Summary: This was a class action case against Life Partners, Inc. Heygood, Orr & Pearson represented investors suing Life Partners over bogus life expectancies used to sell them an investment known as life settlements. A “life settlement” is a life insurance policy that is purchased from the original insured for an amount less than the face amount of the policy (i.e., less than the death benefit). When the insured subsequently dies, the policy proceeds are paid to the purchaser of the policy as opposed to the family of the insured. Life Partners gathers investment funds from would-be investors for the purpose of purchasing life settlement policies. Life Partners arranges to purchase the policies from insureds on behalf of investors for a certain price but charges the investors an amount substantially above that price to acquire the policy. The difference between the amount paid to the insured by Life Partners and the amount paid by the investor to Life Partners to acquire an interest in the policy is retained by Life Partners as their “fee.” Key to the amount an investor should be willing to pay for a life settlement is the life expectancy of the insured. This lawsuit claimed that Life Partners used bogus life expectancies to convince investors to pay far in excess of what they should have paid for life settlements, thus falsely elevating their fees. The lawsuit also claimed that Life Partners caused their customers to pay too much in premiums to the insurance companies to maintain the policies until they matured. In this brief, Heygood, Orr & Pearson sought permission of the Court on behalf of their clients to intervene in an already pending class action against Life Partners.
I. STATEMENT OF THE CASE
This putative class action is a consolidation of lawsuits brought by Sean T. Turnbow and several other named plaintiffs (collectively “Named Plaintiffs”) against Defendants Life Partners, Inc. (“LPI”), Life Partners Holdings, Inc. (“LPHI”), Brian D. Pardo, and R. Scott Peden (collectively “Defendants”).
The Court has yet to rule on class certification, and the existing parties recently stipulated to extend deadlines for certification-related briefing into January of 2013. (Doc 107). The deadlines to join new parties and to amend pleadings herein are not until 30 days after the Court rules on the still-pending motion for class certification. (Doc. 101). Trial is not to begin until June of next year. (Id.).
The proposed class is all persons in the United States who at any time purchased or otherwise acquired fractional interests in life settlements from or through LPI or LPHI for which Dr. Donald Cassidy provided life expectancy assessments. (Consolidated Class Action Complaint, Doc. 32, at ¶ 7). Proposed Intervenors are members of that proposed class. Like the Named Plaintiffs, the Proposed Intervenors purchased fractional interests in life settlements from or through LPI or LPHI for which Dr. Donald Cassidy provided life expectancy assessments. (Proposed Intervenors’ Complaint, Ex. A to Motion to Intervene).
Proposed Intervenors possess claims that share common questions of law and fact with those of the putative classes in the actions already consolidated before this Court. (Compare Consolidated Class Action Complaint, Doc. 32, and Proposed Intervenors’ Complaint, Ex. A to Motion to Intervene). Just like the Named Plaintiffs, Proposed Intervenors possess claims for breach of fiduciary duty against LPI for its “process of procuring, relying on, utilizing, and presenting the services and life expectancy assessments of Cassidy.” (Compare Consolidated Class Action Complaint, Doc. 32, at ¶¶ 52-58 and Proposed Intervenors’ Complaint, Ex. A to Motion to Intervene, at ¶¶ 79-84). Similarly, Proposed Intervenors possess the same claims as Named Plaintiffs for aiding and abetting the breach of fiduciary duty against Defendants Pardo, Peden, and LPHI (Compare Consolidated Class Action Complaint, Doc. 32, at ¶¶ 59-66, and Proposed Intervenors’ Complaint, Ex. A to Motion to Intervene, at ¶¶ 87-95). Proposed Intervenors possess the same claims for breach of contract as the Named Plaintiffs. (Compare Consolidated Class Action Complaint, Doc. 32, at ¶¶ 67-71, and Proposed Intervenors’ Complaint, Ex. A to Motion to Intervene, at ¶¶ 96-99). And, Proposed Intervenor Steuben possesses the same claims for violation of the California Unfair Competition Law against Defendants LPI, Pardo, and Peden as Named Plaintiffs Yoskowitz, Vieiria, and Taylor which are asserted in the 17200 Subclass asserted in this consolidated action. (Compare Consolidated Class Action Complaint, Doc. 32, at ¶¶ 72-80, and Proposed Intervenors’ Complaint, Ex. A to Motion to Intervene, at ¶¶ 103-112).
Proposed Intervenors also possess claims against Defendants for Defendants’ overpayment of premiums which the other members of the putative class asserted herein also possess. (Proposed Intervenors’ Complaint, Ex. A to Motion to Intervene, at ¶¶ 85, 100, 104). These claims have not yet been asserted in this action, and any settlement or judgment in this case could potentially extinguish these claims. Also, if class certification is not granted in this case and Proposed Intervenors are not parties, they could potentially lose rights or claims because of the statute of limitations under the reasoning of Newby v. Enron Corp., 542 F.3d 463 (5th Cir. 2008). For these reasons and others, Proposed Intervenors seek to intervene.
II. LEGAL STANDARDS
“Federal courts should allow intervention where ‘no one would be hurt and greater justice could be attained.’” Ross v. Marshall, 426 F.3d 745, 753 (5th Cir. 2005), quoting Sierra Club v. Espy, 18 F.3d 1202, 1205 (5th Cir.1994). Rule 23 of the Federal Rules of Civil Procedure permits absent class members to intervene in a class action. FED.R.CIV.P. 23(d)(1)(B)(iii). Rule 24 provides for intervention by right and by permission. FED.R.CIV.P. 24.
