Michael Arnold, Janet Arnold, Steve South v. Life Partners, Inc., Abundant Income LLC ( 2015 )


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  •                IN THE SUPREME COURT OF TEXAS
    ════════════
    NO. 14-0122
    ════════════
    LIFE PARTNERS, INC. AND MILKIE/FERGUSON INVESTMENT, INC., PETITIONERS,
    v.
    MICHAEL ARNOLD, JANET ARNOLD, STEVE SOUTH AS TRUSTEE AND ON BEHALF OF
    THE SOUTH LIVING TRUST, JOHN S. FERRIS, M.D., CHRISTINE DUNCAN, AND ALL
    OTHERS SIMILARLY SITUATED, RESPONDENTS
    ═════════════════════════════════════════
    ON PETITION FOR REVIEW FROM THE
    COURT OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS
    ═════════════════════════════════════════
    ~ consolidated for oral argument with ~
    ════════════
    NO. 14-0226
    ════════════
    LIFE PARTNERS HOLDINGS, INC., LIFE PARTNERS, INC., BRIAN. D. PARDO, R. SCOTT
    PEDEN, ADVANCE TRUST & LIFE ESCROW SERVICES, L.T.A., AND PURCHASE
    ESCROW SERVICES, LLC, PETITIONERS,
    V.
    STATE OF TEXAS, RESPONDENT
    ═════════════════════════════════════════
    ON PETITION FOR REVIEW FROM THE
    COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS
    ═════════════════════════════════════════
    Argued January 15, 2015
    JUSTICE BOYD delivered the opinion of the Court.
    The primary issue in these two separate cases is whether a “life settlement agreement” or
    “viatical settlement agreement” is an “investment contract” and thus a “security” under the Texas
    Securities Act. We hold that the agreements at issue are investment contracts because they
    constitute transactions through which a person pays money to participate in a common enterprise
    with the expectation of receiving profits, under circumstances in which the failure or success of
    the enterprise and the person’s realization of the expected profits is at least predominately due to
    the entrepreneurial or managerial efforts of others. We decline to give today’s holding only
    prospective application, and we decline to consider the merits of the “relief defendants’”
    evidentiary arguments. In short, we affirm the courts of appeals’ judgments in both cases.
    I.
    Background
    In Life Partners, Inc. v. Arnold, Michael and Janet Arnold and others1 (collectively, the
    Arnolds) filed a class action lawsuit in Dallas County, seeking rescission and damages based on
    claims that Life Partners, Inc. and others2 (collectively, Life Partners) violated the Texas Securities
    Act by selling unregistered securities and materially misrepresenting to purchasers that they were
    not, in fact, securities. 
    416 S.W.3d 577
    . Meanwhile, in Life Partners, Inc. v. State, the State of
    Texas filed a separate suit in Travis County, seeking an injunction and other relief based on
    allegations that Life Partners and others3 had committed fraud in connection with the sale of
    securities.4 ____S.W.3d____. Before a class was certified in Arnold, both district courts entered
    judgments in favor of Life Partners, holding that Life Partners had not promoted or marketed any
    1
    The “others” include Steve South as Trustee and on behalf of South Living Trust, John S. Ferris, M.D.,
    and Christine Duncan.
    2
    The “others” include Milkie/Ferguson Investment, Inc.
    3
    The “others” include Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, Advance Trust & Life
    Escrow Services, L.T.A., and Purchase Escrow Services, LLC.
    4
    The State had previously sued Life Partners for violations of the Texas Deceptive Trade Practices Act in a
    case based on different underlying facts and presenting different legal issues than those presented here. See State v.
    Life Partners, Inc., 
    243 S.W.3d 236
    , 244 (Tex. App.—Waco 2007, pet. denied) (reversing summary judgment in Life
    Partners’ favor and remanding for further proceedings).
    2
    “securities” and thus could not be liable under the Texas Securities Act. The Dallas Court of
    Appeals reversed in part, affirmed in part, and remanded, holding that the life settlement
    agreements are securities under the Texas Securities 
    Act. 416 S.W.3d at 592
    . The Austin Court of
    Appeals soon followed suit, “agree[ing] with the conclusions reached by the Dallas Court and fully
    incorporat[ing] its analysis.” ___ S.W.3d at ___. Life Partners filed a petition for review in both
    cases, which we granted and consolidated for purposes of oral argument.
    Since 1991, Life Partners has been engaged in the business of buying existing life insurance
    policies from those whose lives the policies insure, and then selling interests in those policies to
    others. These types of transactions are generally referred to as “life settlements” when the insured
    is elderly or “viatical settlements” when the insured is terminally ill. We will refer to both types
    collectively as “life settlement agreements.” According to Life Partners, many people with life
    insurance desire to sell their policies so that they or their family members can enjoy the proceeds
    while the insured is still living. Life Partners purchases the policy from the insured for a “cash
    settlement” that is less than the amount the policy will pay at the time of the insured’s death. To
    fund these purchases and its own business operations, Life Partners sells interests in the policies’
    future benefits to “investors” or “purchasers.”5 The process thus involves at least two distinct
    business transactions, the first being Life Partners’ purchase of the policy from an insured and the
    second being Life Partners’ sale of interests in the policy to its purchasers. The issue here is
    whether the second transaction constitutes the sale of a “security” under the Texas Securities Act.
    Life Partners advertises life settlement agreements as a “sure” investment. Its sales
    pamphlet asserts: “There’s no need to worry about which way the wind is blowing. The returns on
    5
    Although even Life Partners refers to those who buy interests in its insurance policies as “investors,” we
    will use the term “purchasers” to avoid confusion, since the issue here is whether their agreement to buy the interests
    is an “investment contract.”
    3
    life settlements, unlike stocks, mutual funds and other investments, are unaffected by market
    fluctuations, business cycles, the economy or global unrest.” Life Partners assures purchasers that,
    “[n]ot only are your investments safe from these market risks, they have the opportunity to provide
    exceptional return on investment.” If investments in a life settlement are indeed “safe from these
    market risks,” however, they are not free from all risks. In particular, because Life Partners
    calculates a policy’s value based on the insured’s life expectancy and must pay the policy’s
    premiums until the insured’s death to collect on the policy, the anticipated returns are diminished,
    and sometimes lost, when the insured lives longer than Life Partners projects.
    When selecting policies to purchase, Life Partners identifies insureds who are interested in
    selling their policies, evaluates their medical condition, predicts their life expectancy, and
    evaluates the policies’ terms and conditions to ensure they are assignable. It then determines how
    much to pay for the policy based on the insured’s life expectancy, the amount of the benefit, and
    related factors. Life Partners acknowledges that those who purchase an interest in the policies
    “depend upon [Life Partners’] ability to predict life expectancies and set the appropriate prices.”
    If Life Partners accurately predicts the insured’s life expectancy and negotiates a favorable
    purchase price, those who purchase an interest in the policy will receive a profit when the policy
    is paid. But if Life Partners’ prediction is inaccurate or its negotiations ineffective, the purchasers
    can end up having to pay more to cover premiums than they will receive when the policy benefit
    is paid.
    Life Partners uses the purchasers’ funds to (1) pay the insured for the policy, (2) create an
    escrow account from which to pay the policy’s future premiums as they come due, (3) pay fees to
    escrow agents and to any brokers who helped sell the interests to the purchasers, and (4) pay Life
    Partners an administration or brokerage fee. Life Partners does not disclose to the purchasers how
    4
    much of their investment goes to each of these purposes, but instead gives them only a total
    “acquisition price.” Until the purchasers pay that price, they receive no information about the
    insureds or their policies. Once they have paid the acquisition price, the purchasers receive a
    “Confidential Case History” that contains information about the insured’s illness and life
    expectancy, the policy’s grade, value, and annual premium payment, and the amount Life Partners
    has escrowed to make those premium payments. The purchasers never learn the identities,
    addresses, or other personal information about the insureds.6 Life Partners may provide the
    purchasers with updates on an insured’s medical condition or life expectancy, but sometimes it
    may simply “lose contact with the insured.”
    When Life Partners purchases a policy, it becomes the legal owner but appoints a trustee
    to serve as the beneficiary. To cover the future premiums, Life Partners places what it projects to
    be a sufficient amount in escrow and then pays the annual premiums from that account. If the
    insured survives longer than projected, however, and the escrowed amount is depleted, Life
    Partners will require the purchasers to provide additional funds. If the purchasers fail to provide
    additional funds to cover the premiums, the policy will be forfeited along with any anticipated
    return. Life Partners retains at least some discretion over the payments of premiums, however, and
    at times may itself pay premiums to prevent the forfeiture of a policy when an insured outlives a
    projected life expectancy. There is also some evidence in the record that, on at least one occasion,
    6
    Since 2011, the Texas Insurance Code has specifically regulated transactions between a “provider” of life
    settlement agreements, like Life Partners, and the insureds from whom the providers purchase the insurance policies.
    See TEX. INS. CODE §§ 1111A.001–.026 (the Texas Life Settlements Act). Among other requirements, this Act
    requires providers or their brokers to be licensed by the State, 
    id. § 1111A.003;
    to use forms and disclosures approved
    by the State, 
    id. § 1111A.005;
    to submit annual statements to the State, 
    id. § 1111A.006;
    to make certain disclosures
    to the insured, 
    id. § 1111A.007;
    and with limited exceptions, to avoid any disclosure of “the identity of an insured . . .
    or the insured’s financial or medical information to any other person,” 
    id. § 1111A.006(d).
    The Life Settlements Act,
    however, regulates only the transaction between the insured and the provider; it does not regulate the relationships or
    transactions between the providers and those to whom they sell interests in the policies they purchase.
    5
    Life Partners elected to “optimize” a policy’s premiums to get “more years of premium coverage
    with the same amount of money” and thereby protect the purchasers’ investments. To accomplish
    this, Life Partners exercised discretion to prepay premiums, while leaving sufficient funds in the
    escrow account to maintain federal insurance coverage on the funds in that account. As Life
    Partners explained the process,
    because the prepayment would be in excess of the cost of insurance, the amount
    paid in would pay the policy to a date farther in the future than if premiums were
    only paid on an annual basis. Thus, the necessity of a premium call would be
    reduced in the event the insured outlived his or her life expectancy because of the
    additional amount earned by prepayment. Finally, there would remain in escrow
    $250,000 which would not begin to be used until the value from the prepayment
    had been exhausted.
    This “optimization” of premiums, however, can also reduce the purchasers’ return if the insurance
    company refuses to refund any unused premiums.
    Life Partners is responsible for monitoring the insureds. Once an insured dies, Life Partners
    must obtain the death certificate, submit a claim to the life insurance company, and facilitate the
    payment of the benefits. When the insurance company pays the benefits to the trustee whom Life
    Partners has designated as the beneficiary, either the trustee or Life Partners then distributes the
    funds to the purchasers according to their fractional interests. Life Partners acknowledges that
    purchasers rely on Life Partners both before and after they purchase their interests. As its form
    entitled “Life Settlement Risk FactorsRead Before You Invest” explains:
    You will be dependent upon LPI and the Escrow Agent for premium
    administration, tracking, and policy benefit collection services.
    LPI and the Escrow Agent will administer the premium payments on the policies
    purchased, and you will be dependent upon them to ensure timely payment of these
    premiums. If the funds that have been set aside in escrow to pay premiums are
    exhausted, you will be dependent upon LPI and the Escrow Agent to notify you of
    the premiums due, collect the additional premium payments from you and the other
    investors, and to pay the premiums promptly.
    6
    Additionally, as the Escrow agent will be named as beneficiary of the policy to
    collect the death benefit and distribute the death benefit proceeds upon death of the
    insured, you will be dependent upon LPI to notify the Escrow Agent of the death
    of the insured and facilitate the payout of the policy, and upon the Escrow Agent to
    distribute the death benefits to you and the other investors in the policy.
    As with any administrative task, there is always a risk that some aspect of this
    administration could go awry for currently unknown reasons. If these
    administrative tasks are not completed properly, a life settlement policy could lapse
    and you could lose your interest in the policy.
    (Emphasis added.)
    To facilitate Life Partners’ efforts on the purchasers’ behalf, each purchaser must execute
    a Power of Attorney that appoints Life Partners as the purchaser’s “true and lawful agent and
    attorney . . . for its use and benefit to”:
    a. Enter into any agreements or contracts necessary for the purchase of life
    insurance policies . . . [;]
    b. Enter into all documents necessary to facilitate the purchase of the designated
    policy(cies) . . . [;]
    c. File, complete and record any document reflecting the transfer of
    ownership . . . [;]
    d. Notify the Purchaser of any amount necessary to replenish the Premium Escrow
    Account from which premium payments are made . . . [;]
    ...
    f. Obtain proof of death of the insured and instruct Escrow Agent regarding the
    filing of death claims and the payment of death benefits of matured policies to
    the Purchaser or the Purchaser’s designee . . . [; and]
    g. Advance, at the discretion of Agent, any funds which may be necessary to
    replenish the Premium Escrow Account from which premium payments are
    made . . . .
    Because the purchasers do not have legal title to the insurance policy and there is no
    secondary market for their interests, they must rely on Life Partners to coordinate a sale to another
    interested purchaser if they need or decide to divest.
    7
    II.
    “Securities”
    We must decide whether Life Partners’ life settlement agreements are “securities” under
    the Texas Securities Act, TEX. REV. CIV. STAT. art. 581-1 to -43.7 The Act defines the terms
    “security” and “securities” broadly, to include such things as “any limited partner interest in a
    limited partnership, share, stock, treasury stock, . . . investment contract, or any other instrument
    commonly known as a security, whether similar to those herein referred to or not.” 
    Id. art. 581-
    4.A
    (emphasis added). The Arnolds and the State contend that Life Partners’ life settlement agreements
    are “investment contracts,” and thus “securities,” under the Act.
    Because this case requires us to construe a statute, we would normally follow our well-
    established text-based approach to interpret the meaning of “investment contract.” This Court,
    however, has previously considered and addressed the meaning of the term “investment contract”
    as it appears in the Texas Securities Act. See Searsy v. Commercial Trading Corp., 
    560 S.W.2d 637
    , 639 (Tex. 1977). Noting in Searsy that the term “appear[s] to have been taken from an almost
    identical definition of ‘security’ in the Federal Securities Act of 1933,” we looked to federal cases
    and other authorities for guidance in construing the term. 
    Id. (citing 15
    U.S.C. § 77b(1)). As
    discussed below, both before and since our decision in Searsy, the United States Supreme Court,
    numerous federal courts, and many state courts have undertaken to interpret and apply the term
    7
    The Texas Securities Act prohibits selling or offering for sale “any securities . . . until the issuer of such
    securities or a dealer registered under the provisions of this Act shall have been granted a permit by the
    Commissioner.” 
    Id. art. 581-
    7.A(1). The Act also prohibits any person from offering or selling “a security . . . by
    means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the
    statements made, in the light of the circumstances under which they are made, not misleading.” 
    Id. art. 581-
    33.A(2).
    Any person who offers or sells “a security” in violation of either of these provisions “is liable to the person buying the
    security . . . , who may sue either at law or in equity for rescission or for damages if the buyer no longer owns the
    security.” 
    Id. art. 581-
    33.A(1), (2). In addition, the Act obligates the Attorney General “to take such measures and to
    make such investigations as will prevent or detect the violation of any provision thereof.” 
    Id. art. 581-
    3. The Arnolds
    and the State sued Life Partners for violating these provisions, and they concede that Life Partners has no liability
    under these provisions unless its life settlement agreements are “securities.”
    8
    “investment contract” as it appears in various securities acts. American courts have thus developed
    a significant body of law on the topic, and while these courts have not always agreed, their
    decisions have served as a guide to the meaning and application of the term “investment contract”
    in the securities-law context throughout the country. In light of this distinct and developed body
    of judicial precedent and consistent with this Court’s prior reliance on such authorities, we will
    continue to seek guidance from these decisions as we construe the Texas Securities Act here.8
    Based on these authorities and our own reading of the statute’s language, we conclude that
    three key principles must guide our construction and application of the term “investment contract.”
    First, we must broadly construe the term to maximize the protection the Act is intended to provide
    to the investing public. Second, we must focus on the economic realities of the transaction at issue.
    And third, if the economic realities establish that a transaction is an investment contract, we must
    apply the statute regardless of any labels or terminology the parties may have used. In light of
    these principles, we conclude that an “investment contract” for purposes of the Texas Securities
    Act means (1) a contract, transaction, or scheme through which a person pays money (2) to
    participate in a common venture or enterprise (3) with the expectation of receiving profits,
    (4) under circumstances in which the failure or success of the enterprise, and thus the person’s
    realization of the expected profits, is at least predominately due to the entrepreneurial or
    8
    We do not mean to suggest that we can or will ignore the statutory language at issue. When we construe
    and apply statutes, it is always “our goal . . . to ascertain and give effect to the Legislature’s intent,” which we draw
    “from the plain meaning of the words chosen by the Legislature when it is possible to do so.” Tex. Mut. Ins. Co. v.
    Ruttiger, 
    381 S.W.3d 430
    , 452 (Tex. 2012) (citing Entergy Gulf States, Inc. v. Summers, 
    282 S.W.3d 433
    , 437 (Tex.
    2009)). When the “statutory text is clear, that text is determinative of legislative intent unless the plain meaning of the
    statute’s words would produce an absurd result,” but “when statutory text is susceptible of more than one reasonable
    interpretation it is appropriate to look beyond its language for assistance in determining legislative intent.” 
    Id. Here, we
    find the term “investment contract” to be less than clear, and thus look for assistance to other courts that have as a
    whole construed the same language appearing in the same statutory context. Like those courts, we find that the statute
    expresses a clear intent that it be construed broadly to effectuate its remedial purpose. See TEX. REV. CIV. STAT. art.
    581-4.A (defining “securities” to include “any other instrument commonly known as a security, whether similar to
    those herein referred to or not”).
    9
    managerial, rather than merely ministerial or clerical, efforts of others, regardless of whether those
    efforts are made before or after the transaction. Applying this definition to the undisputed material
    facts, we conclude that Life Partners’ life settlement agreements are “investment contracts” and
    thus “securities” under the Texas Securities Act.
    A.      Guiding Principles & the Howey/Forman Test
    The United States Supreme Court first addressed the meaning of “investment contract,” as
    used in the federal Securities Act of 1933, over 70 years ago. S.E.C. v. C. M. Joiner Leasing Corp.,
    
