U.S. Bankruptcy Judge Marvin Isgur ended a hearing Friday morning in the GWG Holdings case after finding lawyers for the trustee had failed to meet their due process obligations under the constitution to provide bondholders with notice of how a proposed settlement would impact them.
“I find there is not due process notice and this is not a close call,” he said, adding the effort of the lawyers to inform bondholders, some of whom put their life savings in the company, that they could expect to get back only about 3 percent of what they invested was “completely deficient” and “an embarrassment.”
GWG, a Dallas-based financial services firm that sells bonds backed by life insurance policies, filed its Chapter 11 bankruptcy petition in April 2022. Litigation trustee Michael Goldberg filed a motion with the court March 7 seeking approval of a $50.5 million settlement agreement with GWG directors and officers who are covered by insurance policies.
“In exchange, the litigation trust will release its claims against the settling defendants but will continue pursuing claims against the reserved trust action defendants, which include various trusts and entities affiliated with Bradley K. Heppner,” the 34-page motion reads.
“The proposed settlement resulted from the parties’ ultimate acceptance of a mediators’ proposal by the Hon. Royal Furgeson (ret.) and David Murphy after nearly 18 months of hard-fought negotiations and multiple mediation sessions,” the trustee told the court in the filing. “After careful consideration, the litigation trustee believes that the proposed settlement is in the best interests of the litigation trust and ultimate beneficiaries.”
According to the motion, there is a “substantial risk” that the D&O policies that would fund the proposed settlement “will be exhausted within the next 18 to 24 months (if not much sooner) as the litigation in the adversary proceeding and the class action ramp up, and proceeds continue to be depleted in parallel legal proceedings.”
Judge Isgur kicked off the 10 a.m. hearing at the Bob Casey Federal Courthouse by reminding Nathaniel Palmer of Reid Collins, who represents Goldberg, that at the time of the last hearing in the case, bondholders hadn’t been told about the “consequences” of the proposed settlement, namely that a $10,000 investment would result in a $300 payout.
“I don’t know that we have due process notice to folks about what’s happening to them,” Judge Isgur said.
The judge asked whether filing the proposed settlement documents to the docket three days before the hearing constituted due process notice. Palmer said the information had also been posted on the GWG bankruptcy FAQ website. Judge Isgur again asked Palmer, as an officer of the court, if he believed bondholders had been given adequate notice of the effect of the settlement on them.
“I don’t have a great answer for you on that,” Palmer said before asking for a five-minute recess to discuss the issue with counsel for the GWG Wind Down Trust, Elizabeth Freeman. When he returned, Palmer told the court he did believe there had been adequate notice given about the impact of the proposed settlement on the bondholders.
Palmer then called Kathy Mayle, a senior director of MACCO Restructuring Group who has been coordinating communication with the bondholders, to testify about the efforts that have been made to inform investors about the impact of the proposed settlement.
Judge Isgur allowed several bondholders who had joined the hearing remotely from across the country to ask questions both of Mayle directly and about the proposed settlement generally. One caller said the FAQ website and the information displayed there was confusing and lamented that the alternative to accepting the deal would mean more litigation and more attorney fees would eat up what’s left of the pie for bondholders.
Another caller, who said he was a “reasonably intelligent” retired electrical engineer in Virginia who had $150,000 tied up in GWG, told the court he hadn’t been able to understand the documents about the impact of the proposed settlement.
One bondholder said no one he contacted for more information was returning his phone calls. Mayle testified that all calls and emails are responded to. Another caller complained that when she called, no one would give her an answer on what her payout would be under the proposed settlement. Mayle testified that’s because they don’t provide estimates because they want their answers to be exact.
Judge Isgur asked Mayle when she told people how much they could expect to receive from the settlement. She said she hadn’t done that and that no one else from her office had, but that the information was posted to the website.
One caller, who had $192,000 in GWG, said it was “beyond disappointing” that she had yet to be informed what her payout would be under the proposed deal. Another caller, who said she has her entire life savings in GWG, called leaders of the company “charlatans.”
