IN THE SUPREME COURT OF TEXAS ════════════ NO. 14-0122 ════════════ LIFE PARTNERS, INC. AND MILKIE/FERGUSON INVESTMENT, INC., PETITIONERS, v. MICHAEL ARNOLD, JANET ARNOLD, STEVE SOUTH AS TRUSTEE AND ON BEHALF OF THE SOUTH LIVING TRUST, JOHN S. FERRIS, M.D., CHRISTINE DUNCAN, AND ALL OTHERS SIMILARLY SITUATED, RESPONDENTS ═════════════════════════════════════════ ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS ═════════════════════════════════════════ ~ consolidated for oral argument with ~ ════════════ NO. 14-0226 ════════════ LIFE PARTNERS HOLDINGS, INC., LIFE PARTNERS, INC., BRIAN. D. PARDO, R. SCOTT PEDEN, ADVANCE TRUST & LIFE ESCROW SERVICES, L.T.A., AND PURCHASE ESCROW SERVICES, LLC, PETITIONERS, V. STATE OF TEXAS, RESPONDENT ═════════════════════════════════════════ ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS ═════════════════════════════════════════ Argued January 15, 2015 JUSTICE BOYD delivered the opinion of the Court. The primary issue in these two separate cases is whether a “life settlement agreement” or “viatical settlement agreement” is an “investment contract” and thus a “security” under the Texas Securities Act. We hold that the agreements at issue are investment contracts because they constitute transactions through which a person pays money to participate in a common enterprise with the expectation of receiving profits, under circumstances in which the failure or success of the enterprise and the person’s realization of the expected profits is at least predominately due to the entrepreneurial or managerial efforts of others. We decline to give today’s holding only prospective application, and we decline to consider the merits of the “relief defendants’” evidentiary arguments. In short, we affirm the courts of appeals’ judgments in both cases. I. Background In Life Partners, Inc. v. Arnold, Michael and Janet Arnold and others1 (collectively, the Arnolds) filed a class action lawsuit in Dallas County, seeking rescission and damages based on claims that Life Partners, Inc. and others2 (collectively, Life Partners) violated the Texas Securities Act by selling unregistered securities and materially misrepresenting to purchasers that they were not, in fact, securities. 416 S.W.3d 577. Meanwhile, in Life Partners, Inc. v. State, the State of Texas filed a separate suit in Travis County, seeking an injunction and other relief based on allegations that Life Partners and others3 had committed fraud in connection with the sale of securities.4 ____S.W.3d____. Before a class was certified in Arnold, both district courts entered judgments in favor of Life Partners, holding that Life Partners had not promoted or marketed any 1 The “others” include Steve South as Trustee and on behalf of South Living Trust, John S. Ferris, M.D., and Christine Duncan. 2 The “others” include Milkie/Ferguson Investment, Inc. 3 The “others” include Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, Advance Trust & Life Escrow Services, L.T.A., and Purchase Escrow Services, LLC. 4 The State had previously sued Life Partners for violations of the Texas Deceptive Trade Practices Act in a case based on different underlying facts and presenting different legal issues than those presented here. See State v. Life Partners, Inc., 243 S.W.3d 236, 244 (Tex. App.—Waco 2007, pet. denied) (reversing summary judgment in Life Partners’ favor and remanding for further proceedings). 2 “securities” and thus could not be liable under the Texas Securities Act. The Dallas Court of Appeals reversed in part, affirmed in part, and remanded, holding that the life settlement agreements are securities under the Texas Securities Act. 416 S.W.3d at 592. The Austin Court of Appeals soon followed suit, “agree[ing] with the conclusions reached by the Dallas Court and fully incorporat[ing] its analysis.” ___ S.W.3d at ___. Life Partners filed a petition for review in both cases, which we granted and consolidated for purposes of oral argument. Since 1991, Life Partners has been engaged in the business of buying existing life insurance policies from those whose lives the policies insure, and then selling interests in those policies to others. These types of transactions are generally referred to as “life settlements” when the insured is elderly or “viatical settlements” when the insured is terminally ill. We will refer to both types collectively as “life settlement agreements.” According to Life Partners, many people with life insurance desire to sell their policies so that they or their family members can enjoy the proceeds while the insured is still living. Life Partners purchases the policy from the insured for a “cash settlement” that is less than the amount the policy will pay at the time of the insured’s death. To fund these purchases and its own business operations, Life Partners sells interests in the policies’ future benefits to “investors” or “purchasers.”5 The process thus involves at least two distinct business transactions, the first being Life Partners’ purchase of the policy from an insured and the second being Life Partners’ sale of interests in the policy to its purchasers. The issue here is whether the second transaction constitutes the sale of a “security” under the Texas Securities Act. Life Partners advertises life settlement agreements as a “sure” investment. Its sales pamphlet asserts: “There’s no need to worry about which way the wind is blowing. The returns on 5 Although even Life Partners refers to those who buy interests in its insurance policies as “investors,” we will use the term “purchasers” to avoid confusion, since the issue here is whether their agreement to buy the interests is an “investment contract.” 