07 Jul LPHI Website FAQ v. 3

LPHI Trustee Website FAQ

LIFE PARTNERS, INC. BANKRUPTCY

Frequently Asked Questions

May 23, 2015

On May 19, 2015, Life Partners, Inc., a Texas corporation (“LPI”), and LPI Financial Services, Inc., a Texas corporation (“LPIFS”), each of which is a direct or indirect subsidiary of Life Partners Holdings, Inc. (“LPHI”), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”).  As previously disclosed in its Current Report on Form 8-K filed on January 26, 2015, LPHI filed a voluntary petition for relief (Case No. 15-40289) under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court on January 20, 2015.  On March 13, 2015, H. Thomas Moran II was appointed as Chapter 11 Trustee (the “Trustee”) for the Company and will continue to occupy that role.  The Trustee has also been named the sole director of LPI and LPIFS, who will operate as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

The Trustee has stated, “After careful consideration, we concluded that filing for Chapter 11 was the appropriate course of action for Life Partners, Inc. and LPI Financial Services, Inc.  I will work towards maximizing the value of their assets and the overall enterprise.”

Based upon the Trustee’s initial investigation as described in the Declaration of H. Thomas Moran II in Support of Voluntary Petitions, First Day Motions and Designation as Complex Chapter 11 Case (the “Declaration”) filed with the Bankruptcy Court (a copy of which is available at http://dm.epiq11.com/LFP or call 866-841-7869), the Trustee believes that a massive fraud has taken place.  As also described in the Declaration, the Texas Supreme Court has held that the agreements LPI used to solicit money from investors (the “Investors”) are “investment contracts.”   The money invested was used by LPI to purchase life insurance policies (each a “Policy” and collectively, the “Policies”), and over the course of many years, LPI has built a portfolio of approximately 3,600 Policies with an aggregate face value in excess of $2.4 Billion (the “Policy Portfolio”).

The Trustee has preliminarily evaluated the procedures through which LPI raised funds to purchase the Policy Portfolio, and his investigation is ongoing.  In most cases, the Investors would either invest directly or through their Individual Retirement Accounts (or “IRAs”).  The investment contracts recite that Investors contracted for the right to receive a percentage of the proceeds paid out on maturity of a Policy.  Once an Investor purchased an investment contract relating to a Policy, the percent of death benefit the Investor had contracted to receive was described as a “position” relating to a Policy or, if the investor was using funds from an IRA account, sometimes as a “note” secured and payable by such a position (in either case, a “Contract Position”).  Investors typically invested in more than one Contract Position (i.e., payouts under multiple Policies).  The investment contracts further obligate Investors to “contribute additional amounts” to pay premiums on the Policy until maturity.

An interim hearing on some of the motions that the Trustee filed in connection with LPI’s bankruptcy petition is scheduled for June 4, 2015, at 2:00 p.m. in the Bankruptcy Court. Investors are encouraged to read the filings made in connection with the bankruptcy petitions filed by LPI and LPIFS, which are available at http://dm.epiq11.com/LFP or call 866-841-7869.

Set forth below is a list of questions that have been asked by or on behalf of Investors regarding the operations of the debtors-in-possession as they relate to Contract Positions.

1.  Will death benefit payouts continue?

The Trustee has instructed Purchase Escrow Services, LLC (“PES”) and Advance Trust and Life Escrow Services, LTA (“ATLES”) to discontinue payouts, and they have both acknowledged that they will comply with his instructions.

2.  Will I still receive premium calls?

The Trustee has filed an Emergency Motion to Approve Plan for Payment of Life Insurance Policy Premiums (the “Premium Relief Motion”) requesting approval of an Interim Payment Plan for Premiums (attached hereto and referred to as the “Premium Payment Plan”) that would permit the Trustee to suspend, at least for some period of time, the obligations of the Investors to pay premium calls, and thereby provide immediate premium relief to all Investors.  Until the Court has granted the relief requested in the Premium Relief Motion after due hearing(s) on that motion, LPI will continue to send out premium calls.  LPI is currently thinly capitalized, and thus unable to advance premiums not funded by the Investors.

An analysis of the Policy Portfolio has determined that none of the Policies are at risk of lapse prior to the first hearing to consider the Premium Relief Motion, which is scheduled for June 4, 2015.  If the Court does not approve the Premium Payment Plan, unless Investors in the Distressed Policies (defined in the Premium Payment Plan) continue to pay 100% of the premium calls, or the Trustee is able to arrange premium financing, which he is pursuing but can provide no assurances will be obtained, many of the Distressed Policies will be at risk of lapse, as described in the Premium Payment Plan.

