Do Life Settlement Statutes Create Private Rights of Action?

Lawyers whose clients participate in the life settlements industry devote significant time to ensuring that their clients strictly adhere to the requirements contained in life settlement laws. For life settlement providers, the rationale is that they do not want to put their licenses at risk and invite regulatory action, as well as not leaving open the possibility of challenges from sellers or their families who might regret having sold the policy. For the funds that purchase and aggregate life settlements, the first rationale is not applicable, but the risk that the provider failed to hew to the letter of the law, thus creating an opening to challenge the fund’s clear title to the policy, is one which has incentivized funds to undertake careful diligence on the underlying purchase transaction to confirm that the providers they use to originate policies are compliant.

This article addresses the statutory framework pursuant to which an individual with “seller’s remorse” can pursue claims for violations, technical or otherwise, of state life settlement statutes with the result that a transaction can be unwound or damages sought from the provider and/or ultimate fund/owner.

What is a Private Right of Action?

Before proceeding further, it is necessary to understand what is meant by a “private right” or “private cause” of action. A private right of action allows an individual or organization to bring a lawsuit in court based on an alleged violation of a law and to seek relief to remedy that alleged violation. If there is no private right of action, only the pertinent government actor (the US Department of Justice (DOJ), state attorneys general, state regulators, etc.) can initiate an action seeking to enforce a given statute, restricting who can sue under it. In the context of life settlements, if the pertinent state regulatory schema does not allow a private right of action, then a regulator such as an insurance department could bring an action to enforce a violation of a settlement law or regulation, but not an aggrieved seller or their family.

A private right of action can either be express or implied. Legislators create an express private right of action when the law explicitly defines that private individuals and groups can file lawsuits pertaining to the legislation at hand.

An implied private right of action is defined by courts rather than the legislators if the law itself is silent on the right of an individual to pursue an action under it. If the legislature does not explicitly spell out who or how individuals can bring lawsuits to enforce the law at hand, it is up to the court system to determine if the pertinent legislators intended for a non-governmental individual or entity to have the ability to pursue relief via the courts. For example, the US Supreme Court recognized that “an implied private right of action” exists under Title VI of the Civil Rights Act of 1964 (prohibiting discrimination under any program receiving federal funds), leaving it “beyond dispute that private individuals may sue” to address allegations of intentional discrimination. Barnes v. Gorman, 536 U.S. 181, 185 (2002).

The NAIC and NCOIL Model Acts

Because life settlements are regulated on a state-by-state basis, whether life settlement statutes create a private right of action must be looked at in the context of each state’s life settlement statute and the pertinent legislature’s intent in enacting it. There are two model acts setting forth a framework for life settlement regulation, The Nation Association of Insurance Commissioners (NAIC) Viatical Settlements Model Act, and the National Conference of Insurance Legislators (NCOIL) Life Settlements Model Act (each, a ‘Model Act’). Because almost all state life settlement regulation is based, in greater or lesser part, on one of the Model Acts, it is worthwhile to see whether this issue is addressed therein. In fact, each of the Model Acts contains language that would appear to create an explicit private right of action by individuals harmed by a violation of such act.

The NAIC Model Act contains the following language:

Section 15 B. “Any person damaged by the acts of a person in violation of this Act may bring a civil action against the person committing the violation in a court of competent jurisdiction.”

And, the NCOIL Model Act provider as follows:

Section 15 B. “Any Person damaged by the acts of another Person in violation of this Act or any rule or regulation implementing this Act, may bring a civil action for damages against the Person committing the violation in a court of competent jurisdiction.”

While, as discussed below, it is not without doubt, the language in these two Model Acts would seem to be an explicit manifestation that “any person” and not just a regulator, can bring an action to seek redress for a violation of the law. Hence, assuming a state legislature has adopted one of the Model Acts largely verbatim, it seems likely that such law does grant an explicit private right of action by individuals harmed by violations thereof.

