Thursday, January 22, 2015

No. 81: Life Partners Files for Bankruptcy in an Effort to Prevent Court Appointment of a Receiver

In five recent posts, I discussed developments after U.S. Senior District Court Judge James R. Nowlin issued a Final Judgment Order (FJO) on December 2 in a lawsuit filed by the Securities and Exchange Commission (SEC) against Life Partners Holdings, Inc. (NASDAQ:LPHI). The FJO is a death sentence for LPHI, which is a company in the secondary market for life insurance. The FJO imposed huge penalties on the company—twice its total assets—and large penalties on its two top officers: Brian D. Pardo, chairman and chief executive officer; and R. Scott Peden, general counsel. Here I discuss further developments, including LPHI's recent filing for bankruptcy in an effort to prevent the district court from appointing a receiver. (SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33; In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)

The SEC Motion for Appointment of a Receiver
Previously I said the SEC filed a motion on January 5 asking Judge Nowlin to appoint a receiver for LPHI, and recommended an individual who is ready to go to work immediately. LPHI filed two briefs in opposition to the SEC's motion, and the SEC filed two briefs in response to LPHI's opposition. A hearing on the SEC's motion was set for January 14 and later postponed until 2:00 p.m. on January 21.

More on the Recent 10-Q Report
Previously I said LPHI, on the January 14 due date, filed its 10-Q report for the fiscal quarter ended November 30, 2014. I offered readers an excerpt from the report: the section on "Legal Proceedings," in which LPHI finally disclosed the FJO. However, I did not mention these two sentences that are buried in the 10-Q report, and that take on new significance in the light of LPHI's bankruptcy filing:
In a Board of Directors meeting held on January 12, 2015, the Board discussed the motion by the Securities and Exchange Commission for the appointment of a receiver for us and our affiliates as part of its effort to enforce the judgment it secured against us and the various consequences that could arise from such an appointment by the Federal Court. The Board was of the unanimous belief that if we cannot get this resolved in a manner favorable to us, we may have to seek protection under Chapter 11 of the Bankruptcy Code.
Chapter 11 of the federal bankruptcy law provides a company with protection from creditors while the current management continues to operate the company under the jurisdiction of the bankruptcy court. In this case, however, the SEC believes that the current management cannot be trusted to operate the company to protect the interests of the creditors, including investors in fractional interests in life settlements.

Judge Nowlin's January 16 Orders
Previously I said LPHI and the SEC filed motions to alter or amend the FJO. The SEC motion was to require Pardo to pay a $13.3 million reimbursement to LPHI in accordance with section 304 of the Sarbanes-Oxley Act of 2002. On January 16, Judge Nowlin issued an order in which he found no basis to alter or amend the FJO, and he therefore denied both motions. He also acknowledged he had failed to enter a "separate form of judgment" at the time of the FJO. On the same day, therefore, he issued a final judgment reiterating the terms of the FJO. He ordered LPHI to pay the penalties within 14 days of the final judgment, and he ordered Pardo and Peden to pay the penalties within 30 days of the final judgment.

LPHI's January 20 Bankruptcy Filing
On January 20, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. The filing included a list of 67 creditors with amounts not shown, and a list of the 20 largest creditors with amounts shown. Here, as contrasted with the $20.3 million of total assets shown in the latest 10-Q report, are the six largest creditors (amounts in parentheses) totaling just under $40 million: SEC ($38,700,000), Baker & McKenzie LLP ($1,058,954), Alexander Dubose Jefferson & Townsend LLP ($85,830), Whitley Penn LLP ($51,000), Michael J. Legamaro PC ($45,225), and Nasdaq Stock Market ($40,000).

January 20 Filings in the District Court
On January 20, there were four filings in the district court. First, LPHI, Pardo, and Peden filed an amended notice of their plan to appeal the final judgment to the U.S. Court of Appeals for the Fifth Circuit.

Second, LPHI filed a "Suggestion of Bankruptcy." This was a notification to the district court that LPHI had filed a voluntary petition for bankruptcy under Chapter 11 of the federal bankruptcy law.

Third, the SEC filed a response to LPHI's "Suggestion of Bankruptcy." The SEC attorney said contact had been made with LPHI's attorney, who said no representative of LPHI intends to participate in the January 21 hearing on the SEC motion for appointment of a receiver and on the LPHI motions for alternative security. LPHI's attorney also told the SEC that appointment of a receiver would violate the bankruptcy stay. In its response, the SEC said "there is ample support in this Circuit for the appointment of a Receiver even after a judgment debtor files bankruptcy." The SEC said it continues to urge its motion for appointment of a receiver and intends to present argument and evidence at the January 21 hearing.

Fourth, LPHI filed an "Amended Suggestion of Bankruptcy." LPHI took the position that Chapter 11's automatic stay prohibits any hearing on the SEC's motion for appointment of a receiver unless the bankruptcy court modifies the automatic stay. LPHI informed the SEC by letter of its position, and attached the letter as an exhibit. In the letter, LPHI said that, "if the SEC does in fact proceed with the hearing set tomorrow on the Motion, LPHI will view this as an intentional violation of the automatic stay," and would then seek relief from the bankruptcy court.

January 21 Developments
The district court hearing on January 21 was held before U.S. Magistrate Judge Andrew W. Austin. He took "under advisement" the motions concerning the appointment of a receiver and the motions concerning the type of security to be posted by LPHI in lieu of a bond.

In the federal bankruptcy court, there were numerous filings. One was LPHI's motion seeking appointment of an "examiner with expanded powers." LPHI recommended appointment of Tracy A. Bolt, an executive consultant. The motion suggests the examiner would provide advice on such matters as compliance with securities laws, but the exact duties will have to be worked out with the bankruptcy court. LPHI also is seeking an expedited hearing on its motion for the appointment of an examiner.

LPHI Share Prices
LPHI's closing share price declined after the FJO—from $1.43 on the day of the FJO, to $1.10 the next day, to 67 cents on December 31, and to 54 cents on January 16. The next trading day was January 20, the day of LPHI's bankruptcy filing. Trading was halted temporarily that day, but then resumed trading and closed at 18 cents on very heavy trading of almost 500,000 shares. The shares closed at 25 cents on January 21 in very heavy trading of more than 400,000 shares.

General Observations
At this writing, on the evening of January 21, I do not know how the duties of the proposed examiner compare with the duties of the receiver proposed by the SEC. Clearly LPHI wants current management to operate the company with advice from the examiner, rather than to have a receiver operate the company. How this will work out remains to be seen.

Meanwhile, I offer a complimentary 19-page PDF consisting of five documents: (1) Judge Nowlin's 2-page January 16 Order, (2) Judge Nowlin's 3-page January 16 Final Judgment, (3) LPHI's 5-page Suggestion of Bankruptcy, (4) SEC's 3-page Response to LPHI's Suggestion of Bankruptcy, and (5) LPHI's 6-page Amended Suggestion of Bankruptcy, including the exhibit. Send an e-mail to and ask for the SEC-LPHI January 21 package.