Garner v. Pillar Life Settlement Fund I, L.P. ( 2017 )

Case: 16-11436 Document: 00514253826 Page: 1 Date Filed: 11/29/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 16-11436 November 29, 2017
Lyle W. Cayce
In the Matter of: LIFE PARTNERS, INCORPORATED Clerk
Debtor
PHILIP M. GARNER, and all other similarly situated; CHRISTINE
DUNCAN; STEVE SOUTH, as Trustee for, and on behalf of South Living
Trust; MICHAEL ARNOLD; JANET ARNOLD; DOCTOR JOHN S. FERRIS;
REORGANIZED LIFE PARTNERS, INCORPORATED, formerly known as
Life Partners, Incorporated, ET AL
Appellees
v.
PILLAR LIFE SETTLEMENT FUND I, L.P., PILLAR II LIFE
SETTLEMENT FUND, L.P., PILLAR 3 LIFE SETTLEMENT FUND, L.P.,
PILLAR 4 LIFE SETTLEMENT FUND, L.P., PILLAR 5 LIFE
SETTLEMENT FUND, L.P., ET AL
Appellants
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 4:16-CV-212
Case: 16-11436 Document: 00514253826 Page: 2 Date Filed: 11/29/2017
No. 16-11436
Before BARKSDALE, DENNIS, and CLEMENT, Circuit Judges.
PER CURIAM:*
This appeal arises from the approval of a bankruptcy proceeding’s
Settlement Agreement and class certifications. While this appeal was pending,
the bankruptcy court entered a chapter 11 confirmation order, effectuating the
Settlement Agreement. For the following reasons, the Pillar Funds’s appeal is
dismissed as moot.
I
Life Partners, Inc. (“LPI”) was a wholly-owned subsidiary of Life
Partners Holdings, Inc. (“LPHI”). LPI acquired, marketed, and sold investment
products known as “viatical settlements” or “life settlements.” LPI created a
life settlement by contracting with the holder of a life insurance policy
(“insured”) to purchase his interest in the policy. The insured would make LPI
the owner of the policy in exchange for a lump-sum cash payment that was less
than the policy’s death benefit. In essence, a life settlement is an arrangement
where an insured—often diagnosed with a terminal illness—sells her policy for
less than its full value to benefit from the proceeds while alive.
LPI then marketed and sold to investors a percentage of the life
settlements (“fractional interests”). LPI did not register the investments as
securities under the Texas or federal securities laws. Michael Arnold, Janet
Arnold, Dr. John S. Ferris, Christine Duncan, and Steven South as Trustee for
and on behalf of South Living Trust (collectively, “Arnold Plaintiffs”) filed a
class action against LPI in Texas state court (“Arnold State Court Action”),
alleging that LPI sold unregistered securities in violation of the Texas
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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Securities Act (“TSA”). The Arnold Plaintiffs sought rescission as well as
attorneys’ fees, costs, and interest. The trial court concluded that life
settlements were not securities and dismissed the suit. The Dallas Court of
Appeals reversed, holding that life settlements were securities as a matter of
law. Arnold v. Life Partners, Inc., 416 S.W.3d 577, 588 (Tex. App.–Dall. 2013).
The Texas Supreme Court unanimously affirmed—life settlements are
securities under the TSA. See Life Partners, Inc. v. Arnold, 464 S.W.3d 660,
682–83 (Tex. 2015).
LPHI voluntarily commenced chapter 11 bankruptcy while the Arnold
State Court Action was pending in the Texas Supreme Court. The bankruptcy
court affirmed the U.S. Trustee’s appointment of H. Thomas Moran as the
chapter 11 trustee (“Trustee”). The Trustee filed petitions for chapter 11
bankruptcy for LPI and another Life Partners company, which were the
operating subsidiaries of LPHI. The bankruptcy court then consolidated these
proceedings (collectively, “Bankruptcy Cases”). It also lifted the automatic stay
so the Texas Supreme Court could render its decision in the Arnold State Court
Action.
Philip M. Garner, Duncan, and South (collectively, “Garner Plaintiffs”)
filed an adversary proceeding in the Bankruptcy Cases on behalf of a class of
LPI investors, seeking a declaration that: (1) the class members were the
beneficial owners of the life settlements; and (2) the life settlements were not
part of LPI’s bankruptcy estate (“Garner Class Adversary”). The parties and
the district court referred to the dispute regarding the ownership of the life
settlements as the “Ownership Issue.” The resolution of the Ownership Issue
was complicated by the fact that most investors purchased fractional interests
in life settlements from LPI, rather than whole life insurance policies.
