The Texas Methodist Foundation is suing the Lon Morris College bankruptcy estate and Texas Attorney General Greg Abbott to prevent Dawn Ragan, the college's chief restructuring officer, from liquidating five separate charitable endowments totaling $265,000 to pay Chapter 11 bankruptcy costs.
The news comes on the same day the Texas Attorney General's Office announced it is attempting to halt the upcoming Dec. 13 college auction because AG officials believe LMC may be improperly attempting to sell restricted assets that are not part of the bankruptcy estate. Lon Morris College is tentatively scheduled to start that auction at 11 a.m. Dec. 13 at McKool Smith, PC, 300 Crescent Court, 12th floor, in Dallas.
Ultimately, the lawsuit from the Texas Methodist Foundation – a domestic non-profit organization – seeks a declaration that none of the endowments are legally considered property of the bankruptcy estate of Lon Morris College.
The lawsuit, filed Nov. 6, asserts that the funds were created with the intention of furthering educational, charitable and religious endeavors of the Methodist church and "Methodism" and not to be used as financial fodder to help offset the college's liquidation costs.
Legal action on behalf of the Texas Methodist Foundation was prompted after Ragan requested they wire her $100,635.36, the principal balance of "The Faubion Funds" endowment. The lawsuit contends that in the request, Ragan stated the funds were needed to "assist in managing current liquidity constraints" and further stated any additional funding provided will be used to cover payroll, utilities, insurance and general overhead costs as well as certain marking/advertising costs," reads the lawsuit.
"As a result of the termination of the educational and religious endeavors of Lon Morris College, the executive committee of TMF ... has determined that to provide any further funds from any of the endowments to Lon Morris College would defeat the charitable intention of the endowments," the lawsuit states.
When asked to respond to these allegations, Ragan emailed the following statement to a reporter:
"The college has been the recipient of many gifts over time, and some of those gifts have been restricted, and some have not," she wrote. "Mone-tary gifts are generally held at various foundations that manage the investment of those funds, which then remit earnings or other distributions to the College periodically. The debtor has been seeking to obtain unrestricted funds to be used to help pay its debts, in particular the unpaid employee wages as well as unsecured creditors such as local vendors and suppliers."
Tom Kelley, Texas Attorney General's Office spokesman did not immediately have a response to the ATF complaint on Friday, but said his office will be filing an answer to it in the next seven days.
This Eastern District lawsuit is the second major legal challenge to the manner in which the college has managed its endowments in the wake of bankruptcy.
The first came when a representative of the Texas Attorney General's Office an-nounced an investigation into a missing $1.3 million from an endowment that should have reverted to Sam Houston State University after LMC declared bankruptcy. Dr. Miles McCall, college president from July 2005 until he resigned May 24, was questioned regarding management of the en-dowment, according to officials and court documents.
In her response, Ragan also addressed the Texas Attorney General's investigation, about which she initially declined comment. This $1.3 million endowment was created by Rusk native Dr. James “Jimmie” Duncan Long, an educator, philanthropist and Lon Morris College grad.
"Money from the Long endowment was given primarily for the library, but also included a provision that the school could invest those funds as it saw fit, and since the money was earning less than 1 percent at the time, it is my understanding the decision was made to further invest in the school and ongoing improvements," Ragan wrote. "The funds are not missing, but the question is whether they were spent appropriately. We are cooperating with the Attorney General’s office in their investigation, as well as conducting a parallel investigation ourselves. These actions happened long ago well in advance of any sale or liquidation process."
A copy of the Texas Methodist Foundation lawsuit was provided by Austin Attorney Kell C. Mercer, who declined further comment on the matter.
Each of the following endowments is held and administrated by TMF:
• The Faubion Endow-ment Fund, created by Last Will and Testament on May 21, 1996, with a current appropriate principal balance relevant to Lon Morris College of $102,261.25.
• The Buel N. Kiker and Rhena N. Kiker Memorial Fund created by Trust Agreement on June 29, 1989, with a current appraiser Principal balance relevant to LMC of $102,906.87.
• The Herbert E. Dishman and Family Trust; created by Trust Agreement on July 2, 1968, with a current approximate principal balance relevant to LMC of $50,444.67
• The Donald G. and Marjorie L. Willis Fund, created by Trust Agree-ment on January 12, 1989, with a current approximately principal balance relevant to LMC of $4,161.79.
• The JL "Bo" Wilson Scholarship Fund, created in December 1976; with a current approximate principal balance relevant to LMC of $10,090.23.