What attorneys need to learn from Grillo v Pettiete

STRUCTURED SETTLEMENTS

By Christopher R. Gullen

A ttorneys are increasingly at risk for legal malpractice for not recommending astructured settlement instead of a lump sum settlement. The potential damagesin such cases can be huge. That is the lesson to be learned from the recently set-tled bellwether case in this area, Grillo v Pettiete et al. Because the matter was

resolved prior to trial, no precedent-setting court opinion will be published. But the case re-mains a wake-up call on this important new area of litigation against attorneys.

In 1982, Christina Grillo was injured at birth at a hospital in Texas. She suffered quadri-plegia, blindness, and seizures allegedly resulting from negligence of the attending physician.Life care plans prepared for the child pegged the cost of caring for the child over her lifetimeat about $20 million. During the pendency of a medical malpractice lawsuit against thephysicians, the defendants offered a structured settlement costing $1.2 million that would,

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over the lifetime of the child,have paid out more than $100million. The child’s representa-tives rejected the structuredsettlement proposal and, in1990, settled the case for a cashpayment of $2.5 million. Thecash settlement was recom-mended by both the child’s at-torney and by the attorneyappointed by the court as thechild’s guardian ad litem.

Like most lump sum settlements, Chris-tina Grillo’s cash settlement was completelygone within a few short years, and the family(and the taxpayers) was left to pay tens of mil-lions of dollars in treatment for many years.

The Grillo family sued the child’s attor-ney and the guardian ad litem for negli-gence and legal malpractice, arguing thatthe child’s case should never have been set-tled for cash, and that the attorneys shouldhave insisted upon a structured settlement.Eventually the defendants in the legal mal-practice case settled for a combined amountin excess of $4 million (a sizeable portion ofwhich was structured!)1

Since Grillo, other cases have been filedagainst attorneys and other participants inpersonal injury cases where lump sums wereaccepted instead of structured settlements.There appears to be a growing consensusthat in certain types of injury cases lumpsum settlements are simply inappropriate.

These cases illustrate the liability exposureof attorneys and guardians of injured partiesassociated with lump sum settlements. A keyproblem with cash settlements is early dissi-pation: the money is spent before the needsof the injured party are met. The settlementsare often intended to cover future medicalexpense and to replace loss of income due tophysical injury. A 1992 California studyfound that in that state, 90 percent of all per-sonal injury settlements were dissipatedwithin five years of the settlement.2 The av-erage person under the age of 85 has a lifeexpectancy greater than five years.

Structured settlements typically includeboth an immediate cash payment to takecare of current needs and future paymentsoften continue for the injured party’s life-

time. Sometimes a structured settlement willalso include future payments of lump sumamounts to meet special needs, such as col-lege education, medical equipment pur-chases, or retirement funds.

Another important risk associated withthe lump sum settlement is poor investmentperformance. Those injured parties wiseenough not to burn up their cash settlementsin reckless spending may well invest a portionof the settlement for growth, preservation, orboth. The investment choices are many, andeach has a different level of risk. Funds putinto stocks and bonds are at the mercy ofmarket fluctuations. Whether in the end thevalue of the investments will turn out to havegrown or to have diminished is totally un-known when the investment is made.

With a structured settlement, the annuitypremium amount is ‘‘invested’’ in the annu-ity, which typically makes payments overtime. Based on either a guaranteed payoutperiod or a life expectancy calculation, thetotal amount that will be paid out can be cal-culated. The difference between the cost ofthe annuity and the greater amount of thetotal to be paid in the future is the internalrate of return of the annuity. Currently, it isnot unusual for structured settlement annu-ities to have internal rates of return of fivepercent or more. Since structured settlementpayments are income-tax free, the taxableequivalent yield would be higher (a 5 percenttax free yield for a taxpayer in the 28 percenttax bracket would be equivalent to a 6.95percent taxable yield).

Indeed, the fact that investment returnson invested cash settlements are taxable,while no portion of the structured settlementpayments are subject to income tax is an-other important source of liability exposure

for attorneys. Similarly, lumpsum settlements are subject todepletion through the loss ofgovernmental benefits basedon the value of owned assets.

Once liability for malprac-tice in failing to recommend astructured settlement is estab-lished, damages must be deter-mined. The measure of dam-ages is the difference between

what the plaintiff actually received and theamount he or she should have received, andthe potential is huge. In Grillo, the lumpsum settlement was $2.5 million and theproposed structured settlement would havepaid more than $100 million, so the arguabledamages for the attorney malpractice totaledmore than $97 million.

All of those risks can be reduced or elimi-nated by structuring at least a portion of apersonal injury settlement. At a minimum,the attorney for the injured party needs toadvise the client of the risks and benefits ofboth lump sum and structured settlements.Dr. Joseph W. Tombs, of Texas Tech Univer-sity, expects to see attorneys asking their cli-ents to sign ‘‘Grillo Waivers’’ in every physi-cal injury case that settles with a lump sumpayment. The waiver would include clientacknowledgement that:

• the benefits of a structure were explained• the dissipation and investment risks

were explained• the settlement decision is irrevocable• competent f inancial and tax advice

was offered.The legal efficacy of such a waiver is sub-

ject to debate. Clearer is the increased needfor personal injury attorneys and their clientsto have a good understanding of structuredsettlements. ♦

Christopher R. Gullen is an attorney with more than20 years of experience in handling personal injurylitigation, specializing in structured settlement de-sign, placement, and processing.

Footnotes1. Grillo v Pettiete et al., 96-45090-92, 96th District

Court, Tarrant County, Texas.2. ‘‘California Practice Guide: Personal Injury,’’ The

Rutter Group, Ltd., 1992.

Fast Facts:There appears to be a growing consensus that incertain types of injury cases lump sum settlementsare simply inappropriate.

Structured settlements typically include both animmediate cash payment to take care of currentneeds and future payments often continue for the injured party’s lifetime.

Structured settlement payments are income-tax free.