The Arnold Plaintiffs filed a second adversary proceeding in the
Bankruptcy Cases (“Arnold Class Adversary”). The Arnold Plaintiffs asserted
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claims under the TSA on behalf of a class of LPI investors for rescission of their
purchases of life settlements. They also sought attorneys’ fees, costs, and
interest. The Garner Plaintiffs and the Arnold Plaintiffs (collectively, “Named
Plaintiffs”) later moved to consolidate the Garner Class Adversary and the
Arnold Class Adversary, which the bankruptcy court granted (“Consolidated
Class Adversary”). The district court then withdrew the automatic reference to
the bankruptcy court, and the Consolidated Class Adversary was filed in
district court.
The Trustee, the Official Committee of Unsecured Creditors
(“Committee”), and the Named Plaintiffs announced the general terms of a
settlement to resolve the Consolidated Class Adversary. After the parties
announced the settlement, Pillar Life Settlement Fund I, L.P., Pillar II Life
Settlement Fund, L.P., Pillar 3 Life Settlement Fund, L.P., Pillar 4 Life
Settlement Fund, L.P., Pillar 5 Life Settlement Fund, L.P., Evergreen Lifeplan
Fund L.P., Evergreen II Lifeplan Fund L.P., Evergreen III Fund LLC, and
Black Diamond Lifeplan Fund L.P. (collectively, “Pillar Funds”) filed their own
adversary proceeding in the Bankruptcy Cases, seeking to settle the
Ownership Issue (“Pillar Adversary”). The bankruptcy court abated the Pillar
Adversary.
The Trustee, the Committee, and the Named Plaintiffs then finalized
and filed a settlement agreement (“Settlement Agreement”) to resolve the
Consolidated Class Adversary. The Settlement Agreement sought certification
for two settlement classes: (1) the ownership settlement subclass; and (2) the
rescission settlement subclass. Both settlement classes were defined as
[a]ll persons or entities . . . who purchased and hold, as of the
Plan Effective Date, securities issued or sold by LPI . . . related
to viatical settlements or life settlements, regardless of how the
investments were denominated . . . and who are Current
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Position Holders under the Plan, regardless of whether or not a
claim was filed by a class member.
LPI and all affiliated entities, Linda Robinson-Pardo, Paget Holdings Ltd., and
“investors whose only investments relate to Pre-Petition Abandoned Interests
under the Plan” were excluded from the settlement classes. “Qualified Plan
Holders” and “all persons and entities listed on Appendix A” to the Settlement
Agreement were additionally excluded from the rescission settlement subclass.
In the Settlement Agreement, LPI agreed to waive any claims to
beneficial ownership in the life settlement securities held by settlement class
members who elected to retain their fractional interests. LPI also agreed to
seek to reorganize in bankruptcy consistent with the Settlement Agreement
and to an injunction prohibiting future sales of unregistered securities. In
exchange, the Settlement Agreement provided settlement class members three
options: (1) Continuing Position Holder Election; (2) Position Holder Trust
Election; and (3) Creditors’ Trust Election.
First, a class member who chose the Continuing Position Holder Election
would retain 95 percent of its fractional interest in life settlements in exchange
for a five percent contribution to the Position Holder Trust. He would be
obligated to continue paying policy premiums. Second, a class member who
chose the Position Holder Trust Election would assign his interest to the
Position Holder Trust in exchange for a corresponding interest in the Position
Holder Trust and relief from his obligation to pay policy premiums and fees.
Third, a class member who chose the Creditors’ Trust Election would rescind
the purchase of his life settlements in exchange for a corresponding interest in
the Creditors’ Trust—a post-confirmation litigation trust—and relief from his
obligation to pay policy premiums and fees. Under the Settlement Agreement,
a class member who did not select an option would be treated as if he chose the
Continuing Position Holder Election.
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The parties sought and received preliminary approval of the Settlement
Agreement from both the bankruptcy court and the district court. The parties
served class notice on all settlement class members. The parties then jointly
moved for class certification, for final approval of the Settlement Agreement,
and to appoint class counsel and representatives. The Pillar Funds objected to
class certification and to the Settlement Agreement. The district court referred
the matter to the bankruptcy court to conduct a hearing. The bankruptcy court
held a hearing, reviewed the Pillar Funds’s objections, and issued a report
recommending that the district court certify the settlement classes and grant
final approval of the Settlement Agreement.
The district court certified the settlement classes, holding that they met
the requirements for certification under Federal Rule of Civil Procedure 23(a)
and (b)(2). It concluded that the Settlement Agreement was “fair, reasonable,
and adequate.” The district court adopted the bankruptcy court’s findings of
fact and conclusions of law, granted the parties’ joint motion for final approval
of the Settlement Agreement, and entered judgment approving the Settlement
Agreement.
