A Recent Fifth Circuit Court of Appeals Opinion Provides Insight for Practitioners on Bankruptcy Claims

August 26 2019| News| | By Okin Adams

The law of pleading standards can be highly nuanced. For practitioners bringing or defending claims of fraudulent transfer, preference, equitable subordination, negligent misrepresentation, or breach of fiduciary duty, the Fifth Circuit’s recent decision in the Life Partners bankruptcy saga is a must-read. Writing for the panel of three judges, Judge Jennifer Walker Elrod lays out in detail in Life Partners Creditors’ Trust v. Cowley the standards for pleading several types of claims that are familiar to all bankruptcy litigators.


The company’s business model is important to understanding the appellate issues before the Fifth Circuit Court of Appeals (the “Court”). Founded in 1991, Life Partners, Inc. and its affiliates (“Life Partners”) was established for purpose of selling investments in life insurance policies that the insureds had sold to third parties. First, the company paid a discounted lump sum price for elderly or ill persons to purchase life insurance policies. Life Partners then recruited licensees to sell fractional interests in these life insurance policies to investors. Specifically, investors paid for the right to receive the proceeds from the policies upon the death of the insured.

In order for the scheme to work, Life Partners needed the purchase price and future policy premiums for any given policy to be less than the death benefits provided when the covered individual passed away. Over a twelve-year period, Life Partners raised more than $1.8 billion from investors. However, advances in medicine combined with the continued use of flawed life expectancy estimates in the mid-2000s resulted in some bad investments, and the company eventually found itself in a precarious situation. Despite being insolvent, Life Partners continued depleting its resources through large commissions to licensees and distributions to insiders. Thus, Life Partners needed to continuously recruit new licensees to keep their Ponzi-like businesses funded. Finally, in 2015, litigation, government investigations, and the resulting publicity issues from the scheme led to a massive chapter 11 bankruptcy filing with multiple debtors, and a chapter 11 trustee was appointed for the Life Partners entities. The chapter 11 trustee filed various adversary proceedings, including some against certain licensees (“Licensees”) to recover their commissions. After the debtors’ plan was confirmed, the trustee (“Trustee”) of a liquidating trust established by the plan took over the prosecution of those adversary proceedings.

In one particular adversary proceeding discussed herein, the Trustee’s third amended complaint (“Complaint”) and supporting exhibits amounted to more than 400 total pages and set out 12 separate causes of action. Many of the defendant’s Licensees filed motions to dismiss the Complaint. The district court withdrew the reference but referred the motions to the bankruptcy court. After two hearings on the motions, the bankruptcy court recommended dismissal of the Trustee’s fraudulent transfer claims, the preference claim, the negligent misrepresentation claim, and the breach of fiduciary duty claim. However, the bankruptcy court recommended the Trustee be granted leave to amend the Complaint. Despite this recommendation, the district court dismissed all of the Trustee’s claims against the Licensees with prejudice and declined to permit further amendment of the Complaint. The district court also dismissed the Trustee’s subsequent motion for reconsideration of the denial of leave to amend.


The Trustee appealed the district court’s determinations to (i) grant the Licensees’ motions to dismiss, (ii) deny the Trustee leave to amend the Complaint, and (iii) deny the Trustee’s motion for reconsideration. In its 34-page opinion, the Court reinstated much of the Trustee’s Complaint. The crux of the opinion is an analysis of whether the pleading standards of Rule 8(a) or Rule 9(b) of the Federal Rules of Civil Procedure applied to the claims set forth in the Trustee’s Complaint.

As explained by the Court, Rule 8(a) requires a complaint to contain a short and plain statement of the claim showing the plaintiff is entitled to relief. Fed. R. Civ. P. 8(a)(2). This means that a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 768 (2009). Plausible claims are those for which the allegations in the complaint allow the court to draw a reasonable inference that the defendant is liable. Id.

In cases where a plaintiff alleges fraud or mistake, however, Rule 9(b) imposes a heightened pleading standard of “particularity” upon the plaintiff. Fed. R. Civ. P. 9(b). In other words, the complaint must allege the “time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby.” Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994). Courts interpret this as the who, what, when, where, and why of the alleged fraudulent conduct. See Id.

  • Actual Fraudulent Transfer

During the case, the Trustee argued that Rule 8(a)’s pleading standard applied to actual fraudulent transfer claims, as opposed to the heightened standard of Rule 9(b). The bankruptcy court had agreed that Rule 8(a) was appropriate, but the district court applied Rule 9(b). On appeal, the Court explained that the pleading standard for actual fraudulent transfer claims is actually unsettled law in the Fifth Circuit, and the other circuits are either split or undecided, as to whether Rule 9(b) applies. However, because the Court found the Trustee’s allegations sufficient under either standard, it chose not to “weigh in on this vexing question.”

With respect to Rule 8(a), the Court found that the actual fraud claims were sufficient because in a “Ponzi-like” scheme such as Life Partners, a plaintiff is not required to identify which entity made the fraudulent transfer. Further, the Complaint alleged the “badges of fraud” set forth in the actual fraudulent transfer statute.

Perhaps more importantly, the Court also found that the Complaint satisfied Rule 9(b)’s heightened pleading standards requiring “particularity” in cases of fraud or mistake. Specifically, the exhibits to the Complaint set out the details of the alleged transfers, “and the Complaint itself contains pages of allegations detailing the underlying fraudulent scheme.” As a result, the Court reinstated the claims for actual fraudulent transfer, except to the extent that a portion of those claims were time-barred as a matter of law.

