November 20, 2013

Texas Supreme Court Petitioned To Review Allegedly Improper Characterization Of Life Settlements As Securities

In the ongoing debate regarding whether investments in life settlements constitute securities, Trinity Settlement Services, LLC (Trinity) recently filed a Petition for Review in the Supreme Court of Texas, in which Trinity seeks guidance following the dismissal of Trinity’s declaratory judgment action against the Texas State Securities Board.

Trinity, a life settlement brokerage firm, sued the Securities Board and its Commissioner, seeking a declaratory judgment (1) that the Securities Board acted without statutory authority in filing an enforcement action against another unrelated viatical settlement provider, Retirement Value, LLC (RV); and (2) that certain investments Trinity proposed to sell are not “securities” as defined by the Texas Securities Act. Trinity’s action concerned a previously filed lawsuit by the State of Texas (at the request of the Securities Board) against RV. In the RV action, the State of Texas/Securities Board asserted several causes of action against RV, including the sale of unregistered securities in violation of the Texas Securities Act. The State of Texas/Securities Board specifically alleged that investments in RV’s life settlements program were “investment contracts,” and were therefore securities.

In Trinity’s subsequent lawsuit against the Securities Board and the Commissioner, Trinity claimed that the State of Texas/Securities Board’s characterization of investments in life settlements as “securities” violated the prohibition against ad hoc rule-making. Trinity also challenged the State of Texas/Securities Board’s position as being generally applicable to all companies and individuals selling percentage interests in the proceeds of life insurance benefits.

The trial court dismissed Trinity’s action. The trial court held (1) that Trinity was not challenging a “rule” of the Securities Board, as defined by the Administrative Procedure Act; (2) that Trinity’s claims were not ripe for adjudication; (3) that Trinity’s Uniform Declaratory Judgment Act claims were barred by sovereign immunity; and (4) that Trinity did not invoke the ultra vires exception to sovereign immunity as to the Commissioner. The Court of Appeals for the Third District at Austin affirmed the trial court’s ruling.

In the petition, Trinity reiterates its argument that the Securities Board’s position in the RV suit constitutes a “statement implementing, interpreting, or prescribing law or policy” under the Administrative Procedure Act and that “[t]he general public and the life settlement industry are left with one conclusion: The [Securities Board] interprets the [Texas Securities Act] to include the regulation of percentage interests in the proceeds of insurance benefits.” Because of the Securities Board’s alleged failure to comply with statutory rule-making procedures, Trinity contends that the challenged statement is invalid.

Trinity claims that as a result of the Securities Board’s alleged ad hoc rule-making, Trinity has been required to “cease its business operations and refuse business from participants seeking to purchase specified percentages in the proceeds of life insurance policies, resulting in a loss of revenue and the benefit and value of all the work performed and expenses incurred to that point.” Trinity further alleges that it suffers from additional imminent concrete injury because it “knew that if it began doing business, [the Securities Board] would invoke the [Texas Securities Act] and order Trinity to cease its operations.”

Although it remains to be seen whether the Texas Supreme Court will grant review (particularly in light of the unique jurisdictional issues and procedural posture of the Trinity petition), the underlying issue may be ripe for review. Earlier this year, in Arnold v. Life Partners, Inc., a Texas appellate state court ruled that life settlements are “investment contracts” and therefore securities subject to the Texas Securities Act. Arnold was inconsistent with previous decisions from both the Waco Court of Appeals and the D.C. Circuit, which found such policies were not securities and therefore not subject to the Texas Securities Act or federal securities laws.

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