Life Partners Creditors' Trust v. Cowley (In re Life Partners Holdings, Inc.)

Decision Date31 May 2019
Docket NumberNo. 17-11477,17-11477
Citation926 F.3d 103
Parties In the MATTER OF: LIFE PARTNERS HOLDINGS, INCORPORATED, Debtor. Life Partners Creditors' Trust ; Alan M. Jacobs, As Trustee for Life Partners Creditors' Trust, Appellants, v. Fred A. Cowley; Gallagher Financial Group; Edward G. Burford Corporation; Faye Bagby; Ella Oliver, doing business as; Wealthstone Financial ; Falco Group, L.L.C.; Mark McKay; Kainos Asset Management, L.L.C. ; Life Settlement Exchange, L.L.C., Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Nolan Cornelius Knight, Dennis L. Roossien, Jr., Esq., Munsch Hardt Kopf & Harr, P.C., Dallas, TX, for Appellants.

Thomas S. Brandon, Jr., Rebecca Kristine Eaton, Esq., Thomas Franklin Harkins, Jr., Esq., Whitaker Chalk Swindle & Schwartz, P.L.L.C., Fort Worth, TX, for Appellees FRED A. COWLEY, EDWARD G. BURFORD CORPORATION, FAYE BAGBY, WEALTHSTONE FINANCIAL, FALCO GROUP, L.L.C., MARK MCKAY, KAINOS ASSET MANAGEMENT, L.L.C., LIFE SETTLEMENT EXCHANGE, L.L.C.

Thomas Giles Farrier, Esq., Murphy, Mahon, Keffler & Farrier, L.L.P., Fort Worth, TX, James Dan Moorhead, Arlington, TX, for Appellee GALLAGHER FINANCIAL GROUP.

Before ELROD, HIGGINSON, and ENGELHARDT, Circuit Judges.


This case arises out of the Chapter 11 bankruptcies of three related entities: Life Partners Holdings, Inc.; Life Partners, Inc. (LPI); and LPI Financial Services (collectively, the "LP Entities"). The LP Entities operated an investment business focused on the sale of interests in life insurance policies, through which they defrauded investors and violated securities laws. See Moran v. Pardo , No. 4:15-cv-00905, Dkt. No. 359 (N.D. Tex. June 12, 2017); see also SEC v. Life Partners Holdings, Inc. , 854 F.3d 765, 789 (5th Cir. 2017). The LP Entities used a multi-level marketing structure to sell their life insurance investments, contracting with individuals and entities they called "Licensees" to refer potential investors in exchange for sales commissions. The bankruptcy trustee filed five adversary proceedings1 against various groups of these Licensees, asserting claims under the Bankruptcy Code and on behalf of individual investors. Life Partners Creditors' Trust (Creditors' Trust)—an entity created by the Chapter 11 plan—was later substituted as plaintiff in these proceedings.

The district court granted the Licensees' motions to dismiss all of Creditors' Trust's claims and declined to allow repleading. The district court also denied Creditors' Trust's motion for reconsideration. We AFFIRM in part and REVERSE and REMAND in part.


In 1991, Brian Pardo founded LPI for the purpose of selling "viaticals"—investments in life insurance policies that the insureds had sold to third parties.2 LPI's parent company, Life Partners Holdings, and a related entity, LPI Financial Services, were also engaged in this business. The LP Entities used a multi-level marketing structure to promote their investment offerings to investors. First, the LP Entities contracted with "Master Licensees" to (1) refer potential investors to the LP Entities and (2) recruit additional licensees. The licensees recruited by Master Licensees—called "Referring Licensees"—would in turn enter into two contracts: one with the LP Entities to refer potential investors, and another with the Master Licensee to facilitate their sharing of the commissions received from the LP Entities' sales. The LP Entities produced offering materials for both types of Licensees to distribute to potential investors.

Through their Licensees, the LP Entities sold life insurance policies in shares referred to as "fractional interests." Under their investment contracts with the LP Entities, the investors funded an escrow account with sufficient funds to keep the policies in effect during the life expectancies of the insureds as estimated by the LP Entities on their offering materials. If the insureds survived beyond the LP Entities' estimate, the investors also agreed to contribute additional funds for premiums until the policies reached maturity.

Initially, the LP Entities focused on policies in which the insureds had been diagnosed with AIDS because the disease shortened the insureds' life expectancies in comparison to the actuarial life expectancies used by insurance companies. However, shortly after the LP Entities entered the viaticals market, medical advances significantly increased life expectancies for AIDS patients. As a result, by 2004, the LP Entities had pivoted their business model to focus on elderly insureds who were terminally ill—individuals whose life expectancies would presumably also be shorter than the actuarial estimates. The LP Entities hired Dr. Donald Cassidy to identify appropriate insureds and estimate their life expectancies.

