This article outlines the basics that a trial lawyer or a judge must know in order to navigate Article 50B, or New York CPLR 5041, 5042, 5043, 5044, 5045, 5046, 5047 and 5048.
What is article 50B?
Article 50B is the Civil Procedure that dictates how future damages awarded as a trier of fact (what the jury wrote down as the damages) are to be paid by a defendant or judgment debtor. Future damages over $250,000 are paid in installments, annuities, or as periodic payments. Verdicts and judgments in New York are frequently entered. However, the reality of these cases is that only one out of a 1,000 will go to the point of full satisfaction of judgment.
So, what happens to verdicts or verdicts on appeal? They settle. Why is this article of the CPLR so important? Because it’s the calculus by which the parties can arrive at a figure, or present value, that represents what the verdict is worth.
In a conversation with a former trial lawyer and now Supreme Court judge, parties to litigation had presented two differing versions of a 50B analysis. As always, there was confusion on the part of the lawyers, the economists, and the judge about what everyone was presenting. The defense team put forward a present value proposal that incorporated the cost of annuities. Not appropriate. Yes, the statute talks about annuities and the purchase of annuities. To create a structured judgment, the court must determine the value of a verdict, rule on the positions of the parties, and enter an order for judgment. Discussion and facts concerning annuities should have been irrelevant. The judge wanted my opinion as to why the defense had a value of $15 million when the plaintiff was squarely at $18 million. Aren’t the economists and lawyers for the parties all working from the same statute and case law? Of course they are.
The “art of advocacy” is posturing values in a complex spreadsheet to make interpretation of the work product so complex and challenging, even actuaries and experts like myself need to figure out what the difference is.
Why are 50B calculations or analysis different all the time?
If you rule out the basics, such as competency and improper methodological steps, you are basically left with math. Here are the steps that should be taken to achieve the present value of a future damage award from a verdict.
First, determine the appropriate discount rate. This is a straightforward calculation; however, I have never seen two economists or experts testify to the same discount rate given a certain amount of time or years. Dr. Reiber from Canisius College states that the discount rate should fairly discount all future cash flows to present value.
What would an economist mean by “fair”? In my opinion, it means that if there is one year of an obligation, it should be discounted using the six-month treasury in effect as of the date of liability, which is either the date of death in a wrongful death case, the date the parties stipulated liability in court, or the date of a verdict finding liability.
Better stated, a 30-year obligation, or 30-year trier of fact would not be fairly discounted using just the one-year treasury rate. Nor would it be fair to discount it using the 30-year treasury rate. To be precise, each individual year of obligation, years one, two, three, four, and so on until 30 should have its very own corresponding discount rate that is based on the treasury. This is the most acceptable instrument and is in keeping with common actuarial and accounting standards for discounting in effect for each year. This is cumbersome and taxing on the parties to litigation. A simple average can be used or agreed upon. The 15-year treasury sounds like a good average for an obligation that spans over 30 years. That means the early years are discounted too much, and the later years are discounted too little. It is improper to use the 30-year discount rate for a 30-year obligation, as that unfairly treats years one through 29 and perfectly discounts year 30.
In CPLR 50B, future pain and suffering is always 10 years or less (if the trier of fact is less than 10 years). So, the five-year treasury would seem appropriate, and so on. Historical U.S. treasury rates are available here.
The entire process can be boiled down from here to four simple steps.
- Calculate the present value of all past and future damages using the right discount rates. The only reason you calculate present value is so you can take attorney fees and expenses.
- Calculate attorney fees and expenses.
- Total the sum of the past damages and the statutory $250,000 as the “cash” to be paid to the plaintiff and two-thirds of any interest. This amount is the “cash to be paid to plaintiff.”
- Calculate the first-year annuity. By starting with the total future component of damage, i.e., $1 million in future pain and suffering, deduct the pro rata percentage of the statutory $250,000. If the only component of damage in the future is pain and suffering, then it’s easy. The remaining future damages are $750,000. Then, divide this amount by the number of years or trier of fact. In this case, that’s 10. Your first-year annuity, before attorney fees and expenses, is $75,000. This is the amount actually owed to the plaintiff, escalated at the statuary four percent per year. A simple spreadsheet like ours can do this calculation.
It is important to keep in mind the reason you are doing a 50B analysis, or calculating present value, or doing anything with 50B. It’s so you can negotiate a settlement. Your expert, whether they are an economist PHD or a settlement planner, should be able to give you the bottom line.
How much will this judgment cost the defendant or their insurer?
Stick to the APDCI rule:
- Attorney fees,
- Past damages (plus interest and 250 offset), and
- The COST of the annuities plus interest.
