Daily Progress, Jacksonville, TX

February 1, 2013

SHOWDOWN: Lon Morris College bankruptcy hearings seemingly devolve into series of disputes; Texas AG asks for answers

Confirmation hearing on LMC liquidation plan takes place in Tyler's federal bankruptcy court Monday and Tuesday

Ben Tinsley
Jacksonville Daily Progress

TYLER —  It's a mess.

There's really no other way to put it. According to filings and counter-filings in federal court, the Lon Morris College bankruptcy process has evolved into a tangled web of conflicting professional agendas, overlooked liens, allegedly mismanaged funds, finger pointing, over-billing, jurisdictional transgressions, media bullying, mistruths by omission and the delusion that somehow all of the germane issues are going to be completely settled by early next week.

Texas Attorney General Greg Abbott is searching for answers and appropriate resolution in the matter. In a fierce series of court filings over the past couple of weeks, the AG and his staff have made his stance clear that officials with the LMC bankruptcy estate should explain themselves  to Federal Bankruptcy Judge Bill Parker.

LMC estate officials revised their liquidation plan Tuesday to accommodate some of these concerns, but the AG quickly fired back that the proposed changes didn't truly address many of the important problems.

Abbott's office also has expressed concern that the recent auction of LMC assets in Dallas was not as transparent a process as it should have been.

From a proposed release from liability that a previous version of the liquidation plan afforded LMC estate officials to the sale of Jacksonville city land that did not actually belong to LMC during an auction, Abbott asserts that there are many issues that need to be addressed next week.

Officials with the Attorney General's Office have urged Judge Parker in writing not to approve the results of the recent property auction or LMC's formal liquidation request when the confirmation hearing is held in court Monday and Tuesday.

Abbott was quick to point out that despite much confusion and nearly not enough resolution, the parties governing the liquidation process have charged the estate more than half a million dollars for their work to date.

Next week's hearings are expected to last awhile. There are literally 33 items — many of them objections to the confirmation — that must be addressed before any decision by the judge can be reached.

AG officials have literally argued their point back and forth with the LMC estate via filings submitted through the legal system.

The LMC bankruptcy estate has drafted and submitted a fourth version of the liquidation request after reading filed complaints by the Texas AG. At least six other parties are involved with the bankruptcy proceedings in one capacity or another.

However, Abbott and his staff contend LMC's plan changes are is too little, too late. They say the bankruptcy estate ultimately did not raise enough money to stave off debts with the recent $2.2 million auction.

"The (new) plan fails to resolve the majority of the attorney general's objections and concerns about the prior version," Abbott states.

One of the priorities emphasized by the LMC estate in their new plan is the monetary reimbursement of former LMC employees, who last received some compensation around Christmas time. But the language of the plan is confusing and seems to not be specific as to how that will be approached.

According to the liquidation plan, Ragan is expected to be appointed "Plan Agent," a $300 an hour position that will not be scrutinized by bankruptcy court, after the bankruptcy conclusion. In this capacity she is expected to act as the sole manager and responsible officer of LMC concerns from that point forward.

In the background of all this drama is former LMC President Dr. Miles McCall, who apparently believes the LMC bankruptcy estate owes him over $150,000 and has filed paperwork to claim that amount from the bankruptcy estate. LMC CRO Ragan heartily disagrees.

As a matter of fact, Ragan lays the blame for the $1.04 million in missing endowment money that attracted the Texas AG's attention to begin with squarely at McCall's feet. The Attorney General launched investigation into a missing $1.04 million from an endowment which should have reverted to Sam Houston State University after the college declared bankruptcy.

Dr. McCall, college president from July 2005 until he resigned May 24, was questioned regarding management of that endowment. This led to concerns about the college's treatment of endowments by others such as the Texas Methodist Foundation. TMF believes a total of $265,000 spread throughout five additional endowments are in danger of being used to offset bankruptcy costs.

Ragan is adamant that McCall deserves no payoff.

"No funds are owed Dr. McCall," Ragan states in her paperwork. "According to the board minutes, it appears Dr. McCall made untrue statements to the board about about the Long endowment and he failed to act with the diligence his contact required. … There is no evidence of board approval of a loan by Dr. McCall to the college."

McCall specifically filed a claim for $154,289.26, claiming he is due $24,289.26 in wages, $50,000 in deferred compensation, and $80,000 for an alleged loan made to the college.

But Dr. McCall made no such loan, Ragan contends. He simply drained the Long Endowment of the $1.04 million, transferred the bulk of it to CDs, then had subordinates covertly cash many of the CDs and transfer them into a restricted fund, records show.

The disposition of these funds have been a major hot button issue with the Texas attorney General's Office. Ragan alleges Dr. McCall told the board all CDs were still funded and accounted for when he knew it was not true.

"In a matter of months, the Long Endowment was reduced from $1 million in cash to a mere book entry," Ragan stated. " … This was not a loan as he contended. …. Through these actions Dr. McCall breached his contract with the college and violated his duties of loyalty, fidelity and good faith."

