Athens Review, Athens, Texas

In the News

December 4, 2012

AG tries to block $500,000 loan to Lon Morris

JACKSONVILLE — Texas Attorney General Greg Abbott is intervening in the bankruptcy proceedings of Lon Morris College to protect charitable endowments and ensure a level playing field for unsecured creditors trying to recover their money, court documents show.

Abbott's latest foray: Attempting to block a $500,000 loan that the LMC bankruptcy estate is seeking, allegedly to pay staff and maintain the college through the conclusion of an upcoming auction and sale

But there's no guarantee the auction will take place on Dec. 13.

Late last week,  AG representatives filed paperwork attempting to stall the upcoming Dec. 13 auction at least until after the New Year.

At roughly the same time Texas Attorney General officials were maintaining their strong presence in Tyler federal bankruptcy court last week, representatives of auction company Ameribid LLC  were calling area reporters en masse, offering tours of the now-vacant Lon Morris College campus, chatting up the auction and making no mention of any possible postponement.

As to his office's opposition to LMC's requested loan, Abbott contends if the college bankruptcy estate is allowed to borrow money without incoming revenue – basically, with no way to pay it back – it would amount to a de facto sale, which would be to the detriment of LMC's unsecured creditors. A $500,000 loan would provide problems for the unsecured creditors because it could eat into the $585,000 the bankruptcy estate has set for them in its plan, the petition states.

"The OAG contends that that proposed auction is actually being conducted for the true benefit of the secured creditors," reads the petition filed last week in Tyler.

One AG criticism of the loan request is that "there is no specificity for what cost and expense the loan proceeds will be used."

Ultimately, the loan illustrates vast disparities in the way the auction itself will benefit the college's secured and unsecured creditors, according to the paperwork, which was provided to the Daily Progress by Tom Kelley, Texas AG spokesman.

The AG contends college maintenance expenses should be limited to minimal staff, and security and maintenance personnel. 

Additionally, instead of taking a loan, LMC and secured creditors would be best served if the secured creditors themselves paid for the expenses the loan is being sought to cover, the AG said.

"Given that the debtor no longer conducts any business and is not generating any revenue, the proposed transaction essentially provides for the debtor to 'sell' its unencumbered property to the DIP lenders in order to fund administrative expenses for the true benefit of the case professionals," the petition reads. "… The debtor should not have to incur additional financing to the detriment of unsecured creditors."

 As part of their opposition to a Dec. 13 auction, the AG is currently investigating whether the Lon Morris bankruptcy estate is trying to auction off restricted property it does not legally own and expects to file a declaratory judgment preventing that from happening.

The auction should not be held since their active investigation is still being conducted, the AG asserts. As part of this investigation, the AG has already located four parcels believed to be restricted properties that cannot legally be auctioned away, reports show.

Yet another aspect of the AG investigation is a missing $1.3 million from an endowment that should have reverted to Sam Houston State University after LMC declared bankruptcy.

Finally, in a separate but related legal matter, the Texas Methodist Foundation has filed its own lawsuit against LMC and the AG's office last month to prevent the college's chief restructuring officer, Dawn Ragan, from liquidating five separate charitable endowments totaling $265,000 to pay Chapter 11 bankruptcy costs.

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