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In re Living Benefits Asset Management, L.L.C.

United States Court of Appeals, Fifth Circuit

February 22, 2019


          Appeal from the United States District Court for the Northern District of Texas

          Before KING, HIGGINSON, and COSTA, Circuit Judges.

          KING, Circuit Judge.

         Debtor-plaintiff Living Benefits Asset Management, L.L.C., brought this adversary proceeding against Kestrel Aircraft Co. for breach of contract. Living Benefits alleges that Kestrel failed to pay almost $900, 000 owed for services that Living Benefits provided Kestrel to help it collateralize a corporate debt offering with life settlements. Following a bench trial, the bankruptcy court held that the contract was voidable because Living Benefits failed to register as an investment adviser in violation of the Investment Advisers Act of 1940. The district court affirmed the bankruptcy court's judgment. Living Benefits now appeals the district court's judgment. For the reasons stated herein, we AFFIRM.


         Much of this dispute centers on the treatment under federal securities laws of so-called life settlements, which are financial instruments involving the sale of insureds' rights under life-insurance policies to third-party investors. In a typical life settlement, a buyer pays the insured more than the policy's surrender value (i.e., the amount of money the insurer would pay the insured to cancel the policy) but less than the death benefit. Thus, in selling a life settlement, the insured transfers some of the policy's value along with the risk that the value will diminish if the insured lives beyond his or her life expectancy. To put it bluntly, a life settlement is a bet on the length of the insured's life.

         Although life settlements are fairly simple instruments at their core, a complex market has developed around them over the past three decades. Generally, the sale of a life settlement involves multiple intermediaries. A broker identifies and works on behalf of an insured to solicit offers or negotiate a sale. A provider then locates one or more investors, who buy either fractionalized or whole interests in the life settlement under terms negotiated between the provider and broker. The provider will typically arrange for a third-party agent to pay the policy's premiums out of escrow. In the event the insured survives longer than expected, the escrow account could deplete, and the investor might become responsible to pay the premiums to prevent the policy from lapsing.

         The return on a life settlement diminishes with each premium payment; thus, the longer the insured lives, the lower the return on the investment. The actuarial estimate of the insured's lifespan therefore dictates the purchase value of a life settlement. And the return on investment depends on the accuracy of that estimate.[1] Accordingly, whether an investment in a life settlement is successful depends primarily on the provider's assessment- usually through a third-party underwriter-of the insured's life expectancy and the price the provider negotiates based on that assessment. See Joy D. Kosiewicz, Death for Sale: A Call to Regulate the Viatical Settlement Industry, 48 Case Western Res. L. Rev. 701, 704 (1998).

         The specifics of this case involve an unfulfilled plan by defendant Kestrel Aircraft Co. ("Kestrel") to purchase life settlements to use as collateral in a corporate debt offering. Kestrel hoped to raise $135 million to develop a prototype of an aircraft it sought to manufacture and to purchase most of the assets of a competing aircraft manufacturer. As part of its financing scheme, Kestrel planned to offer investors the option of taking a security interest in life settlements that it would purchase. Kestrel retained debtor-plaintiff Living Benefits Asset Management, L.L.C., ("Living Benefits") to help develop and ultimately execute this proposal.

         Living Benefits and Kestrel entered into an engagement letter, which set out the terms of Living Benefits' services. Living Benefits promised to provide Kestrel with "consulting and advisory services" in connection with Kestrel's financing plan. These services included helping Kestrel structure its financing plan, preparing a memorandum for investors, advising Kestrel "in structuring of the evaluation, acquisition and ownership of the Life Settlements," and "selecting and retaining strategic partners for [Kestrel], including a suitable custodian for the Life Settlements." Kestrel agreed to pay Living Benefits $950, 000 for these services.

         Kestrel did not commit itself in the engagement letter to purchasing any life settlements. But it agreed that to the extent it did acquire any life settlements within the two following years, it would "engage[] [Living Benefits] to originate such Life Settlements" pursuant to a separate agreement attached as an exhibit to the engagement letter.

         The attached agreement, which the parties refer to as the "origination agreement," specified Living Benefits' contemplated role in assisting Kestrel to acquire life settlements. Living Benefits would first identify life settlements available for purchase and relay certain information to Kestrel about the insured and the policy, including the value of the death benefit and an estimate of the insured's life expectancy. Kestrel would then let Living Benefits know whether it wanted to purchase the identified life settlement and the price it was willing to pay. Once Kestrel decided to purchase a specific life settlement, Living Benefits would, "to the extent requested by [Kestrel]," assist Kestrel in evaluating the terms of the offer and communicating with the seller. Upon reaching a sale agreement, Living Benefits would then conduct due diligence to ensure, among other things, that the policy was valid and transferable, and the seller was the policy's lawful owner. In exchange for the services set out in the origination agreement, Kestrel would pay Living Benefits an initial $50, 000 engagement fee and a commission equal to 1.25% of the aggregate death benefits of the purchased policies.