3.  Will I still have to pay the Platform and Services Fee?

Because LPI is so thinly capitalized, unless Investors continue to pay the Platform and Services Fee, LPI’s, and thus the Trustee’s, ability to provide servicing and management for the Policy Portfolio will be adversely affected.  Accordingly, the Trustee requests that Investors continue to pay the Fee billed in April, and pay any remaining balance of the Fee billed in September 2014, to provide working capital for LPI.

4.  Will I be able to sell my position if I want to or need to?

Given the ruling by the Texas Supreme Court that LPI was selling “investment contracts” that are securities under the Texas Securities Act, as referred to above and described in a previous FAQ, the Trustee and the Debtors cannot engage in the resale of Contract Positions, nor can they authorize anyone else to, without the expensive securities-law compliance procedures noted in the Trustee’s Declaration filed with the Bankruptcy Court.  Accordingly, the LP Market is closed and the Trustee has no plans to reopen it.

Further, as described in the Trustee’s Declaration filed with the Bankruptcy Court, he is concerned that the “abandonment” and resale process has been used to unfairly victimize or otherwise take advantage of Investors, under circumstances that involved failures to disclose the existence of CSV and other instances of “manufactured” distress.  Until he completes his investigation into the conduct of all of those involved in the resale market for Contract Positions, the Trustee does not believe that resale transactions are in the best interests of the bankruptcy estates or their stakeholders.  (For the definition of CSV, see “What is “cash surrender value” (CSV) and why does the Trustee want to use it?” below.)

5.  What is “cash surrender value” (CSV) and why does the Trustee want to use it?

First and foremost, the Trustee wants to use CSV because CSV is a “use it or lose it” type of asset: CSV not used before the Policy pays out is lost forever and reverts to the benefit of the insurance company (the house).

Cash surrender value accumulates in many policies (90% in face amount of the ones that LPI is record owner of) if premiums are not optimized over the term of the investment.  LPI did not optimize premiums in many cases (rather, premiums were paid on a so-called “level basis”), and thus, significant CSV has accumulated in many of the Policies ($187 million in total as of April 28, 2015).

Subject to Court approval, the Trustee has proposed a plan to use CSV first for all Policies in which it is available and, if the Premium Payment Plan is approved, to use Excess CSV (defined in the Premium Payment Plan) to provide premium financing for the Distressed Policies and immediate premium relief to Investors whose Contract Positions relate to the Distressed Policies, and to those whose investments do not relate to Distressed Policies but nevertheless have been receiving premium calls.

Many if not most of the Distressed Policies are “viatical” policies purchased in the 1990s by LPI, and most of these do not have any CSV.  Viatical policies are disfavored in the current marketplace for life settlement policies and as a result, they are the least likely to be marketable to generate revenue, or useful as collateral for premium finance loans.  They are also the farthest beyond the original “life expectancy” estimate that LPI showed to Investors when they invested, and have been subject to the premium carry burden the longest.

6.  How long will the bankruptcy proceeding take and how will I know what is going on?

A complex bankruptcy case like the Life Partners case can take a long time to complete.  The bankruptcy process is designed to keep all stakeholders informed, and when the Trustee’s investigation and proposal for resolving all of the issues is complete, it will be reported to all stakeholders.

The Trustee also intends to continue to update the FAQ posted on the LPI website (and at lphitrustee.com, and to answer questions to the extent feasible.  Because many of the questions received to date are common to all investors, and the Trustee wants to assure that all stakeholders have access to the same information (for transparency), the Trustee encourages all to submit questions and concerns, and to understand that most responses will be under general topic headings in updates to the FAQs.

7.  If my position is held through my IRA, are there any special considerations for me?  Should all Investors seek their own tax advice?

Because IRA accounts (and any other “qualified plans” for federal tax purposes) have a special status under federal tax law, Investors who used funds from an IRA account (or other qualified plan) should consult with their personal tax advisers.

THE TRUSTEE STRONGLY URGES ALL INVESTORS TO CONSULT WITH THEIR OWN TAX ADVISERS.  THE TRUSTEE CANNOT PROVIDE TAX ADVICE TO ANY INVESTORS, AND EXPRESSLY DISCLAIMS ANY SUCH ADVICE THAT MAY HAVE BEEN GIVEN BY LPI OR ANY LICENSEE OR OTHER PARTY RELATING TO INVESTING IN CONTRACT POSITIONS OR MAKING “CONTRIBUTIONS” FOR USE TO PAY PREMIUMS, OR OTHERWISE INVESTING IN LPI OR LPHI.

Please click here to view a copy of the Premium Payment Plan: Interim Payment Plan for Premiums

Please click here to view a copy of Attachment 1 to the Premium Payment Plan, the Lapse/Grace Analysis: Lapse_Grace Analysis

Send additional questions that are not covered here to the Trustee at questions@lphitrustee.com.