In the Matter of: LIFE PARTNERS HOLDINGS, INCORPORATED Debtor.
FRED A. COWLEY; GALLAGHER FINANCIAL GROUP; EDWARD G. BURFORD CORPORATION; FAYE BAGBY; ELLA OLIVER, doing business as Investingmakesmesick.com; WEALTHSTONE FINANCIAL; FALCO GROUP, L.L.C.; MARK MCKAY; KAINOS ASSET MANAGEMENT, L.L.C.; LIFE SETTLEMENT EXCHANGE, L.L.C., Appellees. LIFE PARTNERS CREDITORS' TRUST; ALAN M. JACOBS, As Trustee for Life Partners Creditors' Trust, Appellants,
Appeals from the United States District Court for the
Northern District of Texas
ELROD, HIGGINSON, and ENGELHARDT, Circuit Judges.
JENNIFER WALKER ELROD, CIRCUIT JUDGE.
case arises out of the Chapter 11 bankruptcies of three
related entities: Life Partners Holdings, Inc.; Life
Partners, Inc. (LPI); and LPI Financial Services
(collectively, the "LP Entities"). The LP Entities
operated an investment business focused on the sale of
interests in life insurance policies, through which they
defrauded investors and violated securities laws. See
Moran v. Pardo, No. 4:15-cv-00905, Dkt. No. 359 (N.D.
Tex. June 12, 2017); see also SEC v. Life Partners
Holdings, Inc., 854 F.3d 765, 789 (5th Cir. 2017). The
LP Entities used a multi-level marketing structure to sell
their life insurance investments, contracting with
individuals and entities they called "Licensees" to
refer potential investors in exchange for sales commissions.
The bankruptcy trustee filed five adversary
proceedings against various groups of these Licensees,
asserting claims under the Bankruptcy Code and on behalf of
individual investors. Life Partners Creditors' Trust
(Creditors' Trust)-an entity created by the Chapter 11
plan-was later substituted as plaintiff in these proceedings.
district court granted the Licensees' motions to dismiss
all of Creditors' Trust's claims and declined to
allow repleading. The district court also denied
Creditors' Trust's motion for reconsideration. We
AFFIRM in part and REVERSE and REMAND in part.
1991, Brian Pardo founded LPI for the purpose of selling
"viaticals"- investments in life insurance policies
that the insureds had sold to third parties. LPI's parent
company, Life Partners Holdings, and a related entity, LPI
Financial Services, were also engaged in this business. The
LP Entities used a multi-level marketing structure to promote
their investment offerings to investors. First, the LP
Entities contracted with "Master Licensees" to (1)
refer potential investors to the LP Entities and (2) recruit
additional licensees. The licensees recruited by Master
Licensees-called "Referring Licensees"-would in
turn enter into two contracts: one with the LP Entities to
refer potential investors, and another with the Master
Licensee to facilitate their sharing of the commissions
received from the LP Entities' sales. The LP Entities
produced offering materials for both types of Licensees to
distribute to potential investors.
their Licensees, the LP Entities sold life insurance policies
in shares referred to as "fractional interests."
Under their investment contracts with the LP Entities, the
investors funded an escrow account with sufficient funds to
keep the policies in effect during the life expectancies of
the insureds as estimated by the LP Entities on their
offering materials. If the insureds survived beyond the LP
Entities' estimate, the investors also agreed to
contribute additional funds for premiums until the policies
the LP Entities focused on policies in which the insureds had
been diagnosed with AIDS because the disease shortened the
insureds' life expectancies in comparison to the
actuarial life expectancies used by insurance companies.