State Laws

Regulation of the life settlements market is, perhaps, most consistent in its inconsistency. When the laws of the twenty-six most populous US states that regulate life settlements are reviewed, eighteen states have adopted some form of the language from the NAIC or NCOIL Model Act noted above[1], while eight have not.[2]

The fact that neither California’s nor Texas’ settlement law contains the language explicitly permitting a private right of action is remarkable given that they are the two most populous states in the country, and it would be fair to wonder if a court might read an implicit right of action into the statute. As it turns out, the answer is no.

California

In the case of KKMB v. Khader, 2018 WL 6012225 (C.D. California 2018), at issue was a dispute regarding a policy in the amount of $5,000,000 taken out on the life of Noura Shoubash. The Plaintiff alleged that Jason Boutrous, Shoubash’s physician, intentionally gave Shoubash a false diagnosis of Chondrosarcoma and advanced coronary artery disease in order to shorten her life expectancy. The plaintiff purchased the Policy, relying on allegedly false medical records and life expectancy estimates.

There were a number of arguments made by the parties, but most pertinent for this discussion was the defendant’s assertion that the claim for “fraudulent life settlement acts” in violation of California Insurance Code §§ 10113 et seq. should be dismissed because there is no private right of action under California’s life settlement statute.

The court initially noted that there did not appear to be any precedent directly addressing whether a private cause of action exists to challenge a fraudulent life settlement act under the California Insurance Code §§ 10113, et al. (the California Act). It then set out the analytical framework for determining if a statute creates as private of action under the California Act. The court stated that the first step is to look at the language of the statute itself to see if there is a clear indication of an explicit private right of action. If not, then the legislative intent behind the statute must be reviewed to determine if the “[l]egislature has ‘manifested an intent to create such a private cause of action’ under the statute.” Khader, 2018 WL 6012225 at *7 (quoting, Lu v. Hawaiian Gardens Casino, Inc., 50 Cal. 4th 592, 596 (2010)).

In support of its position that there was an explicit private right of action, the plaintiff cited two provisions of the California Act. First, the requirements that contracts and applications for life settlements must “contain the following statement or a substantially similar statement: ‘Any person who knowingly presents false information in an application for insurance or for a life settlement contract may be subject to criminal or civil liability.’” Cal. Ins. Code § 10113.3(t). Second, the plaintiff referenced one of the enforcement provisions of the Act: “The commissioner may, after notice and a hearing at which it is determined that a licensee has violated this section or Section 10113.3 or any order issued pursuant to this section, order the licensee to pay a monetary penalty of up to ten thousand dollars ($10,000), which may be recovered in a civil action.” Cal. Ins. Code § 10113.2(n).

The Court did not find either of these two provisions from the Act persuasive. It noted that the first statement recognizes the potential for civil liability, but fails to describe the mechanism for the liability, and whether an individual is entitled to an action to seek this redress, or if it was the province of the insurance commissioner. Id. The court found the second statement even less persuasive noting that, “if anything, [it] cuts against Plaintiff’s argument in that it gives the commissioner authority to recover a monetary penalty against a licensee in a civil action; it says nothing about a private action by an aggrieved party.” Id.

Not finding a specific right to a private action in the plain language of the statute, the court then determined that it had to examine the California Act’s legislative history to seek evidence of the legislature’s intent. In this inquiry, the Court noted “that the legislature seemed focused on creating a “regulatory framework,” including the establishment of licensing requirements for those operating in the industry. [citation omitted]. The Bill Analyses do not mention private civil actions.” Id. at *8.

Ultimately, the Khader court dismissed the claims asserted under the Act, concluding that “[i]n light of (1) the lack of cases establishing a private right of action, (2) a dearth of guidance on a seemingly silent legislative history, and (3) the equivocal nature of the statutory language, the Court is skeptical that the California legislature intended to create a private right of action to enforce California Insurance Code § 10113.1 et seq.” Id.

