Daily Progress, Jacksonville, TX

February 7, 2013

Lon Morris estate and Attorney General still tangle over disposition of $3.5 million insurance fund.

Former LMC President Miles McCall denies he is guilty of negligence and breach of fiduciary duty in loss of over $1 million in endowment funds.

Ben Tinsley
Jacksonville Daily Progress

CHEROKEE COUNTY —

Despite a confirmation hearing that lasted several hours on Monday, the Lon Morris College bankruptcy estate still has additional matters to straighten out with Texas Attorney General Greg Abbott.

There is, for instance, the issue of who has the rights to claim proceeds from the $3.5 million Directors & Officer's Liability Insurance policy.

Abbott also seeks to resolve a pending motion for summary judgment his attorneys have filed against the LMC estate as well as two pending Declaratory Judgment Actions filed against LMC by Heartspring Methodist Foundation and the Texas Methodist Foundation.

According to court filings, Monday's evidentiary confirmation hearing was concluded for the most part although federal bankruptcy Judge Bill Parker is taking all evidence under advisement. Scheduled next is a telephone status hearing at 11 a.m. Feb. 26.

A couple of additional, after-the-fact minor claims in the amounts of $443 by Great American T-Shirt Company and $1,870.52 by GTM Sportswear were filed against the estate Wednesday.

In regard to the D&O insurance policy, Abbott and his attorneys still contend these proceeds are not and should not be allowed to become property of the bankruptcy estate. The AG, in filings made in bankruptcy court, contends there is no way the bankruptcy estate could not have received the proceeds without a bankruptcy claim.

Neither LMC Chief Restructuring Officer Dawn Ragan or Houston attorney Hugh Ray III from the Texas offices of McKool Smith returned requests for comment on the matter Wednesday. Shantel Dixon, a representative of RSUI Group Inc., the company that issued the D&O policy, responded, "Please be advised that RSUI has no comment."

The LMC bankruptcy estate, meanwhile, contends in its legal filings that the AG's argument is not "ripe" for adjudication.

At the end of Monday's hearing, the LMC bankruptcy estate had apparently settled the objections of nine other related parties to the finalization of its liquidation plan.

Texas Attorney General litigator Hal Morris — the main objecting party at Monday's hearing — argued that the process needed more transparency. Judge Bill Parker then called a hearing during which Ray, who represents the interests of the bankruptcy estate, completed negotiations with all the parties — ultimately agreeing to settle on every issue.

It was established by all parties in court that neither Abbott's office nor any governmental entity in the state (such as Sam Houston State University) can be stopped from suing Lon Morris College, its officers or directors or the LMC professionals for any pre-petition claims. Language in LMC's liquidation plan would have placed all jurisdictions under one legal umbrella — that of the bankruptcy court — making such action difficult.

This is good news for SHSU, whose officials had already filed a lawsuit against former LMC President Dr. Miles McCall in December.

Also agreed to by all parties is that state courts of concurrent jurisdiction do not have to get permission in bankruptcy court to sue over bankruptcy.

One key issue during Monday's hearing was the appointment of a "Plan Agent" who will liquidate the LMC estate after the liquidation plan is approved by the judge. This official will be supervised not by the judge, but by a group of three creditors, who have yet to be named.

After the bulk of the AG's concerns were resolved Monday, AG rep Morris was dismissed from the proceedings by the judge.

Incidentally, the related McCall lawsuit was filed against McCall by Sam Houston State University officials under the guidance of the AG's office. Both SMSU and the attorney general — the AG in its capacity as the protector of the public's interest in charity — seek to recover over $1 million in lost endowment monies SHSU officials contend they should have been forwarded when LMC first declared bankruptcy.

Dr. McCall has filed a general denial to all the allegations in Cherokee County's Second Judicial District Court, according to documents provided by the AG.

The money is missing from an endowment created by Rusk native Dr. James “Jimmie” Duncan Long, who was an educator, philanthropist and Lon Morris College grad. This endowment, as stated earlier, should have reverted to Sam Houston State University after LMC declared bankruptcy.

Dr. McCall, college president from July 2005 until he resigned May 24. 2012, was questioned last year regarding management of that particular endowment.

In SHSU's original petition, SHSU contends McCall "inappropriately" authorized the transfer of the Long Trust funds without permission from LMC's board of directors and failed to provide any documentation or security to preserve the money.

The lawsuit alleges negligence and breach of fiduciary duty on the part of Dr. McCall in his capacity as president.

Dr. McCall did not return a request for comment Wednesday. Dr. Fernando Gomez Vice Chancellor and General Counsel for the Texas State University System, also declined to address questions arising from the lawsuit.

"We cannot comment," Dr. Gomez said.

The allegations in the suit assert that the former president should have invested the trust funds to return for a reasonable rate of interest.

The allegations in the suit are similar to those of the LMC bankruptcy estate.

LMC contends McCall claimed he made a loan to the college but in actuality drained the Long Endowment, transferred the bulk of it to CDs, then had subordinates covertly cash many of the CDs and transfer them into a restricted fund without the knowledge of his board of trustees.