These items are all you will need to adequately represent how much the case should settle for.
What about interest?
You get nine percent interest on the total present value – not the cost of any annuities – from the date of liability to verdict, from verdict to judgment entry, and from judgment entry to payment. Interest compounds at each step, so the first component of interest creates a new present value and so on.
The proration of expenses is a little cumbersome as well, but so long as you prorate the expenses across all damages, include the statutory $250,000, and you follow the standard of accounting for expenses before attorney fees or off the top, you should be fine.
After having done hundreds of these judgments over nearly 30 years, here are some rules of the road which the law clerk and/or judge may not appreciate otherwise. These points are intended to encourage the parties to settle.
CPLR 5041 and Article 50B annuities are awful for plaintiffs. They lack any control over design. Some of the components are completely life contingent, so if the plaintiff dies, their family or loved ones get nothing. Settling for the full value in my opinion is better for the trial lawyer. You can still defer attorney fee income for control of taxation. and the plaintiff has time to meet with a settlement planner to devise a lifetime strategy – which may or may not include a structured settlement.
Valuable lessons learned regarding 50B judgments, annuities, and periodic payments of judgments in New York
The defendant cannot deduct the payment of the annuities if they are posting security in order to satisfy the judgment – i.e., they are out the money with no deduction. Small corporations and businesses will really care about this; however, if everything is being paid by an insurer, the corporation may not have private counsel.
The plaintiff may enter a default judgment if there is ever a failure to pay for the duration of the liability. The defendant is on the hook for the entire future value, and it must be paid in cash without any discounting. This is a lot of contingent risk for defendants satisfying judgments.
The plaintiff need not provide full satisfaction of judgment until all future payments are made. A partial satisfaction of judgment, after having paid all the money, may cause heartburn for the defense lawyer.
The annuities that the defendant must purchase and post as security will cost more than the present value so long as the IRR or rate of the annuity is lower than four percent. Most annuities pay between 2.75% and 3.25%. So, your $1 million in future pain and suffering is probably worth $1.1 million, not less. That’s due to the 4% additur.
Mid-tier discounting is the process of applying only half a year, as the time modal in the present value formula. Using the average number of years is an appropriate way to fairly discount future obligations.
Interest compounds on interest when you’ve calculated it properly.
Pre and post judgment interest is taxable, notwithstanding most lawyers’ assumptions that everything that will be paid are 104(a)(2) damages, or personal injury and tax exempt. If you get a $5 million verdict, and the defendant pays $10 million six years later and you didn’t try the case again, the IRS is savvy at figuring out they probably paid you some interest. It’s taxable, as seen here or here. Settling may give you control and flexibility to spread this tax liability over many years.
If you are entering judgment and moving ahead with your appeal, the cost of the annuities is irrelevant. Only the present value and its methodology is relevant. If you are satisfying and enforcing the judgment, the cost of the annuities is irrelevant to the plaintiff, as they will be paid the future payments. If trial counsel seeks to settle the case, then the cost of the annuities is very material, and we strongly recommend plaintiff counsel have their own expert.
Not all annuities that are purchased as part of satisfying a judgment under this article can be assigned in the traditional sense of a qualified assignment under the definition in IRC 130. The plaintiff is secure regardless of ownership due to the failure to pay provision in this article. However, the defendant may not want to own a multimillion-dollar annuity and pay taxes on the interest build up, which would be phantom income to the defendant.
In the event of a default, the defendant would not have coverage from their carrier and would be forced to pay double. Ensuring the performance of an insurance company in New York State is unlawful. This is an important leverage point, and in large cases, if the general counsel of the corporation has private litigation counsel, this can posture a case to settle when the lawyer for the insurance company may not appreciate this point.
Paying and satisfying judgments is cumbersome and bad for everyone. It’s best to get your expert on board early and start driving these points home in early mediation, so you can stipulate the things that are easy to agree with, i.e., discount rate and number of years. The appeal process doesn’t really have anything to do with 50B. If the lawyers are still litigating, that will need to conclude prior to discussions on value.
Although rare, if the plaintiff takes their case all the way through appeal, and the first, second, third, or fourth department hands down the appeal, and there is no leave to the court of appeals, the plaintiff’s attorney will have won by default and ended litigation, thereby giving up all leverage to settle. It would be the prerogative of the defendant and their attorney to just pay the judgment. Working in settlement negotiations during your appeal will keep the settlement doors open to some.
Our firm provides comprehensive 50A and 50B analysis for a competitive flat fee. I am also available to testify in any court in New York State regarding the appropriate application of the statute.