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Judge Confirms Life Partners' Plan

Oct 14, 2016
The Deal Pipeline

The Life Partners Holdings Inc. bankruptcy plan was verbally confirmed Friday, Oct. 14, after Vida Capital Inc. acquiesced the day before to giving up an early-termination fee that was the major sticking point hanging over the case.

Judge Russell Nelms of U.S. Bankruptcy Court in Fort Worth, Texas, endorsed the trustee's reorganization plan with Vida providing the financing and servicing at an Oct. 7 hearing, but he rejected the fee.

This meant the trustee plan proponents either needed to eliminate the fee for policies that would be lapsed or sold or send the plan back to 22,000 investors for re-solicitation.

Trustee Tom Moran (pictured) said Vida made the decision Thursday, Oct. 13, to forego the fee, which would have been 2.65% of face value, the same fee that's to be charged on maturities for the servicing work.

One point that came up after the Oct. 7 hearing was whether the servicing fee could travel with the policy if it was sold. The judge said at a followup hearing Oct. 11 that the fee also would have to be eliminated in that circumstance because it hadn't been disclosed to investors.

"As a result of Judge Nelms raising an issue on the Early Termination Fee under the Joint Plan, Vida needed to clarify the court's intent and we accomplished that at a hearing Tuesday," Joe Wielebinski, an attorney with the Munsch Hardt Kopf & Harr PC law firm in Dallas representing the Official Unsecured Creditors' Committee, said in an e-mail.

"Vida is now 'good to go' and we advised the court that we will be submitting the Confirmation Order shortly. We hope to have that Order signed by Judge Nelms next week and then move promptly toward consummation and the Effective Date so that investors can be paid," he said.

Dan Young, vice president of portfolio management with Vida, an Austin, Texas-based life settlement fund manager, said in an e-mail that he expects to return about $150 million to investors in matured policy proceeds by the end of the year.

"We are excited to begin the process of getting money back to investors as quickly as possible," he said.

During the Oct. 7 hearing, Nelms said the early-termination fee should have been disclosed. It only had been raised by opponents of the trustee's plan at the final day of the confirmation hearing Sept. 30. But Nelms said he understood the reason for the fee, saying that Vida would be doing servicing for lapsed policies without getting anything for it. Vida is to be paid for servicing based on maturities.

On virtually all points at the Oct. 7 hearing, the judge said he supported the joint plan by the trustee and committee, saying he believed it's a superior plan with Vida and he was prepared to confirm it.

Nelms also said that he believed that Moran conducted a competitive process. Moran has faced persistent and unending criticism by opponents.

Even on Thursday, Oct. 13, one of the plan opponents, David Elrod, an attorney with the Gruber Elrod Johansen Hail Shank LLP law firm whose firm along with the Erler PC law firm represents more than 3,000 individual retirement account investors, would not give up trying to persuade the judge to back off approving the plan.

He asked the judge to reconsider his decision about finding no need for the plan to be sent back to creditors after Vida reduced its $5 million payment to $4 million for the right to service the Life Partners' portfolio. Elrod argued that this was a material change in the plan, which meant it would need to be re-circulated to investors for their approval.

Elrod even raised another high-profile case in the life settlement market as a comparable situation--the assertion by Coventry First LLC CEO Alan Buerger that the value of the American International Group Inc. portfolio would be decreased by $700 million if it was sold with the contractual provision requiring it to be kept on as the servicer for any new buyer. AIG sued Coventry two years ago for allegedly secretly marking up policies it sold to the insurer. The dispute was settled Feb. 29 with the servicing requirement to keep Coventry eliminated.

Elrod argued that forcing a buyer to use Vida as the servicer or pay a fee would impact the Life Partners' portfolio the same way as the AIG portfolio.

Despite those last-minute arguments, Nelms confirmed the plan Friday.

Nelms harshly criticized a Vida competitor for the servicing and financing work at the Oct. 7 hearing, mincing no words about what he thought about the company's actions during the confirmation process.

He lambasted Transparency Alliance LLC for breaking an agreement to support the trustee's plan in return for a proposed $1.5 million significant contribution claim and taking over providing a $25 million line of credit for the estate from Vida, saying it tried to "sabotage" the trustee's plan with Vida.

That agreement, announced Aug. 29 just before the start of the five-week confirmation process, was dropped days later as Transparency again sought to compete against Vida for the servicing and financing work. The significant contribution claim would have required the judge's approval.

The attorneys representing the trustee plan proponents were elated after the judge's decision to approve the plan on Oct. 7 with the one fee change.

"This is a complete victory for the trustee and the committee. Complete," David Bennett, an attorney with the Thompson & Knight LLP law firm in Dallas, representing Moran, said in an e-mail following the Oct. 7 decision.

Jason Brookner, an attorney with the Gray Reed & McGraw PC law firm in Dallas who represents Vida, said in an e-mail: "Vida is extremely pleased with the court's finding and conclusions."

"Judge Nelms' ruling was a huge victory for the investors because they now have a clear path to exit bankruptcy with a battle tested Plan," Wielebinski said in an e-mail. "The Trustee and the Committee are very pleased with this historic ruling."