A. Intervention as a Matter of Right Standard
For a party to be entitled to intervene in a suit as a matter of right pursuant to FED.R.CIV.P. 24(a)(2), the intervenor must meet four criteria: (1) the application for intervention must be timely; (2) the applicant must have an interest relating to the property or transaction which is the subject of the action; (3) the applicant must be so situated that the disposition of the action may, as a practical matter, impair or impede his ability to protect that interest; (4) the applicant’s interest must be inadequately represented by the existing parties to the suit. Haspel & Davis Milling & Planting Co. v. Board of Levee Comm’rs of the Orleans Levee Dist., 493 F.3d 570, 578 (5th Cir.2007).
B. Permissive Intervention Standard
A court may allow permissive intervention if the movant demonstrates it “has a claim or defense that shares with the main action a common question of law or fact” and that it will not “unduly delay or prejudice the adjudication of the original parties’ rights.” FED.R.CIV.P. 24(b).
A. Newby and the Need for Proposed Intervenors to Protect Their Rights
Courts have held that the filing of a class action generally tolls a statute of limitations as to the members of the class at least from the time class certification is requested until such time as certification is denied, if that occurs. See, Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 350, 352-55, 103 S.Ct. 2392 (1983); American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 554, 94 S.Ct. 756 (1974). Thereafter, class members must file individual suits to protect their interests. American Pipe, 414 U.S. at 554. However, under the Fifth Circuit’s interpretation of Texas law in Newby v. Enron Corp., 542 F.3d 463 (5th Cir. 2008), the general rule does not apply here. Instead, the “contrary rule” that has been referenced by the Supreme Court applies. See, gen.,Crown Cork, 462 U.S. at 350-351; American Pipe, 414 U.S. at 551.
In Newby, the plaintiff contended that claims governed by Texas law were not barred by limitations because limitations had been tolled, under American Pipe, as a result of membership in a federal class action. See Newby, 542 F.3d at 471-473. The Fifth Circuit rejected the argument and held that the district court had “correctly concluded” that “Texas law does not allow tolling for a state claim based on a federal class action.” Id.
Here, the [plaintiff] contends that the federal Newby class action tolled all state law claims based on American Pipe. This is a weak argument given this court’s prior language in Vaught [v. Showa Denko K.K., 107 F.3d 1137 (5th Cir.1997)] and the Texas Court of Appeals’ holding in Bell [v. Showa Denko K.K., 899 S.W.2d 749, 757–58 (Tex.App. 1995)] In Vaught, we questioned whether Texas would “ever” allow tolling for a state claim based on a federal class action. See Vaught, 107 F.3d at 1147. Our doubt was premised, in part, on Bell, where the Texas court did not allow a federal class action to toll the state statute of limitations and made clear that the state tolling rule differs from the federal rule. See Bell, 899 S.W.2d at 757–58. […] Therefore, the district court correctly concluded that, based on our understanding of Texas law, the Texas courts likely will not extend American Pipe tolling to this situation.
Newby, 542 F.3d at 472-473 (emphasis added); see also Moorehead v. Deutsche Bank AG, Not Reported in F.Supp.2d, 2011 WL 4496221, *9 (N.D.Ill. September 26, 2011) (following Newby and holding claims governed by Texas law not tolled by membership in a federal class action).
As noted, Proposed Intervenors possess claims governed by Texas law for breach of fiduciary duty and breach of contract against the same defendants and arising out of the same facts, series of transactions, and life settlement investments as the proposed class action herein. However, given Newby, Proposed Intervenors are not able to rely on the existence of this possible class action suit to protect their rights. “Only by intervening or taking other action prior to the running of the statute of limitations would they be able to ensure that their rights would not be lost in the event that class certification was denied.” Crown Cork, 462 U.S. at 350-512. Because they are faced with possibly losing all right to assert their claims by the running of limitations, each Proposed Intervenor has every incentive to intervene or file their own action “prior to the expiration of his own period of limitations.” See id.
B. The Motion to Intervene should be Granted.
1. This Motion for Intervention is Timely.
The timeliness of an application to intervene “must be determined from all circumstances in the case” and “is not determined solely by the length of time that passes before a motion to intervene is made.” Association of Professional Flight Attendants v. Gibbs, 804 F.2d 318, 320-321 (5th Cir.1986), citing Stallworth v. Monsanto Co., 558 F.2d 257, 263 (5th Cir.1977). In determining whether a party’s motion to intervene as of right is timely, a court considers: (1) the length of time between the would-be intervenor’s learning of his interest and his petition to intervene, (2) the extent of prejudice to existing parties from allowing late intervention, (3) the extent of prejudice to the would-be intervenor if the petition is denied, and (4) any unusual circumstances. In re Lease Oil Antitrust Litigation, 570 F.3d 244, 247-248 (5th Cir. 2009), citing Stallworth v. Monsanto Co., 558 F.2d at 263.
