IN THE SUPREME COURT OF TEXAS

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NO. 14-0122

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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

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ON PETITION FOR REVIEW FROM THE

COURT OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS

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~ consolidated for oral argument with ~

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NO. 14-0226

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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

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ON PETITION FOR REVIEW FROM THE

COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS

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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 
2

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 others3had 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).
3

“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.”
4

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 
5

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.
6

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.
7

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.
8

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 wellestablished 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.”
9

“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”).
10

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 
11

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 
12

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 
13

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 
14

purchaser’s request. Id. at 391. Based on the original purchase price and the fixed monthly leaseback 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 
15

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)).
16

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. 
17

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 
18

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” 
19

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 
20

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 
21

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 
22

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 
23

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’ postpurchase 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”).
24

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 “prepurchase 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 
25

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
26

“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 prepurchase 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.
27

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).
28

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 prepurchase 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 
29

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)). 
30

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”).
31

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 
32

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 postpurchase 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 
33

“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 
34

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 
35

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 
36

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.
37

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 
38

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 
39

efforts were sufficient to meet the Howey/Forman test, our holding on the relevance of prepurchase 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.
40

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