    320 U.S. 344
    (1943) (citing 15 U.S.C. § 77b(1)). Noting that the act included “investment contract”
    as just one of an extensive list of the different types of transactions that constitute “securities,” the
    Court remarked that “the reach of the [a]ct does not stop with the obvious and commonplace.” 
    Id. at 351.
    Instead, “[n]ovel, uncommon, or irregular devices, whatever they appear to be, are also
    reached if it be proved as [a] matter of fact that they were widely offered or dealt in under terms
    or courses of dealing which established their character in commerce as ‘investment contracts,’” or
    as “‘any interest or instrument commonly known as a ‘security.’” 
    Id. (quoting 15
    U.S.C. § 77b(1)).
    “The test” the Court described for determining whether a transaction is an investment contract “is
    what character the instrument is given in commerce by the terms of the offer, the plan of
    distribution, and the economic inducements held out to the prospect.” 
    Id. at 352–53.
    Applying this
    test, the Court concluded that the defendants’ assignments of their rights under oil leases in
    exchange for a small payment coupled with the purchaser’s agreement to pay the defendants to
    drill a test well on the leased acreage was “a form of investment contract in which the purchaser
    was paying both for a lease and for a development project.” 
    Id. at 349.
    Three years later, the Supreme Court addressed the issue again in S.E.C. v. W.J. Howey
    Co., 
    328 U.S. 293
    , 301 (1946). The defendants in Howey offered and sold portions of a large citrus
    10
    grove, “coupled with a contract for cultivating, marketing and remitting the net proceeds to the
    investor.” 
    Id. at 294.
    The issue, as the Court described it, was “whether, under the circumstances,
    the land sales contract, the warranty deed and the service contract together constitute an
    ‘investment contract’ within the meaning of” the federal securities act. 
    Id. at 297.
    The Court noted
    that, although the federal act did not define the term “investment contract,” some state courts had
    already developed a definition when construing their state securities acts even before Congress
    adopted the federal statute in 1933. 
    Id. at 298.
    Although the state statutes did not define the term
    either, the Court noted that state courts “broadly construed” the term “so as to afford the investing
    public a full measure of protection.” 
    Id. The Court
    observed that the state courts that addressed the
    issue disregarded “form” for “substance,” emphasized the “economic reality” of the transactions,
    and “uniformly” defined an “investment contract” as “a contract or scheme for ‘the placing of
    capital or laying out of money in a way intended to secure income or profit from its employment.’”
    
