by John Darer CLU ChFC MSSC CeFT RSP CLTC
The legal malpractice lawsuit against Philadelphia personal injury law firm Anapol Weiss, arising from legal representation 
concerning a 1986 structured settlement, finally settled in March 2023. The compromise followed a pair of Motions in Limine by Defendants to Bar Plaintiff’s tax expert, and to preclude evidence on tax liability, which was granted by United States District Court Judge Karen M. Willams on Valentine’s Day 2023. Had tax testimony been admitted it would have magnified the damages but might not have made the plaintiff any more whole. Instead, in settling, the parties focused on building a case for the damages being tax-free under the “human capital” concept set forth in O’Gilvie v 519 U.S, at 86.
The late Paul Anapol and/or his staff’s unfortunate mistake on a “Recapitulation/Distribution Statement” in 1986, could’ve easily been avoided instead of becoming an example for the ages of what can go wrong when people are not paying attention to critical details.
It was a long and arduous road for Plaintiff Eric Nels Yerkes who, as a teenager on August 18, 1981, sustained “severe and permanent injuries in a plane crash near the Grand Canyon”. Yerkes retained Anapol Weiss and its late founder Paul Anapol to bring a personal injury lawsuit.
“April Fool’s?”
Briefly, on the advice of his lawyers, Eric Yerkes entered into a structured settlement on April Fools Day (April 1, 1986), with Cessna Aircraft and its London market insurers. The settlement called for a cash payment of $125,000.00 and periodic payments of $1,000/month for life, with increasing lump sum payments every 5 years. Cessna’s insurers made a qualified assignment of their obligation to make future periodic payments to ELNY’s assignment company, which funded the assigned obligation with an annuity from Executive Life Insurance Company of New York
The structured settlement was funded with an annuity from Executive Life Insurance Company of New York, at a time when contemporary prime time print and TV news media had observed severe financial impairments of two other similar annuity issuers and Executive Life had been dumped from the approved lists of major financial institutions for more than 24-36 months. See my June 15, 2020 blog Lessons to be Learned from Eric Yerkes v Cessna and Yerkes v Anapol Weiss – Structured Settlements 4Real® Blog
Five years later, in 1991, ELNY was under supervision of New York’s insurance regulator. 22 years later, on August 8, 2013 ELNY was liquidated and restuctured into GABC. Thereafter, 1500 annuitants were set to receive up to 66% less than they were owed under their structured settlements. One of those was Eric Yerkes, whose payments were reduced to just 43.54% of their agreed upon amount.
Yerkes v Cessna et al. is the Seminal Case for Insurers’ Novation under Qualified Assignments
Yerkes’ attempt to recover from Cessna and the London market insurers failed, due to Yerkes having already released them from the perioidc payment claim when the qualified assignment went into effect, in 1986. Yerkes v Cessna and Underwriters at Lloyds, became a seminal case for novation under a qualified assignment. Most insurers will not enter into a structured settlement without a qualified assignment.
Yerkes Then Turns Turrets on Former Law Firm
On April 12, 2017 Yerkes then went after his lawyers Anapol Weiss for legal malpractice based upon, among other things, alleged lawyer representations made in alleged communication with Yerkes about Cessna’s and the London underwriters’ ongoing (post qualified assignment) responsibilities that were incorrect. In connection with the with the Cessna Settlement Agreement, Despite the fact that there was a qualfied assignment, Yerke’s lawyers provided him with a “Recapitulation/Distribution” statement stating that under the Cessna Settlement Agreement ” All Periodic Payments Guaranteed to Eric N. Yerkes by The Cessna Aircraft Company” and “The Total Payout, Assuming a 59 Year Life-Expectancy is $6,668,000.00″ of which all but $468,000.00 is Guaranteed by Cessna”
The Parties Disagreed Whether Yerkes’ Recovery in the Legal Malpractice Case Would Be Taxable
Defendants had submitted Motions in LImine (1) Barring Testimony of Plaintiff’s expert on Taxes (ECF No. 159) and (2) To Preclude Evidence of Tax Liability (ECF No. 160)
Direct Causal Link
“In order for the exception provided by Section 104(a)(2) to apply, a movant must show that there is ” a direct causal link between the damages and the personal injuries sustained” Blum v Commissioner of Internal Revenue, No. 20020-17, 2021 WL 6323- at *7-8 (T.C. Feb. 18, 2021)
Nature of the Claim
” When damages are received pursuant to a settlement agreement, the nature of the claims that was the actual basis for the settlement controls whether the damages are excludable under section 104(a)(2)” See Burke v Schleier 504 U.S. at 237
“The nature of the claim is derived from the terms of the agreement”. See Rivera , 430 F 3d at 1257
“If the agreement is unclear, ” the intent of the payor” is pertinent to examine, taling into account consideration for the amount paid, the factual circumstances leading to the settlement, and the allegations
In this case Plaintiff was awarded damages for severe and permanent injuries, and the intent of the parties has been clear throughout the matter, in mulriple filings from both Plaintiff and Defendant, that the Comtemplated Settlement Agreement is not to simply settle a malpractice claim, but to substitute Plaintiff’s awarded damages, which were drastically reduced due to ELNY’s restructuring, with the contemplated settlement here, The parties have made it crystal clear that they are settling the case for he sole purpose of returning Plabitiff’s human capital (in the form of damages) to make him whole (ECF No. 190 at Exhibit A)
The Yerkes Court found that it is clear from the Contemplated Settlement Agreement, as well as the consistent characterization of Plaintiff’s potential recovery as one of recovering for physical injury throughout the litigation, the Court is satisfied that the paramount reason for the settlement is to compensate the Plainiff for the physical injuries he suffered in the 1981 plane crash.
The Court’s further found that the Contemplated Settlement Agreement is “in lieu” of the plaintiff’s human capital that was lost in the 1981 plane crash, as the Contemplated Settlement Agreenment is intened to be a one-to-one replacement of the damages awarded to Plaintiff from his original suit alleging physical injury.
The Court further found that this Opinion stays faithful to the principle of “human capital” rationale that emanates from Section 104*a)(2) as instructed by the Supreme Court in O’Gilvie 519 U.S. at 86
Eric N. Yerkes, Plaintiff v Anapol Weiss, et al IN THE UNITED STATES DISTRICT COURT FIOR THE DISTRICT OF NEW JERSEY, CAMDEN Civil Action No. 17-2493-KMW-AMD Opinion and Order dated February 14, 2023 (ECF No. 191)
Last updated December 23, 2023