Life Partners, Inc. v. Arnold
464 S.W.3d 660
| Tex. | 2015Background
- Life Partners buys policies from insureds and sells interests in those policies to investors.
- Life Partners’ two-step process: policy purchase (escrowed premiums) and sale of policy interests to investors.
- Investors rely on Life Partners to predict life expectancy and set prices for profits.
- Purchasers grant Life Partners broad Power of Attorney to handle purchase, escrow, and death-benefit actions.
- Life Partners can prepay or optimize premiums; post-purchase management includes premium payments and distributions.
- Texas trial and appellate courts differed on whether life settlements are securities, leading to a consolidated appeal and eventual Supreme Court-like ruling.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are life settlement agreements securities under the Texas Act? | Arnolds: agreements are investment contracts. | Life Partners: not securities; lacks investor reliance on others’ efforts. | Yes; life settlements are investment contracts and securities. |
| What test governs whether an instrument is an investment contract in Texas? | Should follow Howey/Forman with broad, flexible application. | Texas law should limit how pre-purchase activities affect result. | Howey/Forman framework governs; broad, flexible construction. |
| Do pre-purchase efforts of the promoter count toward the Howey test? | Pre-purchase efforts are essential to investment profitability. | Pre-purchase efforts should be limited or excluded. | Pre-purchase efforts may count if they are undeniably significant to profits. |
| Should the ruling apply retroactively? | Retroactive application aligns with longstanding precedent. | Retroactivity could disrupt vested expectations. | Retroactive application retained; not limited to prospective effect. |
| What about relief defendants? | Relief defendants may hold assets related to Life Partners. | Record insufficient to show holdings; remand appropriate. | Remand for relief-defendants issues; not dispositive. |
Key Cases Cited
- Howey Co. v. National Investors?, 328 U.S. 298 (Supreme Court, 1946) (definition of investment contract; profits from promoter/third party)
- Searsy v. Commercial Trading Corp., 560 S.W.2d 637 (Tex. 1977) (Howey/Forman test adopted for Texas)
- United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (Supreme Court, 1975) (expansion of Howey test; focus on economic realities)
- Reves v. Ernst & Young, 494 U.S. 56 (Supreme Court, 1990) (context for when notes may be securities)
- S.E.C. v. Int’l Loan Network, Inc., 968 F.2d 1304 (D.C. Cir. 1992) (profits predominantly from others’ efforts)
- Koscot Interplanetary, Inc. v. S.E.C., 497 F.2d 473 (5th Cir. 1974) (recognizes realistic Howey test; avoid strict formality)
- Bailey v. J.W.K. Props., Inc., 904 F.2d 918 (4th Cir. 1990) (profit reliance may include promoter’s efforts)
- McConathy v. Dal Mac Commercial Real Estate, Inc., 545 S.W.2d 871 (Tex. Civ. App.‑Texarkana 1976) (land venture investments; ministerial vs. managerial distinction)