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Auto-warranty firm fights $25M order from Maryland Attorney General

US Fidelis Inc., once the nation’s largest provider of after-market auto warranties but now embroiled in bankruptcy, is challenging the Maryland Attorney General’s order that it pay more than $25 million in restitution and penalties.

The attorney general’s Consumer Protection Division found that the Missouri-based firm cheated nearly 17,000 Marylanders, in part by selling them “bumper-to-bumper” warranties that failed to cover many auto parts commonly found between the bumpers.

US Fidelis filed a petition for judicial review in Baltimore City Circuit Court, saying the order was “aggrieving and/or materially affecting” the company’s rights.

Philip Ziperman, deputy chief of the division, said the state’s law enforcement actions are exempt from the protection against civil litigation afforded to those in bankruptcy. However, he said the state would not be able to collect on its restitution claim until after the completion of the bankruptcy proceedings, which began in March 2010.

“We pursued our case despite the bankruptcy because we thought the violations were serious in nature and we wanted to obtain relief for Maryland consumers,” Ziperman said.

US Fidelis attorney Kenneth E. Chase, from the Washington, D.C., office of Lathrop & Gage LLP, said he could not comment on the petition for judicial review, which was filed Aug. 25.

Ziperman said Maryland is one of more than 40 states that have filed claims against US Fidelis and its embattled owners, Darain and Cory Atkinson, who were indicted for fraud in June in Missouri.

Scott Eisenberg, the chief restructuring officer appointed by a federal bankruptcy court to liquidate and redistribute US Fidelis’ assets, said the petition for judicial review was essentially a formality. He said Marylanders would likely get a piece of US Fidelis’ assets, but probably not $25 million because the company simply didn’t have that kind of money.

“Based on the assets on hand, I don’t think that will be the [amount],” Eisenberg said. “If you’ve got 40 states asking for $25 million a state — just to use a number — that’s $2 billion.”

Ziperman agreed that “Marylanders are unfortunately unlikely to be fully compensated” because of the bankruptcy.

The indictment against the Atkinson brothers alleges that US Fidelis exaggerated the coverage its warranties provide, falsely suggested it had relationships with car dealers, overcharged customers and kept refunds owed to customers who canceled their coverage.

The Consumer Protection Division’s order, filed Aug. 1, demands that US Fidelis pay back the 16,972 Marylanders the Attorney General’s office identified as buyers of US Fidelis warranties between 2005 and 2010.

Added to the $23,527,411 in restitution for those customers is nearly $1.7 million in penalties — $100 for each customer.

Attorney General Douglas F. Gansler released a statement shortly after the consumer protection order was filed.

“US Fidelis misled thousands of Marylanders by promising warranties that it could not offer,” Gansler’s statement read. “Businesses that sell vehicle service contracts need to be truthful and upfront about the coverage they are offering so consumers can make informed decisions whether to purchase the policies.”

US Fidelis stopped selling warranties in December 2009, three months before filing bankruptcy. The consumer protection order also demands that the company change its business practices if it tries to sell warranties in Maryland again.

“We have an injunction that says going forward, if you’re going to sell these things, you can’t mislead consumers,” Ziperman said. “You have to provide the coverage you’re promising. ‘Bumper-to-bumper’ can’t exclude several things between the bumpers.”