3 life settlements, unlike stocks, mutual funds and other investments, are unaffected by market fluctuations, business cycles, the economy or global unrest.” Life Partners assures purchasers that, “[n]ot only are your investments safe from these market risks, they have the opportunity to provide exceptional return on investment.” If investments in a life settlement are indeed “safe from these market risks,” however, they are not free from all risks. In particular, because Life Partners calculates a policy’s value based on the insured’s life expectancy and must pay the policy’s premiums until the insured’s death to collect on the policy, the anticipated returns are diminished, and sometimes lost, when the insured lives longer than Life Partners projects. When selecting policies to purchase, Life Partners identifies insureds who are interested in selling their policies, evaluates their medical condition, predicts their life expectancy, and evaluates the policies’ terms and conditions to ensure they are assignable. It then determines how much to pay for the policy based on the insured’s life expectancy, the amount of the benefit, and related factors. Life Partners acknowledges that those who purchase an interest in the policies “depend upon [Life Partners’] ability to predict life expectancies and set the appropriate prices.” If Life Partners accurately predicts the insured’s life expectancy and negotiates a favorable purchase price, those who purchase an interest in the policy will receive a profit when the policy is paid. But if Life Partners’ prediction is inaccurate or its negotiations ineffective, the purchasers can end up having to pay more to cover premiums than they will receive when the policy benefit is paid. Life Partners uses the purchasers’ funds to (1) pay the insured for the policy, (2) create an escrow account from which to pay the policy’s future premiums as they come due, (3) pay fees to escrow agents and to any brokers who helped sell the interests to the purchasers, and (4) pay Life Partners an administration or brokerage fee. Life Partners does not disclose to the purchasers how 4 much of their investment goes to each of these purposes, but instead gives them only a total “acquisition price.” Until the purchasers pay that price, they receive no information about the insureds or their policies. Once they have paid the acquisition price, the purchasers receive a “Confidential Case History” that contains information about the insured’s illness and life expectancy, the policy’s grade, value, and annual premium payment, and the amount Life Partners has escrowed to make those premium payments. The purchasers never learn the identities, addresses, or other personal information about the insureds.6 Life Partners may provide the purchasers with updates on an insured’s medical condition or life expectancy, but sometimes it may simply “lose contact with the insured.” When Life Partners purchases a policy, it becomes the legal owner but appoints a trustee to serve as the beneficiary. To cover the future premiums, Life Partners places what it projects to be a sufficient amount in escrow and then pays the annual premiums from that account. If the insured survives longer than projected, however, and the escrowed amount is depleted, Life Partners will require the purchasers to provide additional funds. If the purchasers fail to provide additional funds to cover the premiums, the policy will be forfeited along with any anticipated return. Life Partners retains at least some discretion over the payments of premiums, however, and at times may itself pay premiums to prevent the forfeiture of a policy when an insured outlives a projected life expectancy. There is also some evidence in the record that, on at least one occasion, 6 Since 2011, the Texas Insurance Code has specifically regulated transactions between a “provider” of life settlement agreements, like Life Partners, and the insureds from whom the providers purchase the insurance policies. See TEX. INS. CODE §§ 1111A.001–.026 (the Texas Life Settlements Act). Among other requirements, this Act requires providers or their brokers to be licensed by the State, id. § 1111A.003; to use forms and disclosures approved by the State, id. § 1111A.005; to submit annual statements to the State, id. § 1111A.006; to make certain disclosures to the insured, id. § 1111A.007; and with limited exceptions, to avoid any disclosure of “the identity of an insured . . . or the insured’s financial or medical information to any other person,” id. § 1111A.006(d). The Life Settlements Act, however, regulates only the transaction between the insured and the provider; it does not regulate the relationships or transactions between the providers and those to whom they sell interests in the policies they purchase. 