Koster not happy with US Fidelis bankruptcy plan

By Jessica M. Karmasek | Oct 19, 2010


ST. LOUIS (Legal Newsline) - Missouri Attorney General Chris Koster, in an objection filed last week, says a proposed settlement in a US Fidelis bankruptcy case would allow the company's owners and family members to keep too much money.

In Koster's motion filed Friday, he wrote that the Attorney General's Office was "generally kept apprised" of the progress of settlement negotiations and "was afforded some opportunities to express its views" on the proceedings, but that neither the State nor any other state was "directly involved" in the negotiation or crafting of the settlement.

US Fidelis, once the nation's top seller of extended auto service contracts, filed for bankruptcy in March after being accused of illegal telemarketing ploys and selling worthless warranties.

Court documents suggest the owners, Darain and Cory Atkinson, used company money to maintain excessive lifestyles.

Under the terms of the settlement, the Atkinsons would surrender to US Fidelis about $10.5 million, plus assets amounting to about $10 million more.

The money would go to pay the company's creditors. However, the creditors would be able to tap into that money only after they agree not to sue the Atkinsons' brothers or wives.

In exchange, US Fidelis would drop a lawsuit accusing the Atkinsons of trying to cheat creditors by fraudulently plundering at least $101 million from the company.

Among the aspects of the settlement that give Missouri pause, according to Koster's motion, are the total compensation to the defendants and the third party releases that will be required.

"Nowhere aggregated in the Settlement Motion is this fact: The defendants walk away from this deal with $1,525,000.00 in cash, accounts, and hard assets. Not included in that amount are rent-free living for one of the Defendant's relatives and retainers for personal criminal representation that the Debtor paid for each of the brothers," Koster wrote.

"The Debtor's schedules suggest that the full amount of these retainers was at least $1 million, meaning the total value going to the defendants likely exceeds $2.5 million."

Koster said although never stated outright, the set up is clear: Creditors of the estate who wish to share in the settlement proceeds will be required to give a release to the non-debtor defendants.

"One problem with this arrangement is that the defendants unjustifiably receive, in effect, $20 million-plus worth of leverage that they can use to convince their creditors to grant them releases from various personal liabilities," he wrote. "Another problem is that it leads to inequities as between creditors."

Koster also noted collection could be a challenge. The defendants, he said, have assets in more than one state and even some assets abroad.

Still, despite the challenges and costs associated with collection, Koster believes they could be "overcome" and those costs would likely be substantially less than the amounts the defendants are being allowed to retain.

In his objection, he asked that the Court decline to approve the settlement.

U.S. Bankruptcy Judge Charles Rendlen III must sign off on the proposed settlement, and a hearing on it has been scheduled for Wednesday.

From Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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