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In re Life Partners Holdings, Inc.

United States District Court, N.D. Texas, Fort Worth Division

November 17, 2017


         District Court Nos. 4:16-CV-330-A, 4:17-CV-112-A



         Came on for consideration multiple motions[1] filed by-defendants in the above-captioned action seeking dismissal of claims made by plaintiffs, Life Partners Creditors' Trust and Alan M. Jacobs, as Trustee for Life Partners Creditors' Trust, in their second amended complaint ("Complaint").[2] After having considered such motions, the allegations of the Complaint, plaintiffs' omnibus response to the motions, [3] replies of defendants, [4] the report and recommendation regarding such motions issued by the bankruptcy judge on September 14, 2017, [5] objections to the report and recommendation, [6] plaintiffs' response to defendants' objections, [7] and pertinent legal authorities, the court has concluded that all claims asserted by plaintiffs in the Complaint should be dismissed.[8]


         Identities of the Parties and the Nature of the Claims Asserted by Plaintiffs in the Complaint

         Plaintiffs are the Life Partners Creditors' Trust and Alan M. Jacobs, as trustee for that trust. The background that led to the creation of the trust, the designation of Alan M. Jacobs as trustee, and the contentions of plaintiffs concerning standing to make the claims they are asserting in this action are described in the Complaint. Adv. Doc. 447 at 9-11, ¶¶ 12-22. On those same subjects, the court makes reference to the Motion for Leave to: (1) Substitute Plaintiffs; and (2) Substitute Plaintiffs' Counsel filed February 14, 2017, in Adversary No. 16-04035-rfn, and its related February 16, 2017 Order. Adv. Docs. 440 and 442.

         The defendants are collectively referred to in the Complaint as "Defendant Licensees." Adv. Doc. 447 at 8. Plaintiffs also say that defendants "are Life Partners' Referring Licensees, " but then refer to "all Referring Licensees" as though defendants are a sub-group of them. Id. at 6, ¶ 4. They are listed in paragraph 9 of the Complaint, id. at 6-8, ¶ 9, and in the Complaint's Exhibit 1, id. at 6, n.2 and Adv. Doc. 447-1. The defendants thus named and listed are 205 in number.[9] Adv. Doc. 447-1 at 34.

         Plaintiffs alleged in the Introduction of the Complaint that the "lawsuit seeks to recover commissions paid to the Defendants by [Life Partners]" and "damages suffered by investors who assigned their claims to the Creditors Trust." Adv. Doc. 447 at 4, ¶ 1. The claims asserted in the Complaint are characterized as either "Estate Claims, " which are for "(1) fraudulent transfers under the Texas Uniform Fraudulent Transfer Act and 11 U.S.C. § 548; (2) breach of contract; and (3) preference claims under 11 U.S.C. § 547 and various disallowance claims under 11 U.S.C. §§ 502 and 510, " or "Investor Claims" (or "Investor Assigned Claims"), which are for "(1) negligent misrepresentation; (2) breach of the Texas Securities Act based upon the sale of unregistered securities by unlicensed brokers; (3) for rescission pursuant to the TSA; and (4) for breach of fiduciary duty." Id. at 6, ¶¶ 5-7; 48-50. The assignments of those claims to plaintiffs were alleged to have been accomplished by, or pursuant to, the bankruptcy plan that was confirmed November 1, 2016, and became effective December 9, 2016. Id. at 10-11, ¶¶ 21-22.

         The dollar amount of recovery plaintiffs are seeking from each of the defendants is not alleged in the Complaint unless the "Grand Totals" shown on the Complaint's Exhibit 5 relate to that subject. Adv. Doc. 447-5. The Complaint does say that "all Referring Licensees received in excess of $102 million in commissions." Adv. Doc. 447 at 6, ¶ 4. Confusingly, it also says that "the Defendant Licensees collectively received over $52 million in commissions and fees." Id. at 28, ¶79. In addition to seeking recovery of unspecified amounts of monetary damages from defendants, id. at 51, ¶ 191, plaintiffs seek to impose a constructive trust against all licensees. Id. at 50-51, ¶¶ 187-188. While the allegations lack clarity, apparently the res of the trust is to be whatever money each of the defendants received as compensation for sales on behalf of Life Partners of fractional interests in life insurance policies to the thousands of investors that are identified in Exhibit 6 to the Complaint. Id. at 50-51; DOC. 447-6.