The first timeliness factor is “[t]he length of time during which the would-be intervenor actually knew or reasonably should have known of his interest in the case before he petitioned for leave to intervene.” Stallworth, 558 F.2d at 264. “The timeliness clock does not start running until the putative intervenor also knows that class counsel will not represent his interest.” In re Lease Oil Antitrust Litigation, 570 F.3d 244 at 248, citing Sierra Club v. Espy, 18 F.3d 1202, 1206 (5th Cir.1994). “Unlike a defendant in a normal civil suit, an absent class-action plaintiff is not required to do anything. He may sit back and allow the litigation to run its course, content in knowing that there are safeguards provided for his protection.” See, gen. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 810, 105 S.Ct. 2965 (1985) see also McKowan Lowe & Co. v. Jasmine, Ltd., 295 F.3d 380, 384 (3d Cir.2002) (“Not until the existence and limits of the class have been established and notice of membership has been sent does a class member have any duty to take note of the suit or to exercise any responsibility with respect to it in order to profit from the eventual outcome of the case.”). Proposed Intervenors certainly had no reason to even suspect that the Named Plaintiffs might not be “adequate” representatives until their attorney happened to review concerns raised by Defendants regarding adequacy in Defendants’ Opposition To Plaintiffs’ Motion For Class Certification (Doc. 78), filed May 16, 2012, in light of the Reply thereto filed by the Plaintiffs on June 22, 2012 (Doc. 86). Further, and perhaps more importantly, it became readily apparent to Proposed Intervenors that their interests were diverging from those of the Named Plaintiffs when a “Stipulation” was filed on October 19, 2012 in which the parties herein agreed to extend deadlines for briefing related to class certification into next year. As a result, there will be no ruling on certification until at least early next year and, given the possible application of Newby (discussed above), Proposed Intervenors cannot afford to wait. Only a month after realizing that a class certification ruling in this matter was being pushed back and into next year by the parties, Proposed Intervenors have filed this request to intervene. Consideration of the first timeliness factor supports a finding that the requested intervention is timely.
The second timeliness factor weighs the prejudice to other parties caused by delay in seeking intervention. Here, it seems beyond dispute that there will be no prejudice to the parties from adding additional, essentially identical claims regarding the life expectancy assessments provided by Cassidy. However, the court should also reject any argument that “adding” the premium overpayment claims asserted by Proposed Intervenors will somehow prejudice the existing parties. The Fifth Circuit has explained that “[a]ny potential prejudice caused by the intervention itself is irrelevant, because it would have occurred regardless of whether the intervention was timely.” In re Lease Oil Antitrust Litigation, 570 F.3d at 248, citing Stallworth, 558 F.2d at 265. The “only proper concern” is how much more prejudice would come from intervening earlier compared to intervening now. Id. Here, no class has been certified, no class representatives appointed and there has been no final designation of class counsel. The deadlines to join new parties and to amend pleadings herein are not until 30 days after the Court rules on the still-pending motion for certification. (Doc. 101). Trial is not to begin until June of next year. (Id.). Furthermore, LPI has not only been aware of but has been litigating precisely such premium overpayment claims for almost a year in two putative class actions brought by Proposed Intervenors Steuben and Willingham. Although those actions propose California and Texas statewide classes, the underlying factual and legal issues are the same for a nationwide class. In short, the Defendants herein cannot show prejudice sufficient to justify denying intervention. Additionally, because premium overpayment claims could only increase the potential recovery by plaintiffs and class herein and do not conflict with or undermine the claims already asserted regarding the life expectancy assessments provided by Cassidy, adding premium overpayment claims will clearly not “prejudice” the Named Plaintiffs.
The Court should also consider the prejudice to Proposed Intervenors if the motion to intervene is denied. “To determine whether [Proposed Intervenors] would be prejudiced by being denied intervention, we examine what opportunities” Proposed Intervenors would have to assert their claims if denied intervention herein. In re Lease Oil Antitrust Litigation, 570 F.3d at 249. As noted above, given Newby, Proposed Intervenors may only be able to ensure that their rights will not be lost in the event that class certification is denied (or a certified class is later decertified or certification is reversed on appeal or a certified class definition is modified in a way that excludes them) “by intervening or taking other action prior to the running of the statute of limitations.” See Crown Cork, 462 U.S. at 350-351. Here, given this consolidation of several actions regarding the same life settlements interests purchased from the same Defendants already pending herein in this Court, it hardly seems desirable to require Proposed Intervenors to file their own actions. “Intervening in the existing federal lawsuit is the most efficient, and most certain, way for [each Proposed Intervenor] to pursue its claim. See, In re Lease Oil Antitrust Litigation, 570 F.3d at 250. Because Newby states that limitations may not be tolled on the Intervenors’ claims and also because the Named Plaintiffs are not even asserting premium overpayment claims (that might nonetheless be barred by res judicata following a judgment or settlement herein), denying intervention would certainly cause prejudice to Proposed Intervenors.
The final factor as to timeliness is the presence of any “unusual circumstances.” Texas law as construed in Newby is an unusual circumstance that supports the present requests to intervene. In addition, the fact that the premium overpayment claims are potentially very valuable claims to the proposed class (the claims are discussed in more fully below) and yet are not being asserted by the Plaintiffs should also be considered such an unusual circumstance.
The present motion to intervene has been filed before class certification, before the deadline to join parties, before the deadline to amend pleadings, and, of course, long before trial, much less judgment. See gen. Edwards v. City of Houston, 78 F.3d 983, 1001 (5th Cir.1996) (en banc) (“that these motions were filed prior to entry of judgment favors timeliness, as most of our case law rejecting petitions for intervention as untimely concern motions filed after judgment was entered in the litigation.”) Under appropriate circumstances, intervention can even be timely and proper after a final judgment has been entered in a class action. See, e.g., In re Lease Oil Antitrust Litigation, 570 F.3d at 250; see also United Airlines, Inc. v. McDonald, 432 U.S. 385, 97 S.Ct. 2464 (1977). This motion to intervene is brought much earlier. This application to intervene is timely. This application is brought months before the Court determines whether the Named Plaintiffs are adequate representatives and whether a class will be certified. See, e.g, In re Community Bank of Northern Virginia Mortgage Loan Litigation, 418 F.3d 277, 315 (3d Cir. 2005) (intervention was timely in part because the trial court had only “conditionally” certified the class and thus court was still “faced with the issue of class counsel’s adequacy of representation and possible collusion as matters of first impression.”).