Transparency didn't respond specifically to the judge's harsh criticism, but defended its actions.

"We based our proposal upon our professional assessment of the pool and we stand by that," Tom Vogel, a spokesman for Transparency, said in an e-mail. "The Trustee and Vida's projections of maturities are unlikely to materialize but we wish them and investors well."

He said that Transparency, an affiliate of BroadRiver Asset Management LP, a New York-based life settlement advisory firm, had no comment Oct. 14 following the judge's final decision approving the plan.

Nelms said the plan proponents did not stifle competition, as had been asserted by opponents, adding that "the Vida agreement was negotiated at arm's length and in good faith."

He said he found that Moran and the committee exercised "sound judgment" in coming up with the Vida collaboration agreement. It calls for charging 11% interest on $55 million in exit financing and a $25 million credit facility, 2.65% on maturities as well as providing a $4 million payment for the servicing rights--all terms that had been improved Sept. 26 from an earlier agreement.

He said he found the argument "curious," which was raised by opponents, that Vida was not qualified to service the $2.3 billion life settlement portfolio. He said the IRA investors who objected to Vida just wanted Vida to lower its price for servicing to 2.2% of maturities instead of 2.65% of maturities.

Transparency had undercut Vida in its one-page term sheet presented shortly after the confirmation hearing began by offering to do the servicing work for 2.2% of maturities. It also offered financing at 11% interest. Vida originally proposed charging 2.8% of maturities before reducing it to 2.65% of maturities and had previously proposed 13% interest on financing.

Nelms said that Vida already services 1,400 policies so he said he was rejecting the argument that Vida wasn't qualified. In addition, he noted that Vida planned to retain the Life Partners employees in Waco, Texas, who have done the work for years.

In response to a request by Elrod, the judge said he would not allow 800 of his IRA investor clients to change their votes to oppose the plan with Vida in it.

"It's too late for them to change votes," he said, adding that he would construe their request as being against Vida and for Newco, a company that would be set up post-confirmation if Vida wasn't chosen.

Nelms said he didn't buy the arguments that Moran failed to adequately market the servicing and financing work.

"Why would the committee want to pay more?" he asked, saying the objection didn't ring true to him.

Three of the committee members are among the 22,000 investors who hold 100,000 positions in the 3,400 Life Partners policies with $2.3 billion in face value.

Nelms also asked when was the trustee supposed to have organized an auction, pointing out that the ownership issue had to be resolved first. A class-action settlement has been approved allowing investors to own their interests if they so choose. Moran originally said the estate owned the policies, but the settlement resolved that central issue that had stymied progress in the case.

"The notion that any bidding process would have been quick and easy is belied by the case," Nelms said.

As to competition for the servicing work, he asked where were all the competitors who had wanted to do servicing earlier in the case.

"They were on the sidelines," Nelms said. "They jumped in after Vida made the DIP [debtor-in-possession loan for $10 million], after Vida agreed to pay $5 million and fund the exit facility and went on the road to explain the plan."

He added: "After Vida had spent untold sums of money to get to this point, now we have bidders who say they will do Vida's plan for less--maybe."

Nelms said servicing proposals by Transparency and Q Capital Strategies LLC, a life settlement provider with offices in New York and Florida, are based on Vida's template.

And, he said, any suggestion that Vida would not have thought of making a substantial contribution claim can be dismissed.

Nelms said Vida is much more deserving of any substantial contribution claim than Transparency.

"I disagree that better offers are out there. It's no secret that Moran is not a fan of Transparency," Nelms said. He pointed to an Aug. 15 filing by Transparency saying it was likely the position holder trust running the estate under the trustee's plan would result in insolvency.

"Today Transparency embraces this [plan] as long as it's the servicer and lender," the judge added.

The judge said Transparency agreed in its Aug. 29 term sheet not to oppose confirmation of the trustee's plan with Vida, saying it "required Transparency to be a potted plant in these proceedings."

"Transparency at every point tried to sabotage the trustee's plan with Vida," Nelms said. "It should have done nothing."

He said that "any opinion I hold of Transparency was brought on by Transparency by itself," adding that he held up solicitation so Transparency could catch up with the trustee's plan.

Nelms said, however, he questioned Moran's judgment when he supported the $1.5 million substantial contribution claim for Transparency.

"Transparency chose to breach the agreement. It charted its own course. It was the wrong decision and, yes, it did affect my view of Transparency," Nelms said. "I would not lean toward Newco so Transparency can have another shot at servicing."

He said he found the plan proponents distrust of Transparency was "well-founded."

And except for Transparency, all other suitors for the servicing work have submitted one-page term sheets and none has offered to pay for servicing rights. Vida originally offered to pay $5 million for the right to the servicing business, but scaled back the offer to $4 million after cutting its servicing fee and interest on the loans. Transparency offered to pay $5 million as well for the servicing rights.

"At what point does all of this end?" Nelms asked.

Although the Gruber law firm and the Susan B. Hersh PC law firm, also of Dallas, aren't satisfied with the trustee's proposed board members to oversee the estate after bankruptcy, he said he rejected the idea that selecting Newco over Vida would "lead to a feel-good solution."

By: Donna Horowitz