         Living Benefits performed its obligations under the engagement letter. But Kestrel's fundraising efforts were ultimately unsuccessful; thus, Kestrel did not purchase any life settlements, and the parties never entered into the origination agreement. Kestrel subsequently failed to pay almost $900, 000 owed to Living Benefits under the engagement letter.

         Living Benefits subsequently filed for Chapter 11 bankruptcy. It initiated the present suit against Kestrel as an adversary proceeding in the bankruptcy court to collect the money owed under the engagement letter. Following a bench trial, the bankruptcy court found that Kestrel breached the engagement letter by failing to pay the agreed-upon fee. But it also found that Living Benefits was required to register as an investment adviser under the Investment Advisers Act of 1940 ("IAA") yet failed to do so. Accordingly, it concluded that the engagement letter was voidable and Living Benefits was not entitled to collect any of the funds due under the letter. Living Benefits appealed to the district court. It argued that the bankruptcy court erred in concluding that it was an investment adviser. The district court affirmed. Living Benefits now appeals to this court.[2]


         In reviewing an appeal from a district court's review of a bankruptcy court's ruling, "this court applies 'the same standard of review to the bankruptcy court decision that the district court applied.'" Galaz v. Galaz (In re Galaz), 765 F.3d 426, 429 (5th Cir. 2014) (quoting Frazin v. Haynes & Boone, L.L.P. (In re Frazin), 723 F.3d 313, 317 (5th Cir. 2013)). "Thus, this court reviews factual findings for clear error and legal conclusions de novo." Id.

         The IAA prohibits unregistered investment advisers from using the instrumentalities of interstate commerce "in connection with" their businesses. 15 U.S.C. § 80b-3(a). A contract made in violation of the IAA is void as to the unregistered adviser. Id. § 80b-15(b); see also Transamerica Mortg. Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 16 (1979) ("At the very least Congress must have assumed that § [80b-15] could be raised defensively in private litigation to preclude the enforcement of an investment advisers [sic] contract."). Living Benefits does not dispute that to the extent the bankruptcy court correctly concluded Living Benefits was an investment adviser, it cannot recover the balance owed on the engagement letter. The sole question in this appeal is thus whether Living Benefits was an investment adviser within the meaning of the IAA.

         Subject to certain exceptions not relevant here, the IAA defines investment adviser as:

any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

15 U.S.C. § 80b-2(a)(11).

         Living Benefits argues that it is not an investment adviser because (1) it is not in the business of advising others "as to the value of . . . or as to the advisability of investing in, purchasing, or selling" life settlements and, in any event, (2) life settlements are not securities. We address each argument in turn.


         In arguing that it is not in the business of advising others about the value of life settlements, Living Benefits focuses on the fact that it never entered into the origination agreement with Kestrel. It asserts that the services it rendered under the engagement letter did not constitute advice as to the value of life settlements or the advisability of transacting in life settlements. Living Benefits concedes that it advised Kestrel about transacting in life settlements generally, but it insists that it did not render any advice about the value or advisability of investing in specific life settlements. And it says the IAA only extends to those rendering advice about specific securities.

         We disagree. Living Benefits cites to no caselaw holding that the IAA requires advice about a specific security before a person or entity must register as an investment adviser. Rather, it rests its entire argument on Lowe v. SEC, 472 U.S. 181 (1985). In that case, the Supreme Court held that the publisher of a newsletter about securities, though meeting the prima facie definition of an investment adviser, fell within an exception for publishers. Id. at 203-04, 211. In reaching this conclusion, the Court extensively surveyed the IAA's legislative history to ascertain the species of advisers and advice Congress sought to regulate. See id. at 190-201.

         Living Benefits insists that this same legislative history shows Congress intended to exclude the generalized advice it provided Kestrel under the engagement letter. But Lowe looked to this legislative history to interpret a specific exception to the IAA. Living Benefits does not claim the benefit of any such exception. See id. at 208-09. And even if we were to overlook this distinction, Living Benefits comes away from Lowe with the wrong lesson. In Lowe, the Court concluded that Congress did not mean to cover generalized advice not "attuned to any specific portfolio or to any client's particular needs." Id. at 208 (emphasis added). ...

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