Practice Tip: Calculating Structured Judgments

Historically, a defendant would become obligated to pay the full amount of a personal injury judgment in a lump sum as soon as the judgment was entered. In 1985, New York enacted a Periodic Payment of Judgments Act as part of the State's effort at tort reform. At first, it only applied to medical malpractice actions and required verdicts over $250,000 to be paid over a period of years. A year later, New York applied the rule to personal injury and wrongful death cases.

Since then, about half of the states have enacted similar statutes. These statutes provide for the periodic payment of future damages rather than having the defendant pay them in a lump sum. New York's structured judgment statute has been said to be “circuitous,” “vexing,” “a judge's nightmare” and “mind-numbing.” But now, with this Practice Tip, you will be armed with the ability to estimate the value of settlement proposals in the face of taking a verdict.

Structured Judgments

It is of great importance for a trial lawyer to understand the mechanics of a periodically paid or structured judgment if s/he is trying a case in a jurisdiction in which such judgment will be entered. Otherwise, the trial lawyer may be rejecting offers that, at first glance, appear to be much lower than verdict value but may, in fact, be equal to or higher than a verdict. Of course, no one has ever lost a case s/he settled, so it behooves the trial lawyer to learn the mechanics of periodic payments so s/he can explain it to the client.

Under the structured judgment procedure, past damages are paid in a lump sum as before; however, future damages are paid in periodic installments by the defendants through the purchase of an annuity contract. In some states, the periodic payments cease if the plaintiff dies.

The first thing the trial lawyer must realize is that a structured judgment statute is substantive for Erie purposes as it is “outcome- affective.” Gravatt v. City of New York, 54 F. Supp. 2d 233, 234 (S.D.N.Y. 1999). Thus, even if you are trying a case in a foreign jurisdiction, you must make a determination as to whether or not a structured judgment statute will be applicable under conflict of laws rules.

After a verdict, both parties usually submit a proposed judgment to the court with an economist's report, which provides the methodology of the calculations. The court then decides the amount of the judgment which is to be docketed. But before the momentum of the trial reaches that stage, the plaintiff's attorney should undertake his/her own calculations which need not be as complex as courts have expressed. This article uses New York's structured judgment statute as an example (NY CPLR 5041).

How It Works

New York requires that the jury indicate in its verdict for future damages the number of years for which the amount is going to paid. This number is usually based on the plaintiff's life and work-life expectancies. Unlike the rule in numerous other state and federal cases, New York does not ask the jury to discount future damages to present value (Present value is the current worth of a future sum of money or stream of cash flow. It is based upon the federal discount rate which is the rate charged by the Federal Reserve Bank to commercial banks). The courts in New York will make the present value calculation, usually based upon the economists' reports submitted by the parties.

These calculations can easily be done by a trial lawyer during the trial to weigh the future value of an offer to settle versus a verdict. For example, suppose a 40-year-old worker earning $60,000/year loses his leg due to some defective product. Let's estimate a verdict exactly three years after his accident: $300,000 for pain and suffering from the date of accident to the date of verdict, plus $1 million for the pain and suffering and loss of enjoyment of life from the verdict for 20 years into the future, plus $60,000 x 3 years for lost wages from the date of accident to verdict plus future lost earnings of 22 years x $60,000 = $1.32 million for lost wages (not taking into account any inflation.) See the chart below.

If a judgment was entered on the amount in the chart above, New York would permit a lump sum payment of $300,000 for past pain and suffering and $180,000 for past lost wages (New York does not reduce for income taxes) = $480,000 for past damages to date of verdict. The client may think he's getting an additional $2.32 million for future pain and suffering and lost wages, but the statute will require a reduction of the $2,320,000.

New York allows the first $250,000 of future damages to be paid in a lump sum which is added to the past damages. That means the plaintiff will get $480,000 + $250,000 = $730,000 as a lump sum, which leaves $2,070,000 (2,320,000 ' $250,000) to be paid out in an installment annuity. (We will allocate $125,000 of the $250,000 lump sum payment to each item of future damages: pain and suffering $1,000,000 ' $125,000 = $875,000; lost wages $1,320,000 ' 125,000 = 1,195,000.)

One has to calculate two annuities; one to cover pain and suffering and another for lost wages. New York limits the payout period for pain and suffering to 10 years, notwithstanding that a jury may find it will last longer. (Here, we assumed a jury award for 20 years.)

Present Value

To calculate the present value of $875,000 over 10 years, you can consult a website such as Moneychimp (http://bit.ly/1v3o9HY) and plug in the numbers (using 2.7% as the present Federal discount rate). That present value amount is $670,353 as compared with $875,000.

The present value of remaining lost wages, $1,195,000, ($1,320,000 ' $125,000) over 20 years is approx. $701,389 according to Moneychimp. The annuities required would be $67,035/year ($5,586/month) for pain and suffering and $35,069/year ($2,922/month) for lost wages.

Therefore, if the defendant were to offer $2,101,742 ($480,000 + 250,000 + 670,353 + 701,389) that would be the present value of a possible verdict as calculated under the New York structured judgment statute.

Conclusion

This is just a rough estimate of the calculated amounts. The calculations that would include case expenses and legal fees allocated to each category of damages and income tax consequences are too complicated to discuss within the limitations of this article and will await another day. However, these calculations should be sufficient to permit a trial lawyer to explain to his/her client that it may be in their best interest to take what the client thinks is a reduced settlement than to chance a verdict.

Lawrence Goldhirsch , a member of this newsletter's Board of Editors, is Trial Counsel to New York's Weitz & Luxenberg.