    Id. (quoting State
    v. Gopher Tire & Rubber Co., 
    177 N.W. 937
    , 938 (Minn. 1920)).
    Drawing from these state court constructions, and based on its presumption that Congress
    was aware of these constructions when it adopted the federal act, the Court announced the
    following definition: “an investment contract for purposes of the [Federal] Securities Act means a
    contract, transaction or scheme whereby a person invests his money in a common enterprise and
    is led to expect profits solely from the efforts of the promoter or a third party.” 
    Id. at 298–99.
    The
    Court concluded that the citrus orchard purchases at issue in Howey “clearly involve investment
    contracts as so defined,” because the defendants were offering not just “fee simple interests in
    land” or even an “orchard coupled with management services,” but “an opportunity to contribute
    money and to share in the profits of a large citrus fruit enterprise managed and partly owned by
    [the defendants].” 
    Id. at 299.
    Finding that “[t]he investors provide the capital and share in the
    11
    earnings and profits[, and] the promoters manage, control and operate the enterprise,” the Court
    concluded that the transactions were “investment contracts” under the federal act, “regardless of
    the legal terminology in which such contracts [were] clothed.” 
    Id. at 300.
    The Supreme Court has had occasions to apply and clarify the Howey test over the past 70
    years. In United Housing Foundation Inc. v. Forman, for example, the Court considered the sales
    of “shares of stock” that entitled the purchasers to lease an apartment in a state subsidized and
    supervised nonprofit housing cooperative. 
    421 U.S. 837
    , 840 (1975). As in Howey, the Court
    explained that Congress “sought to define the term ‘security’ in sufficiently broad and general
    terms so as to include within that definition the many types of instruments that in our commercial
    world fall within the ordinary concept of a security.” 
    Id. at 847–48
    (quoting H.R. Rep. No. 85, 73d
    Cong., 1st Sess., 11 (1933)). But the Court rejected the notion that the parties’ labeling of the
    transaction as a sale of a “share of stock” was sufficient to make it a “securities” sale, even though
    the act defines “security” to include any “share [or] stock,” because “Congress intended the
    application of these statutes to turn on the economic realities underlying a transaction, and not on
    the name appended thereto.” 
    Id. at 849.
    Addressing whether the purchase of a “share of stock” in the co-op was an “investment
    contract,” the Court “examine[d] the substance—the economic realities of the transaction—rather
    than the names that may have been employed by the parties.” 
    Id. at 851.
    After reciting the Howey
    test as “the basic test for distinguishing the transaction from other commercial dealings,” the Court
    restated the test slightly, explaining that “[t]he touchstone is the presence of an investment in a
    common venture premised on a reasonable expectation of profits to be derived from the
    entrepreneurial or managerial efforts of others.” 
    Id. at 852
    (emphasis added). Because the
    purchasers in Forman “were attracted solely by the prospect of acquiring a place to live, and not
    12
    by financial returns on their investments,” 
    id. at 853,
    the Court concluded that “the inducement to
    purchase” the shares was “not to invest for profit,” 
    id. at 851,
    and thus “the disputed transactions
    are not purchases of securities within the contemplation of the federal statutes,” 
    id. at 847.
    The Supreme Court addressed the meaning of “investment contract” again in Reves v. Ernst
    & Young, 
    494 U.S. 56
    (1990). In Reves, the Court considered whether “certain demand notes”
    issued by a farmers’ cooperative were “securities” under the federal securities acts. 
    Id. at 58.
    Again, the Court began its analysis by noting that “Congress’ purpose in enacting the securities
    laws was to regulate investments, in whatever form they are made and by whatever name they are
    called,” and explaining that the Court was “not bound by legal formalisms, but instead [must] take
    account of the economics of the transaction under investigation.” 
    Id. at 61.
    The Court explained
    that a note is “likely to be a ‘security’” if “the seller’s purpose is to raise money for the general use
    of a business enterprise or to finance substantial investments and the buyer is interested primarily
    in the profit the note is expected to generate.” 
    Id. at 66.
    But “[i]f the note is exchanged to facilitate
    the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow
    difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note
    is less sensibly described as a ‘security.’” 
    Id. The Court
    concluded that the notes at issue in Reves
    were securities under the federal securities act. 
    Id. More recently,
    the Court addressed whether an investment transaction that promises a fixed
    rate of return, rather than a variable or uncertain rate, can be an investment contract. S.E.C. v.
    Edwards, 
    540 U.S. 389
    , 397 (2004). In Edwards, the defendants offered and sold public
    payphones, along with agreements to immediately lease the payphones back from the purchasers
    for five years, to manage and service the payphones throughout the lease term, and then to buy the
    payphones back for the original purchase price when the lease terminated, or sooner upon the
    13
    purchaser’s request. 
    Id. at 391.
    Based on the original purchase price and the fixed monthly lease-
    back rate, the purchasers would receive a fixed 14% annual return on their purchase. 
    Id. As in
    Forman, the Court explained that “[t]he ‘touchstone’ of an investment contract [is] ‘the presence
    of an investment in a common venture premised on a reasonable expectation of profits to be
    derived from the entrepreneurial or managerial efforts of others.’” 
    Id. at 395
    (quoting 
    Forman, 421 U.S. at 852
    ). The Court rejected the defendants’ argument that
    including investment schemes promising a fixed return among investment contracts
    conflicts with our precedent, [because] when we held [in Howey] that “profits” must
    “come solely from the efforts of others,” we were speaking of the profits that
    investors seek on their investment, not the profits of the scheme in which they
    invest. We used “profits” in the sense of income or return, to include, for example,
    dividends, other periodic payments, or the increased value of the investment.
    
    Id. at 39495.
    The Court concluded that the investment scheme was a security under the federal
    act. 
    Id. at 397.
    When we addressed the meaning of “investment contract” in Searsy, we adopted the
    Supreme Court’s Howey test, as restated in Forman, as the basis for determining whether a
    transaction is an “investment contract,” and thus a “security,” under the Texas Securities Act.
    
    Searsy, 560 S.W.2d at 640
    41. We have described the Supreme Court’s decisions in some detail
    here, however, because in addition to providing the relevant test, they also describe the proper
    approach to the term’s construction.
    We derive from these cases three key principles to guide our application of the
    Howey/Forman test to any particular transaction. First, we must “broadly construe[ ]” the term
    “investment contract” to maximize the protection the Act is intended to provide to the investing
    public. 
    Howey, 328 U.S. at 298
    . Second, we must focus on the “economic realities” of the
    transaction to determine whether it meets the test’s requirements. 
    Reves, 494 U.S. at 61
    ; 
    Forman, 421 U.S. at 849
    ; 
    Howey, 328 U.S. at 298
    . And third, if the “economic realties” satisfy the
    14
    requirements, we must conclude that the transaction is an “investment contract” regardless of the
    labels or terminology the parties used to describe it. 
    Reves, 494 U.S. at 61
    ; 
    Forman, 421 U.S. at 851
    52; 
    Howey, 328 U.S. at 300
    . Following the lead of numerous other courts,9 we accept and
    apply these guiding principles when using the Howey/Forman test to determine whether a
    transaction constitutes an “investment contract.”
    B.       “Profit from the Efforts of Others”
    When the Supreme Court announced the Howey test, it stated that a transaction is an
    “investment contract” under the federal securities act only if the person investing in a common
    enterprise is led to expect profits “solely from the efforts of the promoter or a third party.” 
    Howey, 328 U.S. at 298
    99. Subsequent decisions have transformed this original articulation of the test,
    however, particularly with regard to (1) whether the profits must come “solely” from the efforts of
    others, and (2) the kinds of “efforts” of promoters and others on which the purchasers must rely.
    As both issues are relevant to our resolution of this case, we must consider these cases as well.
    1.       “Solely” from the efforts of others
    The federal Ninth Circuit Court of Appeals was one of the first courts to question whether
    the Howey test actually requires (or should actually require) that the profits the purchaser expects
    from the transaction come “solely” from the efforts of others. S.E.C. v. Glenn W. Turner Enters.,
    Inc., 
    474 F.2d 476
    (9th Cir. 1973). The transactions at issue in Turner Enterprises involved the
    sale of opportunities to attend motivational seminars and receive self-help materials and then sell
    9
    See, e.g., Rodriguez v. Banco Cent. Corp., 
    990 F.2d 7
    , 10 (1st Cir. 1993) (observing that “the Supreme
    Court cases mark out a concept, not a precise definition,” and require that the term “securities” be “flexibly applied to
    capture new arrangements comprising the essence of securities, however they may be named”) (citing Joiner 
    Leasing, 320 U.S. at 351
    ); McCown v. Heidler, 
    527 F.2d 204
    , 208 (10th Cir. 1975) (following a “flexible approach” that
    depends “not upon the form, but upon the substance and economic reality of the transaction in question”) (citing
    Forman, 
    421 U.S. 837
    ); Glen-Arden Commodities, Inc. v. Costantino, 
    493 F.2d 1027
    , 1035 (2d Cir. 1974) (noting that
    “the federal securities laws are to be construed ‘not technically and restrictively, but flexibly to effectuate (their)
    remedial purposes’”) (quoting S.E.C. v. Capital Gains Research Bureau, Inc., 
    375 U.S. 180
    , 195 (1963)).
    15
    the same opportunities to others who would do the same, in a pyramid-type scheme. 
    Id. at 478.
    After quoting the “now familiar” Howey test, 
    id. at 481,
    the Ninth Circuit noted that the purchasers
    in Turner Enterprises would only make money if they themselves “find prospects,” “persuade
    them to attend” meetings, and convince them to “purchase a plan.” 
    Id. at 482.
    Thus, the court
    acknowledged, “it can be said that the returns or profits are not coming ‘solely’ from the efforts of
    others.” 
    Id. Nevertheless, the
    court concluded that the transactions were investment contracts, holding
    that “the word ‘solely,’” as used in the Howey test, “should not be read as a strict or literal limitation
    on the definition of an investment contract, but rather must be construed realistically, so as to
    include within the definition those schemes which involve in substance, if not form, securities.”
    
