Mississippi Litigation Review & Commentary : Mississippi Personal Injury Lawyer & Attorney : Phillip W. Thomas Law Firm : MS Litigation Review & Commentary

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John Spalding wrote a lengthy comment to my last post about A&O that is listed below:

Mr. Thomas,

Your conclusions are misplaced. First and foremost, my wife and I are creditors in the A&O bankruptcy mess. I hear we are in the top five of investors who have lost money. A&O is trying to place companies that should not be bankrupt with companies that have financial problems to rid themselves of all their liabilities and attempt to avoid paying further interest. A&O's claim is that the Mississippi escrow company ran off with $2 million or $4 million, depending on which document you believe. What's a $2 million error between friends? The real question should be--how much should have been with the escrow company in Mississippi to pay premiums and where is that money? I believe the answer is closer to $12 million. Coincidentally, the SEC in the W Financial mess, involving Adley Wahab and Michael Wallens, accuses Wahab of receiving an improprer transfer of $10 million after Wahab's assets were frozen from Mackert.
Were I the trustee, the first order of business would be to see what policies had lapsed or were about to lapse and determine how to keep insuance companies from further lapsing any policies. Then I would try to figure out where the money is. I offered to talk with the Trustee last Friday. I have met with and spoken under oath with the Texas State Securities Board on at least three occasions and didn't "take the nickel", as you inaccurately suggest.
Not all insurance polices are created equally. Perhaps some of the policies should be allowed to lapse rather than pay exhorbitant premiums on something that should not pay for a number of years. I don't know, but if I were the trustee, I would be trying to figure it out.
You failed to mention that Bayou City Escrow was included in one lawsuit and then DISMISSED because it did not do anything wrong. It completely followed the terms of the Escrow Agreement between it and investors.
Finally, any suggestion that Bayou City Escrow was ever contracted to purchase policies, pay the bond premiums or prepay insurance premiums is inaccurate. There may be some other company who was retained to do so, I do not know, but I know Bayou City never was.
Thanks for allowing me to clarify.

John Spalding

I still don't believe that Mr. Spalding's law firm should be representing other A&O investors and asking those investors to waive conflicts, but I appreciate him taking the time to respond to my earlier post.

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Just when I thought the A&O situation could not get more bizarre, it has. There has been an unbelievable development in the A&O Life Bankruptcy proceeding. In the comments section to this earlier post on A&O, there was talk regarding a potential conflict of interest by a law firm that solicited A&O investors as clients. On October 6, 2009 the bankruptcy trustee (Patrick Collins) filed a motion for Rule 2004 examination of John and Laura Spalding regarding representation of investors by the Johnson Spalding Law Firm, which is where John Spalding practices law.  Here is a copy of the Motion. 

According to the motion:

In 2006-2007 Bayou City Escrow was an escrow agent for A&O. In that capacity Bayou City received millions of dollars in investments from investors and passed the funds to A&O entities and others.  John and Laura Spalding owned Bayou City.

John and Laura Spalding have run into trouble in Illinois for not registering life settlement investments as securities. Here is a link to that document. 

John Spalding is a lawyer with the law firm of Johnson and Spalding in Houston. In September 2009 a lawyer with Spalding's firm appeared in the bankruptcy proceeding on behalf of A&O investors, including the Spaldings. The firm now claims to represent 75 investors and entities.

Bayou City is already a defendant in at least one lawsuit against A&O.

Johnson and Spalding is claiming to represent investors who refused to sign contracts with the firm. So we have a law firm whose name partner owns a company being sued by A&O investors representing A&O investors. Sound like a conflict?

Now proceed to Ex. 8 to the motion, which starts on page 46 (of the pdf) and is an affidavit from Texas attorney Janet Chafin. According to Ms. Chafin:

Johnson and Spalding had a call-in conference for A&O investors on September 12, 2009. Johnson and Spalding lawyers Deborah Fritsche and Lori Hood led the call. During the call they did not disclose the firm's relationship with Bayou City. The firm offered to represent the investors for $325 per hour pro rated with an initial retainer of $1,000 or $2,000, depending on the amount invested.

Now proceed to p. 62 (pdf) of the motion, which is a Johnson and Spalding letter "to confirm you waive any conflict of interest arising from Johnson, Spalding, Doyle, West and Trent's representation of you...." The letter then lists other firm clients, including John and Laura Spalding. "You agree, understand and waive any conflicts of interest by and between you and any of the referenced parties which exist now or which may arise in the future."

Oh. My. God. That is un-freaking-believable. Potential targets in the A&O litigation sign up to represent investors and then attempt to have them waive the conflict of interest. I say attempt here because I do not believe that any court would enforce the waiver.

A&O is broke. Lawsuits on behalf of investors seeking to recover their losses will focus on brokers and other associates of A&O who participated in any fraud. Without question, Bayou City, which is owned by the Spaldings, is a potential target and has already been sued in at least one case. This creates a huge conflict of interest for Johnson and Spalding that exists regardless of the attempts to have the conflicts waived. Also, to waive a conflict the client must give knowing and informed consent. That appears not to have happened here.

You would guess that the Spaldings do not want to be deposed. Too bad! On October 14, 2009 the Court granted the motion and ordered the depositions. As Mickey Haller would say, don't be surprised if the Spaldings take the nickel.

I would be shocked if someone has not already filed a bar complaint in Texas against Johnson and Spalding and its lawyers. I am not familiar with disciplinary proceedings in Texas. But in Mississippi, the Bar would not look kindly upon this situation and a serious career altering sanction would be imposed.  

One other point: if I were an A&O investor I would insist that my lawyer take the case on contingency. You need a lawyer who is going to sink or swim with you, not someone who is going to get paid by the hour while taking no risk in the event that no money is recovered. It doesn't have to be a full contingency. It could be part hourly rate at a reduced rate and part contingency. Here is a quote from the web site of David Berg's firm in Houston:

Whether on the defense or plaintiffs side, we have always been willing to share the financial burden of litigation with our clients, entering into creative fee agreements that tie our fees to our results.

If I were an A&O investor I would be looking for a law firm with a similar attitude. This will not be an easy case to collect on and investors need counsel highly motivated to collect, not just get a judgment.