A trustee for Waco-based Life Partners Holdings, a company that sells life insurance policies on behalf of the terminally ill, has filed suit against more than two dozen local, state and national nonprofit agencies seeking the return of $2.1 million in donations made before the company filed for bankruptcy protection last year.
Organizations such as Fuzzy Friends Rescue, Rapoport Academy, Baylor Waco Foundation, the Greater Waco Chamber of Commerce and 23 others have been named in the filing in U.S. District Court in Fort Worth. Trustee H. Thomas Moran asserts that longtime Life Partners CEO Brian Pardo made the donations from funds he fraudulently received.
The suit says defendants “were beneficiaries of Life Partners’ scheme for more than seven years” and that the money legally belongs to company investors.
Among the gifts called into question is the $500,000 donation made to Rapoport Academy to renovate old Grant Hall on the historic Paul Quinn College campus in East Waco for use as a creative-arts facility. That project was completed with help from Pardo’s donation and was named the Dunnam Creative Arts Building.
“We oppose the litigation at hand, but our legal counsel said we can’t really discuss the matter,” said Alexis Neumann, superintendent of Rapoport Academy.
Several entities involved in the welfare of animals appeared in the legal action as having received regular or one-time donations from Pardo. They include, besides Fuzzy Friends Rescue, an organization called Camp Diggy Bones, an animal boarding and training organization based in Lavon; the Colorado State University Animal Cancer Center; Project K-911, an animal rescue organization in Humble; and Love to Spare, an animal support facility based in Central Texas.
Waco businessman Clifton Robinson and his wife, Betsy Robinson, are longtime financial supporters of Fuzzy Friends Rescue, which operates a no-kill shelter.
“I am not a lawyer by any means, and I don’t have a legal background, but this sounds to me to be a little ridiculous,” Clifton Robinson said. “But the law could be on the trustees’ side. I don’t know. I would think it would be difficult, if not impossible, for many of those on this list to repay the money.”
Betsy Robinson, who is more familiar with day-to-day operations of Fuzzy Friends, did not return a call seeking comment.Several of the organizations contacted about the lawsuit said they would have no comment because the issue involves pending litigation.
Heart of Texas Speedway in Elm Mott reportedly received $81,600 from Pardo, who has family members who race, according to the suit.
Amanda Bauser, who identified herself as the manager of Heart of Texas Speedway, said she was aware of the lawsuit but did not know how the new ownership, Betall Inc., would respond to it. She said Betall bought the track from longtime owners Gene and Bill Adamcik in 2014.
Melody McDermitt, executive director of the Central Texas Senior Ministry, which includes Meals & Wheels, said the matter now rests with an attorney.
“Has the money been spent? Absolutely,” said McDermitt, referring to the $17,000 reportedly received from Pardo.
She said the ministry received a $10,000 gift in 2010 to buy a food delivery vehicle, and $5,000 in 2012 to help cover funding cuts.
The lawsuit follows an investigation by the U.S. Securities and Exchange Commission into Life Partners’ practices involving the sale of investment contracts, through which investors obtained an interest in the proceeds of a life insurance policy on the basis of life expectancies.
For example, five investors could agree to pay $500,000 for a $1 million life insurance policy held by someone expected to live only a year. The seller of the policy immediately would have money for living expenses and medical treatments, and the buyers would receive a nice return on their investment.
The SEC and the lawsuit claim that Life Partners, in marketing the investments, greatly underestimated how long individuals would live, making the policies more attractive. The suit also alleges that the commissions received by Life Partners for brokering the sales often proved larger than the buyers anticipated.
“Specifically, Life Partners hid the egregious amount it charged in fees and commissions from its investors, never disclosing that roughly one-third of all investment dollars went to those fees,” the suit said, adding that only about 20 percent of the proceeds from investors were used to acquire policies.
The remaining 80 percent of the acquisition costs were divided primarily between future premiums and commissions to licensees and Life Partners, the suit alleges.
This “fraudulent scheme,” according to the suit, “continued to generate funds that flowed into the pockets of Pardo and other accomplices.”
Donations from Pardo were fraudulent because “defendants exchanged no reasonably equivalent consideration for what they received,” the suit states, adding that the distributions deprived Life Partners of funds it should have been using to administer the life insurance policies.
It alleges that Pardo “looted” Life Partners even after he knew the business had become insolvent and unsustainable.
David M. Bennett, an attorney with the Dallas firm of Thompson & Knight, filed the suit on behalf of trustee H. Thomas Moran II.
“We’re not suggesting that any of these defendants were involved in fraud,” Bennett said. “But, unfortunately for them, we are trying to recover as much as we can for people who have lost material parts of their life savings. This is one of the tools made available to us under the law.”
He said he is aware that many, or even most, of the organizations already have spent what they received from Pardo.
“We will address them on a case-by-case basis,” he said. “What we can actually recover remains to be seen, but we’ll try to recover as much as we can.”
Over the years, Bennett said, Life Partners Holdings has sold $1.4 billion in policies to more than 20,000 individual investors.
“They were originally promised an 18 percent return, but many won’t be able to recover all they originally invested,” he said.
Pardo, who is no longer involved in the operation of Life Partners, could not be reached for comment. Bennett said Life Partners does have a staff and continues to conduct business, but activities are almost exclusively devoted to researching the company’s brokering of policy sales to settle the bankruptcy filing.
David Dickson, a bankruptcy attorney in Waco, confirmed that he and his law partner, Rick Brophy, have been retained to represent four of the defendants.
“This is a tool that can be used,” he said of the lawsuit against the nonprofit groups. “But there are many defenses against it, and those will be raised at the appropriate time with the appropriate pleadings. We anticipate filing an answer later this week.”