Siporin v. Carrington

• Decision Date: 19 April 2001
• Docket Number: No. 1 CA-CV 00-0118.,1 CA-CV 00-0118.
• Citation: 23 P.3d 92,200 Ariz. 97
• Parties: Walter S. SIPORIN and Gerald L. Anchor, Plaintiffs-Appellants, v. Richard CARRINGTON, individually and dba Carrington Investment Service; Carrington Investment Service; and Carrington Estate Planning Services, Defendants-Appellees.
• Court: Arizona Court of Appeals

23 P.3d 92

200 Ariz. 97

Walter S. SIPORIN and Gerald L. Anchor, Plaintiffs-Appellants, v. Richard CARRINGTON, individually and dba Carrington Investment Service; Carrington Investment Service; and Carrington Estate Planning Services, Defendants-Appellees.

No. -0118.

Court of Appeals of Arizona, Division 1, Department E.

April 19, 2001.

As Amended May 10, 2001.

Lieberman, Dodge, Gerding, Kothe & Anderson, Ltd., by David D. Dodge and Marc R. Lieberman, Phoenix, Attorneys for Plaintiffs-Appellants. Michael Salcido, PC, by Michael Salcido, Phoenix, Attorneys for Defendants-Appellees.

Janet A. Napolitano, Attorney General, by Cheryl T. Farson, Special Assistant Attorney General and Robert A. Zumoff, Assistant Attorney General Consumer Protection & Advocacy Section, Phoenix, Attorneys for Amicus Curiae Securities Division of the Arizona Corporation Commission.

OPINION

GARBARINO, Presiding Judge.

¶ 1 By legislative design, the Arizona Securities Act protects the public by preventing dishonest promoters from selling financial schemes to unwary investors who have little or no knowledge of the realistic likelihood of the success of their investments. We hold that the viatical settlement agreements sold to Walter S. Siporin and Gerald L. Anchor are "securities" for purposes of the Arizona Securities Act, Ariz.Rev.Stat. (A.R.S) § 44-1801(23) (Supp.1999). Siporin and Anchor are entitled to judgment on their claim that they were sold unregistered securities by unregistered dealers. They are, therefore, entitled to rescissionary relief.

¶ 2 Siporin and Anchor appeal from partial summary judgment dismissing their claims against Richard Carrington, Carrington Investment Service, and Carrington Estate Planning Services (collectively referred to as Carrington) for alleged violations of the Arizona Securities Act, A.R.S. sections 44-1801 through 44-2126 (1994 & Supp.2000). Appellants' securities claims are based on the theory that the viatical settlement agreements that Carrington sold them constituted "securities" within the meaning of A.R.S. section 44-1801(23) (Supp.1999), and that Appellants' purchases were subject to rescission under A.R.S. section 44-2001(A) (Supp.2000) because the securities were neither registered with the Arizona Corporation Commission (Commission) nor sold by persons registered with the Commission as securities salesmen. See A.R.S. §§ 44-1841 (Supp.2000) and 44-1842 (1994). We agree.

FACTUAL AND PROCEDURAL HISTORY

¶ 3 "A viatical settlement is an investment contract pursuant to which an investor acquires an interest in the life insurance policy of a terminally ill person...."¹ Sec. & Exch. Comm'n v. Life Partners, Inc., 87 F.3d 536, 537 (D.C.Cir.), pet. for reh. en banc denied, 102 F.3d 587 (D.C.Cir.1996). It is the sale of a terminally ill person's life insurance policy at a discount and provides the terminally ill person (viator) with a portion of the death benefit while he or she is still living. Id. Ultimately the purchase will yield a profit to the purchaser upon the viator's death that is equal to the difference between the death benefit paid by the insurer and the purchaser's total investment in the viatical settlement. Id. A purchaser's profit realization on a viatical settlement investment depends on the price paid for the policy and the amount of time that passes between the policy's purchase and the viator's death.

¶ 4 Carrington used advertisements and promotional materials to sell viatical settlement investments. Among the promotional materials were Carrington's brochures entitled "Win/Win Investing with Double-Digit Returns—The Viatical Settlement Story," and "Investment Process for Viatical Settlements." These brochures invited both prospective investors and prospective viators who wished to sell their life insurance policies to contact Carrington through local and national health service organizations. Viators who wished to sell their policies were required to grant Carrington access to their medical and insurance records. Carrington would thereafter contact each prospective viator's physician to obtain an opinion about the prospective viator's state of mind and life expectancy. Carrington would then have its own physician or physicians review the medical history of each prospective viator and express an independent opinion on the prospective viator's life expectancy.