    Id. Consistent with
    the three guiding principles we have identified, the court justified its
    modification of the Howey test “in light of the remedial nature of the legislation, the statutory
    policy of affording broad protection to the public, and the Supreme Court’s admonitions that the
    definition of securities should be a flexible one.” 
    Id. Otherwise, the
    court reasoned, the test, and
    thus the statute’s requirements, “would be easy to evade by adding a requirement that the buyer
    contribute a modicum of effort.” 
    Id. Since that
    “would not serve the purpose of the legislation,”
    the court adopted a “more realistic test,” encompassing transactions that may depend in part on the
    investor’s “efforts,” so long as the “efforts made by those other than the investor are the undeniably
    significant ones, those essential managerial efforts which affect the failure or success of the
    enterprise.” 
    Id. A year
    later, the Fifth Circuit Court of Appeals adopted the Ninth Circuit’s modified
    version of the Howey test when addressing a scheme involving “a multi-level network of
    independent distributors, purportedly engaged in the business of selling a line of cosmetics.” S.E.C.
    16
    v. Koscot Interplanetary, Inc., 
    497 F.2d 473
    , 475 (5th Cir. 1974). Focusing on the “recruitment
    aspects of [the] enterprise,” as opposed to the marketing of cosmetics, the court quoted the Howey
    test, but concluded that “[a] literal application of the Howey test would frustrate the remedial
    purposes of the Act.” 
    Id. at 477,
    480. Because “[t]he admitted salutary purposes of the Acts can
    only be safeguarded by a functional approach to the Howey test,” the court held that “the proper
    standard in determining whether a scheme constitutes an investment contract is that explicated by
    the Ninth Circuit” in Turner Enterprises; that is, “whether the efforts made by those other than the
    investor are the undeniably significant ones, those essential managerial efforts which affect the
    failure or success of the enterprise.” 
    Id. at 480,
    483 (quoting Turner 
    Enters., 474 F.2d at 482
    ).
    The Fifth Circuit noted in Koscot that “a significant number of federal courts invoking the
    Howey test [had] either given it a broader more salutary application or endorsed such an application
    in principle.” 
    Id. at 481.
    Other courts soon followed suit. See, e.g., McCown v. Heidler, 
    527 F.2d 204
    , 211 (10th Cir. 1975) (quoting Turner Enterprises test and stating that “it has been widely held
    that . . . reliance of the investor on the promoter need not be total”). In doing so, some found
    support for the modification in the fact that the Supreme Court had omitted the word “solely” when
    it restated the Howey test in Forman, to require “the presence of an investment in a common
    venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or
    managerial efforts of 
    others.” 421 U.S. at 852
    ; see, e.g., Williamson v. Tucker, 
    645 F.2d 404
    , 418
    (5th Cir. 1981) (quoting Forman and noting that “the Supreme Court has altogether omitted the
    word ‘solely’ in its most recent formulation of the investment contract definition”). These courts
    thus concluded, as stated in Williamson, that, “[a]lthough the Court used the word ‘solely’ in the
    Howey decision, it should not be interpreted in the most literal sense,” because “[t]he Supreme
    Court has repeatedly emphasized that economic reality is to govern over form and that the
    17
    definitions of the various types of securities should not hinge on exact and literal 
    tests.” 645 F.2d at 418
    .
    We adopted the same approach in Searsy, two years after the Supreme Court decided
    Forman. 
    Searsy, 560 S.W.2d at 639
    41. Searsy was a class action seeking rescission and damages
    against two corporations that sold commodity options. 
    Id. at 638
    (explaining the defendants’
    “business of selling ‘puts,’ ‘calls,’ and ‘double options’ on commodity futures contracts”).
    Observing that the Howey test was “widely accepted in state and federal cases,” we restated it as
    containing “four requirements: (1) investment of money; (2) a common enterprise; (3) expectation
    of profits; (4) solely from the efforts of others.” 
    Id. at 640.
    We quoted the “solely” language from
    Howey, but we noted that the word “solely” suggests that “[t]he investor was required to have
    exerted no effort with regard to the investment.” 
    Id. at 641.
    We concluded that “[t]he more recent
    trend, . . . and in our view the more reasonable approach, is to use a more realistic test which
    inquires whether the investor made any significant efforts.” 
    Id. (emphasis added).
    Relying in part
    on the Ninth Circuit’s reasoning in Turner Enterprises, we reasoned that “[t]he ‘solely from the
    efforts of others’ requirement could be easily evaded by requiring the investor to exert some
    modicum of effort, such as picking one orange in the Howey citrus groves. This would be a blind
    and mechanical view of what constitutes an investment contract.” 
    Id. We thus
    agreed that the
    “more realistic test” is “whether the efforts made by those other than the investor are undeniably
    significant ones, those essential managerial efforts which affect the failure or success of the
    enterprise.” 
    Id. (quoting Turner
    Enters., 474 F.2d at 482
    ). Using this test, we held that the
    commodity options at issue were “investment contracts,” and thus “securities,” under the Texas
    Securities Act. 
    Id. at 638
    .
    Since our decision in Searsy, numerous other courts have also adopted this “more realistic”
    18
    version of the Howey/Forman test. See, e.g., S.E.C. v. Int’l Loan Network, Inc., 
    968 F.2d 1304
    ,
    1308 (D.C. Cir. 1992) (concluding Howey/Forman test met because “profits for . . . investors are
    expected to accrue, if not solely, at least predominantly from the efforts of others”); Bailey v.
    J.W.K. Props., Inc., 
    904 F.2d 918
    , 920 (4th Cir. 1990) (“Despite the restrictive language of the
    third prong of the test, later courts have explained that a program requiring some effort from the
    investor may still constitute an ‘investment contract,’ but the most essential functions or duties
    must be performed by others and not the investor.”). We are not aware, in fact, of any jurisdiction
    that continues to require that profits result “solely” from the efforts of others. Instead, even if the
    purchaser’s profits depend in part on the purchaser’s own efforts, a transaction will satisfy the
    “efforts” element of the Howey/Forman test if the efforts of others “are undeniably significant
    ones, those essential managerial efforts which affect the failure or success of the enterprise.”
    
    Searsy, 560 S.W.2d at 641
    .
    2.   “Efforts” of others
    The “efforts” that the Supreme Court concluded met the test in Howey included the
    defendant’s work to cultivate and market the citrus crops and otherwise “manage, control and
    operate the enterprise.” 
    Howey, 328 U.S. at 294
    , 300. After the Ninth Circuit held in Turner
    Enterprises that the “efforts” that count “are the undeniably significant ones, those essential
    managerial efforts which affect the failure or success of the 
    enterprise,” 474 F.2d at 482
    , the
    Supreme Court included similar language when it restated the test in Forman, referring to “the
    entrepreneurial or managerial efforts of 
    others.” 421 U.S. at 852
    . That same year, we used the
    Turner Enterprises language in Searsy, concluding that the kinds of efforts that are “significant”
    when applying the test are “essential managerial efforts.” 
    Searsy, 560 S.W.2d at 641
    (citing Turner
    
    Enters., 474 F.2d at 482
    ). We noted in that case that the defendant’s “personnel frankly testified
    19
    that customers were not supposed to understand the . . . business operation,” that the defendant’s
    salesmen “advised the customer what to do,” and that, “[a]lthough the final decision was left to
    the customer, he rarely had any choice but to follow the advice given him.” 
    Id. Finding that
    the
    defendant’s actions constituted “essential managerial efforts,” we concluded “that the commodity
    options sold . . . in this case meet the requirements of an ‘investment contract,’ as set forth in the
    Howey test.” 
    Id. Several other
    courts have since expanded on the types of “efforts” that qualify as
    “significant” under the Howey/Forman test and those that do not. Since the purchaser need not
    rely “solely” on others’ efforts, the courts have considered the purchasers’ activities as well as
    those of the sellers. Specifically, they have looked to determine whether the purchaser enjoyed or
    exercised control over the asset or the operations of the enterprise, such that the purchaser would
    fulfill a “managerial” or “operational” role. See, e.g., Banghart v. Hollywood Gen. P’ship, 
    902 F.2d 805
    , 807 (10th Cir. 1990) (“Courts which have considered the issue have uniformly held that
    general partnerships are not investment contracts because the partners—the investors—are
    ordinarily granted significant control over the enterprise.”). As the Fifth Circuit explained:
    Howey teaches that [a transaction] is a security only if the holder is relying on the
    managerial skills of others to generate his profit. By implication, if the holder is
    relying on his own entrepreneurial talents to generate his profit, his interest is not
    treated as a security because he does not fall within the class of persons Congress
    meant to protect when it included non-traditional securities in the coverage of the
    securities laws.
    Siebel v. Scott, 
    725 F.2d 995
    , 999 (5th Cir. 1984).
    In some cases, the courts considered whether the purchaser retains the right to control the
    asset or enterprise. See, e.g., 
    Williamson, 645 F.2d at 421
    (“So long as the investor has the right to
    control the asset he has purchased, he is not dependent on the promoter or on a third party for
    ‘those essential managerial efforts which affect the failure or success of the enterprise.’”). But
    20
    most courts appear to have focused on whether, as an “economic reality,” the purchaser in fact did
    exercise managerial or entrepreneurial control, or instead relied on others to do so. See, e.g., 
    Siebel, 725 F.2d at 998
    (“There is no evidence that any of the limited partners planned or desired to
    participate in the operation of the cable television system.”). This is in essence the approach that
    we followed in 
    Searsy. 560 S.W.2d at 641
    (noting that, “[a]lthough the final decision was left to
    the customer, he rarely had any choice but to follow the advice given him”).
    In light of the Supreme Court’s admonition to “broadly construe” the act in recognition of
    the “economic realities” of a transaction, we are not alone in this approach. For example, in Long
    v. Shultz Cattle Co., 
    881 F.2d 129
    (5th Cir. 1989), the Fifth Circuit acknowledged that the
    plaintiffs, who invested in a cattle-raising operation, “had a substantial degree of theoretical control
    over their investment. They could, theoretically, move their cattle to a different feedyard, decide
    what to feed them, provide their own veterinary care, or seek buyers on their own,” and in fact
    they “were required to authorize every management decision involving their cattle.” 
    Id. at 134.
    But “the evidence [was] undisputed that at each juncture plaintiffs relied solely on the [seller’s]
    advice” and followed all of the seller’s recommendations. 
    Id. Thus, “even
    if [the purchasers]
    technically made the key management decisions, they simply rubber-stamped [the seller’s]
    recommendations and relied entirely on [the seller’s] efforts and expertise to manage the
    underlying venture.” 
    Id. at 136.
    Following the Supreme Court’s “flexible approach” to
    construction of the statute, the Fifth Circuit concluded that it was “impossible to conclude that the
    . . . Howey [test] is not satisfied without ignoring entirely the economic realities of [the seller’s]
    program.” 
    Id. The cases
    thus indicate that, to constitute an investment contract under the “efforts” aspect
    of the Howey/Forman test, the transaction must be such that, in reality, the seller, or another party
    21
    other than the purchaser, exercises the predominate managerial or entrepreneurial control on which
    the purchaser’s anticipation of profits is based.10 Conversely, courts have recognized that control
    over merely “ministerial” or “clerical” functions does not constitute the kind of “significant
    efforts” that satisfy the Howey/Forman test. See, e.g., Fargo Partners v. Dain Corp., 
    540 F.2d 912
    ,
    91415 (8th Cir. 1976) (“Where the investors’ duties were nominal and insignificant, their roles
    were perfunctory or ministerial, or they lacked any real control over the operation of the enterprise,
    the courts have found investment contracts.”); see also Martin v. T. V. Tempo, Inc., 
    628 F.2d 887
    ,
    890 (5th Cir. 1980) (noting purchaser’s argument that transactions were investment contracts
    because “only simple ministerial tasks were required on the part of plaintiffs”); Koscot
    