However, it soon became apparent that Dr. Cassidy did not have the ability to perform either task with any accuracy. Of the 302 policies that the LP Entities originated between 2004 and 2007, Dr. Cassidy predicted that 157 would mature by the end of 2007. Only seven matured during that time. Undeterred, the LP Entities continued to use the inaccurate life expectancies to set the purchase price of the fractional interests, which resulted in the LP Entities overcharging investors. In addition, the offering materials distributed by the Licensees continued to represent that the insureds had short life expectancies when their life expectancies were likely no shorter than the actuarial estimates.

According to Creditors' Trust, the LP Entities' offering materials also contained numerous other misrepresentations regarding the life insurance industry and the LP Entities' investment offerings. Most of these misrepresentations were related to Dr. Cassidy's flawed life expectancy estimates, which the LP Entities used to support their claims that the fractional interests were sound investments with a "superior yield potential," that the policies would mature relatively quickly, that the investments were low-risk even if the LP Entities' life expectancy predictions were incorrect, that the LP Entities' prices were appropriate, and that the LP Entities had a positive track record with past life insurance investments. These misrepresentations form the basis of several of Creditors' Trust's claims against the Licensees.

Over a twelve-year period, the LP Entities raised more than $ 1.8 billion from the sale of more than 100,000 fractional interests to investors. Even when investors began expressing doubts because policy maturities were long overdue and media coverage suggested Dr. Cassidy's predictions were inaccurate, Pardo and other LP Entities insiders continued to represent that Dr. Cassidy's predictions were accurate and that the policies would mature imminently. The Licensees disseminated these representations to the investors.

Throughout this time, the Licensees received commissions and fees under their contracts with the LP Entities. Between 2008 and 2015, these commissions and fees totaled more than $ 27.6 million. While investors knew that a portion of their investment funds would be used to pay fees, they were not given specifics as to how that money was distributed. On average, the Licensees received 12% of the money an investor provided in exchange for a fractional interest, which was well above the industry standard for a commission in a securities transaction.

Due to the large commissions paid to the Licensees—as well as large distributions made to Pardo and other LP Entities executives—Creditors' Trust alleges that the LP Entities were insolvent for much of their existence prior to filing for bankruptcy. Because the life settlements were bad investments, each new purchase of a fractional interest created a liability to the investor. And because the LP Entities were depleting all their resources on commissions and distributions, they did not have sufficient funds to cover those liabilities. Instead, the LP Entities—through the Licensees—continued to recruit new investors to keep the business funded. Eventually, however, the LP Entities no longer had enough capital to conduct their business operations or continue maintaining the policies that had not yet matured.

As the fraudulent practices of the LP Entities came to light through media coverage, investors began to file class action lawsuits against the companies. See, e.g. , Turnbow v. Life Partners, Inc. , 2013 WL 3479884, at *1–2 (N.D. Tex. July 9, 2013). In addition, the SEC began investigating the LP Entities. The SEC filed suit based on its findings, and the Western District of Texas found that Pardo had "knowingly—or at least recklessly—violated securities laws." SEC v. Life Partners Holdings, Inc. , 71 F. Supp. 3d 615, 619 n.1 (W.D. Tex. 2014), vacated in part and rev'd in part on other grounds , 854 F.3d at 789.


On January 20, 2015, Life Partners Holdings filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The Chapter 11 trustee filed bankruptcy petitions on behalf of the LP subsidiaries, LPI and LPI Financial Services, on May 19, 2015.

The Chapter 11 trustee then filed a series of adversary proceedings on behalf of the bankruptcy estates. One of the proceedings targeted Pardo and other LP Entities executives and insiders. See Moran , No. 4:15-CV-905, Dkt. No. 16 (amended complaint). The district court assigned to that case withdrew the bankruptcy reference and denied the defendants' motions to dismiss, some of which raised arguments similar to those raised by the Licensees here. Id. Dkt. Nos. 5, 192. The case proceeded to trial, where a civil jury found that Pardo was liable for fraud and that Pardo and other LP insiders were unjustly enriched. See id. Dkt. No. 359 (jury verdict). The district court's final judgment awarded the LP Entities' bankruptcy estates and the plaintiff-investors in the case more than $ 40 million in damages. Id. Dkt. No. 440 (final judgment).

The five related adversary proceedings before this...

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