07 Jul LPHI Website FAQ v. 4

LPHI Trustee FAQ
June 30, 2015

Please review the following list of questions, answers and additional information. If you have a question is not addressed, please send your question(s) to questions@lphitrustee.com. Additional questions will be compiled and, as answers become available, they will be included in future FAQs.

Bankruptcy-Related Questions:
1. What is Chapter 11 Bankruptcy?
Chapter 11 of the U.S. Bankruptcy Code is a legal mechanism for court supervised reorganization of a company’s financial obligations. Chapter 11 provides a way for companies to address their financial issues while continuing day-to-day operations.
2. Why did Life Partners Holdings, Inc. (“LPHI”) file to reorganize under chapter 11 of the U.S. Bankruptcy Code?
Prior to the appointment of the Trustee, LPHI stated that it filed for bankruptcy in order to continue its business during its appeal of a judgment entered against it in connection with a lawsuit brought by the Securities and Exchange Commission.

Further, LPHI had insufficient funds available to maintain ongoing business operations.
3. Are other LPHI entities also in bankruptcy?
On May 19, 2015 Life Partners, Inc. and LPI Financial Services, Inc. (collectively with LPHI, the “Debtors”) each filed a petition in the United States Bankruptcy Court for the Northern District of Texas (Dallas Division) seeking relief under Chapter 11 of the United States Bankruptcy Code.
4. Who is the Trustee and what is his role?
The Trustee, H Thomas Moran, is an independent third party, appointed by the U.S. Trustee, who has “stepped into the shoes” of LPHI’s management and assumed control over the assets and business operations of LPHI. The Trustee’s fiduciary duty is to maximize the value of the bankrupt estate for the benefit of all parties.
5. Who is Thompson & Knight and what is their role?
Thompson & Knight is counsel to the Chapter 11 Trustee, H. Thomas Moran II and Life Partners, Inc. and LPI Financial Services, Inc., which are subsidiaries of LPHI.

6. What is the Official Unsecured Creditors Committee and what is their role?
The Official Unsecured Creditors Committee, which was appointed by the Bankruptcy Court, consists of retail investors that will participate in the bankruptcy process and report to interested parties such as yourself. The Committee is represented by the law firm of Munsch Hardt Kopf and Harr PC.

The Committee members can be contacted by sending an email to: lphi-committee@munsch.com.
7. Who is Epiq and why have I received e-mails from Epiq?
The Trustee hired Epiq Systems to coordinate communications with creditors and investors. Among other things they will mail the appropriate notices to all the parties and will maintain a website to host bankruptcy information.
8. What does this bankruptcy mean to me and how does it affect my investment?
The goal of appointing a Trustee is to sort through the affairs of the company in order to maximize value for all creditors of the bankruptcy estate. This means that the Trustee is investigating the operations and accounts, including the policies and their prior management, and is working to develop a plan that will result in the most equitable result possible for all creditors and investors.
9. Why did I receive a copy of a Court Order in the mail?
Epiq, the noticing agent, sent out notice of the hearing to over 70,000 people that were listed in the LP database. The notice process is required under the bankruptcy law. The 70,000 people that were included fit primarily into one of the following categories: 1) Investors, 2) Policy Sellers (policy owners or insureds who sold policies to LPI), 3) Licensees, 4) Brokers that submitted policies, and 5) Policy owners or insureds that had their life insurance policies submitted to LPI for review (many of these individuals may have had their policies submitted by a broker without realizing that it was reviewed by LPI).
10. How long will the reorganization / bankruptcy process take?
There is no way to predict how long the process will ultimately take, though cases frequently range from one to two years.
11. Has anything changed at Life Partners, Inc.?

Yes. The majority of senior management changed after LPHI filed for bankruptcy; the Bankruptcy Court was asked to replace them and appoint a Trustee. After the Court appointed a Trustee, several other members of senior management were removed from control and the members of the board of directors resigned. The Trustee, in concert with the LPI management and staff, continue to evaluate whether any additional changes should be made to business operations.

Many other changes are discussed individually throughout this FAQ.

12. How is the Trustee being compensated?

The Trustee is not taking a salary at this time but is receiving reimbursement for out of pocket expenses. He is reserving his right to seek compensation in the future for the value of his time in light of the results obtained. His compensation, and that of his counsel and other professionals, is subject to the oversight of the Bankruptcy Court and the United States Trustee’s Office.

13. How can I contact the Trustee and get more information regarding the bankruptcy?

The Trustee would like to be able to speak with each and every investor; however, this is not practical with over 20,000 investors and tens of thousands of other parties. Because the input of the investors is critically important to the Trustee, he and his team have established a process whereby questions can be sent to a dedicated email address where they can be reviewed, and from those emails, groups of questions can be developed and published in future FAQs.