However, shortly after the LP Entities entered the viaticals
market, medical advances significantly increased life
expectancies for AIDS patients. As a result, by 2004, the LP
Entities had pivoted their business model to focus on elderly
insureds who were terminally ill-individuals whose life
expectancies would presumably also be shorter than the
actuarial estimates. The LP Entities hired Dr. Donald Cassidy
to identify appropriate insureds and estimate their life
it soon became apparent that Dr. Cassidy did not have the
ability to perform either task with any accuracy. Of the 302
policies that the LP Entities originated between 2004 and
2007, Dr. Cassidy predicted that 157 would mature by the end
of 2007. Only seven matured during that time. Undeterred, the
LP Entities continued to use the inaccurate life expectancies
to set the purchase price of the fractional interests, which
resulted in the LP Entities overcharging investors. In
addition, the offering materials distributed by the Licensees
continued to represent that the insureds had short life
expectancies when their life expectancies were likely no
shorter than the actuarial estimates.
to Creditors' Trust, the LP Entities' offering
materials also contained numerous other misrepresentations
regarding the life insurance industry and the LP
Entities' investment offerings. Most of these
misrepresentations were related to Dr. Cassidy's flawed
life expectancy estimates, which the LP Entities used to
support their claims that the fractional interests were sound
investments with a "superior yield potential," that
the policies would mature relatively quickly, that the
investments were low-risk even if the LP Entities' life
expectancy predictions were incorrect, that the LP
Entities' prices were appropriate, and that the LP
Entities had a positive track record with past life insurance
investments. These misrepresentations form the basis of
several of Creditors' Trust's claims against the
twelve-year period, the LP Entities raised more than $1.8
billion from the sale of more than 100, 000 fractional
interests to investors. Even when investors began expressing
doubts because policy maturities were long overdue and media
coverage suggested Dr. Cassidy's predictions were
inaccurate, Pardo and other LP Entities insiders continued to
represent that Dr. Cassidy's predictions were accurate
and that the policies would mature imminently. The Licensees
disseminated these representations to the investors.
this time, the Licensees received commissions and fees under
their contracts with the LP Entities. Between 2008 and 2015,
these commissions and fees totaled more than $27.6 million.
While investors knew that a portion of their investment funds
would be used to pay fees, they were not given specifics as
to how that money was distributed. On average, the Licensees
received 12% of the money an investor provided in exchange
for a fractional interest, which was well above the industry
standard for a commission in a securities transaction.
the large commissions paid to the Licensees-as well as large
distributions made to Pardo and other LP Entities
executives-Creditors' Trust alleges that the LP Entities
were insolvent for much of their existence prior to filing
for bankruptcy. Because the life settlements were bad
investments, each new purchase of a fractional interest
created a liability to the investor. And because the LP
Entities were depleting all their resources on commissions
and distributions, they did not have sufficient funds to
cover those liabilities. Instead, the LP Entities-through the
Licensees-continued to recruit new investors to keep the
business funded. Eventually, however, the LP Entities no
longer had enough capital to conduct their business
operations or continue maintaining the policies that had not
fraudulent practices of the LP Entities came to light through
media coverage, investors began to file class action lawsuits
against the companies. See, e.g., Turnbow v.
Life Partners, Inc., 2013 WL 3479884, at *1- 2 (N.D.
Tex. July 9, 2013). In addition, the SEC began investigating
the LP Entities. The SEC filed suit based on its findings,
and the Western District of Texas found that Pardo had
"knowingly-or at least recklessly-violated securities
laws." SEC v. Life Partners Holdings, Inc., 71
F.Supp.3d 615, 619 n.1 (W.D. Tex. 2014), vacated in part
and rev'd in part on other grounds, 854 F.3d at 789.
January 20, 2015, Life Partners Holdings filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. The
Chapter 11 trustee filed bankruptcy petitions on behalf of
the LP subsidiaries, LPI and LPI Financial Services, on May
Chapter 11 trustee then filed a series of adversary
proceedings on behalf of the bankruptcy estates. One of the
proceedings targeted Pardo and other LP Entities executives
and insiders. See Moran, No. 4:15-CV-905, Dkt. No.
