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Life Partners says appointing bankruptcy trustee could hurt investors

Feb 24, 2015
The Deal Pipeline

Bankrupt life settlement provider Life Partners Holdings Inc. said Monday, Feb. 23, that appointment of a trustee to run the company could harm shareholders and investors who own life settlements.

Life Partners made its statement in a press release issued in response to testimony in its bankruptcy by a witness for its unsecured creditors' committee. The witness referred to appears to be Michael Quilling, who has served as a receiver in three viatical and life settlement cases, although he wasn't named in Life Partners' statement. He testified Feb. 12. 

Quilling was among numerous witnesses who testified over five days before the U.S. Bankruptcy Court in Fort Worth, Texas. Life Partners is seeking appointment of a chief restructuring officer to oversee the company, while the Securities and Exchange Commission and U.S. Trustee's Office want a court-appointed trustee.

Life Partners filed for Chapter 11 bankruptcy Jan. 20 after the SEC won a $38.7 million judgment against the company after it was found liable for filing false financial reports with the commission from 2007 to 2011.

The point of Quilling's testimony "was to show his experience with life settlement cases and counter debtor's assertions that appointment of a trustee would in and of itself be catastrophic to the company," said Joseph Wielebinski, an attorney with the Munsch Hardt Kofp & Harr PC law firm in Dallas who is the committee counsel. 

Waco, Texas-based Life Partners has argued previously that only it has the ability to keep its investors' $2.5 billion in face value of life insurance policies from lapsing because it alone keeps track of when premiums are due.

The unsecured creditors' committee is made up of three purchasers of fractional interests in policies. Life Partners sells such interests to accredited investors.

The latest statement by Life Partners follows the departure of CEO Brian Pardo who resigned on Wednesday, Feb. 18, from the company he founded 24 years ago. James Hulme, a securities attorney with the Arent Fox LLP law firm in Washington who has been following the case, has said he believes Pardo's resignation may have been part of an effort to head off appointment of a bankruptcy trustee.

The statement that Life Partners issued Feb. 23 may have been a continuation of that effort, Hulme said.

"Based on this, I would say that LPHI is trying to get out ahead and spin the testimony in its favor to try to convince the judge not to appoint a trustee," he said in an e-mail.

The board said Pardo will be kept on as an independent consultant for marketing and strategic direction, under terms yet to be negotiated.

The board also accepted the resignation of Scott Peden as secretary of the company and as officer of its subsidiaries, but he is to remain as general counsel of Life Partners Inc., the company's life settlement provider unit.

In its statement, Life Partners said it believed it should tell its shareholders and fractional interest investors of the risks they face if a trustee is appointed and the company is potentially liquidated.

Life Partners said that if a trustee is chosen, it is likely that he or she would assert ownership over interests in life settlements owned by investors.

The company also said that if a receiver or trustee is appointed, he or she may decide that the policies are actually owned by Life Partners. This could lead to the trustee requesting that the bankruptcy court pool the life settlements and strip all beneficial interests of the purchasers from any single policy that they invested in, Life Partners said.

The company further said such pooling of interests in policies could be done without notice to the investors. If the policies were pooled, investors would only be entitled to a pro rata share of the proceeds from all the policies, Life Partners added.

Furthermore, Life Partners said policy owners may stop paying premiums and lose interest in their investment.

The pooling of interests in policies also could be done to obtain debt financing secured by those interests, the company added.

The interests could be treated as assets of the company and could result in policies lapsing, Life Partners said.

"If a trustee asserts ownership of the purchasers' life settlements, the financial obligations of the Company for the premium payments and administration of the policies would increase substantially and it would have a material adverse effect on the Company's financial position and results of operations," Life Partners stated.

The company might not be able to obtaining financing to meet these obligations or if it does, it may not be able to comply with the credit requirements and the lenders may increase the borrowing costs or declare the debt due immediately, Life Partners said.

If the company ultimately is liquidated, the shareholders may receive little or nothing. In addition, Life Partners said any sale of interests in the policies could be at a substantial discount and there would be few assets to distribute among investors in policies and shareholders.

Life Partners said Quilling also testified that all the life settlement receiverships he's been involved with only brought between 2% or 3% up to 38% of recovery of the face value of policies.

By: Donna Horowitz