In granting an application for a permanent injunction, a Texas federal district court held that a party could not use arbitration to circumvent a state structured settlement protection act that requires state court approval of a proposed transfer of an annuitant's rights to future structured settlement payments.

In Symetra Life Insurance Co. v. Rapid Settlements, Ltd., No. H-05-3167, 2008 WL 901584 (S.D. Tex. Mar. 31, 2008), Symetra sought a permanent injunction to prevent Rapid Settlements (Rapid), a factoring company, from using arbitration to effect a transfer of an annuitant's rights to future structured settlement payments where a state court had not approved the transfer.

The Texas Structured Settlement Protection Act (TSSPA) requires a state court to determine whether such a transfer is in the annuitant's best interests before the transfer can be made. The purpose of the TSSPA is to protect the payee from overreaching by factoring companies to ensure that the decision to give up future-payment streams in exchange for a much smaller present payment is "informed and voluntary," and "for good reason."

Rapid was in the practice of entering into proposed transfer agreements with structured settlement payees, including Symetra annuitants. After failing to obtain the requisite state-court approval of the transfer (either because the court had rejected the transfer or Rapid had not sought court approval), Rapid would invoke the arbitration clause in the proposed transfer agreement, alleging breach of some provision in that agreement.

The ensuing arbitration usually occurred in Houston in front of an arbitrator selected by Rapid, and the annuitant usually appeared by telephone and without a lawyer. Rapid would then obtain an "agreed-to" arbitration award, the effect of which required the annuitant to transfer the same payments to Rapid that Rapid would have received if a state court had approved the transfer as required by the TSSPA. Rapid would then seek confirmation of the award in state court without giving Symetra notice.

The Court held that the arbitration awards that Rapid pursued were improper because they circumvented and undermined the TSSPA, which required state court approval of such transfers. Rapid argued that the TSSPA did not apply to the arbitration awards that it obtained because Rapid only sought lost profits arising out of a breach of contract, not a "transfer" as defined in the TSSPA. The Court rejected this argument, holding that "the fact that Rapid has obtained such a transfer by an arbitration award purporting to award 'lost profits' or 'damages' for a breach of the agreement does not change the fact that it is a transfer."

Furthermore, the Court held that "obtaining confirmation of an arbitration award does not equate to the statutorily required court approval of the proposed transfer because a court's inquiry in confirming an arbitration award is necessarily limited."

The Court also rejected Rapid's argument that the Federal Arbitration Act (FAA) preempted the TSSPA to the extent that it conflicted with the arbitration right set out in Rapid's transfer agreements. The Court held that the TSSPA did not prohibit or limit arbitration because the TSSPA "requires prior court approval of the transfer agreement, not the arbitration clause, and is therefore not preempted by the FAA."

In granting the permanent injunction, the Court also held that "[a]n injunction would further serve the public interest by precluding further illegal practices by Rapid and preventing Rapid from attempting to use arbitration and court orders confirming arbitration awards to accomplish what 'the substantive law clearly prohibits'" – namely, transfer of an annuitant's rights to future structured settlement payments that a state court had not approved as required by the TSSPA.