16 (amended complaint). The district court assigned to that
case withdrew the bankruptcy reference and denied the
defendants' motions to dismiss, some of which raised
arguments similar to those raised by the Licensees here.
Id. Dkt. Nos. 5, 192. The case proceeded to trial,
where a civil jury found that Pardo was liable for fraud and
that Pardo and other LP insiders were unjustly enriched.
See id. Dkt. No. 359 (jury verdict). The district
court's final judgment awarded the LP Entities'
bankruptcy estates and the plaintiff-investors in the case
more than $40 million in damages. Id. Dkt. No. 440
five related adversary proceedings before this panel target
the LP Entities' Licensees. The Chapter 11 trustee filed
the original complaint in this adversary proceeding in
October 2015. The Chapter 11 trustee amended the complaint
twice before the bankruptcy judge abated all adversary
proceedings pending confirmation of the Chapter 11 plan. The
plan created Creditors' Trust and assigned it two types
of claims: (1) claims for liabilities owed to the LP
Entities' bankruptcy estates (Estate Claims), which the
Chapter 11 trustee had previously asserted in the adversary
proceedings; and (2) claims previously held by individual LP
Entities investors (Investor Claims), which Creditors'
Trust asserted for the first time in the third amended
the Chapter 11 plan was confirmed, the bankruptcy judge
lifted the abatement and proceeded to consider the adversary
proceedings, including this one. Creditors' Trust then
filed its third amended complaint, asserting the following
(A) Estate Claims
• Count 1: Actual fraudulent transfer
under Texas Business & Commerce Code § 24.005(a)(1)
through 11 U.S.C. § 544 (against all Licensees listed on
Exhibit 4 of the third amended complaint). Exhibit 4 lists
"the annual total commissions received by the Defendant
Licensees from 2008 through February 2015." Thus,
Creditors' Trust claims that the commissions the
Licensees received from the LP Entities are fraudulent
transfers that can be avoided under the Bankruptcy Code.
• Count 2: Constructive fraudulent
transfer under Texas Business & Commerce Code §
24.005(a)(2) through 11 U.S.C. § 544 (against all
Licensees listed on Exhibit 4).
• Count 3: Actual fraudulent transfer
under 11 U.S.C. § 548(a)(1)(A) (against "Certain
Licensees" listed on Exhibit 4).
• Count 4: Constructive fraudulent
transfer under 11 U.S.C. § 548(a)(1)(B) (against
"Certain Licensees" listed on Exhibit
• Count 5: Preferences under 11 U.S.C.
§ 547 (against "Certain Licensees" listed on
Exhibit 4). Creditors' Trust claims that the commissions
received by "Certain Licensees" are also avoidable
as preferential transfers under the Bankruptcy Code.
• Count 6: Recovery of avoided
transfers under 11 U.S.C. § 550 (against all Licensees).
• Count 7: Breach of contract (against
all Licensees). Creditors' Trust later agreed to
voluntarily abandon this claim, and it is not at issue on
• Count 8: Equitable subordination of
the Licensees' claims against the LP Entities'
bankruptcy estates under 11 U.S.C. § 510(c) (against all
• Count 9: Disallowance of the
Licensees' claims against the LP Entities' bankruptcy
estates under 11 U.S.C. § 502(d) (against all
(B) Investor Claims
• Count 10: Negligent misrepresentation
(against "Certain Licensees," with a reference to
Exhibit 5 of the third amended complaint). Exhibit 5 is a
"chart detailing the . . . relationship between
Licensees and Investors with regard to sales to specific
investors." Creditors' Trust's negligent
misrepresentation claims appear to be primarily based on the
Licensees' distribution of the LP Entities' offering
materials to investors.
