Friday, March 13, 2015

No. 89: Life Partners—The Bankruptcy Court Judge Comes Down Hard on the Company's Former Management

In No. 88 posted March 12, I reported that, on March 10, U.S. Bankruptcy Court Judge Russell F. Nelms granted the motion of the Securities and Exchange Commission (SEC) and ordered the U.S. Trustee to appoint a Chapter 11 Trustee for Life Partners Holdings, Inc. (LPHI). I also said I had not seen Judge Nelms' findings of fact and conclusions of law referred to in his Order. I now have the 32-page transcript of the 48-minute March 9 hearing at which Judge Nelms placed his findings of fact and conclusions of law on the record.

The Hearing
In attendance at the hearing, in person or by telephone, were attorneys representing the SEC, LPHI, certain LPHI shareholders, the U.S. Trustee, an ad hoc committee of investors in fractional interests, Advance Trust & Life Escrow Services, the Official Committee of Unsecured Creditors, and plaintiffs in the Arnold case. Also in attendance were an investor in fractional interests, two monitors, and the reporter.

Judge Nelms explained five principles that guided him in his ruling. He discussed the judgment handed down by Senior U.S. District Court Judge James R. Nowlin in the SEC lawsuit against LPHI, Brian D. Pardo, and R. Scott Peden, the jury findings in the case, and a series of issues in the case. Among those issues are the continued use (until February 2015) of life expectancy estimates by Dr. Cassidy, the ministerial fees imposed in 2014, the continued payment of dividends to LPHI shareholders in recent years (even in September 2014), the level of Pardo's compensation in recent years, the continued subservience of the LPHI board of directors to Pardo, and the most recent 8-K (material event) report and the accompanying letter and press release that created "panic" among investors in fractional interests. In summary, Judge Nelms said:
Finally, cause exists and the best interests of all parties would be served by appointing a trustee because someone needs to come into this case and calm the waters. In the last three months, a $40 million judgment has been entered against the Debtor, the Debtor has filed bankruptcy, Pardo and Peden have resigned, and the Debtor told creditors that a trustee would likely pool their interests. Naturally, investors and shareholders are concerned. Premiums are at risk. Someone needs to come into this case and assure everyone that they have a voice and that voice will be heard. And that message needs to come from someone who does not sound like they are contradicting themselves.
Finally, someone needs to come into this case and remind every party in interest of the role that this Court plays in this process. Nothing outside of the ordinary course of business is going to happen to this Debtor without this Court saying so. And this Court will not say so without according to all parties their rights under the law, including their rights of due process.
So, for these reasons, I will grant the SEC's motion to appoint a trustee.
General Observations
I came away from reading the transcript with the belief that Judge Nelms has provided a strong statement of the need for a Chapter 11 Trustee in the LPHI case. I also believe that the best way for readers to understand the matter is to read the transcript for themselves.

Therefore I am offering a complimentary 32-page PDF containing the transcript of the hearing. Send an e-mail to and ask for the transcript of the Nelms March 9 hearing in the LPHI case.