Michael Arnold, Janet Arnold, Steve South v. Life Partners, Inc., Abundant Income LLC
05-12-00092-CV
| Tex. App. | May 8, 2015Background
- Life Partners purchased existing life-insurance policies and sold fractional interests in their death benefits ("life/viatical settlements"). Purchasers paid an acquisition price and received confidential case histories only after payment.
- Life Partners evaluated insureds, negotiated purchase prices, placed projected premium funds in escrow, paid premiums, and administered claims and distributions; purchasers lacked title, identities of insureds, and a secondary market.
- The Arnolds (class action) and the State sued Life Partners alleging violations of the Texas Securities Act for selling unregistered securities and making material misrepresentations. Trial courts ruled for Life Partners; two courts of appeals reversed, holding the agreements were securities.
- The Supreme Court of Texas granted review to decide whether these life-settlement agreements are "investment contracts" (and thus "securities") under the Texas Securities Act and whether the Court should apply its ruling retroactively.
- On undisputed facts, the Court found Life Partners performed entrepreneurial and managerial acts pre- and post-sale (policy selection, pricing, escrow management, premium payments, claims processing) on which purchasers relied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether life-settlement agreements are "investment contracts" under the Texas Securities Act | Arnolds/State: agreements are investment contracts because purchasers pay money, enter a common enterprise, expect profits, and depend on Life Partners' efforts | Life Partners: profitability depends on insureds' mortality, not seller's managerial efforts; post-sale acts are ministerial; pre-purchase efforts are already priced in | Held: Yes. Agreements are investment contracts: money paid into common enterprise with profit expectation, and success depends predominantly on others' entrepreneurial/managerial efforts (pre- and post-purchase) |
| Relevance of pre-purchase promoter efforts to Howey/Forman "efforts of others" prong | Arnolds/State: pre-purchase selection, pricing, and life-expectancy evaluation are managerial and determinative of investor profit | Life Partners: pre-purchase efforts should not count or are reflected in price; only post-sale managerial control matters | Held: Pre-purchase managerial/entrepreneurial efforts are relevant; the controlling test asks whether others' managerial efforts (pre or post) predominantly determine profits |
| Whether the Court's holding should apply only prospectively | Life Partners: reliance on Waco precedent (Griffitts) and fairness require prospective application; retroactive application raises constitutional concerns | Arnolds/State: longstanding jurisprudence supports retroactive application; investor protection favors retroactivity | Held: Declined prospective-only rule; applied retroactively because decision rests on longstanding principles and imposes no inequitable disruption |
| Relief-defendants (escrow entities) liability/evidence | State sought equitable relief against escrow entities as possible holders of Life Partners' assets | Escrow entities argued there was no evidence they held Life Partners' property | Held: Court declined to resolve merits; remanded so trial court can address relief-defendants' evidentiary arguments on remand |
Key Cases Cited
- Searsy v. Commercial Trading Corp., 560 S.W.2d 637 (Tex. 1977) (adopts Howey/Forman approach under Texas law)
- S.E.C. v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943) (early expansive test; focus on economic character of instrument)
- S.E.C. v. W. J. Howey Co., 328 U.S. 293 (1946) (establishes investment-contract test: investment in common enterprise with profits from others' efforts)
- United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975) (restates test emphasizing profits from entrepreneurial/managerial efforts of others)
- Reves v. Ernst & Young, 494 U.S. 56 (1990) (economic-reality approach; notes when notes are securities)
- S.E.C. v. Edwards, 540 U.S. 389 (2004) (fixed returns can still constitute securities under Howey/Forman)
- Life Partners, Inc. v. SEC, 87 F.3d 536 (D.C. Cir. 1996) (discusses role of pre- vs post-purchase efforts in viatical settlements)
- S.E.C. v. Mutual Benefits Corp., 408 F.3d 737 (11th Cir. 2005) (holds viatical settlements can be investment contracts; pre-purchase efforts relevant)
- McConathy v. Dal Mac Commercial Real Estate, Inc., 545 S.W.2d 871 (Tex. Civ. App.—Texarkana 1976, no writ) (distinguishes mere land appreciation/ministerial protection from managerial efforts)