2. Each Proposed Intervenor has an interest relating to the property or transaction which is the subject of the litigation and is so situated that disposition of the action, as a practical matter, may impede or impair his or her ability to protect that interest.
As set out above, Proposed Intervenors are members of the proposed Class herein and accordingly possess the same claims against Defendants as are being alleged herein. Proposed Intervenors all have a significant protectable interest relating to the subject of the instant action and are so situated that disposition of the action, as a practical matter, may impede or impair their ability to protect that interest. See, In re Community Bank of Northern Virginia, 418 F.3d at 315 (“In the class action context, the second and third prongs of the Rule 24(a)(2) inquiry are satisfied by the very nature of Rule 23 representative litigation.”).
3. The Named Plaintiffs “may be” inadequately representing the interests of the Proposed Intervenors.
“The Supreme Court has held that the inadequate representation requirement ‘is satisfied if the [proposed intervenor] shows that representation of his interest ‘may be’ inadequate’ and that ‘the burden of making that showing should be treated as minimal.’” Chiles v. Thornburgh, 865 F.2d 1197, 1214 (11th Cir. 1989) (emphasis added), quoting Trbovich v. United Mine Workers, 404 U.S. 528, 538 n. 10, 92 S.Ct. 630, 30 L.Ed.2d 686 (1972); accord Ross v. Marshall, 426 F.3d 745, 761 (5th Cir. 2005) (“We have described this burden as “minimal,” noting that a potential intervenor need only show that “representation by the existing parties may be inadequate.”) (emphasis in original).
Here, the Named Plaintiffs and their attorneys may be inadequately representing the interests of Proposed Intervenors for at least three independent reasons: (a) because they lack standing to assert the individual claims that Proposed Intervenors risk losing to limitations under the reasoning of Newby if not timely asserted now; (b) because they are failing to pursue claims on behalf of the Class for the considerable damages suffered due to premium overpayments by the Defendants even though a settlement release or judgment in this action could very possibly be broad enough to bar such claims; and (c) for the reasons set forth in the Defendants’ opposition to the motion for certification with regard to the adequacy of Named Plaintiffs and their counsel. Considered alone, each reason is sufficient to support the requested intervention. Considered cumulatively, there can be no doubt that Proposed Intervenors have met their minimal burden to show the existing parties may be inadequately representing their interests.
(a) Newby and the Need for Adequate Representation of Individual Rights
As discussed above, according to the Fifth Circuit, “the Texas courts likely will not extend American Pipe tolling to … allow a federal class action to toll the state statute of limitations.” Newby, 542 F.3d at 472-473. And, as the Supreme Court has recognized, without American Pipe tolling, absent class members are not “able to rely on the existence of the suit to protect their rights.” See Crown Cork, 462 U.S. at 351-352. Instead, “[o]nly by intervening or taking other action prior to the running of the statute of limitations would they be able to ensure that their rights would not be lost in the event that class certification was denied.” Id. Here, the Named Plaintiffs lack standing to adequately ensure that the Proposed Intervenors’ rights are not lost in the event that, for example, class certification is denied, a certified class is later decertified, certification is reversed on appeal, or a certified class definition is later modified in a way that excludes them. As a result, representation of the interests of the Proposed Intervenors by the existing parties clearly “may be inadequate.”
(b) Named Plaintiffs are Failing to Assert Valuable Claims and Jeopardizing the Ability of Class Members to Subsequently Pursue Such Claims
The Named Plaintiffs are not asserting significant claims for damages caused by the overpayment of premiums with regard to the same life settlement transactions underlying the class claims herein. The overpayment of premiums occurred when LPI paid “level premiums” instead of paying the minimum necessary to keep the policy in force, which is called “optimizing” premiums. In Intervenors Class Action Complaint, in addition to protecting their claims related to the bogus Cassidy life expectancies, Intervenors seek to assert a Subclass for damages related to overpayment of premiums by LPI (the “Premium Overpayment Subclass”).
“Case law certainly exists to support the proposition that class certification should be denied on the basis that class representatives are inadequate when they opt to pursue certain claims on a class-wide basis while jeopardizing the class members’ ability to subsequently pursue other claims.” In re Universal Service Fund Telephone Billing Practices Litigation, 219 F.R.D. 661 (D.Kan. 2004) (emphasis added). Here, by limiting the Class claims to only those regarding the Cassidy life expectancy determinations and completely failing to also seek potentially very substantial damages for Defendants’ overpayment of premiums arising out of the same life settlement investments, the interests of Proposed Intervenors—and indeed many (if not all) Class members with such overpayment claims—may not be adequately represented by the Named Plaintiffs. See, gen., Ditcharo v. United Parcel Service, Inc., 376 Fed.Appx. 432, 438 (5th Cir. 2010) (“by specifically attempting to limit the amount of damages available to each member of the class, Appellants demonstrate that the potential interests of certain class members–particularly those seeking more than $75,000 in damages–would not be well-represented”); McClain v. Lufkin Industries, Inc., 519 F.3d 264 (5th Cir. 2008) (finding a “conflict of interest” when named plaintiffs failed to asset “significant” claims for damages on behalf of the class); Manguno v. Prudential Property and Cas. Ins. Co., 276 F.3d 720, 724 (5th Cir. 2002) (“it is improbable that Manguno can ethically unilaterally waive the rights of the putative class members to attorney’s fees without their authorization”).