    Interplanetary, 497 F.2d at 485
    (concluding that the purchaser’s “act of consummating a sale is
    essentially a ministerial not managerial one”).
    Because the Howey/Forman test does not strictly require that the purchaser rely “solely”
    on the efforts of others, courts must apply the distinction between “managerial or entrepreneurial
    control” and “perfunctory or ministerial duties” to the activities of both the purchasers and the
    sellers in any given transaction. If, for example, both parties exert “efforts” to support the
    enterprise but the purchaser’s efforts are “purely ministerial,” those efforts are not “significant”
    and the “efforts” aspect of the Howey/Forman test will typically be met. See, e.g., Mitzner v.
    Cardet Int’l, Inc., 
    358 F. Supp. 1262
    , 1268 (N.D. Ill. 1973) (noting that “the efforts of the
    franchisee-licensee in this case appear to be purely ministerial”).11 But if the seller’s efforts are
    10
    See also 
    Bailey, 904 F.2d at 923
    (“We agree with the district court that the plaintiffs had the authority to
    exercise some control over their individual investments. They could choose the embryos they wished to purchase and
    direct the feeding practices and marketing of their cattle or terminate the management agreement with Albemarle
    Farms. When viewed in light of the surrounding circumstances, however, the plaintiffs had little to no control over
    the ultimate success or failure of their investments.”).
    11
    The distinction between “entrepreneurial or managerial” efforts and “ministerial and clerical” efforts grows
    out of and accommodates courts’ acceptance of the idea that the purchaser need not rely “solely” on the efforts of
    22
    ministerial and perfunctory, rather than managerial or entrepreneurial, the purchaser cannot be said
    to be relying on the seller’s efforts for the anticipated profits, and the test is not met. See, e.g.,
    McConathy v. Dal Mac Commercial Real Estate, Inc., 
    545 S.W.2d 871
    , 875 (Tex. Civ. App.—
    Texarkana 1976, no writ) (noting that “[t]he only management on the part of the managing venturer
    . . . was that of insuring the property, paying the taxes and the like—not for profit, but solely to
    protect and preserve the investment”).
    C.       Pre-purchase versus Post-purchase Efforts
    Early cases applying the Howey/Forman test generally focused on the efforts and control
    that the parties exercised after the transaction occurred. See, e.g., 
    McConathy, 545 S.W.2d at 875
    (noting that “no development or operations were to be undertaken with regard to the property”)
    (emphasis added). In the 1990s, however, Life Partners faced the issue of whether the efforts it
    exerted before the transaction were relevant to the Howey/Forman analysis. S.E.C. v. Life Partners,
    Inc., 
    87 F.3d 536
    (D.C. Cir. 1996). The SEC argued that Life Partners’ purchasers “are essentially
    passive,” and rely for their anticipated profits on Life Partners’ “pre-purchase expertise in
    identifying existing policyholders and . . . post-purchase management of the investment.” 
    Id. at 545.
    The D.C. Circuit rejected the SEC’s position, holding first that all of Life Partners’ post-
    purchase efforts—“holding the policy, monitoring the insured’s health, paying premiums,
    others. See, e.g., Slevin v. Pedersen Assocs., Inc., 
    540 F. Supp. 437
    , 440 (S.D.N.Y. 1982) (stating that whether a
    transaction is an investment contract “depend[s] on whether ‘solely’ is interpreted literally (i.e., did plaintiff contribute
    in any manner to the project) or liberally (i.e., did the plaintiff provide only ministerial, nonmanagerial help)”). If the
    purchaser had to rely “solely” on the efforts of others, such that any efforts by the purchaser would prevent the
    transaction from being an investment contract, it would not matter whether the efforts of others were managerial or
    merely ministerial. But since the purchaser’s own efforts to support the enterprise will not necessarily prevent the
    transaction from being an investment contract, the managerial-ministerial distinction is helpful to determine whether
    the purchaser is in fact relying on the efforts of others to obtain the anticipated profit. See, e.g., Wieboldt v. Metz, 
    355 F. Supp. 255
    , 261 (S.D.N.Y. 1973) (concluding that the purchaser’s “given role was not essentially ministerial, but
    truly active and discretionary” and “gave him virtually unfettered control, a situation which is irreconcilable . . . with
    Howey’s definition of an investment contract”).
    23
    converting a group policy into an individual policy where required, filing the death claim,
    collecting and distributing the death benefit (if requested), and assisting an investor who might
    wish to resell his interest”—were merely ministerial or clerical, rather than managerial or
    entrepreneurial. 
    Id. at 54546.
    These post-purchase efforts, the court found, have no “material
    impact upon the profits of the investors.” 
    Id. at 546.
    “[O]nce the transaction closes, the investors
    do not look to the efforts of others for their profits because the only variable affecting profits is the
    timing of the insured’s death, which is outside of [Life Partners’] control.” 
    Id. at 545.
    The court then addressed the SEC’s reliance on Life Partners’ pre-purchase efforts, which
    it described as efforts “to locate insureds and to evaluate them and their policies, as well as to
    negotiate an attractive purchase price.” 
    Id. at 547.
    Although the court agreed that these efforts were
    “undeniably essential to the overall success of the investment,” the court expressed its “doubt that
    pre-purchase services should ever count for much,” and concluded that, in this case, the “pre-
    purchase services cannot by themselves suffice to make the profits of an investment arise
    predominantly from the efforts of others.” 
    Id. Asserting the
    lack of any authority finding an
    “investment contract” based solely on pre-purchase efforts, the court reasoned that such efforts do
    not justify the federal securities act’s disclosure requirements because
    the value of the promoter’s efforts has already been impounded into the promoter’s
    fees or into the purchase price of the investment, and if neither the promoter nor
    anyone else is expected to make further efforts that will affect the outcome of the
    investment, then the need for federal securities regulation is greatly diminished.
    
    Id. Because “it
    is the length of the insured’s life that is of overwhelming importance to the value
    of the viatical settlements,” the court concluded, the SEC had failed to “show that the promoter’s
    efforts have a predominant influence upon investors’ profits.” 
    Id. at 548.
    One judge dissented from the D.C. Circuit’s decision. 
    Id. at 549
    (Wald, J., dissenting). The
    dissenting opinion began by describing three “background principles [that] should guide our
    24
    analysis”: (1) “we should . . . apply securities laws flexibly so as to achieve their remedial
    purposes,” (2) “the securities laws do not grant federal protection to all investments, but only to
    that subcategory of investments that are securities,” and (3) the securities laws “embody the belief
    that information is the most important form of investor protection.” 
    Id. at 549
    50. Acknowledging
    that the anticipated profits must come “‘predominately,’ but not solely,” from the seller’s efforts,
    and that the seller’s efforts “must be of a managerial or entrepreneurial character, and not merely
    ministerial or clerical,” the dissent concluded that the court’s “bright-line rule” rejecting the
    relevance of pre-purchase activities “elevates a formal element, timing, over the economic reality
    of the investors’ dependence on the promoter. Even more troubling, the majority’s approach
    undercuts the flexibility and ability to adapt to ‘the countless and variable schemes’ that are the
    hallmarks of the Howey test.” 
    Id. at 55051.
    The dissent vigorously disagreed with the majority’s assertion that no precedent supported
    her application of the Howey/Forman test, and cited to numerous cases in which lower courts had
    relied on the promoters’ pre-purchase activities to determine whether a transaction constituted an
    investment contract. 
    Id. at 55253.
    She noted, for example, that the Second Circuit had found in
    Glen-Arden Commodities that the “investors’ profits depended on the promoter’s expertise in
    selecting whiskey for [the] investors to purchase as well as on the promoter’s promise to buy back
    the whiskey in the future.” 
    Id. (citing Glen-Arden
    Commodities, 493 F.2d at 1035
    ). More recently,
    she noted, the Second Circuit had found “an investment contract where [the] promoter both
    promised to maintain a secondary market for CDs—a post-purchase managerial activity—and used
    its market power to negotiate favorable CD rates with participating banks—a pre-purchase
    activity.” 
    Id. (citing Gary
    Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
    
    756 F.2d 230
    , 24041 (2d Cir. 1985)). In addition, the dissent noted, the Eleventh Circuit had
    25
    “emphasiz[ed] [the] promoter’s claimed expertise in locating bargain-priced Florida properties for
    [the] investor to purchase, as well as [the] promoter’s post-purchase activities,” when concluding
    that the promoter was not entitled to summary judgment on the “question of whether [an]
    investment contract existed.” 
    Id. (citing Gordon
    v. Terry, 
    684 F.2d 736
    , 740 n.4, 74243 (11th Cir.
    1982)). Contrary to the majority’s assertion, the dissent concluded that “courts frequently refer to
    pre-purchase as well as post-purchase activities of the promoter in finding Howey’s third prong
    met.” 
    Id. at 552–53.12
    Rejecting the majority’s conclusion that pre-purchase efforts “should be categorically
    excluded,” the dissent asserted that “the Howey test can be met by pre-purchase managerial
    activities of a promoter when it is the success of these activities, either entirely or predominantly,
    that determines whether profits are eventually realized.” 
    Id. at 551.13
    Because the purchasers’
    profits depended on whether Life Partners selected the right life insurance policies, negotiated the
    right price, and accurately predicted the insured’s life expectancy, the dissent would have
    concluded that Life Partners’ “viatical settlements represent one of the rare instances where
    investor profits depend predominantly on the pre-purchase managerial activities of a promoter.”
    