         Plaintiffs described the Estate Claims they are asserting as follows:

Count 1 asserts actual fraudulent transfer claims against all Licensees shown on Exhibit 5 to the Complaint[10] based on section 24.005(a) (1) of the Texas Business & Commerce Code through 11 U.S.C. § 544. Adv. Doc. 447 at 40-43, ¶¶ 115-26.
Count 2 asserts constructive fraudulent transfer claims based on section 24.005(a)(2) of the Texas Business & Commerce Code through 11 U.S.C. § 544, again brought against all Licensees shown on Exhibit 5. Id. at 43-44, ¶¶ 127-39.
Count 3 asserts actual fraudulent transfers against certain Licensees as contemplated by 11 U.S.C. § 548(a) (1) (A) . Id. at 45, ¶¶ 140-44.
Count 4 asserts constructive fraudulent transfer claims against certain Licensees as contemplated by 11 U.S.C. § 548(a)(1)(B). Id. at 45-46, ¶¶ 145-52.
Count 5 asserts preference claims brought pursuant to 11 U.S.C. § 547 against certain Licensees shown on Exhibit 5. Id. at 46, ¶¶ 153-59.
Count 6 asserts claims against all Licensees for recovery of all avoided transfers as authorized by 11 U.S.C. § 550. Id. at 46, ¶¶ 160-62.
Count 7 asserts breach of contract claims against all Licensees. Id. at 46-47, ¶¶ 163-68. The court's understanding is that the breach of contract claims have been abandoned by plaintiffs, Doc. 23 at 9, ¶ 6.
Count 8 asserts equitable subordination claims by which plaintiffs seek to cause all claims of all Licensees to be equitably subordinated as contemplated by 11 U.S.C. § 510(c). Adv. Doc. 447 at 47-48, ¶¶ 169-72 .
Count 9 seeks disallowance of all claims of all Licensees pursuant to the authority of 11 U.S.C. § 502(d). Id. at 48, ¶¶ 173-74.

         The "Investor Assigned Claims" alleged by plaintiffs are as follows:

Count 10 asserts negligent misrepresentation claims against certain Licensees.[11] Id. at 48-49, ¶¶ 175-77.
Count 11 asserts claims against certain Licensees for breach of the Texas Securities Act. Id. at 48-49, ¶¶ 178-81.
Count 12 asserts claims of breach of fiduciary duty against certain Licensees. Id. at 50, ¶¶ 182-85.

         In addition to the Estate Claims and Investor Assigned Claims mentioned above, plaintiffs make constructive trust claims, apparently against all Licensees, and a request for recovery of attorneys' fees and costs, again apparently against all Licensees, pursuant to the authority of section 24.013 of the Texas Business & Commerce Code.[12] Id. at 50-51, ¶¶ 186-90.


         Main Grounds of the Motions to Dismiss

         The grounds for dismissal most frequently asserted in the motions to dismiss are the failures of plaintiffs to satisfy the pleading standards of Rules 8(a)(2) and 9(b) of the Federal Rules of Civil Procedure. Those grounds are discussed in a general way under this heading.

         A. The Rule 8(a)(2) Pleading Standards

         Rule 7008 of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules") makes Rule 8 of the Federal Rules of Civil Procedure applicable to adversary proceedings. Rule 8(a)(2) provides the standard of pleading for a complaint. It requires that a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief, " Fed.R.Civ.P. 8(a)(2), "in order to give the defendant fair notice of what the claim is and the grounds upon which it rests, " Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks and ellipsis omitted).

         Although a complaint need not contain detailed factual allegations, the "showing" contemplated by Rule 8 requires the plaintiff to do more than simply allege legal conclusions or recite the elements of a cause of action. Twombly, 550 U.S. at 555 & n.3. Thus, while a court must accept all of the factual allegations in the complaint as true, it need not credit bare legal conclusions that are unsupported by any factual underpinnings. See Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) ("While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.").

         Moreover, to survive a motion to dismiss for failure to state a claim, the facts pleaded must allow the court to infer that the plaintiff's right to relief is plausible. Id. To allege a plausible right to relief, the facts pleaded must suggest liability; allegations that are merely consistent with unlawful conduct are insufficient. Twombly, 550 U.S. at 566-69. "Determining whether a complaint states a plausible claim for relief . . . [is] a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679.

