Texas Justices Asked To Ax Life Partners Class Action By Jeremy Heallen
Law360, Houston (March 25, 2014, 10:35 PM ET) -- Life Partners Inc. urged the Texas Supreme Court Monday to reverse a lower appeals court’s decision to reinstate a putative class action accusing it of selling unregistered securities, saying life settlements do not qualify as such under state law.
In a petition for review filed with the high court, Life Partners says that the Fifth District Court of Appeals improperly revived the suit last year after it erroneously concluded that life settlements, which allow investors to buy fractional interests in life insurance policies, must comply with the Texas Securities Act.
Life Partners says that its products are distinguishable from traditional securities regulated under Texas law because profits that flow from life settlements are tied directly and solely to the discounted purchase price the company negotiates when it acquires the underlying policies investors buy into.
The Texas Securities Act by contrast aims to regulate instruments like stocks and bonds that have fluctuating values influenced by the “managerial or entrepreneurial efforts” of the company offering the investments, according to Life Partners.
“Once the investors purchased their fractional interests, Life Partners did nothing beyond performing ministerial functions to preserve and protect the policies until they matured,” the petition said. “Because ‘the value of [Life Partners’] efforts has already been impounded into ... the purchase price of the investment,’ and ‘neither [Life Partners] nor anyone else is expected to make further efforts that will affect the outcome of the investment,’ the life settlements plaintiffs purchased are not securities.”
An attorney for the class was not immediately available for comment late Tuesday.
The lower appeals court rejected Life Partners’ argument in August saying the profits the plaintiffs expected to realize from the investments depended on expertise from the company, which chose the policies, estimated the life expectancy of the insured, negotiated the discounted price for the policy with the insured, and monitored the policy to keep it in force.
“The 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,” the appeals court said.
But the company told the high court Monday that the ruling is contrary to decisions from the Tenth District Court of Appeals and the D.C. Circuit, which held that Life Partners’ investments are merely insurance contracts and are not regulable securities.
“[N]ow Life Partners faces potentially ruinous liability because it is trapped in an untenable Catch-22 — advising investors that its life settlements are securities violates the Tenth Court of Appeals holding, while advising that they are not violates the Fifth Court of Appeals holding,” the petition said.
Life Partners' appeal to the high court also comes about a month after the Third District Court of Appeals revived a suit the State of Texas brought against the company for allegedly violating state law.
Following the reasoning of the Fifth District Court of Appeals decision, the Austin appeals court held that life settlements should be treated as investment contracts, not insurance contracts, and as such are subject to compliance with the Texas Securities Act.
Life Partners says the high court should weigh in to resolve the dispute among the lower appeals courts and noted that the “better reasoned” decisions have held that life settlements are not securities.
“[T]he life settlements as transacted by Life Partners are not securities,” the petition said. “Once investors purchased policies, Life Partners neither committed to nor engaged in activity designed to enhance the policies’ value — the sine qua non of an ‘investment contract.’”
The putative class is represented by Robert T. Cain Jr., Scott Coleman Skelton and Keith L. Langston of the Langston Law Firm.
Life Partners is represented by Douglas W. Alexander, Wallace B. Jefferson and Susan S. Vance of Alexander Dubose Jefferson & Townsend LLP; Elizabeth L. Yingling, Laura J. O’Rourke and Will R. Daugherty of Baker & McKenzie LLP; and Harriet O’Neill of Harriet O’Neill PC.
The case is Life Partners Inc. et al. v. Arnold et al., case number 14-0122, in the Texas Supreme Court.
--Additional reporting by Jess Davis. Editing by Philip Shea.
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