The premium overpayment claims in question are founded on the same form agreements (such as LPI’s “Agency Agreements” with the Class), the same life settlement investments, and the same legal theories (breach of fiduciary duty and breach of contract) arising out of the same relationships and duties created by the same agreements as the claims currently asserted by the Named Plaintiffs. (See Intervenors’ Complaint).
In the life settlement context, when the insured passes away, the investor only receives the set amount of the death benefit. Because the payout will not increase, a reasonably prudent investor’s goal is to pay as little as possible to keep the policy in force up until the policy matures. (See ex. 1, Affidavit of Brad Thompson, Appx. pp. 7-8; Ex. Rebuttal Report of Brad Thompson, Appx. pp 19-23. If additional money has been paid to the insurer through the use of “level premiums” that are above the cost of insurance, that additional money is not returned to the life settlement investor at maturity. (Ex. 1, Thompson, Appx. pp. 7-8). Thus, all life settlement companies acting as agents for investors should “optimize premiums” down to the minimum necessary to keep the policy in force. (Id.). Although it now optimizes premiums for it clients, LPI failed to optimize premiums on any of the life settlements at issue herein. Because a reasonably prudent life settlement provider would optimizepremiums, the premium overpayment claims allege breach of fiduciary duty and breach of contract claims against LPI for failing to do so. (See Intervenors’ Complaint, at ¶¶ 16-20, 84, 99; see also Ex. 1, Thompson, Appx. pp. 9-11).
When its customers purchase an interest in a life settlement, Life Partners places a portion of the customer’s money into an escrow account for the purpose of paying premiums on the policy. See, e.g., Ex. 3, Deposition of Scott Peden, Appx. p. 61 (depo p. 52, l. 10- l. 12; p. 53, l. 11 – l. 22; p. 54, l. 16 – p. 55, l. 7); Ex. 4, Deposition of Brian Pardo, Appx. p. 93 (depo p. 54, l. 7 – .l. 9). Virtually all of the life settlements at issue herein—i.e., those for which Cassidy provided life expectancy assessments—involve a type of life insurance known as a “universal life insurance” policy with a level (unchanging) death benefit. One feature of a universal life insurance policy “is that it offers flexible premium payments.” (Ex. 3, Peden, Appx. p. 60 (depo p. 45, l. 1). In other words, the premium payer has a choice: “level” premiums can be paid “where the premiums will be level and will not increase or you can try and just pay the cost of insurance,” i.e. “optimized” premiums. (Id., at Appx. p. 54 (depo p 21, l. 10-l. 16).
Level premiums were paid on all of the life settlements at issue. (Id., Appx. p. 52 (depo p. 16, l. 15 – l. 22; p. 18, l. 7 – l. 9)). For Life Partners, paying level premiums means “[o]btaining an illustration generated by the insurance company for a period of time, which solves for the amount of premiums that would be necessary to carry or maintain the policy for that period of time at a level rate.” (Id., Appx. p. 56 (depo p. 32, l. 1 – l. 6). Premium amounts were based on insurance company illustrations showing level premiums to age 100. (Id., Appx. 55, (depo p. 26, l. 6 – l. 9). On the other hand, optimizing premiums means “estimating what the cost of insurance only is and then paying only the cost of insurance.” (Id., Appx. 56 (depo p. 31, l. 22-l. 25)) (emphasis supplied). To calculate the amount of optimized premiums, “[t]here is an industry-wide or a widely used program [called MAPS], which will estimate the cost of insurance for premiums, and the output from that would be the documents that’s used.” (Id., at p. 35, l. 10 – l. 17). Life Partners now uses the MAPS program to calculate optimized premiums. (Id.). “From a operational standpoint,” it is undisputed that “it’s just as easy to optimize premiums, as it is to utilize level premiums.” (Id., Appx. p. 76 (depo p. 111, l. 1 – l. 4). In fact, according to Peden, it may take even less time to determine optimized premiums than it would to determine level premiums. (Id., at p. 110, l. 19 – l. 25).
It is indisputable that the less a life settlement investor has to pay to acquire and keep the policy in force, the greater the profit the investor will make when the policy matures. Even though it was in the obvious best interest of the Class to pay only the minimum necessary to keep the policies in force until maturity, LPI paid higher “level” premiums rather than lower “optimized” premiums.
Via standard form agreements, Purchasers appointed LPI their “agent and attorney in fact” to “to instruct and direct ESCROW AGENT concerning the disbursement of the Acquisition Cost” including “the payment of premiums for maintenance of the policy”:
9. By this agreement, PURCHASER does make, constitute and appoint LIFE PARTNERS, INC. its true and lawful agent and attorney in fact and in his/her name, place and stead and for his/her use and benefit to:
e. Instruct and direct ESCROW AGENT concerning […] the payment of premiums for maintenance of the policy […]
(Ex. 5, Appx. p. 123) (form agency agreement between Mr. Willingham and Life Partners).