Texas

Utilizing essentially the same analysis as the Khader court, the court in Brighthouse Life Insurance Company v. Daboub, 577. F. Supp.3d 504 (N.D.TX 2021), reached a similar conclusion.

The issue came before the court in the context of a Motion to Dismiss Crossclaims filed by Cross-Defendant Coventry First, LLC. The claim against Coventry First alleged it and Wells Fargo violated the Texas Life Settlements Act (the Texas Act) by engaging in fraudulent life settlement acts, prohibited practices, and failing to provide disclosures required under §§ 1111A.012, .014, and .017 of the Texas Act.

Coventry First and Wells Fargo both argued that the Texas Act does not provide a private right of action. The Daboub court noted that, “[u]nder Texas law, a statute creates a private cause of action “only when a legislative intent to do so appears in the statute as written.” Daboub, 577 F.Supp. at 525 (citing Brown v. De La Cruz, 156 S.W.3d 560, 567 (Tex. 2004)). In granting the motion to dismiss, the court looked at other, non-life settlement, provisions of the Texas Insurance Code that do expressly grant a private of action, and then concluded “[t]he Texas Life Settlements Act does not contain a private right of action. See Tex. Ins. Code §§ 1111a.001–.026. At most, the statute provides that the Texas Insurance Commissioner may seek civil remedies of injunctions or cease and desist orders to address violations of the Act. Id. § 1111a.023.” Id.

Other Cases

There is very little case law that specifically addresses situations in which a private action was found, explicitly or implicitly, under a life settlement statute. Although not specifically discussed, in the case Consolidated Wealth Management, LLC v. Short, 414 F.Supp.3d 1011 (S.D. Tex. 2019) it is clear the court, applying West Virginia law, did believe that a private right of action existed.

The court was presented with the following facts: In January 2014, James Short, a resident of West Virginia, entered into a Senior Facilitation Agreement (SFA) with an individual employee of Montage Financial Group (Montage). Montage played no role in the transaction with Mr. Short and was not a party to the SFA. Under the terms of the SFA, Mr. Short agreed to assign his interest interests in the policy for a payment of $25,016. Three days after entering the SFA with Mr. Short, the individual assigned his entire interest in the policy to Consolidated Wealth Management (CWM) for a payment of $37,700.

When Mr. Short passed away several years later, Mrs. Short and CWM made competing claims to the death benefit. As a result, the carrier filed an interpleader action and deposited the death benefit with the court.

Mrs. Short argued that the sale of her husband’s policy violated West Virginia’s viatical settlement law, and was, therefore, unlawful and void.[3] Whereas, CWM argued that under the “natural person” exemption in West Virginia’s law, the individual who purchased the policy was not a “viatical settlement provider” when he entered into the SFA and therefore the SFA was not a “viatical settlement contract” under West Virginia law.

The Court did not discuss whether a private right of action was created under West Virgnia’s Viatical Settlement Act,[4] but ultimately the court rejected CWM’s arguments finding that the natural person exemption was not applicable under the facts in front of it and concluded that the sale of the policy violated the West Virginia viatical settlements act. As a result, the court effectively unwound the sale transaction and awarded the entire death benefit to Mrs. Short. Short, 414 F.Supp.3d at 1019.

An example of a case in which a court did not recognize a private right of action for a claim even where the state’s life settlement did contain the pertinent language from the NAIC Model Act is Southwestern Life Ins. Group v. Morehead, 245 Fed.Appx. 304 (4^th Cir. 2007). Here, the court was presented with a situation in which the Morehead’s, rather than allow the policy on Mr. Morehead’s life to lapse, engaged the Medical Escrow Society, a viatical settlement broker, which solicited bids to sell the policy for cash to an investor. Ultimately, the Robin Hood Group made the Morehead’s an offer of $21,000 for the sale of the policy. After Mr. Morehead passed, Ms. Morehead filed a competing claim for the death benefit, which prompted the carrier to seek a declaratory judgment. After a bench trial, the court declared that the ultimate purchaser of the policy was the rightful owner of the death benefit.

