Luke Lee, the founder and chief executive of Inspired Healthcare Capital, is locked in a legal dispute with the company’s creditors over access to a $10 million directors and officers (D&O) insurance policy. The policy could potentially cover millions of dollars in legal fees for Lee as the firm navigates Chapter 11 bankruptcy proceedings initiated this winter.
Lee launched Inspired Healthcare Capital in 2016, and the company eventually issued $1.2 billion in high-risk investments, including private placements and Delaware Statutory Trusts (DSTs). These securities were sold through independent broker-dealers and their financial advisors to fund the development of assisted-living facilities across 14 states. The collapse has drawn scrutiny from the financial advisory industry, as broker-dealers earned more than $100 million in fees and commissions on sales that have since stopped generating distributions for clients.
Earlier this month, Lee filed a motion in a Texas bankruptcy court to access the D&O insurance policy, according to court documents. On June 19, the committee of unsecured creditors filed an objection, arguing that the proceeds of such policies are property of the debtor’s estate and should not be used for Lee’s legal defense. The case highlights the contentious nature of insurance coverage in bankruptcy, particularly when fraud allegations may be involved.
“This type of insurance is to cover directors and officers from lawsuits, and it’s also a little blind to fraud,” said one senior industry executive who spoke on condition of anonymity. “There is certainly an emotional aspect to this, but keep in mind what these policies are designed to do.” An attorney for Lee declined to comment on the matter.
The $100 million in fees and commissions on $1.2 billion in sales represent an 8.3% commission rate, which is on the high end of industry standards. Emerson Equity served as the managing broker-dealer on 29 of the DSTs and all of the investment funds. Emerson was also the managing broker-dealer for more than $1 billion in now nearly worthless securities issued by bankrupt GWG Holdings, which filed for bankruptcy in 2022.
Inspired Healthcare Capital currently operates 33 senior-living facilities across 14 states and has acquired five real estate properties for development, two of which are still under construction and three that remain undeveloped land, according to a February bankruptcy filing. The company first used private placements to raise capital and shifted to DSTs in 2020.
The fight over D&O insurance echoes a similar situation at GPB Capital Holdings, another private-placement financed venture that collapsed. Last year, it was revealed that GPB underwrote $75 million in legal costs for its two senior executives, founder David Gentile and broker-dealer chief Jeff Schneider, both of whom were convicted felons. Such battles over legal fees can be particularly troubling for investors and advisors caught in the fallout.
Financial advisors should be aware that the high commissions on these private securities—8.3%—may have masked underlying risks. As the case unfolds, advisors may need to help business owners decouple personal wealth from company value, a topic covered in a recent InvestLin article: Advisors Must Help Business Owners Decouple Personal Wealth from Company Value. Additionally, the broader trend of nontraded REITs and private placements facing liquidity challenges is evident in the case of National Healthcare Properties, which recently listed on Nasdaq after a decade-long wait.