Defendant Peden, the President and General Counsel of Defendant LPI, has testified that, after a policy is initially funded, it is LPI that overseas the payment of premiums, “on behalf” of its clients (i.e., the Class), to keep the policy in force all the way to maturity. Every premium payment that goes from the escrow agent to the life insurance company, is paid pursuant to the instruction of Life Partners. (Ex. 3, Peden, Appx p. 61; see also Ex. 5, Appx. p. 122 at ¶ 3 (“AGENT will instruct ESCROW AGENT, on behalf of PURCHASER herein, to distribute funds from the Escrow Account for purchase and maintenance of the policy and the payment of the costs related thereto…”).
24 Q.[W]hatever version [of agency agreement] you look at, it would still be
25 your contention that life Life Partners had the power and
1 authority to instruct the escrow agent on the payment of
2 premiums, right?
3 A. Certainly be in power to act as a reasonably prudent
4 man would in the execution of our duties as agent.
5 Q. And that’s from the time the policy is purchased
6 through maturity, right?
8 A. Yes.
(Ex. 3, Peden, Appx. 64 (depo pp. 61-62) (emphasis supplied).
23 Q. And you instruct the escrow agent in terms of how
24 much premium to pay, right?
25 A. It depends on the nature of the premium.
1 Q. And if Life Partners believes that an amount
2 different than the amount listed on the premium notice is
3 appropriate, and Life Partners will so instruct the escrow
4 agent, correct?
5 A. It depends on the situation of, you know, what the
6 individual policy is based on. In other words, if it’s — I’m
7 trying to think of a situation that would come up like that.
8 If the premium notice was for a greater amount than was
9 necessary to keep the policy in force, then we might instruct
10 for a different amount, yes.
(Id., Appx. p. 61 (depo pp. 49-50) (emphasis supplied).
15 Q. Do you agree that Life Partners is only supposed to
16 instruct the escrow agent to pay premiums that are needed to
17 keep the policy enforced?
19 A. Under ordinary circumstances, yes.
(Id., Appx. p. 68 (depo p. 77) (emphasis supplied).
Mr. Peden has also acknowledged that, in the payment of premiums, the “power” and duty of Life Partners extends beyond “specific obligations” that are “enumerated” to also do “what a reasonably prudent person would have done under the circumstances”:
7 Has Life Partners ever taken any action on
8 behalf of a client, outside of things specifically set forth in
9 the agency agreement?
11 A. By that, do you mean actions, specifically, or not —
12 that are not enumerated?
13 Q. Yes.
14 A. But under the powers that were granted, yes. In
15 other words, we acted, at all times, under the powers that were
16 granted, whether those actions were enumerated specifically or
(Id., Appx. 60 (depo p. 45) (emphasis supplied).
18 Q. Was there any obligation or duty to prepay the
19 premiums on the Gummelt policy?
20 A. There was no specific obligation for us to do so.
21 Q. Why was it done?
22 A. It was done because, in our estimation, it was what a
23 reasonably prudent person would have done under the
(Appx. p. 64 (depo p. 62) (emphasis supplied).
Defendant Peden has agreed with the obvious proposition that LPI owed—at the very least—a duty to act as a reasonably prudent agent:
19 If optimization of premiums was the only
20 reasonable option, then under that hypothetical, then you would
21 agree that’s what Life Partners should have done, correct?
23 A. Since we’re doing hypotheticals, it wouldn’t have to
24 be limited to that. Any kind of action, which is the only
25 course of action that would be reasonable, would be what we
1 would have done.
(Id., (depo pp. 63-64).
8 Q. If paying level premiums was a bad idea, and no
9 reasonably prudent agent would do it, then Life Partners agrees
10 that they shouldn’t have done it, right?
12 A. If there was any action, which is generally
13 recognized as being antithetical to what a prudent man would
14 do, then, no, [Life] partners would not have done that.
(Id., Appx. p. 65 (depo p. 65).
Mr. Peden agrees that if premiums are optimized, then “the premiums that would be paid would be, in the early years, would be less.” (Id., Appx. p 55 (depo p. 28, l. 14 – l. 15) Similarly, he agrees the “total amount” required to placed in escrow for premiums in a life settlement will usually be less if premiums are optimized and would never be more than the amount needed for level premiums. (Id., at l. 7 to l. 16). He further agrees that the “worst case” scenario when paying optimized premiums is that they will be the “same” as level premiums:
14 Q. Do you agree that paying a level premium is never
15 less than an optimized premium?
17 A. No. I would not agree with that statement.
18 Q. […] Why?
19 A. Because it could be the same.
(Appx. p. 56 (depo p. 29). Not surprisingly, Mr. Peden was unable to recall a single instance where an investor would have saved money on his premium payment by paying a level premium:
25 Do you agree that a level premium can never be
1 less than an optimized premium?
3 A. Never is a long time. So, I hate to make absolute
4 statements like that. I will say that I can’t recall any
5 instance where it was.
(Id., (depo pp. 29-30)).
Mr. Peden also agrees that optimizing premiums is “just as easy” “from an operational standpoint” as paying level premiums. (Id., Appx. p. 75 (depo p. 106, l. 25 – p. 107, l. 3). Life Partners does now in fact optimize premiums. (Id., Appx. 65 (depo p. 65)).
