GWG Holdings files suit against former lender over breakup fee

By Sarah Lizee

Olympia, Wash., May 19 – GWG Holdings, Inc. filed an adversary proceeding against its former debtor-in-possession lender, according to documents filed Thursday with the U.S. Bankruptcy Court for the Southern District of Texas.

The lender is Fifth Season Investments, LLC, formerly known as Chapford SMA Partnership, LP.

Fifth Season is demanding payment of an unearned $18.3 million breakup fee, GWG said in the suit.

GWG said the breakup fee would have been triggered if the debtors filed bid procedures, if they executed definitive documents for a sale, or if they sold at least 20% (by value or face amount) of the life insurance policy portfolio assets to a third party through a plan or reorganization.

In December, GWG entered into replacement DIP financing with Vida Capital, Inc., which replaced the previous DIP financing with Fifth Season.

The Vida financing is secured by all of the debtors’ assets, including the policy portfolio.

GWG said that, despite that the agreement between the debtor and Fifth Season explicitly provides that a bona fide replacement financing would not trigger the $18.3 million breakup fee, Fifth Season now asserts that the Vida DIP facility and the proposed exit financing to be provided by Vida are disguised asset sales and must be recharacterized as such, which would entitle Fifth Season to the breakup fee.

“To be clear, the Vida facilities are not asset sales in any sense,” GWG said in the court documents.

“Fifth Season’s position disregards the plain language of the applicable agreements as well as the characteristics of each of the Vida facilities, which bear all indicia of bona fide post-petition secured financings.”

GWG noted that the debtors and the to-be-formed holders of the policy portfolio will retain ownership of the collateral and any associated net residual value.

Further, the debtors still own and will continue to own the policy portfolio.

“There is no basis to break new ground and distort the plain meaning of the documents for the sole purpose of providing an unearned windfall to an unsuccessful bidder at the expense of the debtors’ legitimate creditors,” GWG said.

GWG is a life insurance company based in Dallas. The company filed bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas on April 20, 2022 under Chapter 11 case number 22-90032.

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