Historically, a defendant would become obligated to pay the full amount of a personal injury judgment in a lump sum as soon as the judgment was entered. In 1985, New York enacted a Periodic Payment of Judgments Act as part of the State's effort at tort reform. At first, it only applied to medical malpractice actions and required verdicts over $250,000 to be paid over a period of years. A year later, New York applied the rule to personal injury and wrongful death cases.

Since then, about half of the states have enacted similar statutes. These statutes provide for the periodic payment of future damages rather than having the defendant pay them in a lump sum. New York's structured judgment statute has been said to be “circuitous,” “vexing,” “a judge's nightmare” and “mind-numbing.” But now, with this Practice Tip, you will be armed with the ability to estimate the value of settlement proposals in the face of taking a verdict.

Structured Judgments

It is of great importance for a trial lawyer to understand the mechanics of a periodically paid or structured judgment if s/he is trying a case in a jurisdiction in which such judgment will be entered. Otherwise, the trial lawyer may be rejecting offers that, at first glance, appear to be much lower than verdict value but may, in fact, be equal to or higher than a verdict. Of course, no one has ever lost a case s/he settled, so it behooves the trial lawyer to learn the mechanics of periodic payments so s/he can explain it to the client.

Under the structured judgment procedure, past damages are paid in a lump sum as before; however, future damages are paid in periodic installments by the defendants through the purchase of an annuity contract. In some states, the periodic payments cease if the plaintiff dies.

The first thing the trial lawyer must realize is that a structured judgment statute is substantive for Erie purposes as it is “outcome- affective.” Gravatt v. City of New York , 54 F. Supp. 2d 233, 234 (S.D.N.Y. 1999). Thus, even if you are trying a case in a foreign jurisdiction, you must make a determination as to whether or not a structured judgment statute will be applicable under conflict of laws rules.

After a verdict, both parties usually submit a proposed judgment to the court with an economist's report, which provides the methodology of the calculations. The court then decides the amount of the judgment which is to be docketed. But before the momentum of the trial reaches that stage, the plaintiff's attorney should undertake his/her own calculations which need not be as complex as courts have expressed. This article uses New York's structured judgment statute as an example (NY CPLR 5041).

How It Works

New York requires that the jury indicate in its verdict for future damages the number of years for which the amount is going to paid. This number is usually based on the plaintiff's life and work-life expectancies. Unlike the rule in numerous other state and federal cases, New York does not ask the jury to discount future damages to present value (Present value is the current worth of a future sum of money or stream of cash flow. It is based upon the federal discount rate which is the rate charged by the Federal Reserve Bank to commercial banks). The courts in New York will make the present value calculation, usually based upon the economists' reports submitted by the parties.

These calculations can easily be done by a trial lawyer during the trial to weigh the future value of an offer to settle versus a verdict. For example, suppose a 40-year-old worker earning $60,000/year loses his leg due to some defective product. Let's estimate a verdict exactly three years after his accident: $300,000 for pain and suffering from the date of accident to the date of verdict, plus $1 million for the pain and suffering and loss of enjoyment of life from the verdict for 20 years into the future, plus $60,000 x 3 years for lost wages from the date of accident to verdict plus future lost earnings of 22 years x $60,000 = $1.32 million for lost wages (not taking into account any inflation.) See the chart below.

If a judgment was entered on the amount in the chart above, New York would permit a lump sum payment of $300,000 for past pain and suffering and $180,000 for past lost wages (New York does not reduce for income taxes) = $480,000 for past damages to date of verdict. The client may think he's getting an additional $2.32 million for future pain and suffering and lost wages, but the statute will require a reduction of the $2,320,000.

New York allows the first $250,000 of future damages to be paid in a lump sum which is added to the past damages. That means the plaintiff will get $480,000 + $250,000 = $730,000 as a lump sum, which leaves $2,070,000 (2,320,000 ' $250,000) to be paid out in an installment annuity. (We will allocate $125,000 of the $250,000 lump sum payment to each item of future damages: pain and suffering $1,000,000 ' $125,000 = $875,000; lost wages $1,320,000 ' 125,000 = 1,195,000.)

One has to calculate two annuities; one to cover pain and suffering and another for lost wages. New York limits the payout period for pain and suffering to 10 years, notwithstanding that a jury may find it will last longer. (Here, we assumed a jury award for 20 years.)

Present Value

To calculate the present value of $875,000 over 10 years, you can consult a website such as Moneychimp (http://bit.ly/1v3o9HY) and plug in the numbers (using 2.7% as the present Federal discount rate). That present value amount is $670,353 as compared with $875,000.

The present value of remaining lost wages, $1,195,000, ($1,320,000 ' $125,000) over 20 years is approx. $701,389 according to Moneychimp. The annuities required would be $67,035/year ($5,586/month) for pain and suffering and $35,069/year ($2,922/month) for lost wages.

Therefore, if the defendant were to offer $2,101,742 ($480,000 + 250,000 + 670,353 + 701,389) that would be the present value of a possible verdict as calculated under the New York structured judgment statute.

Conclusion

This is just a rough estimate of the calculated amounts. The calculations that would include case expenses and legal fees allocated to each category of damages and income tax consequences are too complicated to discuss within the limitations of this article and will await another day. However, these calculations should be sufficient to permit a trial lawyer to explain to his/her client that it may be in their best interest to take what the client thinks is a reduced settlement than to chance a verdict.

Lawrence Goldhirsch , a member of this newsletter's Board of Editors, is Trial Counsel to New York's Weitz & Luxenberg.