    Id. at 555.
    Under her “approach, since the investors’ profits depend entirely on managerial
    12
    The dissent cited several additional cases as support for her reliance on pre-purchase activities. 
    Id. at 553
    (citing S.E.C. v. Brigadoon Scotch Distributions, Ltd., 
    388 F. Supp. 1288
    , 1293 (S.D.N.Y. 1975) (in which, as Judge
    Wald explained, “the court specifically stated that the promoter’s [pre-purchase] selection activities alone were
    sufficient to satisfy Howey’s third prong because ‘[c]oins do not appreciate in value at the same rate and accordingly
    their selection is the most crucial factor in determining how much profit an investor in coins will make’”); 
    Bailey, 904 F.2d at 924
    25) (which, as Judge Wald explained, emphasized the value to the investment of “the promoter’s pre-
    purchase activity of selecting and crossbreeding [cattle] embryos”); and S.E.C. v. Energy Grp. of Am., Inc., 459 F.
    Supp. 1234, 1241 (S.D.N.Y. 1978)) (which, as Judge Wald explained, concluded that investment contract may be
    based on “purchase of property in expectation that it will appreciate due to promoter’s expertise in selecting the
    property”)).
    13
    The dissent agreed that “Howey’s third prong would not be satisfied whenever the promoter’s managerial
    activities occurred prior to purchase and the realization of profits depended significantly on outside forces, such as a
    lottery.” 
    Id. at 552.
    26
    activities of the promoter, the Howey test is met and [Life Partners’] viatical settlements should be
    subject to the securities laws.” 
    Id. at 556.
    Following the D.C. Circuit’s Life Partners decision, courts in other jurisdictions reached
    different conclusions on the issue of whether life settlement agreements can be “investment
    contracts” based on the promoter’s pre-purchase efforts.14 During this time, the Waco Court of
    Appeals became the first Texas appellate court to address the issue in Griffitts v. Life Partners,
    Inc., No. 10-01-00271-CV, 
    2004 WL 1178418
    (Tex. App.—Waco May 26, 2004, no pet.) (mem.
    op.). Like the D.C. Circuit, the Waco court concluded that Life Partners’ life settlement agreements
    were not investment contracts. 
    Id. at *2.
    Addressing Life Partners’ post-purchase efforts, “such as
    paying the policy premiums and filing evidence of death with the insurance company,” the court
    found that Life Partners merely “holds an investment in anticipation of appreciation or maturity,”
    and performed only “ministerial functions” that “could have no effect on the profitability of the
    policies, which was overwhelmingly determined by how long the insured lived.” 
    Id. Addressing Life
    Partners’ pre-purchase efforts, “such as locating, researching, and
    evaluating the policies,” the court concluded that these actions were analogous to those of the land
    14
    In Ohio, for example, a state court of appeals concluded that the viatical settlements at issue were not
    investment contracts because the promoter’s post-purchase efforts “cannot increase the value of the investor’s
    interests” and the only variable that can impact the profitability of the viatical settlements at issue is the timing of the
    death of the insured. Glick v. Sokol, 
    777 N.E.2d 315
    , 319 (Ohio Ct. App. 2002). The following year, however, another
    Ohio court of appeals concluded that the viatical settlements at issue were investment contracts, in part because the
    investors “had no control over the selection of people whose policies were purchased, the prices paid for the policies,
    the escrow agent who would hold the funds, or any other managerial decision of the company.” Rumbaugh v. Ohio
    Dep’t of Commerce, 
    800 N.E.2d 780
    , 787 (Ohio Ct. App. 2003). In concluding that the promoter’s pre-purchase efforts
    were relevant to the analysis, the Rumbaugh court found guidance in the statute’s “broad policy to prevent fraudulent
    exploitation of the investing public.” 
    Id. at 784.
    See also Siporin v. Carrington, 
    23 P.3d 92
    , 97–99 (Ariz. Ct. App.
    2001) (concluding that similar investments were “investment contracts” because “[t]he pre-sale activities resulted in
    the determination that the viatical settlements that Carrington sold would be profitable. Indeed, no one disputes that
    Carrington’s efforts were ‘the undeniably significant ones, those essential managerial efforts which affect the failure
    or success of the enterprise.’”) (citing Turner 
    Enters., 474 F.2d at 482
    ); Michelson v. Voison, 
    658 N.W.2d 188
    , 190
    (Mich. Ct. App. 2003) (deferring to administrative decision implementing Siporin’s holding in applying Michigan’s
    investment-contract statute); Poyser v. Flora, 
    780 N.E.2d 1191
    , 1196–97 (Ind. Ct. App. 2003) (adopting rule from
    and quoting extensively from Siporin).
    27
    developer defendant that the Texarkana court had concluded did not promote “investment
    contracts” in 
    McConathy, 545 S.W.2d at 873
    . Although the land developer had engaged in pre-
    purchase efforts, such as “‘investigat[ing] the location, zoning and price to fair market value ratio’
    of real estate before organizing and selling joint ventures in the property,” the Texarkana court
    held that the developer “did not undertake managerial efforts that would affect the profitability of
    a venture.” Griffitts, 
    2004 WL 1178418
    , at *2 (quoting 
    McConathy, 545 S.W.2d at 873
    ). Instead,
    “in such a case the enhancement in the value of the land took place by virtue of ‘its location and
    the normal appreciation of neighborhood land values,’ and not because of any efforts by the
    promoters.” Id. (quoting 
    McConathy, 545 S.W.2d at 875
    ). Citing the D.C. Circuit’s Life Partners
    decision and analogizing to the facts of McConathy, the Waco court concluded that “the
    profitability of Griffitts’s interests in life insurance policies is not determined by any managerial
    efforts on the part of Life Partners, but is determined by the mortality of the insureds.” Griffitts,
    
