Friday, April 15, 2016

No. 156: Life Partners—Trustee Moran, Unsecured Creditors, and Class Action Plaintiffs File Joint Motion to Settle Bankruptcy Case

Life Partners Holdings Inc. (LPHI) and its subsidiaries Life Partners Inc. (LPI) and LPI Financial Services Inc. (LPIFS) participated for years in the secondary market for life insurance. On January 20, 2015, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. On January 30, the U.S. Trustee appointed an Official Committee of Unsecured Creditors (committee) to represent investors in fractional interests in life settlements that LPI had sold. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

Other Developments Early in 2015
On March 13, the U.S. Trustee appointed H. Thomas Moran II as Chapter 11 Trustee. On March 19, the bankruptcy court judge approved Moran's appointment. On April 7, the judge allowed Moran to expand the bankruptcy filing to include LPI and LPIFS. On May 20, Moran filed a declaration containing a preliminary report of his investigation of the alleged fraudulent activities of the debtors (LPHI, LPI, and LPIFS) and their top officers that preceded the bankruptcy filing.

Recent Developments
On November 28, 2015, Moran and the committee filed a Plan of Reorganization. On January 19, 2016, they filed an Amended Plan of Reorganization. On March 24, they filed a Second Amended Plan of Reorganization.

The Joint Motion
On April 1, 2016, Moran, the committee, and the plaintiffs in a recently consolidated class action lawsuit filed a 44-page "Joint Motion to Compromise Class Action Controversies, to Approve Plan Support Agreement, and for Related Relief." The joint motion, which grew in part out of the previously mentioned Second Amended Plan of Reorganization, is a proposal to settle the bankruptcy case. (For the recent class action lawsuit, see Garner v. LPI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-04061.)

The parties to the joint motion say "the proposed settlement is fair and equitable," is "in the best interests of the estates of the Debtors," resolves "pending disputes," and provides "meaningful compensation and recovery to approximately 22,000 investors ... who have been so grievously damaged by the Debtors' pre-petition activities." The parties to the joint motion also believe that the proposed settlement enables the unsecured creditors to "recover more than they are likely to recover under any realistic alternative scenario."

The joint motion describes the bankruptcy case, the class action lawsuits that were instituted before and after the bankruptcy filing, a recently consolidated class action lawsuit, and the "ownership issue." In the bankruptcy case, Moran had taken the position that LPI (and therefore Moran) owned the life insurance policies underlying the life settlements. In the consolidated class action lawsuit, however, the plaintiffs had taken the position that the class members owned the policies. The proposed settlement sidesteps and thereby resolves the ownership issue.

The joint motion also describes "complex and protracted discussions" that preceded the filing of the joint motion. Also, in a section entitled "The Proposed Settlement Is Truly the Product of Arm's-Length Bargaining and Not of Fraud or Collusion," the joint motion says:
It would be an understatement to suggest the Settlement Agreement was the product of anything other than hard fought and contentious negotiations. Through months of extensive good-faith and arm's-length bargaining, including two days of mediation with retired [federal] bankruptcy Judge Richard Schmidt, the Parties have reached a resolution they believe minimizes the potential damage and risk to all parties and maximizes value for the Settlement Class Members and the Debtors' estates and their creditors.
Attorneys' Fees
The joint motion describes the agreed-upon attorneys' fees (agreed fee) and calls the agreed fee "fair and reasonable." The parties say they negotiated the agreed fee "only after the parties reached agreement on the essential terms of the settlement." The agreed fee is $33 million, which will be paid over many years. The estimated present value of the agreed fee is about $5.2 million, depending on certain assumptions. Also, the agreed fee is 2.57 percent of the "common fund" of about $1.28 billion that was calculated in a lawsuit heard earlier by the Texas Supreme Court.

The Settlement Agreement
The 60-page settlement agreement itself is an appendix to the joint motion. It provides for the unsecured creditors to be divided into classes and subclasses that have differing options from which to choose. The settlement agreement discusses, among other things, the court approval process, a stipulation to class certification, equitable relief, and the release of claims.

The parties to the joint motion plan to file soon a motion seeking the bankruptcy court judge's preliminary approval of the settlement agreement. If the judge grants the motion, the parties would send the unsecured creditors a class notice of the proposed settlement.

An Alternative Settlement Proposal
To my knowledge, only one other proposal has been filed as an alternative to the settlement proposal in the joint motion. On April 5, 2016, Vida Capital (Austin, TX) filed an alternative plan. Vida, which was founded in 2009, describes itself as
an institutional asset manager focused exclusively on providing longevity-contingent investment solutions to institutions and individual investors. Vida specializes in the structuring, servicing, financing and management of life settlements, synthetic products, annuities, notes, and structured settlements.
In 2010, Vida acquired Magna Life Settlements, a life settlement provider. Magna, which has been in the life settlement business since 2004, is licensed in 37 states and the District of Columbia.

ASM Capital's Offer
ASM Capital (Woodbury, NY) is a firm that invests in obligations of companies in bankruptcy. As I reported in No. 138 (posted January 11, 2016), ASM sent a letter on December 22, 2015 to LPI fractional interest investors who have a "matured fund interest." That expression refers to a fractional interest in a policy on the life of an insured person who has died. ASM offered to pay 75 percent of the matured fund interest promptly in cash to each investor who would transfer to ASM the rights to the matured fund interest. Some LPI investors have accepted the offer. For example, a document filed with the bankruptcy court on April 7, 2016 lists 72 transfers of ownership to ASM.

General Observations
The settlement proposal presented in the joint motion is complex. I have attempted here to describe a few key elements of the proposal. It represents a difficult "compromise," a word that appears in the title of the joint motion, especially with regard to the important ownership issue relating to the fractional interests.

I think the parties to the joint motion have forged a satisfactory settlement. Further, I think the settlement would bring closure to the bankruptcy case in a relatively short time, thereby avoiding long delays and the huge expenses associated with dragged-out legal proceedings.

It remains to be seen how the bankruptcy court judge will rule on the upcoming motion for preliminary approval of the settlement. Also, it will be interesting to see whether the parties are able to provide, as part of the class notice, a reasonably brief and understandable explanation of the complex settlement proposal. Finally, it remains to be seen whether Vida's alternative proposal gains traction.

Available Material
I am making available a complimentary 44-page PDF containing the joint motion. Email and ask for the April 2016 joint settlement motion in the Life Partners bankruptcy case.