Daily Progress, Jacksonville, TX

December 20, 2012

Bankruptcy judge tentatively approves LMC employee payback but wants to review legal documents first

Ben Tinsley
Jacksonville Daily Progress

TYLER —

A federal judge offered tentative approval Thursday to a $137,000 settlement agreement between Lon Morris College and the United Methodist Higher Education Foundation, but stressed he will need to carefully review the wording of their unsigned agreement order first.

Judge Bill Parker's caution comes from concerns voiced during the hearing alleging the unsigned agreement order was last-minute and could impose unnecessary restrictions down the line on the UMHEF endowment fund from which the settlement money is being taken.

Both Texas Attorney General representative Hal F. Morris and Tye C. Hancock, a Houston attorney representing the Scurlock Foundation, made the case for caution.

Houston attorney Hugh Ray III vigorously opposed the objection, alleging that because Hal Morris did not object to the tentative agreement itself, he should not be allowed to do so for the final agreement order.

This hearing took place one day after Parker, of the U.S. Bankruptcy Court for the Eastern District of Texas, approved the remaining $350,000 of a $500,000 Debtor-In-Possession loan from "a syndicate of lenders" that includes Amegy Bank, N.A., Scurlock Foundation, Heartspring Methodist Foundation, and Martha Squibb, with Amegy serving as administrative agent, court documents show.

This D.I.P. Loan, LMC's second since the bankruptcy proceedings began, was requested by Lon Morris earlier this month. At that hearing, Parker granted $150,000 of the request.

The Lon Morris-UMHEF agreement is expected to pay $130,000 in back wages to furloughed LMC employees and $7,000 to the LMC bankruptcy estate.

In return, the LMC bankruptcy estate has agreed to abandon its attempts to access the $1 million restricted endowment fund, which will number at roughly $900,000 after the payout.

The AG has recently been monitoring the LMC bankruptcy proceedings because of the estate's approach to some endowments as a potential source of revenue to defray bankruptcy costs.

The paragraph in the unsigned final order of which Morris is taking issue states that UMHEF is free to use the remaining money from the restricted fund after the payout to provide scholarships to Methodist students attending Methodist colleges and universities within the State of Texas.

The specific clause that is causing concern is, "other than this, the funds are not subject to any restriction," which the two attorneys claim in itself constitutes a restriction.

Morris and Hancock contend this additional clause is unnecessary.

"We think significant mischief could be met from 'no further restrictions,' " Morris said.

Only Ray and LMC Chief Restructuring Officer Dawn Ragan attended Thursday's hearing in person. Morris and Hancock attended by conference call, which means they were prohibited by law from cross-examining Ragan, who was a hearing witness.