The Saga Continues…
New chapters to unfold as the liquidation of Kentucky Central Life Insurance Company moves into the courtroom

Like the horror movie villain that never seems to be sufficiently killed, the shredded remnants of Kentucky Central Life Insurance Company lurch toward the one thing that may finally bring some resolution to this drawn out tale – litigation.

In brief, the Kentucky Department of Insurance, under Commissioner Don Stephens, took control of KCL on February 12, 1993, when it stood at a $141 million deficit. The company was later declared insolvent, due in large part to bad real estate loans and consistently questionable investment decisions. Jefferson-Pilot Life Insurance Co. assumed the company's life and annuity liabilities and most of its related assets in May 1995 and provided $250 million of support. Additional support came from State Guaranty Funds. The balance of KCL's assets have been or are being sold by Insurance Commissioner George Nichols III under the supervision of Franklin Circuit Court judge William L. Graham.

As of last March 31, fees paid since February 1993 for attorneys, accountants and other professionals in the Kentucky Central liquidation totaled $46.2 million. There are over 30 lawsuits filed throughout the state. But even this part of the story will stretch out over the next few years, with several trial dates not yet set, and the policy surrender moratorium not due to expire until May 31, 2000.

Last May, the Liquidator made a $40 million distribution to the State Guaranty Associations, which had loaned $109 million to KCL for the benefit of policyholders, and committed another $44 million in policyholder support. Agreements were also reached to go ahead with extensive repairs and upgrades to Kincaid Towers, a property now held by the Liquidator.

Here is a preview of other coming attractions:

• On January 27, Wallace Wilkinson, Wallace's Bookstores and Wilkinson Enterprises, Inc. will go on trial in a case surrounding the sale to KCL of the Capital Plaza Hotel in 1987 (just after Wilkinson's election as governor). While KCL paid around $12 million for the Capital Plaza (based on a short form value opinion by Charlie Murphy), a "retrospective appraisal" by Atlantic Appraisals showed the hotel's value to be a mere $6 million.
• Next up, in July, will be developer Dudley Webb, et al. In this case, "al." embodies Donald and Julie Webb and about 22 other "Webb-related entities." Over $100 million is sought to cover claims against the Webbs pursuant to numerous promissory notes and personal guarantees. As noted in a 1993 Forbes article, "Kentucky Central lent $143 million – an astounding 32 percent of its loan portfolio – to partnerships headed by the Webbs. The insurance company invested another $26 million in joint ventures with the Webb brothers. During 1990 Kentucky Central refinanced more than half of the Webb loans at lower interest rates and extended the maturities."
• The biggest lawsuit, seeking $200 million, is against the five former officers and directors of KCL, the accounting firm Deloitte & Touche, and KCL's own former legal counsel. The individual defendants are:
  • Wendell L. Gunn, a KCL board member and senior vice president.
  • Edwin F. Schaeffer Jr., a KCL director and partner in the law firm of Kincaid, Wilson, Schaeffer, Hembree & Kinser.
  • Charles R. Hembree, a KCL board member and also a partner in the Kincaid law firm.
  • Robert D. Preston, a KCL director and company senior vice president.
  • H. Hart Hagan Jr., a KCL board member until 1989.

According to the suit, "The actions and failures to act by [Messrs.] Schaeffer, Hembree, Preston, Gunn and Hagan ... were undertaken or omitted with malice, oppression, willfulness and a wanton or reckless disregard for the rights of the KCL entities and KCL insureds, creditors and shareholders." Oddly enough, a $1.3 million payment has been made by the Liquidator to codefendant Deloitte & Touche for the firm's accounting services during the liquidation process. A date has not yet been set for this trial.

Other lawsuits name as defendants Wallace and Martha Wilkinson, for their personal guarantee regarding the performance of Park Plaza Associates; ABN AMRO Bank, regarding the Kincaid Towers property; and Mid-America Bank of Louisville and Trust Company, for their allegedly hasty liquidation of KCL securities to pay off part of Dudley Webb's outstanding debt. This last case is set to go to trial in October.

The cycle of bad and risky decisions appears to have germinated from a seemingly innocuous business strategy: a company sales goal. An unrealistic projection set in motion subsequent overpayment on certain life insurance products, which in turn forced the company to try and squeeze the highest yield they could from their real estate and investment portfolio. The gambles grew riskier, and the internal controls fewer. Now that delayed reckoning will come not in the company ledger, but in the courtroom.

Adam Bruns is a staff writer for The Lane Report.

EDITOR'S NOTE: A lawsuit represents only one side of a legal matter

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