On a "to do" list following the confirmation hearing, Ragan says suing Lynn Acker and Acker and Co for accounting malpractice is a high priority.

At one point, federal judge Parker alleged McKool Smith, the law firm representing Lon Morris, had overcharged the estate about $14,000 for over 30 man hours of over-billing. He docked them that amount before awarding the firm a separate $85,529.90 for work performed for LMC between July 2 and Sept. 30. Ragan was paid $144,001 recently for three month's work.

Ragan has been reluctant to release information about these developments to the media. She is known for long silences on the matter followed by overly-general public statements and press releases crafted by PR experts released outside the news cycles. These releases convey only the portions of the story she wishes to be heard.

Abbott and staff, meanwhile, continues to monitor the liquidation plan proposals, contending that Ragan and the other officials involved with the bankruptcy estate have provided themselves and former LMC board members with an inappropriate discharge of liability for the way they are conducting the bankruptcy process.

In the original third version of the liquidation plan it stipulated that Ragan, all other professionals retained by the bankruptcy estate – or any of their agents or successors – the estate itself, and certain members of the former board of trustees couldn't be held liable for their actions in connection with this case by any claim holder, interest holder, or other party of interest. This included acts of omission, the case itself or the decision to file bankruptcy.

This are several, at least six, objections filed in federal bankruptcy court against LMC's Monday auction confirmation and estate liquidation — not counting the city of Jacksonville's complaint that the college estate auctioned off property it legally owns despite being repeatedly asked not to.

But in response to the many concerns about the upcoming confirmation hearing, Ragan on Wednesday drafted her fourth version of the plan, which appears to accommodate the concerns of the taxing authorities and ensures that rodeo grounds and related property that were inadvertently sold to a high bidder will instead return to the city of Jacksonville, which legally owns it.

Ragan has removed "decision to file bankruptcy" from the list of items exempted from legal liability. She has also removed certain members of the LMC bored of trustees from the list of shielded officials.

But for every change that was made by LMC, Abbott and his staff have had lingering concerns and objections — such as Ragan's suggested placement of all jurisdictions involved in the entire bankruptcy umbrella under one jurisdictional umbrella.

"The Attorney General continues to object to the retention of jurisdiction provisions of the Plan to the extent they impermissibly seek to vest this honorable court with exclusive jurisdiction to hear certain matters to which state courts have concurrent jurisdiction," the AG wrote.

Incidentally, LMC"s revised plan contends the concerns Texas Methodist Foundation and Heartspring Methodist Foundation have about the confirmation hearing can be resolved during respective adversary hearings rather than the final liquidation judgment.

In her paperwork, Ragan strongly asserts formal approval of the results of the recent auction sale is in the best interest of all creditors.

"There is no better option," she wrote. "The plan proposed a minimum guaranteed payment to former employees and secured creditors.'

Ragan said the revised plan addresses the concerns by the Texas Workforce Commission the US Trustee and the Texas Bank.

It does not, however, do so for the Scurlock Foundation, which contends the plan discriminates against its property and claims.

Representatives of the Amegy National Bank Association, "object to the sale and thus confirmation of the plan in its current form” because they believe conclusion of a Chapter 11 confirmation would absolve LMC of all financial obligations – including the collateral Amegy needs to get the loans paid.

The newest liquidation plan points out that discussions with Amegy have started and are expected to continue.

The Texas Methodist Children's Home has reached an agreement with the estate to drop a claims in exchange for a $15,000 payment after claims are settled.

The AG's responses to the bankruptcy — it's filings, arguments and assertions from several possible legal angles — has been praised by some area residents.

"I think the Attorney General of Texas is the hero in the sorry spectacle that once was our beloved Lon Morris College," John W. Croft of Jacksonville recently stated. "Looks to me like he is trying to keep the playing field level."

Thomas Kelley, a spokesman with the AG's office declined Friday to elaborate on his office's filed objections. McCall, Ragan, and Houston attorney Hugh Ray III from the Texas offices of McKool Smith did not return requests for comment. Acker could not be located to comment.






EVENT: Lon Morris College bankruptcy liquidation plan confirmation hearing

DATE: February 4, 2013 TIME: 1:30 PM According to a new draft of the Lon Morris College bankruptcy estate's liquidation plan, approval of said plan is not the final order of business for bankruptcy proceedings. The following needs to be finished before that can become a reality:


• Sale of real estate in downtown Houston for about $250,000;

• Sale of trademarks and intellectual property;

• Completion of Department of Education audit and sale of the building securing the $591,485 letter of credit;

• Marketing and sale of mineral interests (including unencumbered mineral interests);

• Compromise of LMC's recently discovered claims regarding the placement of the athletic building on property not subject to the lien of Texas National Bank;

• Pursuit of litigation against former auditor Lynn Acker and Acker & Co. for accounting malpractice

• Pursue of litigation against insiders;

•Sale of other real estate not sold at auction;

• claims administration;

• Collection of non-student receivables; and

• Compromise of TMF and Heartspring foundation disputes.


SOURCE: Dawn Ragan, from a bankruptcy court document