Wednesday, January 28, 2015

No. 82: Life Partners—Bankruptcy Court Developments

In six recent items beginning with No. 75, 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. (LPHI). The FJO was a death sentence for LPHI, which is in the secondary market for life insurance, because the penalties imposed were twice LPHI's total assets. Large penalties were also imposed on LPHI's two top officers: Brian D. Pardo, chairman and chief executive officer; and R. Scott Peden, general counsel. (SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33.)

In No. 81, I said LPHI filed for bankruptcy on January 20. Here I discuss important filings in the bankruptcy court since then. (In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)

SEC District Court Motion for Receiver
In No. 79, I said the SEC filed a motion on January 5 asking the district court to appoint a Receiver, and recommending a person who was ready to go to work immediately. A magistrate judge held a hearing on the motion on January 21. SEC representatives attended, but LPHI representatives did not. LPHI had said after its bankruptcy filing that no LPHI representatives would attend the hearing. According to the first of the SEC's two January 23 filings (discussed later),
the magistrate judge directed the SEC staff to seek emergency expedited relief from this Court [the bankruptcy court] in the first instance, with an invitation to renew the motion in the District Court at a later date.
LPHI Bankruptcy Court Motion for Examiner
In No. 81, I said LPHI filed a motion on January 21 asking the bankruptcy court to appoint an "examiner with expanded powers." LPHI recommended appointment of Tracy A. Bolt, an executive consultant. The two escrow agents used by LPHI filed responses in support of LPHI's motion. Also, Bolt filed a declaration in support of LPHI's motion.

Throughout its motion, LPHI refers to Judge Nowlin's FJO as the "SEC Judgment." In No. 79, I said Pardo was caught on tape telling members of his sales staff that Judge Nowlin did not write the FJO, but that the SEC wrote it and somehow arranged for Judge Nowlin to sign it.

SEC Opposition to the LPHI Motion for Examiner
On Friday, January 23, the SEC filed an opposition to LPHI's motion. The SEC characterized LPHI's proposed self-selected "examiner with expanded powers" as an "examiner with diminished power." The SEC also said it was preparing a motion for the bankruptcy court to appoint a Chapter 11 Trustee, and would file the motion either later that day or not later than Monday, January 26.

SEC Motion for Appointment of Chapter 11 Trustee
Later on January 23, the SEC filed its motion asking the bankruptcy court to appoint a Chapter 11 Trustee. Attached were many exhibits in support of the SEC's argument that LPHI's current management cannot be trusted to manage the company in the interests of creditors, including owners of fractional interests in life settlements. In the motion, the SEC expressed concern that the bankruptcy involves only LPHI, and not its two subsidiaries. One is Life Partners, Inc. (LPI), which is LPHI's operating subsidiary. The other is LPI Financial Services, Inc., which was created recently to receive the new ministerial fees.

U.S. Trustee Filings
The U.S. Trustee Program is part of the U.S. Department of Justice and oversees the administration of bankruptcy cases. On January 25, the U.S. Trustee's Dallas office filed an objection to LPHI's motion for appointment of an examiner. On January 26, the U.S. Trustee filed a motion asking the bankruptcy court to appoint a Chapter 11 Trustee.

Both motions filed by the U.S. Trustee refer to Judge Nowlin's FJO as the "SEC Judgment." The language probably came from the previously mentioned filing by LPHI, and may suggest that the U.S. Trustee has not yet learned to be wary about relying on LPHI documents.

LPHI Press Release about NASDAQ
On January 26, LPHI issued a press release disclosing it received a letter from the NASDAQ staff on January 20 informing the company that the bankruptcy filing placed LPHI in violation of NASDAQ listing rules, and that LPHI shares therefore will be delisted. LPHI said that it plans to appeal the ruling, and that, if the appeal is not successful, LPHI shares may be eligible to be quoted on the Pink Sheets if a market maker applies to perform that function and is approved.

LPHI 8-K Filing
On January 26, LPHI filed an 8-K (material event) report with the SEC. Attached are two press releases—the January 20 release about the bankruptcy filing and the January 26 release about receipt of the January 20 letter from the NASDAQ staff. This is the first 8-K filing by LPHI since the September 2014 good news announcement of a five-cent quarterly dividend for shareholders.

Incident in the Willingham Lawsuit
In No. 78, I mentioned the Willingham lawsuit against LPI by 158 owners of fractional interests in life settlements. The case was set for trial beginning early in February 2015.

Royce West is a Dallas attorney whose "primary focus areas," according to his website, include "public finance, business transactions, school law and white-collar criminal investigations." He has been a Texas state senator since 1993. On December 2, 2014, he filed a notice of appearance to represent LPI as its attorney. On January 7, 2015, LPI filed a motion for a "legislative continuance," which is a postponement of the proceedings so that an attorney can tend to legislative business. LPI said the legislative session was to begin January 13 and continue until about June 1. LPI, citing a Texas rule, asked for a postponement until 30 days after the end of the legislative session. Although the attorney for the plaintiffs opposed the motion, the judge granted the motion. Thus LPI won a five-month postponement of the trial, from early February to early July. It will be interesting to see whether West remains LPI's attorney after the postponement. (Willingham et al. v. LPI et al., 191st Judicial District Court, Dallas County, Texas, DC-11-10639 and MDL 13-0357.)

I am not an attorney, and I do not know whether it is ethical for an attorney who is also a legislator to allow himself to be used by a litigant to win the postponement of a trial. As a layman, however, I think it is a clever trick that reflects badly on the legal profession.

The Plight of One Owner of Fractional Interests
Several owners of fractional interests in life settlements have contacted me about their problems, and one provided some details. The person had four fractional interests purchased in 1994. One insured had a life expectancy of 18 months and died after 12 years. Another insured had a life expectancy of 24 months and died after 17 years. The other two insureds had life expectancies of 24 months and 36 months, and they are still alive after more than 20 years.

General Observations
At this writing, on the evening of January 27, it remains to be seen whether LPHI will be run during the bankruptcy proceedings by its current management with supervision by an appointed examiner, or whether it will be run by an appointed trustee. I think Judge Russell F. Nelms of the bankruptcy court will make the decision soon.

Meanwhile, I offer a complimentary 54-page PDF consisting of five documents: (1) LPHI's 15-page January 21 motion for appointment of an examiner, with exhibit; (2) SEC's 8-page January 23 opposition to LPHI's motion, without exhibits; (3) SEC's 18-page January 23 motion for appointment of a Chapter 11 Trustee, without exhibits; (4) U.S. Trustee's 11-page January 26 motion for appointment of a Chapter 11 Trustee; and (5) LPHI's 2-page January 26 press release about the delisting by NASDAQ. Send an e-mail to and ask for the SEC-LPHI January 27 package.