provisions specifically set forth in CPLR § 1206 and the court did not see itself as having the discretionary power to approve of such an arrangement (Id.at 346).4. The Livigni court opined that the unsecured character of structured settlements, a feature essential to such settlements’ tax-free treatment, (see, 26 USC § 104[a] [2]), violates the insurance requirements of CPLR § 1206(128 Misc2d at 346).

More recently, in the case of Hilgarth v. Costello, (132 Misc 2d 1020 [Suffolk Co Court 1986]) an arrangement similar to a structured settlement was denied an infant plaintiff, with Livigni cited as support.5. In Hilgarth the lump sum had already been paid by the defendant and the Court denied a request that it be used to purchase an annuity. (132 Misc 2d at 1021). The court went on to state that the Legislature, whose prime concern in the area has been to guard against the depletion of an infant’s funds, had given the judiciary no latitude when considering settlement proposals under CPLR § 1206 (Id.).

Such restrictive interpretation has not been applied in other cases. Despite the substantial similarities between CPLR § 1206 and SCPA § 2220, surrogates have not raised any objection to the concept of structured settlements for infant plaintiffs or beneficiaries. In Matter of Muccini (118 Misc 2d 38 [Surr Queens Co 1983]), Judge Laurino modified the structured settlement proposed by the parties, on the grounds that its provisions regarding attorney fees were inequitable and the distribution of proceeds was not correctly computed. (118 Misc 2d at 42). Judge Laurino raised no objection to the use of a structured settlement to settle the case, which was a wrongful death action. Similarly, in Matter of Green (127 Misc 2d 266 [Surr Nassau Co 1985]), Judge Radigan raised no objection to the use of structured settlements when compromising a wrongful death action. Indeed, after making some adjustments to the parties’ formula for determining the amount of proceeds due each infant distributee in the action, Judge Radigan approved the structured settlement (127 Misc 2d at 271).

In addition, it must be noted that none of the courts addressing the structured settlement issue has raised any objection to the notion of impairing the use of an infant’s funds beyond the infant’s attaining the age of majority.6. Frequently, the settlement calls for annuity payments to be made over long periods of years, or for the lifetime of the annuitant. Such impairment has been held invalid in past cases, (see Matter of Vanderbilt, 129 Misc 605 [Surr New York Co 1927]; Villard v. Villard, 219 NY 482[1916]). The rule, which was said to have originated in the equity courts of England, 7. The rule has been recognized by New Jersey’s courts, but has been held to have been abrogated by statute in that state (see, Guardianship of ADL, 208 NJ Super 618, 506 A2d 792; Ramos v. Ramos. 219 NJ Super 679, 530 A2d 1328). was seen in those cases to bar the purchase of an annuity plan to benefit an infant, using the proceeds of an estate inherited by the infant.

However, it would appear that the rule has been changed by statute, at least with regard to settlements of claims, since SCPA § 1813 allows court approval of a fiduciary’s settlement proposal, and CPLR § 1207 authorized the court to order settlement of an action on behalf of an infant or incompetent. In addition, in surrogate practice, fiduciaries are held only to a standard of prudent investment of a distributee’s funds (EPTL 11-2.2 [a] [1]), while in other courts the paramount concern is that the court stand in the position of parens patriae and act in the best interests of the infant (Matter of Sanjivini K., 40 NY2d 1025, 1027 [1976]).

Moreover, the rule against impairment of a minor’s assets, to the extent it may still exist, has certainly been further eroded by the Legislature’s recent enactments of CPLR Articles 50-A and 50-B, which mandate that, in certain personal injury and malpractice cases, judgment be entered for periodic payment of damages, regardless of the age of the plaintiff.8. The first clause of CPLR § 1206 provides that the section applies. “Except as provided in EPTL 7-4.8, . . . .”Similarly, subdivision 1 of SCPA § 2220 also refers to EPTL § 7-4.8 as exception to the SCPA section. Article 7 of the EPTL involves procedures under the Uniform Gifts to Minors Act, with Section 7-4.8 relating to an infant’s petition seeking an accounting in court by the custodian of funds. Research reveals that CPLR § 1206 and SCPA § 2220 correctly referred to EPTL § 7-4.8 when the CPLR section was amended in 1973 to contain that reference (L 1973. c 455). However, several sections of EPTL Article 7 were renumbered in 1981 (1981, c 43). CPLR § 1206 itself was amended in 1981 (L 1981, c 73), and further amended in 1982 (L 1982. c 177) and 1986 (L 1986, c 125). SCPA § 2220 has been amended three times since the EPTL Article 7 renumbering, twice in 1981 (L 1981, c 115; L 1981, c 362) and once in 1982 (L 1982, c 358). In none of these enactments, however, were the CPLR and SCPA references to the EPTL section changed to reflect the EPTL renumbering of 1981. The relevant EPTL section is now EPTL § 7-4.9, and CPLR § 1206 and SCPA § 2220 should be amended to contain references to that section, as opposed to current references to EPTL § 7-4.8.