Ms. Morehead appealed to the Fourth Circuit Court of appeals, which found: 1) that the offer by Robin Hood was the highest offer made by any viatical company for the sale of the policy; and 2) the Morehead’s decided to sell the policy, and executed a purchase and sale agreement with Robin Hood; 3) the viatical settlement was fully and satisfactorily performed as contemplated by all parties; and 4) neither of the Morehead’s complained about the terms of the transaction prior to the institution of the litigation.

Looking at the facts as determined by the trial court, the appeals court concluded that “[a]t all times relevant to the viatical settlement transaction, neither Robin Hood nor [the management company] were licensed to conduct business in North Carolina as viatical settlement providers pursuant to N.C. Gen.Stat. § 58-58-210(a) (2002) Also, Robin Hood failed to provide Mr. Morehead with a brochure describing the process of viatical settlements as required by N.C. Gen.Stat. § 58-58-245(a)(8), and failed to use contracts in execution of the viatical settlement that had been approved by the Commissioner of Insurance, as required by N.C. Gen.Stat. § 58-58-220.” Morehead, 245 Fed.Appx at 306.

The court presented the question in front of it as, “whether, under North Carolina law, a party to a fully executed contract may rescind it on the basis of the other contracting party’s failure to comply with licensing and similar regulatory statutes, which statutes do not expressly create such a private right of action.” Morehead, 245 Fed.Appx. at 306 (emphasis added). After considering the facts and the law, the Fourth Circuit concluded that “North Carolina case law clearly and directly answers the posited question in the negative.” Id. (citing Hawkins v. Holland, 97 N.C.App. 291, 388 S.E.2d 221, 223 (1990)).

In light of the provisions of N.C.G.S.A. § 58-58-290(b), “Any person damaged by the acts of a person in violation of this Part may bring a civil action against the person committing the violation in a court of competent jurisdiction,” one might think the court would have reached the opposite conclusion, and determine that a private right of action did exist under North Carolina law in this instance.

To reach its conclusion, rather than focus on the general question of whether a private right of action exists under the North Carolina Settlements Act, the court focused instead on the specific claim made by Mrs. Morehead, which the court characterized as, “attempting to recover moneys still owing to them under the tainted agreement…Morehead is trying to recover back the consideration she and her late husband voluntarily parted with as part of their performance under the Viatical Settlement Agreement, after receiving the full benefit of their bargain.” Id.

Because of the nature of the claim asserted by Ms. Morehead, the court determined that notwithstanding that “the relevant regulatory enactment provides for ample penalties and enforcement mechanisms, that “not one of [those remedies] is a private right of action for annulment and avoidance of a concluded transaction…In sum, we conclude that appellees’ technical violations of North Carolina’s Viatical Settlement Act neither entitle Morehead to unwind the viatical transaction after it has been fully executed and satisfactorily performed, nor give rise to a claim at law where she can prove no actual injury.” Id. at 307.

Conclusion

While there is a paucity of case law directly addressing the issue, what precedent there is suggests that courts are more likely to find a private right of action exists under a life settlements statute where language, such as that contained in the Model Acts, explicitly permits “any person” to seek redress for a violation of the act. As shown by the Morehead decision, however, even when the pertinent language is contained in the statute, the plaintiff still must articulate a claim that is sufficiently specific that it falls within a violation of the statute that has a direct connection to the injury alleged to have been suffered.

In sum, in light of the distinct possibility of that an aggrieved seller could seek to unwind a sale transaction on the basis of a violation of the underlying statute, it is prudent that the funds that aggregate life settlements continue to insist that the providers they use strictly follow the provisions of the pertinent life settlements law, or potentially suffer the consequences for their failure to do so.

James W. Maxson is Partner at EM3 Law