5 Life Partners elected to “optimize” a policy’s premiums to get “more years of premium coverage with the same amount of money” and thereby protect the purchasers’ investments. To accomplish this, Life Partners exercised discretion to prepay premiums, while leaving sufficient funds in the escrow account to maintain federal insurance coverage on the funds in that account. As Life Partners explained the process, because the prepayment would be in excess of the cost of insurance, the amount paid in would pay the policy to a date farther in the future than if premiums were only paid on an annual basis. Thus, the necessity of a premium call would be reduced in the event the insured outlived his or her life expectancy because of the additional amount earned by prepayment. Finally, there would remain in escrow $250,000 which would not begin to be used until the value from the prepayment had been exhausted. This “optimization” of premiums, however, can also reduce the purchasers’ return if the insurance company refuses to refund any unused premiums. Life Partners is responsible for monitoring the insureds. Once an insured dies, Life Partners must obtain the death certificate, submit a claim to the life insurance company, and facilitate the payment of the benefits. When the insurance company pays the benefits to the trustee whom Life Partners has designated as the beneficiary, either the trustee or Life Partners then distributes the funds to the purchasers according to their fractional interests. Life Partners acknowledges that purchasers rely on Life Partners both before and after they purchase their interests. As its form entitled “Life Settlement Risk FactorsRead Before You Invest” explains: You will be dependent upon LPI and the Escrow Agent for premium administration, tracking, and policy benefit collection services. LPI and the Escrow Agent will administer the premium payments on the policies purchased, and you will be dependent upon them to ensure timely payment of these premiums. If the funds that have been set aside in escrow to pay premiums are exhausted, you will be dependent upon LPI and the Escrow Agent to notify you of the premiums due, collect the additional premium payments from you and the other investors, and to pay the premiums promptly. 6 Additionally, as the Escrow agent will be named as beneficiary of the policy to collect the death benefit and distribute the death benefit proceeds upon death of the insured, you will be dependent upon LPI to notify the Escrow Agent of the death of the insured and facilitate the payout of the policy, and upon the Escrow Agent to distribute the death benefits to you and the other investors in the policy. As with any administrative task, there is always a risk that some aspect of this administration could go awry for currently unknown reasons. If these administrative tasks are not completed properly, a life settlement policy could lapse and you could lose your interest in the policy. (Emphasis added.) To facilitate Life Partners’ efforts on the purchasers’ behalf, each purchaser must execute a Power of Attorney that appoints Life Partners as the purchaser’s “true and lawful agent and attorney . . . for its use and benefit to”: a. Enter into any agreements or contracts necessary for the purchase of life insurance policies . . . [;] b. Enter into all documents necessary to facilitate the purchase of the designated policy(cies) . . . [;] c. File, complete and record any document reflecting the transfer of ownership . . . [;] d. Notify the Purchaser of any amount necessary to replenish the Premium Escrow Account from which premium payments are made . . . [;] . . . f. Obtain proof of death of the insured and instruct Escrow Agent regarding the filing of death claims and the payment of death benefits of matured policies to the Purchaser or the Purchaser’s designee . . . [; and] g. Advance, at the discretion of Agent, any funds which may be necessary to replenish the Premium Escrow Account from which premium payments are made . . . . Because the purchasers do not have legal title to the insurance policy and there is no secondary market for their interests, they must rely on Life Partners to coordinate a sale to another interested purchaser if they need or decide to divest. 7 II. “Securities” We must decide whether Life Partners’ life settlement agreements are “securities” under the Texas Securities Act, TEX. REV. CIV. STAT. art. 581-1 to -43.7 The Act defines the terms “security” and “securities” broadly, to include such things as “any limited partner interest in a limited partnership, share, stock, treasury stock, . . . investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not.” Id. art. 581- 4.A (emphasis added). The Arnolds and the State contend that Life Partners’ life settlement agreements are “investment contracts,” and thus “securities,” under the Act. Because this case requires us to construe a statute, we would normally follow our well- established text-based approach to interpret the meaning of “investment contract.” This Court, however, has previously considered and addressed the meaning of the term “investment contract” as it appears in the Texas Securities Act. See Searsy v. Commercial Trading Corp., 560 S.W.2d 637, 639 (Tex. 1977). Noting in Searsy that the term “appear[s] to have been taken from an almost identical definition of ‘security’ in the Federal Securities Act of 1933,” we looked to federal cases and other authorities for guidance in construing the term. Id. (citing 15 U.S.C. § 77b(1)). As discussed below, both before and since our decision in Searsy, the United States Supreme Court, numerous federal courts, and many state courts have undertaken to interpret and apply the term 7 The Texas Securities Act prohibits selling or offering for sale “any securities . . . until the issuer of such securities or a dealer registered under the provisions of this Act shall have been granted a permit by the Commissioner.” Id. art. 581-7.A(1). The Act also prohibits any person from offering or selling “a security . . . by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.” Id. art. 581-33.A(2). Any person who offers or sells “a security” in violation of either of these provisions “is liable to the person buying the security . . . , who may sue either at law or in equity for rescission or for damages if the buyer no longer owns the security.” Id. art. 581-33.A(1), (2). In addition, the Act obligates the Attorney General “to take such measures and to make such investigations as will prevent or detect the violation of any provision thereof.” Id. art. 581-3. The Arnolds and the State sued Life Partners for violating these provisions, and they concede that Life Partners has no liability under these provisions unless its life settlement agreements are “securities.” 