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Suit seeks to block US Fidelis affiliate from gaining

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US Fidelis office
April 17, 2009 - An overview of the US Fidelis call center in Wentzville.

The telemarketers of US Fidelis never would have been able to sell more than 650,000 vehicle-service contracts without the "financial grease" provided by a little-known finance company that stands to take the lion's share of US Fidelis' $25 million bankruptcy estate, according to a suit filed this week in the Wentzville firm's bankruptcy case.

If the suit succeeds at limiting the take of Chicago-based Mepco Finance Corp., more money could go to other creditors — including hundreds of disgruntled customers who have filed claims and state attorneys general seeking restitution for tens of thousands more.

Other creditors who could benefit from the suit include consultants who were owed hundreds of thousands of dollars in fees for trying to keep US Fidelis afloat, as well as potentially hundreds of former employees who didn't get sufficient notice when they were laid off.

The lawsuit takes the long-running scandal from the realm of high-pressure telemarketers peddling presumably worthless auto service contracts and into the complex financing arrangements that underpinned the whole scheme. Those deals ultimately collapsed along with Fidelis when customers revolted en masse.

Mepco was left holding the biggest bag: $57 million in bad debt, according to a proof of claim the company filed in bankruptcy court. As Mepco, the only secured creditor, seeks to get in line before others Fidelis owes money to, a committee of unsecured creditors with large claims sued Tuesday to prevent the company from collecting a dime — alleging Mepco was deeply enmeshed in the scheme. According to the suit, Mepco acted as willing partner in a business model that the finance company should have known was built on fraud and could not be sustained.

Among the plaintiffs is the law firm started by John Ashcroft, a former Missouri senator and U.S. attorney general. His firm contends that US Fidelis stiffed it $676,277 for consulting work it performed.

A lawyer for Mepco wouldn't comment on specific allegations of the suit. "Mepco believes these claims are absolutely meritless, and we're going to vigorously defend," said David Going, a partner at Clayton-based Armstrong Teasdale.

Mepco is the primary finance company used by independent sellers of vehicle service contracts, and it financed coverage plans sold by dozens of firms that have operated out of the industry's hub in the St. Louis area.

In terms of sales volume, none of those companies rivaled US Fidelis, the country's No. 1 seller of vehicle service contracts. It began to collapse in late 2009 amid allegations that it routinely lied to consumers in order to sell auto protection plans riddled with fine-print exceptions and limitations.

US Fidelis filed for bankruptcy in March 2010, and its owners, brothers Darain and Cory Atkinson, were indicted on June 15 on charges of consumer fraud, stealing and illegally selling insurance.

The latest suit seeks to draw a line of responsibility from the Atkinsons to Mepco, a subsidiary of publicly traded Independent Bank Corp., based in Ionia, Mich.

Mepco provided more than 600,000 US Fidelis customers with interest-free financing for their purchases of the service contracts, which typically cost them between $2,000 and $4,000, depending on the type of coverage, the age and model of the covered car and the persuasiveness of the commission-paid telemarketer who closed the sale.

After a consumer started making monthly payments to Mepco, the company would pay in lump sum the entire amount US Fidelis was to due to receive over the life of the contract, which typically lasted four or five years. When consumers canceled coverage or stopped making payments, US Fidelis would owe money to Mepco and the amount would be deducted from payments related to new sales.

The system worked only as long as US Fidelis continued strong sales and existing customers kept making their monthly payments. In 2009, cancellations outpaced new sales and US Fidelis quickly fell deeply in debt to Mepco.

According to the suit, the arrangement "came to embody some of the same elements of a Ponzi scheme in that (Mepco's) ability to be paid by US Fidelis for cancellations on yesterday's sales was largely dependent on fundings from tomorrow's sales."

In addition to the money owed to Mepco stemming from cancellations, Mepco lent US Fidelis about $4.5 million after it filed for bankruptcy protection in order to keep some operations running, including efforts to discourage customers from canceling coverage or stopping payments, which would have the effect of increasing the amount that Mepco was owed.

The suit seeks to subordinate about $1.9 million from that loan that was used to operate what it called "a kind of collection agency for Mepco."

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