Life Partners Products Are Securities, Texas Court RulesLaurel Brubaker Calkins
Life Partners Inc.’s life-settlement policies should be regulated under state securities laws, a Texas appeals court said, reversing a lower court that found the policies didn’t qualify and sending shares down 14 percent on the news.
A three-judge appellate panel in Austin yesterday sided with a Dallas appeals court, which ruled in August that the company’s insurance-related products qualified as “investment contracts” subject to oversight by Texas securities regulators.
Life Partners buys rights to death benefits from policyholders in exchange for lump-sum payments, generating revenue on the split between what the company pays for policies it acquires and what it charges investors for their interests.
Texas accused parent company Life Partners Holdings Inc. and several affiliates of engaging in fraud in connection with the sale of securities. The state is seeking an injunction blocking the sale of the life-settlement policies to Texans.
Life Partners argued that state court judges should be guided by a 1996 federal court decision and a 2004 ruling by a different state appellate court in Waco. Rulings in both cases declared the company’s life-settlement products weren’t securities.
“Two appellate courts have previously ruled that LPI’s life settlements are not securities, and we continue to believe that those are the better-reasoned authorities,” company attorney Douglas Alexander said in an e-mailed statement. He said the company will appeal to the Texas Supreme Court.
Life Partners Holdings, which fell as low as $2.70 on the news, closed yesterday at $2.98, a 5 percent decline, in Nasdaq Stock Market trading.
The Dallas appellate court last year “discussed how many courts from other states have determined that these types of products constitute securities and that more recent federal cases have disagreed with” the 1996 federal decision Life Partners relied upon, Justice David Puryear in Austin said in yesterday’s ruling.
“This case considers whether Life Partners’ business practices constitute the sale of securities under Texas law, and no binding determination on that matter has been previously made,” Puryear wrote.
Life Partners argued that any ruling inconsistent with the earlier court findings would be an unconstitutional deprivation of property, because “it has entered into thousands of contracts based on the holdings of those cases,” Puryear wrote, disagreeing with that position.
The appeals court sent the case back to a lower court in Austin for further proceedings.
The case is Texas v. Life Partners, 03-13-00195, Texas Court of Appeals, Third District (Austin).