Life Partners Trustee Created His Own Mess: Interest HoldersBy Ben Conarck
Law360, New York (June 12, 2015, 2:18 PM ET) -- Fractional interest holders in Life Partners Holdings Inc.’s bankruptcy on Thursday objected to the trustee’s emergency motion to tap certain assets to pay out policy premiums, saying the trustee created the alleged cash crisis himself by halting payments.
Though the trustee's payment premium plan predicts that premium calls will drop from the historically high level of 90 percent, that level continued throughout March — after the bankruptcy of LPHI and after Trustee H. Thomas Moran II, who has accused the company of a "wide-ranging" fraud, was appointed, the ad hoc committee of direct fractional interest owners of the life settlement policies in the bankruptcy said in its motion.
Beyond that, the court approved an exchange between the fractional interest holders and the official committee of unsecured creditors to support the continuation of paying policy premiums, the motion said.
“Given these facts, one would not expect an immediate widespread rash of premium call defaults,” the fractional interest holders said.
But about a week before the bankruptcy of an LPHI subsidiary was announced, the interest holders said, Moran directed the record beneficiaries to stop paying policy premiums and refused to inform them of when maturities occurred.
“Accordingly, this alleged emergency is the result of Moran’s own actions, and the responsibility of any emergency should be laid at Moran’s feet,” the motion said.
The emergency motion to approve the premium payment plan calls for the immediate use of certain estate property, such as the cash value of life insurance policies and premium payment funds, to “preserve the portfolio” and relieve investors from the financial burden of paying premiums while enabling LPI to continue to pay them out, predicting a drop in the collection rate on premium calls based on the fraud that has been uncovered.
The “stakes could not be greater,” according to the premium payment plan, which said that LPHI since the bankruptcy filing has been “substantially drained of its resources by, among other things, a pattern of gross mismanagement, fraud and self-dealing,” leaving the enterprise “very thinly capitalized.” In the year leading up to March 31, the motion argued, investors have been billed for more than $72 million in premiums, of which about $67.6 million has been paid.
“In order to preserve as much value as possible for those who have been impacted by that activity, Life Partners must ensure that policy premiums continue to be paid in respect of the policy portfolio in order to keep the life insurance policies in force,” the motion said. “LPI’s pre-petition business model required investors — the victims of fraud — to pay policy premiums in respect of the policy portfolio.”
Moran was appointed as trustee in March at the urging of the U.S. Securities and Exchange Commission after Life Partners hit Chapter 11 in January in an effort to buy time while it appeals a $47 million judgment by the SEC. The company was dealt a blow last month by the Texas Supreme Court, which ruled that its life settlements are securities under state law.
The fractional interest policyholders said in their objection that the immediate 30-day term requires less than $200,000 to cover the shortfall in premium payments and that LPI has sufficient funds on hand to pay it.
Instead of considering other options outside of the “drastic measure” of using cash surrender value, the motion said, “Moran appears to want to retain control of the policies.” Allowing Life Partners to use cash surrender value will “drastically change the LPI business and prejudice the investors,” the fractional interest holders said.
“Moran has the ability to put together a plan that would authorize and allow the fractional interest owners to pay the premiums, as many clearly want to do,” the motion said.
Counsel for Moran did not immediately return requests for comment on Friday.
Trustee H. Thomas Moran II is represented by David M. Bennett, Richard B. Roper and Katharine Battaia Clark of Thompson & Knight LLP.
The fractional interest owners are represented by David D. Ritter and Stephen A. Kennedy of Kennedy Law PC.
The case is In re: Life Partners Holding, case number 4:15-bk-40289, in the U.S. Bankruptcy Court for the Northern District of Texas.
--Editing by Rebecca Flanagan.
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