As with the claims that are being asserted by the Named Plaintiffs, the premium overpayment claims would also all be governed by Texas law. Under Texas law:
An agent owes to its principal the use of such skill as may be required to accomplish the object of the employment; if the agent fails to exercise reasonable care, diligence, and judgment, the agent may be responsible for any resulting damage sustained by the principal. As a fiduciary, an agent is obligated to exercise a high degree of care to conserve its principal’s money and to pay that money only to those entitled to receive it. Thus, an agent must act with reasonable prudence and good faith, whenever it makes any expenditures of the principal’s money …
3 TEX. JUR. 3d Agency § 163 (citations omitted, emphasis supplied). More specifically, this case involves LPI’s duties as an “agent to buy for the principal.” The purpose of the agency was to buy interests in life settlements as an investment. The death benefits that will be paid out at maturity of these life settlements is a certain, stated amount. The less money a purchaser pays the insurers to keep the policies in force, the greater the return when the policies mature. In short, a life settlement investor’s “interest” and “manifested purpose” in such a transaction is to pay as little as possible for the life settlement in order to maximize the stated return on the investment. Under established principles of the law of agency, LPI owed purchasers a duty to be loyal to the Purchasers’ interests and to use reasonable care to obtain terms which best satisfy the manifested purposes of the Purchasers. Section 424 of the Restatement (Second) of Agency specifically covers the duty owed by “Agents To Buy Or To Sell”:
Unless otherwise agreed, an agent employed to buy or to sell is subject to a duty to the principal, within the limits set by the principal’s directions, to be loyal to the principal’s interests and to use reasonable care to obtain terms which best satisfy the manifested purposes of the principal.
(emphasis supplied). The official Comment to Section 424 provides, in relevant part:
b. Price. The duty to obtain the terms most advantageous to the principal exists even though the principal has fixed the price at which the agent is to buy or to sell, except when the principal has specifically directed the agent not to depart from the price fixed, or when the agent should know that the principal has a fixed price policy, as is ordinarily true of retailers and manufacturers selling a standardized commodity.
* * * *
g. Sale or purchase at improper price. The violation of duty by the agent may be selling to a third person at too low a price something which he is otherwise authorized to sell. […]
The same principles apply where an agent pays too much for things which he is otherwise authorized to purchase.
Although the new Third Restatement of Agency is considerably more concise and thus does not independently address the specific duty of an “agent to buy,” the duty described above is, of course, nothing but a situation-specific application of an agent’s general and well-established duties of loyalty and best efforts. See RESTATEMENT (THIRD) OF AGENCY § 8.01 (“An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.”); id., at § 8.10 (“An agent has a duty, within the scope of the agency relationship, to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise.”). While noting that the duty of an agent/stock broker engaged to buy is rooted in common law agency obligations, the federal Third Circuit court of appeals has explained:
Since it is understood by all that the client-principal seeks his own economic gain and the purpose of the agency is to help the client-principal achieve that objective, the broker-dealer, absent instructions to the contrary, is expected to use reasonable efforts to maximize the economic benefit to the client in each transaction.
Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270-71 (3rd Cir. 1998) (emphasis supplied). Here, it is undisputable that LPI was appointed by Proposed Intervenors (and the Class) for the very purpose of assisting with life settlement investments and that LPI, as stated in its Agency Agreements, is “a company principally engaged in the identification, qualification and purchase of discounted life insurance policies (and related death benefits) of senior citizens and terminally ill insured persons.” According to the Third Restatement:
Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. If an agent claims to possess special skills or knowledge, the agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge.
RESTATEMENT (THIRD) OF AGENCY § 8.08 (emphasis supplied).
The Texas Supreme Court certainly follows the common law and Restatement rule that an agent owes his principal a fiduciary duty be loyal to the principal’s interests and to use reasonable care to obtain terms which best satisfy the manifested purposes of the principal. See, e.g, Kinzbach Tool Co. v. Corbett–Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 512-514 (1942) (agent/employee engaged to purchase sales rights to a certain tool breached fiduciary duty owed to his principal/employer where agent failed to disclose to principal the best possible price that sales rights might be bought for); Neuhoff Bros. Packers Management Corp. v. Wilson, 453 S.W.2d 472 (Tex 1970) (agent employed as cattle buyer was obligated to buy cattle for his principal at “lowest possible price”); see gen., Cabot Corp. v. Brown, 754 S.W.2d 104, 106 (Tex.1987) (“Under a gas royalty clause providing for royalties based on market value, the lessee has an obligation to obtain the best current price reasonably available. … The standard of care applied to test the performance of the lessee in marketing the gas is that of a reasonably prudent operator under the same or similar circumstances.”) (emphasis supplied).; see also W. Reserve Life Assurance Co. of Ohio v. Graben, 233 S.W.3d 360, 377 (Tex.App.–Fort Worth 2007, no pet.) (affirming verdict for breach of fiduciary duty based on evidence that defendant broker/investment advisor “put almost all of the Clients’ money into equity stocks and recommended leaving it there even when the market tumbled” and plaintiff’s expert testified that “because the Clients were at retirement age and needed current income from their investments, almost all financial advisors would have recommended the Clients’ money to be invested more in the bond market rather than in equity funds due to the reduced risk of loss that bond funds provided.”); Rauscher Pierce Refsnes, Inc.., 923 S.W.2d at 115 (agent retained to procure “investment quality” loans for client owed fiduciary duty to client).
