Life Partners Creditors' Trust & Alan M. Jacobs v. 72 Vest Level Three LLC (In re Life Partners Holdings, Inc.)

IN RE: LIFE PARTNERS HOLDINGS, INC., Debtor,

LIFE PARTNERS CREDITORS' TRUST AND ALAN M. JACOBS,AS TRUSTEE FOR LIFE PARTNERS CREDITORS' TRUST, Plaintiffs, v. 72 VEST LEVEL THREE LLC, ET AL., Defendants.

Case No. 15-40289-RFN11

Adversary No. 16-04035-rfn

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION

November 17, 2017

Chapter 11

District Court Case No. 4:16-CV-330-A

(Consolidated with No. 4:17-CV-112-A)

MEMORANDUM OPINION and ORDER

Came on for consideration multiple motions¹ 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, intheir 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

I.Identities of the Parties and the Nature of the ClaimsAsserted 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 astrustee, 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 characterizedas 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 fromdefendants, 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 Complaint¹⁰ 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, againbrought 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.¹¹Id. 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 againstall Licensees, pursuant to the authority of section 24.013 of the Texas Business & Commerce Code.¹² Id. at 50-51, ¶¶ 186-90.

II.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,...