Texas appeals court ruling allows lawsuit by Life Partners investors alleging securities violations to proceed

by Jay Pate

Life Partners is a financial services company engaged in buying life insurance policies and selling interests in those policies to investors. Such transactions are known as “viatical settlements” or “life settlements.” Life Partners works to locate people who wish to sell their life insurance policies for an amount less than the face value. Viatical and life settlement investors acquire a fractional interest in the life insurance policies at a discount to the policy’s face value, and the insured receives an immediate cash settlement. The most critical factor in determining whether an investor will make a profit on a life settlement transaction is the “discount” at which Life Partners acquires a life insurance policy from an insured. However, life settlement purchasers never know the exact amount of money Life Partners pays any insured for their life insurance policy.

After Life Partners purchases a life settlement account and locates an investor, funds are deposited into a trust account. Policy ownership is changed from the insured to Life Partners. Investors are never named the owner or beneficiary of the policy, but rather Life Partners holds the policies as “agents” for the investors. In some situations, investors may be required to make additional premium payments to maintain the insurance policy if the insured outlives the life expectancy calculated by Life Partners.

Michael and Janet Arnold sued Life Partners alleging that Life Partners engaged in a scheme to offer and sell unregistered securities in violation of Texas law. The Arnolds claimed Life Partners’ “life settlements” were in reality “investment contracts” and therefore “securities” requiring registration under the Texas Securities Act (TSA). The Arnolds claimed that because Life Partners violated the TSA, they were entitled to relief in the form of rescission or damages.

Life Partners filed a motion to dismiss the lawsuit arguing that life settlements are not investment contracts or securities governed by the TSA. The trial court agreed with Life Partners and entered a summary judgment in its favor. The Dallas Court of Appeals has now reversed. Ruling in favor of the investors, the court of appeals held that the life settlements are “investment contracts” and therefore “securities” as defined by the TSA.

An “investment contract” refers to “an investment of money in a common enterprise with profits to come solely from the efforts of others.” S.E .C. v. W.J. Howey Co., 328 U.S. 293, 301 (1946). Texas adopted the Howey test in Searsy v. Commercial Trading Corporation, 560 S.W.2d 637 (Tex.1977). The Texas Supreme Court reiterated the four requirements as (1) an investment of money; (2) in a common enterprise; (3) with an expectation of profit; (4) solely from the efforts of others.

In this case, it was disputed that Life Partners’ viatical settlements involved an investment of money in a common enterprise or that appellants invested with the reasonable expectation of profits. Thus, the main dispute was whether the profits were derived from the entrepreneurial or managerial efforts of others.

The court of appeals began by noting that Life Partners admist that their business model includes using agents to identify insureds, negotiate the price of the policy, evaluate the terms and conditions of the policy, purchase the policy, find potential investors, evaluate the health of the insured, and when the insured dies, submit death benefits to the investors. Investors must rely on Life Partners’ medical assessments of patients and the patients’ policies.

According to the court of appeals, “at the end of the day, appellants had to rely on the information provided by Life Partners” in making the decision to invest. Moreover, investors also must rely on Life Partners’ subscriptions to notification services and public record information to track when an insured had died. Investors are “dependent” upon Life Partners and it agents “for premium administration tracking, and policy benefit collection services.” In sum, “this shows [the Arnolds] had to rely on Life Partners’ expertise to perform investment tasks and its managerial efforts to make profits in their viatical settlements,” said the court of appeals.

The court of appeals disagreed with two opinions from other courts that that had determined the profitability of interests in life insurance policies is “not determined by any managerial efforts on the part of Life Partners, but is determined by the mortality of the insureds.” Contrary to those courts, the Dallas Court of Appeals concluded that “[t]he efforts of Life Partners are undeniably significant ones which affected the success or failure of the enterprise and therefore, the activities, albeit pre-sale, were sufficient to classify the transaction as an investment contract. “ According, the court held that the viatical settlements sold by Life Partners were investment contracts, as a matter of law, under the Texas Security Act and met the definition of a “security.”

Heygood, Orr & Pearson has filed lawsuits on behalf of investors across the country who allege they were misled by Life Partners about life settlement investments. We also handle cases involving investors who purchased investments from other life settlements companies.

If you or a loved one invested in a life settlement agreement, you may be eligible to join one of the lawsuits that have been filed on behalf of investors. For a free legal consultation from an attorney to find out if you qualify, contact Heygood, Orr & Pearson for a free consultation. You can reach us by calling toll-free at 1-877-446-9001 or by completing the free case evaluation form located on this page.

by Jay Pate

John “Jay” Pate is a licensed attorney who focuses his practice on complex tort litigation involving catastrophic personal injury, wrongful death, medical malpractice, and product liability cases.