  • Constructive Fraudulent Transfer

Circuit courts are also split as to which pleading standard applies to constructive fraudulent transfer claims. The Fifth Circuit is yet to decide whether the more strenuous standard of Rule 9(b) should apply, but district courts within the Fifth Circuit have “suggested” that only Rule 8(a) applies. Citing a persuasive opinion from Judge Lynn in the Northern District of Texas, the Court acknowledged that a transaction can be constructively fraudulent without the transferor having fraudulent intent and therefore only Rule 8(a) need be applied. Conversely, the Court explained that two other circuits apply Rule 9(b) to constructively fraudulent transfer claims. Once again, however, the Court found that the Trustee’s claims for constructively fraudulent transfers under the Texas Uniform Fraudulent Transfer Act and Section 548(a)(1)(B) of the Bankruptcy Code met both pleading standards. First, the Complaint satisfied Rule 8(a) because it plausibly alleged that the Life Partners entities were (i) insolvent for much of their existence, and (ii) did not receive reasonably equivalent value in furtherance of the fraudulent Ponzi-like scheme. Notably, the Court reaffirmed its position from Warfield v. Byron, 436 F.3d 511 (5th Cir. 2006) that providing services in furtherance of a Ponzi-scheme does not confer reasonably equivalent value as a matter of law.

Second, the Court found that even if the standards of Rule 9(b) were applied, the allegations would still survive because they were made with sufficient particularity. Thus, except for the time-barred claims, the constructively fraudulent transfer claims were sufficient under either standard and reinstated by the Court.

  • Preferential Transfer

The Court found that the Trustee’s preferential transfer claims did not pass muster. That Rule 8(a)’s pleading standards applied to the Trustee’s preference claims was not in dispute by the parties. However, in order to adequately plead a preferential transfer claim, a plaintiff must allege the elements set forth in section 547(b) of the Bankruptcy Code. Among the elements required by that section is an allegation that the preferential transfer enabled the creditor to receive more than it would have received if the bankruptcy case was filed under chapter 7 of the Bankruptcy Code. See 11 U.S.C. § 547(b)(5)(A). Here, the Complaint did not plead any facts to explain what the Licensees would have received in a chapter 7 case. Lacking this essential element, the Court upheld the district court’s dismissal of the claim.

  • Equitable Subordination

Next, the Court clarified that Rule 9(b) is not the correct pleading standard for equitable subordination claims. Although the district court dismissed the claims by applying 9(b), the Court, en route to affirming the dismissal, stated that only Rule 8(a) applies because “equitable subordination claims, by their nature, do not require the establishment of fraud by the defendant.” Rather, only inequitable conduct need be demonstrated under the standard of Rule 8(a). Nevertheless, the Trustee’s conclusory allegations in the Complaint did not adequately address the elements of the claim because it did not allege the Licensees were fiduciaries—or that they controlled the debtors—and the district court’s dismissal was affirmed.

  • Negligent Misrepresentation

Unlike the fraudulent transfer claims which relied on allegations related to commissions paid to Licensees, the allegations of negligent misrepresentation in the Trustee’s Complaint relied on the offering materials supplied by the Licensees to potential investors. The Court cited Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 723 (5th Cir. 2003) to explain that the Fifth Circuit does not normally apply Rule 9(b) to negligent misrepresentation claims. However, that standard has been applied in situations where the claims were based on fraudulent conduct and the parties did not urge a “separate focus” for the negligent misrepresentation claims. Because there were factual allegations in the Trustee’s Complaint that were a “separate focus” from the facts supporting fraudulent transfer, the Court found that the heightened pleading standard should not apply. Specifically, the Trustee’s negligent misrepresentation claims relied on the offering materials as opposed to the commission paid to the Licensees. Given this different set of facts, the Court applied Rule 8(a)’s pleading standard and found that the allegations in the Complaint were sufficient. As a result, the district court erred in its dismissal of the claim.

  • Breach of Fiduciary Duty

The parties disagreed as to the application of Rule 9(b) to breach of fiduciary duty claims based on fraud. Although the Court noted that Rule 9(b) could be applied to breach of fiduciary duty claims predicated on fraud, it found that the Trustee’s claims for breach of fiduciary duty were not based on fraud, and instead relied on the Licensees’ failure to exercise reasonable care (i.e. negligence). Therefore, only Rule 8(a) should apply in the absence of a claim predicated on fraud. To establish its breach of fiduciary claim under Texas law, the Trustee needed to show (1) the existence of a fiduciary duty, (2) breach, (3) causation, and (4) damages. The Fifth Circuit has recognized that brokers owe their customers a fiduciary duty. However, the Trustee’s Complaint did not contain facts sufficient to support the plausible existence of a fiduciary duty. As a result, the Court upheld dismissal of this final cause of action because the Complaint failed to sufficiently allege the nature of the fiduciary duty owed.


The Fifth Circuit’s opinion in Life Partners Creditors Trust v. Cowley is a primer for federal practitioners on applicable pleading standards for several common types of bankruptcy-related claims. While the Court declined to choose sides on certain circuit splits regarding fraudulent transfer, it still provided an abundance of helpful insight on strategies for surviving motions to dismiss. Practitioners would be wise to give this opinion a thorough review.