Pay to Win

If you're lucky enough to win the lottery, you can cash in not just some but all of your future payouts for a lump sum. The Texas Supreme Court last week invalidated a state law that prohibited winners from selling their final two payments to finance companies offering cash now, often at a steep price. 

The court's unanimous decision in Texas Lottery Commission v. First State Bank of DeQueen, Stone Street Capital, Inc., and Cletius Irvan, delivered Friday by Justice Phil Johnson, effectively struck down 1999 amendments to the Texas Lottery Act, which aimed to prevent the all-too-common, riches-to-ruin descent of lottery winners. Under the amendments, prize winners were allowed to assign their payments to others if certain requirements were met — but not the final two payments. 

Lawmakers crafted the statutes to protect consumers from businesses that entice prize winners to take an immediate — but usually much smaller — lump sum in trade for annuitized payments. While the commission traditionally pays prizes in installments (because future dollars are worth less than today's dollars), it also offers to pay a smaller dollar figure up front, known as the “cash value” option on lottery tickets. Texas Solicitor General James Ho, who argued the Texas Lottery Commission's case before the high court, declined comment on the ruling.

The ballad of Cletius Irvan

The case involved Cletius Irvan, who won $8.8 million from the Texas lottery in 1995. Flash forward 11 years: Irvan was living in Arkansas, staring down $308,032 of debt. In a bind, he decided to try to sell off his final two annuitized payments for a lump sum of cash equal to his debt. Those payments, scheduled for 2013 and 2014, were worth nearly three times that much: $880,000.

A court in Arkansas approved the arrangement between Irvan and the bank, but the lottery commission refused to abide by the ruling. The bank sued the state of Texas, arguing that Texas commercial code trumped the Lottery Act because it restricts any government entity from determining how prize winners can spend their loot. And that conflicted directly with the law, passed later, prohibiting sale of the final two payments.

The Texas Supreme Court concurred, noting that while controlling a winner's assignment of payouts might be good public policy, the statute clearly prevents the government from doing so. "Lottery winners are allowed to assign what no one contests is their property, even at the risk of their making poor assignment choices,” the court wrote.

The court also rejected the commission’s argument that the conflict between the two statutes should be resolved by invoking Lockhart v. United States, a case in which the U.S. Supreme Court ruled that, when two or more statutes contradict one another, the newest statutory provision supersedes the older one. In the case involving Irvan, the law prohibiting the sale of lottery payments was newer than the law contradicting it. But the Texas Supreme Court ruled that Lockhart did not apply, because the two-payment amendment made no effort to repeal or modify the earlier and conflicting Texas code.

In the older law, the Legislature "explicitly provided that ‘a rule of law, statute, or regulation that prohibits [or] restricts’ an assignment of a prize won in a state lottery ‘is ineffective,’” the court wrote.

The commission had also argued that the decision to nullify the Lottery Act provision would have the unintended side effect of eliminating the state’s ability to garnish lottery payments to pay off a prize winner’s delinquent child support obligations. The court did not give a binding legal decision on the child support but did address the commission's concern. “We agree that persons who owe child support should pay it,” the opinion said. “But when the language of a statute is clear, it is not the judicial prerogative to go behind or around that language through the guise of construing it to reach what the parties or we might believe is a better result.”

Irvan's attorney, Jeffrey Boyd, contends that the decision leaves the question of child support up in the air for now, but he predicts the court would have to rule on that issue later. 

Broke and bankrupt

Boyd says Irvan was never able to go through with the deal to sell his future winnings: The legal limbo forced him to settle his debt through bankruptcy. It's unclear whether he will now sell the winnings or how much his creditors will take. “I think the court reached the right result, and I think it provides the clarification that everybody needed, not just for this case but for other cases that were in dispute until this decision could be reached,” Boyd says. 

The commission now has two options: request a re-hearing from the Texas Supreme Court or pursue a new, clearer statute in the 2011 legislative session. Yet the author of the 1999 amendment, state Rep. Phil King, R-Weatherford, says he wouldn't support an attempt to counteract the court's decision. He never wanted the government prohibiting the sale of lottery winnings in the first place, he says, explaining that he probably included the final-two-payments provision as a compromise. "I have no idea why that was in there," he says.

King says he worked to pass the '99 law because some families realized only after choosing annuitized payments over the cash value option that the estate tax could claim many future payments. He hoped to give them the option to change their mind, sell their payments and put the money in a trust. Nearly 12 years later, the Bush tax cuts are set to expire, meaning the estate tax could be increased back to 1999 levels. Regardless of how that turns out, King says, the Texas Supreme Court decision, by stripping the provision he didn't like, puts the current law more in line with his original intent.