Daily Progress, Jacksonville, TX

December 11, 2012

DISCONNECT: Can an Texas Attorney General investigation into missing money cost Lon Morris College even more money?

Ben Tinsley
Jacksonville Daily Progress

JACKSONVILLE —

Contradictions continue to crop up in federal court documents and public statements made by the Lon Morris College bankruptcy estate.

This most recently was exhibited in the estate's response to Texas Attorney General Greg Abbott's ongoing investigation into missing LMC endowment funds.

In a federal hearing last week, LMC estate officials sought permission to take out a second "debtor in possession" loan to defray its Chapter 11 bankruptcy costs. A written request to U.S. Bankruptcy Judge Bill Parker from LMC Chief Restructuring Officer Dawn Ragan blamed the need for the loan in part on the Texas Attorney General's Office's investigation.

During the actual hearing, Ragan and attorney Hugh Ray III asserted that both the Texas AG's investigation and subsequent media coverage is causing deliberate and irreparable harm to its upcoming auction sale.

In the petition, Ragan asserted that the AG investigation forced college officials to spend more money to conduct their own inquiry into missing endowment monies.

"Compliance with the Attorney General’s requests requires fees and other expenses for, among other things, professional time, which were not anticipated in the First DIP Facility budget," reads Ragan's petition.

The first disconnect comes in that despite the college allegedly conducting its own investigation into the matter, Ragan states in the petition that the college estate anticipates spending even more money trying to keep the attorney general from redirecting any endowment money away from LMC.

"The Attorney General has indicated that it may seek to redirect to another college certain gifts and bequests given to Lon Morris," Ragan wrote. "Defense of Lon Morris’s interests in the funds will require additional expenses."

Despite the fact that a $500,000 loan was requested by LMC officials during this proceeding, the judge authorized them to borrow $150,000. There will be a followup hearing later this month during which the attorney general will object to LMC borrowing the remaining $350,000, AG spokesman Thomas Kelley said.

As last week's hearing was still taking place, the LMC issued a press release mentioning the loan and the fact that the estate's planned auction had been delayed until January — but nothing about the comments about the attorney general, written or spoken.

The attacks by Lon Morris officials prompted a letter to Ragan from AG representative Hal Morris emphasizing that the investigation should not impact the auction or any bidder's ability to acquire real estate free and clear of any existing liens and claims.

The next disconnect is that in the petition to Judge Parker, Ragan acknowledges that "certain of the college's trust funds may have gone missing in 2010." However, in person, Ragan has gone to great lengths to assert to the Daily Progress and other media that there was no missing money.

"The funds are not missing, but the question is whether they were spent appropriately," Ragan asserted in a Nov. 30 email to the Jacksonville Daily Progress. "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."

Is the parallel investigation even needed? Neither Ragan nor Ray responded to requests for further comment Tuesday.

This began in October, after the Texas Attorney General's Office announced 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 endowment, according to officials and court documents.

Ragan's explanation to the Progress for the missing funds: "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."

This second "debtor in possession" loan authorized by the judge will come 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.

In return for the loan, the lenders will obtain liens on the Cole Learning Center at 410 Tilley; the Athletic Coach’s Office at 404 Devereux; the Chaplain’s Home at 409 Tilley; the Morris Hassel Alumni & Student Center, 502 Devereux; and the Turner Smith Visual Arts Building, 905 College, according to court documents.

The Texas AG opposed the LMC bankruptcy estate's application for this loan, asserting that without incoming funds, it would amount to a de facto sale of the college property on which liens were placed.

Incidentally, the court previously authorized the Debtor to borrow up to $750,000 from Amegy.