Please see the following for more information on communications and information:

Information / Source By Computer By phone By Email
Trustee www.lphitrustee.com info@lphitrustee.com or questions@lphitrustee.com
Epiq*    (Bankruptcy Specific Information)

*Noticing Agent

 

http:/dm.epiq11.com/LFP/Project#

866-841-7869 (recording for those that have no computer access)
LPI Customer Service (Regarding Your Account) www.lpi-policies.com 800-368-5569 custsrv@lifepartnersinc.com

Life Settlement Policy-Related Questions:

14. Is the Trustee continuing to administer the Policies, and track Investor’s investments, in the ordinary course of business?

Yes. Maintaining the policies is a key objective of the Trustee. Policies continue to be managed, premiums continue to be paid, and insureds continue to be tracked; however significant upgrades have been made to the processes and procedures used by the policy management department.
15. Should I continue to send in money to pay premiums as billed by LPI?
Neither the Trustee, nor his counsel, can advise you whether to pay premiums, but the Trustee can inform you of the risks. If premiums are not paid, the nonpayment creates a risk of the policy lapsing.

16. Are others paying premiums when billed?

Yes. Premium contributions generally are still being made, however, receipts do fluctuate.

17. Are the premium notices I receive correct?

The Trustee is undertaking a thorough evaluation of Life Partner’s premium notice and payment practices, as well as the methods used to determine premium amounts. Thus far, the Trustee’s investigation has shown that premium payments have not been “optimized” on most of the UL policies (“optimized” refers to an industry standard process of determining and paying the minimum amount required to maintain the death benefit). Some premium billings may increase while others may decrease. These are all being reviewed and confirmed on an individual basis, but likely fit into one of the following categories:

UL Policies
• If a policy is “overfunded” (has excess CSV in the policy fund at the carrier from which premium expenses and charges will be deducted), no premiums will be paid or billed to investors. These will begin again when, and if, appropriate – every policy is different.
• If a policy was being paid on a level basis, from information LPI received on a level-premium illustration from the carrier, such as an illustration showing a level premium for 5 years, when that 5 year period concludes, premiums may increase.
• Some premium billings have been insufficient. These are being individually reviewed and “optimized” and the appropriate amount to keep the policy inforce will be billed, which may result in a billing increase.
Term and Group Policies
• Term policy premiums are typically level for a specific “term” and then increase (in increments or every year).
• Other term policies may be Annual Renewable Term policies (“ART”) and may increase every year. The increased premium amount may not be known until the billing notice is received from the carrier.
• Group policy premiums may also increase at different times and for different reasons.

18. Have any policies lapsed?

Yes. The Trustee’s investigation, to date, has revealed over 90 policies that lapsed before he was appointed. Letters have been sent to all investors who were listed in LPI’s records relating to those policies.

19. Are there any other instances whereby the death benefit may decrease?

There are many instances where the death benefit that LPI “sold” has decreased, or may decrease. These may include the following:
• UL policies that have certain maturity dates. For example, if a policy has a maturity age of 95 (or 100), when the insured turns 95, the death benefit is discontinued and the policy may only pay the amount of the cash value in the policy. At this time, one policy with a maturity date of age 95, has been identified (the insured is already 93). The UL policies are being reviewed to determine how many more of these policies exist.
• Many of the group policies have death benefits that decrease under different circumstances, including age and employment status.

Verifications of Coverage (“VOCs”) have been requested for all the policies and are being reviewed. These should reveal any other policies that no longer exist and/or have decreased in value.
20. How can I determine if the insured of a policy in which I have an interest has died?

The Trustee is reviewing the tracking practices of Life Partners at this time. In addition to the tracking that LPI performs, supplemental tracking services are being periodically performed by Asset Servicing Group. During their initial insured tracking efforts, three deaths (that occurred in years past) were found that neither LPI nor their service provider had located.

21. Are the Dr. Cassidy LEs accurate? If not, should I conclude that my positions are worthless?

Prior to the Trustee’s appointment, the Security and Exchange Commission (“SEC”), a branch of the U.S. Government, sued Life Partners. The United States District Court found that there was ample evidence that the life expectancies provided by Dr. Cassidy were not accurate.

As part of the Trustee’s ongoing investigation, the District Court’s finding has been verified. There is ample evidence that the LEs projected by Dr. Cassidy were short and were often used to manufacture a fraudulent spread (or false “arbitrage”) between the price that Life Partners paid to acquire policies and the aggregate prices paid by investors

With regard to value, as long as premiums are paid the policies will remain in force and will have value (with the exception of the lapsed policies).

