Life Partners, Inc. v. Arnold

• Court: Texas Supreme Court
• Writing for the Court: Justice Boyddelivered the opinion of the Court.
• Citation: Life Partners, Inc. v. Arnold, 464 S.W.3d 660 (Tex. 2015)
• Decision Date: 08 May 2015
• Docket Number: No. 14–0226,No. 14–0122,14–0122
• Parties: Life Partners, Inc. and Milkie/Ferguson Investment, Inc., Petitioners, v. Michael Arnold, Janet Arnold, Steve South as Trustee And on Behalf of the South Living Trust, John S. Ferris, M.D., Christine Duncan, And All Others Similarly Situated, Respondents Life Partners Holdings, Inc., Life Partners, Inc., Brian. D. Pardo, R. Scott Peden, Advance Trust & Life Escrow Services, L.T.A., and Purchase Escrow Services, LLC, Petitioners, v. State of Texas, Respondent

464 S.W.3d 660

Life Partners, Inc. and Milkie/Ferguson Investment, Inc., Petitioners

v.Michael Arnold, Janet Arnold, Steve South as Trustee And on Behalf of the South Living Trust, John S. Ferris, M.D., Christine Duncan, And All Others Similarly Situated, Respondents

Life Partners Holdings, Inc., Life Partners, Inc., Brian. D. Pardo, R. Scott Peden, Advance Trust & Life Escrow Services, L.T.A., and Purchase Escrow Services, LLC, Petitioners

v.State of Texas, Respondent

No. 14–0122

No. 14–0226

Supreme Court of Texas.

Argued January 15, 2015

Opinion Delivered May 8, 2015

Rehearing Denied September 11, 2015

Hector De Leon, De Leon & Washburn, Austin, for Amicus Curiae Conestoga International, LLC

Christopher M. Staley, NASAA, Washington, DC, for Amicus Curiae North American Securities Administrators Association

G. Kevin Buchanan, Kevin Buchanan & Associates, PLLC, Dallas, Harriet O'Neill, Law Office of Harriet O'Neill, PC, Susan S. Vance, Wallace B. Jefferson, Douglas W. Alexander, Alexander Dubose Jefferson & Townsend LLP, Austin, Elizabeth L. Yingling, Laura J. O'Rourke, William R. Daugherty, Meghan Hausler, Baker & McKenzie LLP, Dallas, for Petitioners Life Partners Holdings, Inc., Life Partners, Inc., Brian D. Pardo and R. Scott Peden

Henry J. Ackels, Samuel H. Ackels, Ackels & Ackels, L.L.P., Dallas, for Petitioner Milkie/Ferguson Investment, Inc.

Keith L. Langston, Langston Law Firm, Longview, Robert T. Cain Jr., Alderman Cain & Neill PLLC, Scott C. Skelton, Skelton Slusher Barnhill Watkin Wells PLLC, Lufkin, for Respondents Michael Arnold, Janet Arnold, Steve South as Trustee on and on behalf of the South Living Trust, John S. Ferris, M.C., Christine Duncan, and all others similarly situated

Andy McSwain, Fulbright Winniford PC, Waco, for Petitioners Advanced Trust & Life Escrow Services LTA and Purchase Escrow Services

Kristofer S. Monson, Assistant Solicitor General, Lesli Gattis Ginn, Office of the Attorney General, Austin, for Respondent State of Texas

Opinion

Justice Boyd delivered the opinion of the Court.

The primary issue in these two separate cases is whether a “life settlement agreement” or “viatical settlement agreement” is an “investment contract” and thus a “security” under the Texas Securities Act. We hold that the agreements at issue are investment contracts because they constitute transactions through which a person pays money to participate in a common enterprise with the expectation of receiving profits, under circumstances in which the failure or success of the enterprise and the person's realization of the expected profits is at least predominately due to the entrepreneurial or managerial efforts of others. We decline to give today's holding only prospective application, and we decline to consider the merits of the “relief defendants' ” evidentiary arguments. In short, we affirm the courts of appeals' judgments in both cases.

I.Background

In Arnold v. Life Partners, Inc., Michael and Janet Arnold and others¹ (collectively, the Arnolds) filed a class action lawsuit in Dallas County, seeking rescission and damages based on claims that Life Partners, Inc. and others² (collectively, Life Partners) violated the Texas Securities Act by selling unregistered securities and materially misrepresenting to purchasers that they were not, in fact, securities.