    2004 WL 1178418
    , at *2 (citing Life 
    Partners, 87 F.3d at 545
    46).
    The following year, however, the Eleventh Circuit Court of Appeals reached the opposite
    conclusion in S.E.C. v. Mutual Benefits Corp., 
    408 F.3d 737
    (11th Cir. 2005). Expressly
    “declin[ing] to adopt the test established by the [D.C. Circuit] Life Partners court,” the Eleventh
    Circuit rejected the notion that Howey “require[s] such a clean distinction between a promoter’s
    activities prior to his having use of an investor’s money and his activities thereafter.” Mutual
    Benefits 
    Corp., 408 F.3d at 743
    . Noting that the Supreme Court’s precedent “directs us to broadly
    apply” the statutes “to all ‘schemes devised by those who seek the use of the money of others on
    the promise of profits,’” and relying in part on the D.C. Circuit’s dissenting opinion, 15 the court
    15
    Like the D.C. Circuit’s dissenting judge, the Eleventh Circuit disagreed that there was no precedent in
    which courts relied on “the pre-purchase exercise of expertise by promoters in selecting or negotiating the price of an
    asset in which investors would acquire an interest.” 
    Id. at 74344
    (citing S.E.C. v. Eurobond Exch., Ltd., 
    13 F.3d 1334
    (9th Cir.1994) (involving interests in foreign treasury bonds); Gary Plastic, 
    756 F.2d 230
    (involving interests in
    28
    concluded that “there is no basis for excluding pre-purchase managerial activities from the
    analysis.” 
    Id. (citing Life
    Partners, 87 F.3d at 551 
    (Wald, J., dissenting)).
    The Eleventh Circuit went on to conclude that, in that case, the purchasers “relied heavily”
    on both pre-purchase and post-purchase “efforts of the promoters in making investments in viatical
    settlement contracts profitable.” 
    Id. at 744.
    Regarding pre-purchase efforts, the court found that
    the promoters “selected the insurance policies in which the investors’ money would be placed,”
    “bid on policies and negotiated purchase prices with the insureds,” “determined how much money
    would be placed in escrow to cover payment of future premiums,” and “undertook to evaluate the
    life expectancy of the insureds—evaluations critical to the success of the venture.” 
    Id. If the
    promoter “underestimated the insureds’ life expectancy,” the court noted, “the chances increased
    that the investors would realize less of a profit, or no profit at all.” 
    Id. And regarding
    the promoter’s
    post-purchase efforts, the court concluded that these were also “important” and “managerial,”
    because, “[o]ften, life-expectancy evaluations were not completed until after closing,” and the
    promoter “assumed the responsibility of making premium payments” and “collectively managed
    [the payments] in such a manner that investors were not required to pay additional premiums.” 
    Id. By comparison,
    the court explained, the purchasers performed no managerial tasks other
    than selecting the terms of the policies in which they invested: they “had no ability to assess the
    accuracy of [the promoter’s] representations . . . or the accuracy of the life-expectancy
    evaluations,” and “[t]hey could not, by reference to market trends, independently assess the
    prospective value of their investments in [the] viatical settlement contracts.” 
    Id. Because the
    “investors relied on both the pre- and post-purchase management activities of [the promoter] to
    certificate of deposit program); Glen–Arden, 
    493 F.2d 1027
    (involving investments in warehouse receipts for
    whiskey)).
    29
    maximize the profit potential of investing in viatical settlement contracts,” the court concluded
    that the promoter “thus offered what amounts to a classic investment contract.” 
    Id. D. The
    Texas Test, Clarified and Confirmed
    As we have discussed, many courts throughout the country have addressed the meaning of
    “investment contract,” and several have even addressed whether life settlement agreements are
    investment contracts. In Texas, the Texarkana court held in 1976 that the purchase of an interest
    in a venture to hold a tract of land “for investment and capital appreciation” was not an “investment
    contract” because the “evidence shows only that the parties joined together to purchase land and
    hold it for possible appreciation in value.” 
    McConathy, 545 S.W.2d at 875
    . This Court then
    addressed the issue and adopted the Howey/Forman test in Searsy, in which we held that the
    purchase of commodity options was an investment contract even though “the final decision was
    left to the customer,” because in reality the customer “rarely had any choice but to follow the
    advice given him.” 
    Searsy, 560 S.W.2d at 641
    .
    After Searsy, a few Texas courts addressed the issue under facts similar to McConathy,
    where the purpose of the enterprise was to acquire and sell a tract of land, and those courts reached
    different results depending on the facts of each case.16 Twenty-seven years after Searsy, the Waco
    court held that Life Partners’ life settlement contracts are not investment contracts because “the
    16
    See, e.g., Cross v. DFW S. Entry P’ship, 
    629 S.W.2d 860
    , 864 (Tex. App.—Dallas 1982, no writ)
    (concluding no investment contract because purchaser “failed to show that any managerial or entrepreneurial services
    were expected of [defendant] in [purchaser’s] re-sale or development of the property”); Mayfield v. Troutman, 
    613 S.W.2d 339
    , 343 (Tex. Civ. App.—Tyler 1981, writ ref’d n.r.e.) (distinguishing McConathy and Wilson and holding
    that limited partnership interests in a partnership created to buy and sell a tract of land were “investment contracts”
    because the general partner “actively sought buyers for the property,” “showed it several times to many brokers and
    people,” and “investigated the value of surrounding property in order to determine a price for the partnership property,”
    and thus “did indeed act in a ‘managerial’ capacity and was solely responsible for making the significant decisions
    affecting the success of [the partnership]”); Wilson v. Lee, 
    601 S.W.2d 483
    , 484 (Tex. Civ. App.—Dallas 1980, no
    writ) (adopting McConathy’s reason and holding “that a joint venture interest in raw land, purchased by investors
    whose sole expectations of profit or appreciation rests upon market inflation and not upon the managerial or
    entrepreneurial efforts of others, was not a ‘security’ under the Securities Act”).
    30
    profitability of [the] interests in life insurance policies is not determined by any managerial efforts
    on the part of Life Partners, but is determined by the mortality of the insureds.” Griffitts, 
    2004 WL 1178418
    , at *2 (citing Life 
    Partners, 87 F.3d at 545
    46). And then the Dallas and Austin courts
    rejected the Waco court’s approach in the two cases we address 
    today. 416 S.W.3d at 592
    ;
    ___S.W.3d at ___.
    Having reviewed both the statute’s language and the extensive authorities from Texas and
    throughout the country, we now confirm and clarify, first, that the Texas Securities Act’s definition
    of “securities” must be construed broadly to maximize the protection it provides to investors, while
    focusing on the economic realities of the transaction regardless of any labels or terminology the
    parties may have used. The Act itself expressly supports this approach. See TEX. REV. CIV. STAT.
    art. 581-10-1.B (“This Act may be construed and implemented to effectuate its general purposes
    to protect investors . . . .”); 
    id. art. 581-10-1.A
    (“This Act may be construed and implemented to
    effectuate its general purpose to maximize coordination with federal and other states’ law and
    administration . . . .”).
    Second, in light of these guiding principles and consistent with the uniform constructions
    of the precedents we have discussed, we confirm and clarify that an “investment contract” for
    purposes of the Texas Securities Act means a contract, transaction, or scheme through which a
    person pays money to participate in a common venture or enterprise with the expectation of
    receiving profits, under circumstances in which the failure or success of the enterprise, and thus
    the person’s realization of the expected profits, is at least predominately due to the entrepreneurial
    or managerial, rather than merely ministerial or clerical, efforts of others.
    And third, we hold that the entrepreneurial or managerial efforts that are relevant to this
    inquiry, whether those of the purchasers or of others, include those that are made prior to the
    31
    transaction as well as those that are made after. We reach this conclusion in light of the guiding
    principles we have identified, because we agree that the “bright-line rule” dismissing the relevance
    of pre-purchase efforts “elevates a formal element, timing, over the economic reality of the
    investors’ dependence on the promoter [and] undercuts the flexibility and ability to adapt to ‘the
    countless and variable schemes’ that are the hallmarks of the Howey test.” Life 
    Partners, 87 F.3d at 551
    (Wald, J., dissenting).
    In reaching this conclusion, we are not persuaded by the argument that the Act’s protections
    are unnecessary when the entrepreneurial or managerial efforts occur before the transaction
    because the value of those efforts is incorporated into the purchase price. See, e.g., 
    id. at 54547.
    The Act protects investors against a promoter’s harmful conduct before a sale of securities, as well
    as after. See, e.g., TEX. REV. CIV. STAT. art. 581-7.A (requiring permit and registration before
    offering to sell a security), art. 581-7.B(2)(c) (authorizing Commissioner to act against misleading
    facts “at any time, before or after registration of securities); art. 581-9 (providing protection in
    response to an offer to sell securities); art. 581-22 (regulating offers to sell securities); art. 581-33
    (imposing liability for misleading offers to sell a security). We reject the argument that only post-
    purchase conduct should determine whether these pre-purchase protections apply. We agree that
    the Act’s disclosure requirements provide protection if the purchaser relies predominately on the
    entrepreneurial or managerial efforts of others to receive the anticipated profit, rather than on
    market forces or on the purchaser’s own efforts, even if those efforts occur before the sale. See
    Life 
    Partners, 87 F.3d at 552
    (Wald, J., dissenting) (citing S.E.C. v. G. Weeks Sec., Inc., 
    678 F.2d 649
    , 652 (6th Cir. 1982)).
    We are also not persuaded by the concern that the consideration of pre-purchase efforts
    will transform every traditional land acquisition or purchase for use or consumption into an
    32
    “investment contract,” because we believe the various aspects of the definition we have provided
    are sufficient to ensure that the transaction in question is the type of “investment contract” the Act
    aims to address. The transaction must involve the payment of money, a common enterprise, the
    expectation of profits, and dependence predominately on the entrepreneurial or managerial efforts
    of others to achieve the anticipated profits, and this test “can be met by pre-purchase managerial
    activities of [others only] when it is the success of these activities, either entirely or predominantly,
    that determines whether profits are eventually realized.” 
    Id. at 551
    (Wald, J., dissenting).
    The State suggests that we add additional requirements to this test, allowing, for example,
    for the consideration of pre-purchase efforts only if the promoter or third party also retains some
    continuing post-purchase obligations, such as an obligation to assist the purchaser in selling or
    redeeming the investment in the future. See, e.g., 
    Glen-Arden, 493 F.2d at 1032
    (noting that
    purchasers relied on promoters to redeem investments because there was no secondary market for
    interests in whiskey). We decline to do so. While reliance on such efforts may certainly be relevant
    to whether a transaction is an investment contract, the key question is not when the efforts of others
    take place, but whether they are entrepreneurial or managerial efforts that affect the failure or
    success of the enterprise. The relevance to the Act’s purpose to protect investors is not the timing
    of the efforts but the efforts’ role in the transaction as the factor on which the investor
    predominately relies.
    E.      Life Partners’ Life Settlement Agreements
    Applying this definition to Life Partners’ life settlement agreements, we conclude based
    on the undisputed material facts that they are investment contracts, and thus securities, under the
    Texas Securities Act. The parties do not dispute that the agreements are a transaction through
    which the purchasers pay money to participate in a common enterprise with the expectation of
    33
    receiving profits. Life Partners contends, however, that the failure or success of the enterprise, and
    thus the purchaser’s realization of the expected profits, does not depend on the entrepreneurial or
    managerial efforts of Life Partners or others.
    We disagree. Life Partners is the facilitator and administrator of the investments in life
    settlements through its Power of Attorney. It identifies the insured, negotiates the discount for the
    policy, evaluates the policy’s terms and conditions, and evaluates the health of the insured. It
    purchases the policy and finds purchasers to buy an interest in the policy until all interests are sold.
    These pre-purchase efforts require Life Partners to accurately evaluate the insured’s life
    expectancy and to set the correct purchase price (the discount) to yield a profit based on the
    insured’s life expectancy, future premiums, and end-value of the policy’s benefits. If Life Partners’
    prediction is accurate, the purchaser will receive a profit. Life Partners acknowledges that its
    purchasers “depend upon [Life Partners’] ability to predict life expectancies and set the appropriate
    prices,” and even the D.C. Circuit’s majority agreed that Life Partners’ pre-purchase
    entrepreneurial efforts are “undeniably essential to the overall success of the investment.” Life
    
    Partners, 87 F.3d at 547
    . We agree.
    Moreover, Life Partners’ significant managerial efforts do not end when the sale
    transaction occurs. We do not agree with Life Partners’ characterization of its post-purchase efforts
    as merely ministerial acts that serve only to preserve and protect the investment. See 
    McConathy, 545 S.W.2d at 875
    (“The only management on the part of the managing venturer . . . was that of
    insuring the property, paying the taxes and the like—not for profit, but solely to protect and
    preserve the investment.”). As we and other courts have explained, “managerial” efforts, as
    opposed to ministerial efforts, are actions through which the person exercises oversight, discretion,
    and control over activities and transactions on which the anticipation of profits depends. See
    34
    