¶ 5 Carrington also evaluated the prospective viator's life insurance policy. Carrington required that the life insurer be a company with an A.M. Best rating of A or better, that the policy's two-year contestability period had expired, and that the policy permitted a redesignation of the beneficiary. Carrington also required that any current beneficiaries waive their rights.

¶ 6 The prospective investor in Carrington's viatical settlement program would enter into a Policy Purchase Agreement and an accompanying Agency Agreement and Special Power of Attorney. Under the Purchase Agreement, Carrington undertook to:

a. Review and qualify the applicants for Viatical Funding based upon underwriting criteria and other relevant guidelines, and provide medical and other pertinent information to the PURCHASER for review prior to purchase.

b. Forward to ESCROW AGENT the documents necessary to open the ESCROW ACCOUNT....

c. Forward to the insurance company the documents necessary to register PURCHASER as IRREVOCABLE BENEFICIARIES of the policy(s) in accordance with PURCHASER'S ownership interest.

d. Instruct ESCROW AGENT to keep all premiums due on the policy current.

e. Apply on behalf of PURCHASER for the death benefit upon the demise of the insured.

f. Supply PURCHASER on or about the anniversary date of purchase an updated medical summary of the insured (24-36² months policies only).

¶ 7 The investor deposits funds with an escrow service to be held until Carrington matches the investor with one or more life insurance policies. The money remains in escrow until "the policies [that the investors] have been placed into are funded and closed."

¶ 8 As part of the closing and funding process, Carrington would send a check to the viator's life insurance company in an amount equal to 36 months' premiums on the policy. According to Carrington's "Investment Process for Viatical Settlements," "[t]his insures the policy will stay active without possibility of lapsing."³

¶ 9 In the "Win/Win Investing" brochure, Carrington suggests returns of from 10% to 11% for policies in which the viator had a projected life expectancy of up to 12 months, to as high as 68% to 70% for policies in which the viator's projected life expectancy was up to 48 months. The brochure further advised that the amount of the return was "guaranteed," but that "the time frame for the payout of the death benefit is a variable and will affect the actual annualized rate of return.... Once the transaction has been completed, there is no liquidity for the investor until the insured dies."

¶ 10 During Richard Carrington's deposition, the following colloquy occurred:

Q. ... Once the investor puts their [sic] money into Arizona Escrows, do you then have the discretion to draw down that money and purchase the life insurance contracts that you deem advisable?

A. Yes. That's what the power of attorney that our investors sign gives us the ability to do.

Q. So other than the discretion to invest or not invest, beyond that point the investors really don't have any control over the investments that Carrington makes for them?

A. Generally, no, we make that determination for them.

He further admitted that he understood that his investors were "basically relying upon Carrington's expertise in selecting the insurance company, the [prospective viators], and evaluating the medical information that's available to get them the highest possible return for their investment[.]"

¶ 11 Carrington did not consider the viatical settlement agreements to be securities and did not register them with the Commission. Neither Richard Carrington nor any of his employees were registered as securities dealers or salespersons with the Commission.

¶ 12 Anchor saw one of Carrington's advertisements and called Carrington's office. He later brought Siporin into the investment. In July 1997, they each signed Policy Purchase Agreements and they each deposited $100,000 with Arizona Escrow & Financial Corporation, Carrington's escrow agent.

¶ 13 In January 1999, Anchor and Siporin brought this action against Carrington. They amended their complaint to allege, among other things, claims for the sale of unregistered securities through unregistered salespersons. On cross-motions for partial summary judgment on Anchor's and Siporin's securities-based claims, the trial court ruled that the viatical settlements that Carrington sold them did not constitute "securities" within the meaning of A.R.S. section 44-1801(23) (Supp.1999). Siporin and Anchor appeal from the trial court's entry of partial summary judgment in Carrington's favor. We have jurisdiction pursuant to A.R.S. section 12-2101(B) (1994).

STANDARD OF REVIEW

¶ 14 Whether an investment qualifies as a "security" under the Arizona Securities Act is a question of law. See Vairo v. Clayden, 153 Ariz. 13, 18, 734 P.2d 110, 115 (App.1987). We review questions of law de novo. State ex rel. Udall v. Superior Court, 183 Ariz. 462, 464, 904 P.2d 1286, 1288 (App. 1995).

DISCUSSION

I. Interpretation and Analysis of Questions Arising Under the Arizona Securities Act

¶ 15 When adopting the Arizona Securities Act, the legislature suggested its purpose and proper interpretation:

The intent and purpose of this Act is for the protection of the public, the preservation of fair and equitable business practices, the suppression of fraudulent or deceptive practices in the sale or purchase of securities, and the prosecution of persons engaged in fraudulent or deceptive practices in the sale or purchase of securities. This Act shall not be given a narrow or

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