416 S.W.3d 577. Meanwhile, in State v. Life Partners, Inc., the State of Texas filed a separate suit in Travis County, seeking an injunction and other relief based on allegations that Life Partners and others³ had committed fraud in connection with the sale of securities.⁴ 459 S.W.3d 619. Before a class was certified in Arnold, both district courts entered judgments in favor of Life Partners, holding that Life Partners had not promoted or marketed any “securities” and thus could not be liable under the Texas Securities Act. The Dallas Court of Appeals reversed in part, affirmed in part, and remanded, holding that the life settlement agreements are securities under the Texas Securities Act. 416 S.W.3d at 592. The Austin Court of Appeals soon followed suit, “agree[ing] with the conclusions reached by the Dallas Court and fully incorporat[ing] its analysis.” 459 S.W.3d at 621. Life Partners filed a petition for review in both cases, which we granted and consolidated for purposes of oral argument.

Since 1991, Life Partners has been engaged in the business of buying existing life insurance policies from those whose lives the policies insure, and then selling interests in those policies to others. These types of transactions are generally referred to as “life settlements” when the insured is elderly or “viatical settlements” when the insured is terminally ill. We will refer to both types collectively as “life settlement agreements.” According to Life Partners, many people with life insurance desire to sell their policies so that they or their family members can enjoy the proceeds while the insured is still living. Life Partners purchases the policy from the insured for a “cash settlement” that is less than the amount the policy will pay at the time of the insured's death. To fund these purchases and its own business operations, Life Partners sells interests in the policies' future benefits to “investors” or “purchasers.”⁵ The process thus involves at least two distinct business transactions, the first being Life Partners' purchase of the policy from an insured and the second being Life Partners' sale of interests in the policy to its purchasers. The issue here is whether the second transaction constitutes the sale of a “security” under the Texas Securities Act.

Life Partners advertises life settlement agreements as a “sure” investment. Its sales pamphlet asserts: “There's no need to worry about which way the wind is blowing. The returns on life settlements, unlike stocks, mutual funds and other investments, are unaffected by market fluctuations, business cycles, the economy or global unrest.” Life Partners assures purchasers that, “[n]ot only are your investments safe from these market risks, they have the opportunity to provide exceptional return on investment.” If investments in a life settlement are indeed “safe from these market risks,” however, they are not free from all risks. In particular, because Life Partners calculates a policy's value based on the insured's life expectancy and must pay the policy's premiums until the insured's death to collect on the policy, the anticipated returns are diminished, and sometimes lost, when the insured lives longer than Life Partners projects.

When selecting policies to purchase, Life Partners identifies insureds who are interested in selling their policies, evaluates their medical condition, predicts their life expectancy, and evaluates the policies' terms and conditions to ensure they are assignable. It then determines how much to pay for the policy based on the insured's life expectancy, the amount of the benefit, and related factors. Life Partners acknowledges that those who purchase an interest in the policies “depend upon [Life Partners'] ability to predict life expectancies and set the appropriate prices.” If Life Partners accurately predicts the insured's life expectancy and negotiates a favorable purchase price, those who purchase an interest in the policy will receive a profit when the policy is paid. But if Life Partners' prediction is inaccurate or its negotiations ineffective, the purchasers can end up having to pay more to cover premiums than they will receive when the policy benefit is paid.

Life Partners uses the purchasers' funds to (1) pay the insured for the policy, (2) create an escrow account from which to pay the policy's future premiums as they come due, (3) pay fees to escrow agents and to any brokers who helped sell the interests to the purchasers, and (4) pay Life Partners an administration or brokerage fee. Life Partners does not disclose to the purchasers how much of their investment goes to each of these purposes, but instead gives them only a total “acquisition price.” Until the purchasers pay that price, they receive no information about the insureds or their policies. Once they have paid the acquisition price, the purchasers receive a “Confidential Case History” that contains information about the insured's illness and life expectancy, the policy's grade, value, and annual premium payment, and the amount Life Partners has escrowed to make those premium payments. The purchasers never learn the identities, addresses, or other personal information about the insureds.⁶ Life Partners may provide the purchasers with updates on an insured's medical condition or life expectancy, but sometimes it may simply “lose contact with the insured.”

When Life Partners purchases a policy, it becomes the legal owner but appoints a trustee to serve as the beneficiary. To cover the future premiums, Life Partners places what it projects to be a sufficient amount in escrow and then pays the annual premiums from that account. If the insured survives longer than projected, however, and the escrowed amount is depleted, Life Partners will require the purchasers to provide additional funds. If the purchasers fail to provide additional funds to cover the premiums, the policy will be forfeited along with any anticipated return. Life Partners retains at least some discretion over the payments of premiums, however, and at times may itself pay premiums to prevent the forfeiture of a policy when an insured outlives a projected life expectancy. There is also some evidence in the record that, on at least one occasion, Life Partners elected to “optimize” a policy's premiums to get “more years of premium coverage with the same amount of money” and thereby protect the purchasers' investments. To accomplish this, Life Partners exercised discretion to prepay premiums, while leaving sufficient funds in the escrow account to maintain federal insurance coverage on the funds in that account. As Life Partners explained the process,

because the

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