22. Is the Trustee going to obtain updated or more accurate life expectancies?

Obtaining life expectancy reports (“LEs”) for all the policies would be cost prohibitive. For example, the cost of obtaining life expectancies on just 3,000 of the policies would be approximately $1,425,000 ($350 for the LE and approximately $125 for medical records). Some updated life expectancies may be obtained on a case-by-case basis, but at this time there is no plan to update all life expectancies.

23. Can I sell my interest?

Given the ruling by the Texas Supreme Court that Life Partners was selling “investment contracts” that are securities under the Texas Securities Act, the Trustee and the Debtors cannot engage in the resales, 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 LPI resale 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 cash surrender value (“CSV”) and other instances of “manufactured” distress. In other words, an investor was not told that cash value was available to pay a premium and instead led to believe that the investor would have to pay premiums when reserves were exhausted. Investors who were unable to do so, were told that their only recourse was to abandon or sell their interest. While the investigation is ongoing it appears that at least some of the abandonments and resales created a windfall for repurchasers who paid only a small proportion of the value attributable to these interests. 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.

24. Why is Life Partners still charging administrative fees?

LPI did not retain sufficient operating capital to run the business in the absence of fees from the sales of new policies and resales. As discussed above, this practice violated State Law the Trustee cannot continue it. As a result, platform or administrative fees are currently necessary to continue to operate the business and maintain the policies. The Trustee is working to formulate a plan that would not require such fees in the future.

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

Cash surrender value accumulates in UL policies when the premiums paid into a policy are in excess of the amount needed to maintain the death benefit, and therefore build up the cash account built into the policy. This often happens when policies are paid on a so-called “level basis”. Life Partners did not optimize premiums in most policies and allowed for significant CSV to accumulate unnecessarily (approximately $187 million as of April 28, 2015). Excess cash in the policy is kept by the carrier when the death claim is paid out. This is why optimizing premiums is standard practice within the life settlement industry. For example, if a UL policy has a face value of $10,000,000 and has excess CSV in the amount of $1,500,000, in most cases the $1,500,000 will be kept by carrier and only the $10,000,000 death benefit will be paid out. Again, this policy account value increased by $1,500,000, due to the amount of funds paid by LPI in the form of unnecessary premiums.

26. Will death benefits be paid to the Investors after they are received by the escrow companies?

For the time being, the escrow agents have agreed to comply with the Trustees request that funds not be released (including funds put in escrow to purchase investment contracts, and other proceeds left with escrow agents for reinvestment). There are certain legal questions that must be answered regarding what is property of the bankruptcy estate, and until the Court rules on those issues, the Trustee cannot authorize the release of any funds.

27. Am I guaranteed the full payout amount that I have been expecting?

At this time, the Trustee is unable to say what amounts will be paid out on any claim and cannot make any guarantees. Payouts must be authorized by the Bankruptcy Court, and will ultimately depend upon the plan for reorganization approved by the Bankruptcy Court. It is unknown at this time how future payouts may compare to investors’ expected returns.

28. Can I transfer my account to someone else?

Due to the bankruptcy, all account transfers are on hold. As mentioned previously, there are certain legal questions that must be answered regarding what is property of the bankruptcy estate, and until the Bankruptcy Court rules on those issues all transfers are on hold. If you have a need to transfer ownership for legal reasons (such as a death, divorce, participation in a government funded program, etc.), you are encouraged to discuss the need with your attorney to see what documentation would be appropriate to reflect the transfer for those purposes while the bankruptcy proceeds.

29. Would you please send me copies of my file/documents?

Given the enormous amount of work currently required to be performed by the Trustee and Life Partners’ employees as a result of the bankruptcy cases, it is extremely difficult for them to copy and send documents to individual investors. Additionally, with over 20,000 investors, the cost of copying files for even a small percentage of the investors would be extremely expensive. That being said, if you truly need a copy of your documentation due to a loss of some sort, we ask that you send a written request to Life Partners customer service, but please understand that it will take some time to process any such requests and provide a response. Your patience and understanding will be appreciated.

30. 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.

31. I own shares of stock in Life Partners Holdings, Inc. (LPHI). Why can I no longer trade this stock on the NASDAQ?

NASDAQ filed notice with the SEC that LPHI’s stock has been delisted, and thus LPHI’s stock will no longer be traded on NASDAQ and will not be immediately eligible to be quoted on the OTCQX, OTCQB or OTCPink markets. There is no guarantee that LPHI’s stock will ever be eligible to be quoted on such markets or traded on any other market.