LPI’s CEO Brian Pardo has explained that, in some ways, a life settlement transaction can be compared to a real estate purchase, with LPI’s role as an agent for its clients who are purchasing interests in life settlements being comparable to a real estate agent’s role on behalf of the buyer. (Ex. 4, Pardo Depo, Appx. pp. 90-92 (depo 44, l. 21 – 49, l. 9); Appx. p. 96 (depo 67, l. 3 – p. 68, l. 6); Appx. 83 (depo 15, l. 23- 16, l. 1). The comparison is certainly valid in the sense that the agent for a buyer in a real estate transaction owes a duty to his client to use care and diligence to obtain the best price reasonably possible for his or her client. See Tinsley v. Penniman, 34 S.W. 365 (Tex.Civ.App. 1896) (”As agent for the vendee, his duty is to buy for the lowest [price].”); Keitt v. Gresham, 174 S.W. 884 (Tex.Civ.App. –Fort Worth 1915, no writ) (same); see also, gen., Wilson v. Donze, 692 S.W.2d 734, 739 (Tex.App.-Fort Worth 1985, no writ) (“[the defendant real estate agent] Wilson contends that since the Donzes received the price they asked for the property and are happy with the Bullards as eventual owners of the property, they have no right to complain. We disagree. As real estate broker for the Donzes, Wilson had the obligation to obtain for them the best price possible, even if the Donzes had set a lesser price.”) (emphasis supplied).
Attached hereto as Ex. 1 is an affidavit from Brad Thompson, an expert in the life settlement industry. Mr. Thompson’s affidavit explains the nature of the life settlement transactions underlying this action. (Appx. pp. 4-8). Further, Thompson explores how and why a reasonably prudent investor and life settlement provider would reserve and pay premiums for a life settlement. (Appx. pp. 4-11 (¶¶ 8-24 and 30-37)). Thompson’s affidavit concludes:
36. It is my opinion that a reasonably prudent investor would only want to invest the minimum amount possible to return the highest amount possible. In a life settlement contract this is accomplished, among other ways, through the use of optimized premiums. Upon maturity, the life settlement policies involved here will only pay the death benefit and will not pay out any accumulated cash value. If level premiums are paid by life settlement investors for a policy in this situation, large cash values would be “trapped” in that policy and not returned to the life settlement investor at maturity.
37. Optimized premiums are sufficiently predictable and relatively simple for a life settlement provider to compute. Using optimized premiums is the reasonably prudent approach to paying for a life settlement contract such as those involved here (which will only pay level death benefits). As to the Willingham policies, a reasonably prudent life settlement provider would have used optimized premiums to determine the initial premium reserve, would have paid optimized premiums to the Carrier, and would optimize premiums to determine amounts needed to meet any premium call in the event the initial reserves become depleted. By failing to do so, it is my opinion that Life Partners, Inc. failed to act as a reasonably prudent life settlement provider would have acted in such circumstances.
(Appx. pp. 10-11). In addition, Ex. 2, Mr. Thompson’s “Rebuttal Report,” addresses how damages may be calculated on a class-wide basis with accuracy and ease. (Appx. pp. 19-24).
As explained in the Thompson Affidavit, as a result of Life Partners using level premiums, the total amount placed by Life Partners’ clients into escrow accounts for the policies Mr. Willingham invested in was over $9 million more than it would have been if the amounts needed for the escrow account had been calculated using optimized premiums. (Appx. pp. 9-10 (¶ 31) and pp. 14-17). As to Mr. Willingham personally, the amount placed in escrow was $114,953 more because level rather than optimized premiums were used. (Id.) Significantly, it is LPI, not its clients, that profits from the interest that accumulates on these escrow accounts:
2 Q. The interest on the escrowed funds held to pay
3 premiums, who gets that interest?
4 A. It is split between [the escrow agent] ATLAS and Life Partners.
(Ex. 3, Peden, Appx. p. 66 (depo p. 69); id. at l. 5 – i. 20 (explaining that Life Partners has had an arrangement to split such interest with each of its escrow agents over the years). Thus, by using level premiums, LPI was earning interest on a substantial amount of money that would have been placed into escrow if LPI had properly utilized optimized premiums. (See, Ex. 1, Thompson, Appx. pp. 9-10 (¶ 31)).
All of this is to say that the premium overpayment claims are potentially very valuable. Because the Named Plaintiffs are failing to pursue these claims on behalf of the Proposed Intervenors for the considerable damages suffered due to premium overpayments by the Defendants—even though a settlement release or judgment in this action could very possibly be broad enough to bar such claims—the representation of the Proposed Intervenors’ interests may be inadequate.
(c) According to Evidence and Arguments Raised by Defendants, Named Plaintiffs May Be Failing to Adequately Represent Proposed Intervenors.
Defendants’ Opposition to Plaintiffs’ Motion for Class Certification raises several specific concerns regarding the adequacy of Named Plaintiffs and their counsel. (Doc. 78, at pp. 4-18). The Court has yet to rule on certification, including adequacy. To the extent the Court might agree with Defendants in any regard that the Named Plaintiffs or their counsel fail to establish adequacy, the interests of Proposed Intervenors may not be adequately represented.
IV. CONCLUSION AND PRAYER
“Federal courts should allow intervention where ‘no one would be hurt and greater justice could be attained.’” Ross v. Marshall, 426 F.3d 745, 753 (5th Cir. 2005), quoting Sierra Club v. Espy, 18 F.3d 1202, 1205 (5th Cir.1994). Proposed Intervenors pray that the motion to intervene be granted and they be allowed to appear as Intervenors for the reasons stated herein.
s/ James Craig Orr, Jr.
JAMES CRAIG ORR, JR.
State Bar No. 15313550
MICHAEL E. HEYGOOD
State Bar No. 00784267
HEYGOOD, ORR & PEARSON 2331 W. Northwest Hwy., 2nd Floor
Dallas, Texas 75220
(214) 237-9002 (fax)