Daily Progress, Jacksonville, TX

September 3, 2013

LMC estate sues trustees for ‘$20 billion’

Ben Tinsley
Jacksonville Daily Progress

TYLER —

Attorneys with the Lon Morris College bankruptcy estate are suing former college president Miles McCall and members of the former LMC board of trustees in federal court — alleging mismanagement that effectively destroyed the institution.

“McCall and the Board Defendants should now be held responsible for their

grossly negligent, improper, and financially devastating actions,” reads the action filed Aug. 29.

The estate's demand from the defendants? The lawsuit specifies, “damages for the board defendants' breaches of fiduciary duty in an amount to be determined at trial.” But the number listed on a heading page lists a “2” and 10 accompanying zeroes — as in $20 billion.

The 31-page LMC complaint names as defendants former board members Gene Brumbelow, Bill Wagner, Frank Ashcroft, Bob Staton, Windol Cook, Helen Dubcak, June Deadrick, Jim Crawford and Mark Brown.

Brumbelow said Tuesday he was unaware any suit had been filed.

“We had been expecting for something like this to happen down the road, but you're the first person to tell me anything like this actually did,” Brumbelow said during a brief phone interview. “This is totally new to me.”

However, former board member Helen Dubcak said the lawsuit, to her, is ironic because she believes LMC should have remained open. She said she believes the board president was unwisely convinced to close its doors by LMC bankruptcy estate Plan Agent Dawn Ragan.

“I fought closing it tooth and nail — and in many ways I'm still fighting it,” she said. “I always thought doing that was the most ridiculous thing I'd ever heard. We had always been in debt. It never should have closed.”

McCall — who is currently involved in two other lawsuits alluding LMC fiscal mismanagement —  responded to a Tuesday interview request from a Jacksonville Daily Progress reporter with, “I cannot comment on pending legal issues. Thank you.”

Ragan also did not return a request for interview Tuesday.

The action lists the current LMC attorneys as representatives of the Dallas law firm Munsch, Hardt, Kopf & Harr PC — specifically represented in court by Phil C. Appenzeller, Michael C. Lee, and Joseph J. Wielebinski Jr. None of the three returned phone calls or messages for comment Tuesday.

The LMC estate previously had been represented in court by McKool Smith, PC of Houston. But that firm — along with its most visible attorney Hugh M. Ray III — handed the reins over on June 19.

The suit states that before its dissolution, Lon Morris was the oldest existing two year college in Texas, having survived two World Wars and the Great Depression.

“But, Lon Morris could not survive Dr. Miles McCall,” the suit reads. “Indeed, the fiduciary failings, incompetence, mismanagement, gross negligence, and cover-up of McCall and certain members of Lon Morris’s Board of Trustees would ultimately destroy Lon Morris and cause millions of dollars in damages to the institution that they were entrusted with protecting.”

The suit alleges McCall, who served as president from 2005 to 2012, was required under the law to act with "complete candor" on Lon Morris’s be half — failing miserably in that regard.

The suit alleges McCall caused well over $20 million in damages to Lon Morris, inflicting the following damage:

• Encouraging Lon Morris’s Board of Trustees to authorize a secured loan transaction with

Amegy Bank in 2006, which included a side agreement swapping the floating rate of interest provided for in such loan with an obligation to pay Amegy a fixed rate of interest. The detriment was extra interest payments over what the loan would otherwise have paid — costing the an additional $1 million.

• Improperly using certain endowment funds — from the $1.017 million Long Endowment — for operational expenses and not disclosing these actions to his board.

• Executing an unauthorized wraparound real estate lien note with Tilley, LLC in excess of $6 million to replace an existing lease with Tilley, when doing so significantly increased Lon Morris’s secured debt and its overall liability exposure in the event of a default.

• Refinancing existing debt facilities with Texas National Bank without authority and imprudently pledging Lon Morris’s valuable mineral interests as collateral for a loan that would almost certainly be in default—and did result in default—soon thereafter, costing LMC at least, $400,000.

• Failing to collect approximately $1 million in tuition from students who were allowed to take classes, earn credit for those classes, and-or graduate. Plus:

• Destroying Lon Morris’s value by implementing a grossly negligent business plan that included unlimited student population expansion that would cause debt and grievous expense beyond the ability to pay. Additionally, adding programs such as football, hospitality, and agriculture when the addition would require massive expenditures well beyond the remedy of any increase in revenues.

• Grossly mismanaging the estate, taking unauthorized actions, and not disclosing crucial information in a manner that devalued Lon Morris by millions of additional dollars — including $8 million to $10 million million in accreditation value alone.

• Engaging in McCall’s grossly negligent conduct, unauthorized actions, and nondisclosures also exposed Lon Morris to another $17 million in claims filed in the bankruptcy case by Sam Houston State University (the alternate beneficiary of the Long Endowment) and the Texas Attorney

General for violating the public trust.

In regard to the alleged improper actions of the LMC board of trustees, the lawsuit essentially blames members for allowing Dr. McCall to to commit the aforementioned actions, contributing to the millions in subsequent damages he is alleged to have caused.

“The Board Defendants were required to act in Lon Morris’s best interest and supervise McCall’s actions, including by authorizing financial and endowment transactions made outside of day-to-day operations,” it states. “The Board defendants breached their duties to Lon Morris during McCall’s tenure.”