The SEC Lawsuit
In January 2012, the Securities and Exchange Commission (SEC) filed a civil lawsuit against LPHI and its top officers alleging violations of federal securities laws. The case was assigned to U.S. Senior District Court Judge James R. Nowlin.
In January 2014, the case went to trial. The jury found in favor of the defendants on some allegations and against the defendants on some allegations. Judge Nowlin later threw out some and retained some of the jury findings against the defendants.
On December 2, 2014, Judge Nowlin handed down a Final Judgment Order. It was a death sentence for LPHI because the civil penalties imposed on the company were more than twice the company's total assets. Also, Brian D. Pardo, chairman and chief executive officer of LPHI, and R. Scott Peden, general counsel of LPHI, were ordered to pay civil penalties of $6.2 million and $2 million, respectively. (See SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33.)
On December 30, LPHI began the process of appealing the Final Judgment Order. The appeal is in its early stages. (See SEC v. LPHI, U.S. Court of Appeals, Fifth Circuit, No. 14-51353.)
On January 16, 2015, Judge Nowlin handed down a Final Judgment confirming the terms of the December 2 Final Judgment Order. Pardo and Peden were ordered to pay their penalties within 30 days. They were not able to obtain surety bonds or post sufficient collateral to obtain a stay of the Final Judgment pending appeal. The penalties have not been paid. On February 19, the district court placed 20-year liens (subject to renewal) on all real property owned by Pardo and Peden.
On January 20, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. The case was assigned to Judge Nelms. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)
On January 23, the SEC filed a motion for appointment of a Chapter 11 Trustee. The U.S. Trustee and an official committee of unsecured creditors filed similar motions. LPHI opposed the motions, instead seeking the appointment of a chief restructuring officer.
In February and early March, Judge Nelms held a six-day hearing on the motions. On February 18, between two of the hearing days, LPHI made a desperate attempt to avoid appointment of a Chapter 11 Trustee. Pardo resigned from his executive and board positions, and became a consultant. Peden also resigned his executive positions. Colette Pieper, the chief financial officer and not a defendant in the case, was appointed the chief executive officer. At the same time, LPHI also took other actions.
The March 10 Order
The March 10 Order is brief. After referring to the January 23 SEC motion for appointment of a Chapter 11 Trustee, Judge Nelms said:
Finding that service and notice of the Motion and the hearing thereof was sufficient and appropriate under the particular circumstances, the Court having held an evidentiary hearing on this matter on February 9, 10, 12, 17, and 19, and March 3, 2015, and having rendered findings of fact and conclusions of law on the record on March 9, 2015, it is hereby:
ORDERED that the Motion is GRANTED, and it is further
ORDERED that the United States Trustee shall appoint a Chapter 11 Trustee, subject to the Court's approval.
I have not seen the March 9 "findings of fact and conclusions of law" referred to in the Order. When I do, I plan to report on them. Judge Nelms also issued a brief Order denying as "moot" the U.S. Trustee's motion for appointment of a Chapter 11 Trustee.
When the U.S. Trustee makes its appointment, presumably we will learn the identity of the Chapter 11 Trustee. Hopefully we will also learn more than is found in the general language of the federal bankruptcy law about the duties of the Chapter 11 Trustee in this particular case.