         In the testing of the adequacy of allegations under Rule 8(a), any reference by a plaintiff to defendants collectively in a complaint fails to satisfy the pleading standards of Rule 8(a). See Griggs v. State Farm Lloyds, 181 F.3d 694, 699 (5th Cir. 1999); see also Searcy v. Knight (In re Am. Int'l Refinery), 402 B.R. 728, 738 (Bankr. W.D. La. 2008).

         B- Rule 9(b) Standards for the Pleading of Claims Based on Fraud

         Rule 7009 of the Bankruptcy Rules makes Rule 9(b) of the Federal Rules of Civil Procedure applicable to adversary proceedings. Rule 9(b) applies to all cases where the gravamen of the claim is fraud even though the theory supporting the claim is not technically termed fraud. Frith v. Guardian Life Ins. Co. of Am., 9 F.Supp.2d 734, 742 (S.D. Tex. 1998). Claims alleging violations of the Texas Insurance Code and the Texas DTPA as well as those for fraud, fraudulent inducement, fraudulent concealment, and negligent misrepresentation are subject to the requirements of Rule 9(b). Berry v. Indianapolis Life Ins. Co., 608 F.Supp.2d 785, 800 (N.D. Tex. 2009); Frith, 9 F.Supp.2d at 742. In other words, all claims that have fraudulent conduct as an element are subject to the Rule 9(b) pleading standards. See Lone Star Fund V (U.S.), LP v. Barclays Bank PLC, 594 F.3d 383, 387 n.3 (5th Cir. 2010); see also Berry, 608 F.Supp.2d at 799; In re Am. Int'l Refinery, 402 B.R. at 737; Ingalls v. Edgewater Private Equity Fund III, L.P., No. CIV.A. H-05-1392, 2005 WL 2647962, at *5 (S.D. Tex. Oct. 17, 2005); Tigue Inv. Co., Ltd. v. Chase Bank of Tex., N.A., No. 3:03-CV-2490-N, 2004 WL 3170789, at *l-*2 (N.D. Tex. Nov. 15, 2004).

         Rule 9(b) requires "a plaintiff pleading fraud to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." Herrmann Holdings Ltd. v. Lucent Techs. Inc., 302 F.3d 552, 564-65 (5th Cir. 2002) (internal quotation marks and citations omitted). To satisfy this requirement, plaintiffs must identify in the Complaint "the particulars of 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." See Tuchman v. DCS Commc'ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (internal quotation marks and brackets omitted); see also Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir. 2008).

         In Ackerman v. Northwestern Mutual Life Insurance Co., 172 F.3d 467, 469 (7th Cir. 1999), the court provided an explanation of the defensible purpose of the heightened pleading requirement of Rule 9(b) by saying that it served "to force the plaintiff to do more than the usual investigation before filing his complaint." Id. The rationale behind Rule 9(b) is that "[f]raud charges can seriously damage a defendant's reputation, even when the claim is ultimately defeated." Tigue Inv. Co., Ltd., 2004 WL 3170789, at *2.

         "General allegations, which lump all defendants together failing to segregate the alleged wrongdoing of one from those of another cannot meet the requirements of Rule 9(b)." Id. at *1 (brackets, internal quotation marks, and citations omitted). See also Ingalls, 2005 WL 2647962, at *5 (quoting from Glaser v. Enzo Biochem, Inc., 303 F.Supp.2d 724, 734 (E.D. Va. 2003) (that group pleading does not satisfy the who, what, where, why, and when required by 9(b), and that, instead, specificity is required for each defendant)); In re Am. Int'l Refinery, 402 B.R. at 738 (stating that "[t]he allegations in the Complaint that refer to Defendants collectively do not satisfy the heightened pleading standards of Rule 9(b)").

         The Rule 9(b) standards apply as to each defendant even when hundreds of similarly situated defendants are named. See Ackerman, 172 F.3d at 470-71 (stating, in the context of a multiple-plaintiff lawsuit, that " [o]f course . . . compliance with Rule 9(b) is burdensome. But you cannot get around the requirements of the rule just by joining a lot of separate cases into one.").



         As disclosed below in the discussions of the counts of the Complaint, the court has adopted recommendations of the bankruptcy judge that the allegations of certain counts fail to comply with the pleading standards of the Federal Rules of Civil Procedure, with the result that the inadequately pleaded claims are to be dismissed. As to the other claims, the court has concluded from the court's independent evaluation of the merits of the grounds of the motions to dismiss that all claims asserted by plaintiffs in the Complaint are insufficiently pleaded, that some are rendered moot because of insufficient pleading of predicate claims, and that all claims should be dismissed. With one exception, [ ...

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