8 “investment contract” as it appears in various securities acts. American courts have thus developed a significant body of law on the topic, and while these courts have not always agreed, their decisions have served as a guide to the meaning and application of the term “investment contract” in the securities-law context throughout the country. In light of this distinct and developed body of judicial precedent and consistent with this Court’s prior reliance on such authorities, we will continue to seek guidance from these decisions as we construe the Texas Securities Act here.8 Based on these authorities and our own reading of the statute’s language, we conclude that three key principles must guide our construction and application of the term “investment contract.” First, we must broadly construe the term to maximize the protection the Act is intended to provide to the investing public. Second, we must focus on the economic realities of the transaction at issue. And third, if the economic realities establish that a transaction is an investment contract, we must apply the statute regardless of any labels or terminology the parties may have used. In light of these principles, we conclude that an “investment contract” for purposes of the Texas Securities Act means (1) a contract, transaction, or scheme through which a person pays money (2) to participate in a common venture or enterprise (3) with the expectation of receiving profits, (4) under circumstances in which the failure or success of the enterprise, and thus the person’s realization of the expected profits, is at least predominately due to the entrepreneurial or 8 We do not mean to suggest that we can or will ignore the statutory language at issue. When we construe and apply statutes, it is always “our goal . . . to ascertain and give effect to the Legislature’s intent,” which we draw “from the plain meaning of the words chosen by the Legislature when it is possible to do so.” Tex. Mut. Ins. Co. v. Ruttiger, 381 S.W.3d 430, 452 (Tex. 2012) (citing Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433, 437 (Tex. 2009)). When the “statutory text is clear, that text is determinative of legislative intent unless the plain meaning of the statute’s words would produce an absurd result,” but “when statutory text is susceptible of more than one reasonable interpretation it is appropriate to look beyond its language for assistance in determining legislative intent.” Id. Here, we find the term “investment contract” to be less than clear, and thus look for assistance to other courts that have as a whole construed the same language appearing in the same statutory context. Like those courts, we find that the statute expresses a clear intent that it be construed broadly to effectuate its remedial purpose. See TEX. REV. CIV. STAT. art. 581-4.A (defining “securities” to include “any other instrument commonly known as a security, whether similar to those herein referred to or not”). 9 managerial, rather than merely ministerial or clerical, efforts of others, regardless of whether those efforts are made before or after the transaction. Applying this definition to the undisputed material facts, we conclude that Life Partners’ life settlement agreements are “investment contracts” and thus “securities” under the Texas Securities Act. A. Guiding Principles & the Howey/Forman Test The United States Supreme Court first addressed the meaning of “investment contract,” as used in the federal Securities Act of 1933, over 70 years ago. S.E.C. v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943) (citing 15 U.S.C. § 77b(1)). Noting that the act included “investment contract” as just one of an extensive list of the different types of transactions that constitute “securities,” the Court remarked that “the reach of the [a]ct does not stop with the obvious and commonplace.” Id. at 351. Instead, “[n]ovel, uncommon, or irregular devices, whatever they appear to be, are also reached if it be proved as [a] matter of fact that they were widely offered or dealt in under terms or courses of dealing which established their character in commerce as ‘investment contracts,’” or as “‘any interest or instrument commonly known as a ‘security.’” Id. (quoting 15 U.S.C. § 77b(1)). “The test” the Court described for determining whether a transaction is an investment contract “is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect.” Id. at 352–53. Applying this test, the Court concluded that the defendants’ assignments of their rights under oil leases in exchange for a small payment coupled with the purchaser’s agreement to pay the defendants to drill a test well on the leased acreage was “a form of investment contract in which the purchaser was paying both for a lease and for a development project.” Id. at 349. Three years later, the Supreme Court addressed the issue again in S.E.C. v. W.J. Howey Co., 328 U.S. 293, 301 (1946). The defendants in Howey offered and sold portions of a large citrus 10