    Searsy, 560 S.W.2d at 641
    ; 
    Howey, 328 U.S. at 294
    , 300 (concluding the promoter “manage[d],
    control[ed], and operate[d] the enterprise”); see also 
    Wieboldt, 355 F. Supp. at 261
    (concluding
    that the purchaser’s “given role was not essentially ministerial, but truly active and discretionary”
    and “gave him virtually unfettered control, a situation which is irreconcilable . . . with Howey’s
    definition of an investment contract”); Schultz Cattle 
    Co., 881 F.2d at 134
    , 136; 
    Bailey, 904 F.2d at 923
    ; cf. 
    McConathy, 545 S.W.2d at 876
    (establishing that investors had control over the
    investment). To decide whether efforts are managerial, we must look to the substance and
    economic realities of the transactions. 
    Forman, 421 U.S. at 851
    .
    Here, after the purchase, Life Partners exercises complete control and discretion over the
    investment and the investment’s success. It holds legal title to the policy, monitors the insured and
    the policy premium payments, and collects and distributes the necessary funds. It uses its discretion
    to project the amount necessary to place in escrow to cover the premiums, and is responsible for
    notifying purchasers if additional premiums are required because an insured survives beyond Life
    Partners’ predicted life expectancy. In its discretion, Life Partners advances premiums if the
    purchaser cannot make the additional payments, and may optimize premiums to protect and
    maximize the value of the escrowed funds. Life Partners’ failure to properly project and maintain
    premiums will result in forfeiture of the policy, and therefore, the investor’s profits.
    In addition, Life Partners has complete control over all efforts to monitor the insureds and
    their health status, and the purchasers are unable to do so because of privacy requirements. When
    the insured dies, Life Partners must obtain the death certificate, complete required insurance forms,
    and ensure that the purchasers receive their pro-rata share of the benefits. Life Partners (or its
    designated trustee) is the only party that may cash out the policy and is responsible for timely filing
    the insurance forms. Additionally, Life Partners solely manages the policy payout by dividing and
    35
    distributing it according to each investor’s pro-rata share, using information that only Life Partners
    can access.
    The purchasers have neither the power to complete these tasks nor the information
    necessary to do so, yet they can lose some or all of their anticipated profits if Life Partners fails to
    perform as it has agreed. Even Life Partners acknowledges that purchasers rely on it both before
    and after the interest is purchased. Life Partners’ efforts are not merely ministerial efforts like
    paying taxes to preserve an investment, see 
    McConathy, 545 S.W.2d at 875
    , because Life Partners
    has complete control over the investment and uses its discretion and control to properly manage
    the investment and produce a profit. Without Life Partners’ managerial efforts, the investments
    would fail. Under these facts, we conclude that Life Partners’ post-purchase efforts are managerial,
    not ministerial. Life Partners manages and controls the entire enterprise, from start to finish, both
    before the transaction and after. We conclude, therefore, on the undisputed material evidence in
    this record, that Life Partners’ life settlement agreements are investment contracts, and thus
    securities, under the Texas Securities Act.
    III.
    “Retroactive” Application
    Conditionally and alternatively, Life Partners requests that we give our holding only
    prospective effect, and thus alleviate Life Partners from any liability to the Arnolds or the State in
    these cases based on its prior conduct. In support, Life Partners notes that the Waco court’s 2004
    decision in Griffitts was the only relevant Texas case until the Dallas Court of Appeals’ 2013
    decision in Arnold, and contends it should not be subjected to the Securities Act’s strict liability
    when it was reasonably relying on that decision. In addition, Life Partners suggests that a
    “retroactive” application of our decision would violate the Texas Constitution’s prohibition against
    retroactive laws and several provisions of the federal Constitution.
    36
    In support of its request, Life Partners relies on the Supreme Court’s decision in Chevron
    Oil Co. v. Huson, 
    404 U.S. 97
    (1971), and our decision in Carrollton–Farmers Branch
    Independent School District v. Edgewood Independent School District, 
    826 S.W.2d 489
    , 492, 515
    (Tex. 1992) (“Edgewood III”), to apply the holdings in those cases prospectively only. In Chevron,
    the Supreme Court articulated a three-part analysis for deciding whether to give a holding only
    prospective relief:
     First, the decision to be applied nonretroactively must establish a new principle
    of law, either by overruling clear past precedent on which litigants may have
    relied, or by deciding an issue of first impression whose resolution was not
    clearly foreshadowed.
     Second, [the court] must . . . weigh the merits and demerits in each case by
    looking to the prior history of the rule in question, its purpose and effect, and
    whether retrospective operation will further or retard its operation.
     Finally, [the court must] weig[h] the inequity imposed by retroactive
    application, for where a decision of [the court] could produce substantial
    inequitable results if applied retroactively, there is ample basis in our cases for
    avoiding the injustice or hardship by a holding of 
    nonretroactivity. 404 U.S. at 106
    –07 (citations and quotations omitted).
    We adopted the Chevron test in Edgewood III and elected to apply our decision in that case
    declaring the State’s public school finance system unconstitutional prospectively 
    only. 826 S.W.2d at 521
    . Considering the first Chevron factor, we noted that we had decided an “issue of first
    impression” and that there was “a dearth of caselaw interpreting the constitutional provisions in
    issue, and none of those cases involve circumstances like those presented in this case.” 
    Id. at 520.
    Addressing the second factor, we noted that the “rule in question” was “not a simple one because
    more than one constitutional provision [was] involved.” 
    Id. But the
    effect of our ruling was to find
    provisions of recently enacted Senate Bill 351 to be unconstitutional, and because the State’s
    public school districts had already been collecting taxes as that bill authorized, we acknowledged
    37
    that a retroactive application of our decision would “require a refund of those taxes, [and] the effect
    upon the school system would be devastating” and “so damaging to the school system it could not
    further any purpose of the Constitution.” 
    Id. at 52021.
    Similarly, addressing the third factor, we
    concluded that retroactive application would cause “serious disruption in the education of Texas’
    children.” 
    Id. at 521.
    Applying the Chevron factors here, we reach the opposite result. First, our decision in this
    case does not “establish a new principle of law” by “overruling clear past precedent on which
    litigants may have relied, or by deciding an issue of first impression whose resolution was not
    clearly foreshadowed.” The Texas Securities Act has existed since 1957, and in 1977 we
    announced in Searsy that we must look to federal cases and other authorities, which “broadly
    construe” the term “investment 
    contract.” 560 S.W.2d at 639
    . For decades, as we have explained,
    federal courts and state courts have affirmed and followed the three guiding principles and the
    definition we have described today. If any principle of law is new, it is the principle that the
    relevant “efforts of others” include pre-purchase efforts, yet the Eleventh Circuit announced that
    holding more than ten years ago. Mutual Benefits Corp., 
    408 F.3d 737
    .
    Moreover, although the Waco Court of Appeals held to the contrary the prior year, we do
    not agree that the Griffitts decision makes today’s decision “new.” As a rule, court decisions apply
    retroactively, and the Chevron test provides only an exception to that rule. See State Farm Fire &
    Cas. Co. v. Gandy, 
    925 S.W.2d 696
    , 719 (Tex. 1996); Elbaor v. Smith, 
    845 S.W.2d 240
    , 250 (Tex.
    1992); Edgewood 
    III, 826 S.W.2d at 515
    ; Sanchez v. Schindler, 
    651 S.W.2d 249
    , 254 (Tex. 1983).
    If we must apply decisions only prospectively any time we affirm a court of appeals judgment that
    conflicts with the previous holding of a different court of appeals, the exception would swallow
    the rule. And in any event, because the evidence here establishes that Life Partners’ post-purchase
    38
    efforts were sufficient to meet the Howey/Forman test, our holding on the relevance of pre-
    purchase efforts is not “the rule in question” for purposes of the Chevron analysis.
    Considering the remaining factors of the Chevron test, we believe that retroactive
    application of our holding furthers the operation and enforcement of the Securities Act, and in light
    of the decades of precedent on which we rely, the results impose no inequities on Life Partners.
    See, e.g., Bowen v. Aetna Cas. & Sur. Co., 
    837 S.W.2d 99
    , 100 (Tex. 1992) (per curiam) (holding
    that a prior decision should be given retroactive effect, even though it had overruled five different
    courts of appeals on a matter of statutory interpretation). And finally, in response to Life Partners’
    constitutional concerns, we need only note that our decision merely interprets and applies a very
    old law, consistent with the manner in which other courts have interpreted and applied it for
    decades; it does not create a new one.17 We therefore decline to limit today’s holding to prospective
    application.
    IV.
    “Relief Defendants”
    Finally, we address the arguments of Advance Trust & Life Escrow Services, L.T.A., and
    Purchase Escrow Services, LLC, two Petitioners in Life Partners, Inc. v. State. The State sued
    these Petitioners as “relief defendants,” seeking equitable relief “on the belief that they might hold
    property or assets belonging to Life Partners.” See S.E.C. v. George, 
    426 F.3d 786
    , 798 (6th Cir.
    2005) (“A relief defendant (sometimes referred to as a nominal defendant) may ‘be joined to aid
    the recovery of relief’ and ‘has no ownership interest in the property which is the subject of
    litigation.’”) (quoting S.E.C. v. Cherif, 
    933 F.2d 403
    , 414 (7th Cir.1991)); S.E.C. v. Colello, 139
    17
    Life Partners cites Landgraf v. USI Film Products, 
    511 U.S. 244
    , 247–48 (1994) as support for its
    constitutional concerns, but the issue there was whether the newly passed Civil Rights Act of 1991 applied
    retroactively to a Title VII case then pending on appeal. 
    Id. at 247.
    Here, we do not have a newly passed law but
    merely the interpretation of an existing law.
    
    39 F.3d 674
    , 675–77 (9th Cir. 1998) (same). The trial court entered judgment in favor of these
    Petitioners as well as Life Partners, and on the State’s appeal, Petitioners requested that the court
    of appeals affirm as to them because there was no evidence that “either of them ‘held or retained’
    any property of Life Partners.” ___S.W.3d at ___. The appeals court concluded that “these
    assertions are better suited for the district court’s consideration on remand.” 
    Id. As it
    is not clear
    from the record whether the trial court granted judgment in favor of these Petitioners based on its
    evidentiary findings or on its legal conclusion that life settlement agreements are not securities,
    we agree with the court of appeals.
    V.
    Conclusion
    We hold on this record that Life Partners’ life settlement agreements are investment
    contracts, and thus securities, under the Texas Security Act. We decline to apply this holding
    prospectively only, and in light of our holding, we agree that the trial court should consider the
    relief defendants’ arguments on remand. We affirm the judgments of the Third and Fifth District
    Courts of Appeals.
    _____________________________
    Jeffrey S. Boyd
    Justice
    Opinion Delivered: May 8, 2015
    40
    

Document Info

Docket Number: 05-12-00092-CV

Filed Date: 5/8/2015

Precedential Status: Precedential

Modified Date: 9/30/2016

Authorities (44)

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Fed. Sec. L. Rep. P 95,216 Dallas Banghart and Michael G. ... , 902 F.2d 805 ( 1990 )

fed-sec-l-rep-p-98787-edwin-f-gordon-v-george-a-terry-sr-edwin , 684 F.2d 736 ( 1982 )

securities-and-exchange-commission-v-allen-george-03-3791-carl-e , 426 F.3d 786 ( 2005 )

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