IV. Conclusions and Recommendations .

New York courts have reached different results when considering the use of structured settlements in cases governed by the CPLR and the SCPA, with no apparent rational basis for a distinction. The absence of any statutory language in CPLR § 1206 and SCPA § 2220 which directly addresses the propriety of approving structured settlements has left the courts uncertain as to whether they are empowered to approve such arrangements, regardless of their merit in any given case.

Despite the absence of such statutory authorization, the courts’ traditional role of guarding an infant or incompetent’s funds in the best interests of the infant or incompetent is a strong one. A conflict thus occurs whenever a court may believe a structured settlement to be in an infant’s or incompetent’s best interests, while at the same time it is uncertain as to whether the Legislature has authorized such settlements. While it would appear that the Legislature has at least impliedly approved such settlements by mandating periodic payment judgments in CPLR Articles 50-A and 50-B, specific legislation permitting to approval of structured payments in cases which do not proceed to judgment would give the state’s courts the latitude to truly carry out their role of guarding an infant’s or incompetent’s best interests.9. The Commission has noted that under CPLR Article 50-A and 50-B, periodic payments are mandated with respect to judgments for future damages in excess of $250.000. The Commission believes, however that structured settlements for infants, incompetents, and conservatism under CPLR 1206 and SCPA § 2220 should be discretionary with the court. In the first place it should be remembered that the mandatory provisions of CPLR articles 50-A and 50-B apply only to judgments and the parties are specifically permitted to devise their own settlements, which may or may not include future periodic payments. Secondly. CPLR § 1206 and SCPA § 2220 deal, ultimately, with the power and duty of the court, as parens patriae, to provide for the best interests of infants, incompetents, or conservatees on an individual case-by-case basis. A structured settlement of a given amount with respect to a given plaintiff may or may not be in the best interests of such plaintiff. The court should make such a determination in the exercise of its sound discretion.

Although there is early case law citing equitable principles as precluding the impairment of an infant’s funds beyond the infant’s attaining the age of majority, this issue does not appear to have been raised in the cases governing the recent advent of structured settlements. It could be argued that the rule simply requires that installment payments paid to settle an infant’s claim simply must go directly to the infant upon attainment of the age of majority. In addition, the rule seems to already have been at least partially abrogated by statute in the EPTL and ,n CPLR Articles 50-A and 50-B with regard to periodic payments. In any event, it would be difficult to argue that withholding approval of a structured settlement for an infant or incompetent is “equitable” when the court genuinely believes such a settlement to be in the best interests of the infant or incompetent.

Finally, some courts have expressed fears that structured settlements may pose risks to the claimant, these risks could be reduced if the courts were permitted, in their discretion, to adopt the provisions enacted as part of Articles 50-A and 50-B of the CPLR, which require that the future payments be secured by annuities purchased from solvent and financially responsible insurance companies. The Commission is aware that under present law such security provisions will jeopardize the income tax advantages of structured settlements to claimants. Nevertheless, where infants, incompetents and conservatees are the claimants involved, the protective policies of CPLR § 1206 and SCPA § 2220 are of major importance. Secondly, in many cases, structured settlements would be clearly desirable despite the lack of tax advantages. Finally, the tax advantages are ultimately controlled by Congress and not the New York Legislature.

Section 1206 of the CPLR and section 2220 of the SCPA also should be updated with regard to its erroneous reference to EPTI § 7-4.8 in its opening clause. Research shows conclusively that the relevant EPTL section was renumbered, with no subsequent amendment of CPLR § 1206 containing any provision to reflect that renumbering.

Add, L 1962, ch 308; amd, L 1968, ch 844, § 3; L 1973, ch 455, § 5; L 1974, ch 924, § 3; L 1975, ch 228, § 1; L 1981, ch 73, § 1; L 1981, ch 115, § 24, eff May 18, 1981; L 1982, ch 177, § 1; L 1986, ch 125, § 1; L 1988, ch 635, §§ 1, 2, eff Oct 1, 1988; L 1995, ch 205, § 1, eff July 26, 1995; L 1995, ch 464, § 1, eff Aug 2, 1995; L 2011, ch 62, § 104 (Part A), eff Oct 3, 2011.