• Count 11: Breach of the Texas
Securities Act (against "Certain Licensees," with a
reference to Exhibit 5). Creditors' Trust claims that the
fractional interests were "unregistered
securities," and "certain Licensees" were
"unlicensed brokers engaged in the sale" of these
• Count 12: Breach of fiduciary duty
(against "Certain Licensees," with a reference to
Exhibit 5). Creditors' Trust claims that as securities
brokers, the Licensees owed the investors a fiduciary duty
which they breached by making material
the Licensees filed or amended previously filed motions to
dismiss the third amended complaint. The district court
withdrew the reference in the adversary proceeding and
referred the motions to the bankruptcy judge. The bankruptcy
judge held two hearings on the motions before filing his
report and recommendation.
bankruptcy judge recommended dismissal of the fraudulent
transfer claims, the preference claim, the negligent
misrepresentation claim, and the breach of fiduciary duty
claim. The judge further recommended that the Texas
Securities Act claim be dismissed in part on limitations
grounds, and that the equitable subordination and
disallowance claims be dismissed in part as to Licensees who
did not file claims in the LP Entities' bankruptcy
cases. As to each claim for which he recommended
dismissal, the bankruptcy judge also recommended that
Creditors' Trust be granted leave to amend the third
reviewing the bankruptcy judge's recommendations, the
district court issued a memorandum opinion and order
dismissing all of Creditors' Trust's claims against
the Licensees with prejudice. In contrast to the bankruptcy
judge's recommendation, however, the district court
declined to permit Creditors' Trust to amend its
complaint to correct the pleading defects. Creditors'
Trust then filed a motion for reconsideration, urging the
court to grant leave to amend the third amended complaint
based on an "oral motion" Creditors' Trust made
before the bankruptcy judge. Creditors' Trust attached a
fourth amended complaint with significantly longer exhibits
which it insisted addressed the pleading issues identified in
the district court's order. The district court denied the
Trust appeals three determinations by the district court: (1)
its grant of the Licensees' motions to dismiss; (2) its
denial of leave to amend the third amended complaint; and (3)
its denial of the motion for reconsideration.
review a district court's grant of a motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6) de
novo. Castro v. Collecto, Inc., 634 F.3d 779,
783 (5th Cir. 2011). Rule 8(a)(2) requires a complaint to
contain "a short and plain statement of the claim
showing that the pleader is entitled to relief[.]"
Fed.R.Civ.P. 8(a)(2). To satisfy Rule 8(a), "a complaint
must contain sufficient factual matter, accepted as true, to
'state a claim to relief that is plausible on its
face.'" Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)). A pleaded claim is plausible if the
allegations in the complaint "allow the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged." Id.
9(b) imposes a heightened pleading standard in cases where
the plaintiff alleges fraud or mistake: particularity.
Fed.R.Civ.P. 9(b). When the Rule 9(b) pleading standard
applies, the complaint must contain factual allegations
stating the "time, place, and contents of the false
representations, as well as the identity of the person making
the misrepresentation and what [that person] obtained
thereby." Tuchman v. DSC Commc'ns Corp., 14
F.3d 1061, 1068 (5th Cir. 1994) (alteration in original)
(citation omitted). In other words, to properly allege fraud
under Rule 9(b), the plaintiff must plead the who, what,
when, where, and why as to the fraudulent conduct. See
live pleading in this case is the 48-page third amended
complaint, to which Creditors' Trust has attached in
support nearly 400 pages of exhibits. See Ferrer v.
Chevron Corp., 484 F.3d 776, 780 (5th Cir. 2007)
("A written document that is attached to a complaint as
an exhibit is considered part of the complaint and may be
considered in a 12(b)(6) dismissal
proceeding."). The third amended complaint recites a
complex set of detailed factual allegations and sets out
twelve separate causes of action under which Creditors'
Trust insists that it is entitled to relief. With respect to
each of Creditors' Trust's claims, we evaluate de
novo whether the allegations in the third amended
complaint adequately state a claim.
Counts 1 and 3 - Actual Fraudulent Transfer
Trust's first claim relies on the actual fraud provision
of the Texas ...