The Pillar Funds appeal the district court’s order certifying the classes
approving the Settlement Agreement. The Pillar Funds argue that the district
court erred by certifying the class actions pursuant to Rule 23(b)(2) and
approving the Settlement Agreement. Reorganized Life Partners Inc., Eduardo
S. Espinosa, and Alan M. Jacobs (collectively, “New LPI”), as well as the
Named Plaintiffs, oppose the Pillar Funds’s appeal. Importantly, they did not
seek a stay of the reorganization plan, and the bankruptcy court entered a
chapter 11 confirmation order while this appeal was pending. The Pillar Funds
did not appeal the bankruptcy court’s confirmation order. As conceded by the
Pillar Funds, the plan has been substantially consummated.
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II
This court reviews a district court’s ruling regarding class certification
for abuse of discretion. Union Asset Mgmt. Holding A.G. v. Dell, Inc., 669 F.3d
632, 638 (5th Cir. 2012) (citing Ordonez Orosco v. Napolitano, 598 F.3d 222,
225 (5th Cir. 2010)). “We review de novo whether the district court applied the
correct legal standards.” M.D. ex rel. Stukenberg v. Perry, 675 F.3d 832, 836
(5th Cir. 2012) (quoting Maldonado v. Ochsner Clinic Found., 493 F.3d 521,
523 (5th Cir. 2007)). This court reviews a district court’s approval of a class
settlement for abuse of discretion. Parker v. Anderson, 667 F.2d 1204, 1209
(5th Cir. 1982).
III
The Named Plaintiffs argue that the Pillar Funds’s appeal is moot under
Article III because “[t]he bankruptcy court’s confirmation order extinguished
all claims against LPI.” “An actual case or controversy must exist at every
stage in the judicial process.” Motient Corp. v. Dondero, 529 F.3d 532, 537 (5th
Cir. 2008). A claim becomes moot if “the issues presented are no longer live or
the parties lack a legally cognizable interest in the outcome.” Id. (quoting
Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi
Negara, 335 F.3d 357, 365 (5th Cir. 2003)). “[I]f an event occurs while a case is
pending on appeal that makes it impossible for the court to grant ‘any effectual
relief whatever’ to a prevailing party, the appeal must be dismissed.” Church
of Scientology of Cal. v. United States, 506 U.S. 9, 12 (1992) (quoting Mills v.
Green, 159 U.S. 651, 653 (1895)).
The Pillar Funds concede that they did not appeal the bankruptcy
court’s confirmation order. The question is thus whether the confirmation
order “makes it impossible for the court to grant ‘any effectual relief whatever’”
to the Pillar Funds. Church of Scientology, 506 U.S. at 12. The Pillar Funds
argue only that the Settlement Agreement provides for rescission if the district
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court’s order approving the Settlement Agreement “is modified or set aside on
appeal.” The Pillar Funds do not address the effect of the confirmation order
on their ownership claims.
The rescission provision of the Settlement Agreement states that, if the
district court’s order approving the Settlement Agreement
is modified or set aside on appeal . . . then the Party or Parties
adversely affected by or who opposed such refusal to provide or
affirm the requested relief, modification, vacation, or appeal
shall each, in their sole discretion, have the option to rescind
this Settlement Agreement in its entirety by written notice to
the Court.
Neither the Named Plaintiffs nor New LPI addresses the rescission provision
in their briefs on appeal. But the Pillar Funds also fail to grapple with the
actual text of the rescission provision. First, the right to rescind is limited to
“Parties adversely affected by” the modification of the Settlement Agreement
“or who opposed such refusal to . . . affirm the requested relief.” The Pillar
Funds do not meet that requirement. Second, the rescission provision allows
such parties to “have the option to rescind this Settlement Agreement in its
entirety by written notice to the Court.” The Pillar Funds argue that they are
not seeking to set aside the Settlement Agreement in its entirety, but rather
are just requesting the right to opt out of the Settlement Agreement.
But even if the rescission provision allowed the Pillar Funds to rescind
the Settlement Agreement if it is “modified or set aside on appeal,” it does not—
and cannot—authorize an appeal if this court does not have jurisdiction to hear
the appeal. Because the confirmation order incorporated and implemented the
Settlement Agreement, the Pillar Funds’s claims were nullified when the
bankruptcy court entered the confirmation order. The Pillar Funds concededly
failed to appeal the bankruptcy court’s confirmation order. “A timely notice of
appeal is necessary to the exercise of appellate jurisdiction.” United States v.
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Truesdale, 211 F.3d 898, 902 (5th Cir. 2000) (quoting United States v. Cooper,
135 F.3d 960, 961 (5th Cir. 1998)). As such, the court cannot grant any effectual
relief to the Pillar Funds’s appeal of only the Settlement Agreement.
IV
Because the Pillar Funds’s appeal is moot, the court need not reach the
other issues raised on appeal.
Accordingly, this appeal is DISMISSED as MOOT.
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