Still another bondholder who called into the hearing said he is also advising 11 other clients involved in this case and even he couldn’t figure out what the payout would be, meaning in his estimation, there was “no way” his clients — or the thousands of other individual bondholders — could have done so.
Another bondholder who called in asked Judge Isgur if it was protocol in bankruptcy cases for a bondholder to have to continually check a website for information about the case rather than receive communications by mail. Judge Isgur told her it wasn’t protocol and said to that point, he hadn’t heard any testimony indicating the trustee’s attempt at notice was sufficient to meet due process requirements.
Before leaving the stand, Mayle told the court that an earlier mailing sent to all bondholders had cost $324,000.
Soon thereafter, Judge Isgur found there had not been due process notice, that efforts to meet that requirement had been “completely deficient” and that, therefore, the hearing could not continue. He told the parties that it “was knowable” to the attorneys at the time the earlier mailing was sent out what the payout would be to individual bondholders and that wasn’t communicated. He said the idea that posting the information on the website would be sufficient “is absurd.”
Judge Isgur then addressed a public policy issue tied to the heart of the proposed settlement agreement and seemed bothered that in all the briefing to the court “no one bothered to cite” what he called the most influential opinion in this area of law, a panel opinion authored by retired Seventh Circuit Judge Richard Posner in 2001 in Level 3 Communications v. Federal Insurance Company, and a subsequent 2010 ruling from the Fifth Circuit that cited that case.
In Level 3, the court determined an insurance policy could not be used to cover a settlement in a fraud suit. Judge Isgur said it would be against public policy to hold that someone could be insured for “wilful fraudulent conduct” and requested the parties address the issue in future briefing.
Toward the end of the hearing, another attorney for the trustee asked Judge Isgur to clarify what language he wanted to see in the mailed notice to bondholders so that they don’t “waste another $300,000.”
The judge replied that he wasn’t going to “dictate the language” and instructed the attorney to “do it right.”
“I think it’s an embarrassment that people weren’t told” what their payout would be, he said.
The last attorney to address the court at the hearing was Elizabeth Freeman, who said one of the issues in communication with the bondholders has been in reaching those “indirect” holders through various financial advisory firms. With more than 100 bondholders still tuned in to the hearing remotely, she asked those individuals to contact the wind-down trust directly and gave the website and phone number, vouching that all calls and messages are being returned within 24 hours.
Judge Isgur allowed one last bondholder to address the court. The woman told the court she had tried many times to call Freeman directly and that none of her phone calls were answered, and none of her messages were returned. The caller then raised the issue of Freeman’s illicit relationship with former bankruptcy judge David Jones, who resigned his bench after the relationship was publicly reported.
“How can we trust her?” the caller asked.
“Thank you for your statement,” Judge Isgur replied before adjourning the hearing.
Goldberg, the trustee, has also sued the law firm Holland & Knight, filing a 156-page complaint last month accusing the firm of “knowing participation in a fraudulent looting scheme and associated criminal enterprise” that included Dallas-based financial services firm Beneficient and its founder and CEO Bradley Heppner.
Goldberg alleges the firm and Dallas partner Bill Banowsky colluded with Heppner to “fraudulently induce” GWG to invest $148.4 million to help BEN “stave off collapse” by repaying a senior lender. But the senior lender, according to the complaint, was actually a “front for Heppner” and the money “flowed in-and-out of bank accounts of various Heppner-controlled intermediaries into an entity that had for two decades functioned as Heppner’s personal slush fund.”
In April 2024, Goldberg filed suit against BEN, Heppner and other executives, accusing them of fraud and conspiracy. And in September 2024, he targeted Foley & Lardner in another lawsuit, alleging the firm GWG hired to advise a special committee guiding the company’s partnership with BEN had committed legal malpractice and breach of fiduciary duty. Judge Isgur sent that case to arbitration in February.
The case number is 22-90032.
Mark Curriden contributed to this report.