washingtonpost.com

Bankruptcy court official calls for probe of credit counseling firm

BC-MD--AmeriDebt Bankruptcy,0866

Bankruptcy court official calls for probe of credit counseling firm

mdbae-wh

GREENBELT, Md. (AP) -- The transfer of AmeriDebt's assets to a for-profit affiliate started by the Montgomery County credit counseling agency's former chief executive should be investigated as potentially fraudulent, according to a bankruptcy court examiner looking into AmeriDebt's finances.

The examiner, appointed by the U.S. Bankruptcy Court in Greenbelt, also noted in a report filed this past weekend that the Internal Revenue Service has filed a claim against AmeriDebt for more than $15 million, in anticipation that its nonprofit status might be revoked.

The examiner's report grew out of a request in June by the U.S. Trustee for the bankruptcy court to appoint a trustee to run AmeriDebt. The U.S. Trustee argued that AmeriDebt's managers had abdicated the management and finances to Ballenger Group, a for-profit company based in Frederick that has been paid millions of dollars to process AmeriDebt's client accounts.

Nelson Deckelbaum, AmeriDebt's bankruptcy lawyer, said Monday that he couldn't comment because he hadn't read the report.

"Our concern is for the protection of our consumers," Deckelbaum said. "That's our prime objective in this case. We have had a productive meeting with the examiner."

Mike Barnhart, a spokesman for Ballenger, said lawyers are "carefully and thoroughly reviewing the documents" and won't have a comment until they finish the task, which might be in several days.

The report and a decision to appoint a Chapter 11 trustee were to be considered at a hearing in bankruptcy court Tuesday.

AmeriDebt became one of the nation's largest credit counseling agencies in the 1990s through an aggressive advertising campaign. It had nearly 97,000 clients enrolled in debt management plans as of early last year.

But as the counseling agency grew, its business practices came under increasing scrutiny.

Last year, AmeriDebt was sued by the Federal Trade Commission and the states of Illinois, Missouri, Minnesota and Texas for deceptive practices, including charging excessive and poorly disclosed fees. In response, AmeriDebt stopped advertising and enrolling new customers last fall. In June, it filed for Chapter 11 bankruptcy protection, listing assets of $8.3 million and liabilities of $12.3 million.

In his report, examiner Raymond J. Peroutka Jr. looked at the connection between the nonprofit agency, for-profit affiliates and Andris Pukke, whose wife, Pamela Shuster, founded AmeriDebt in December 1996. Pukke had been convicted in 1996 of a federal felony related to a loan scheme.

Pukke created a for-profit company called DebtWorks in 1999, while he was chief executive of AmeriDebt, the examiner reported. A few months later, AmeriDebt agreed to sell its assets to DebtWorks and hire the for-profit company to process AmeriDebt's client accounts. Ballenger was formed with Pukke's help in late 2002 to acquire DebtWorks, and some of Ballenger's managers came from DebtWorks. Ballenger began handling AmeriDebt's processing last year.

"Mr. Pukke held a position of control within the Debtor's operations. His decision to set up DebtWorks and transfer assets should be subject to considerable scrutiny," Peroutka said in his report. The examiner said the "potential fraudulent" transfer needs to be investigated.

"We are aware that a more rigorous factual analysis of this potential claim is needed and that legal obstacles may exist," Peroutka said. "But we feel strongly that this issue should be vigorously pursued."

Pukke's lawyer, John Williams, said Monday that he hasn't seen the examiner's report and can't comment on it. But he added that AmeriDebt's assets were transferred for fair market value in 1999. "It's always easy to criticize something in retrospect," Williams said.

Meanwhile, AmeriDebt faces potential penalties from Texas and Illinois totaling $215 million.

"But perhaps of most significance, the IRS has filed a claim for more than $15 million in anticipation of an adverse determination on review of Debtor's (nonprofit) status," Peroutka said. The IRS could revoke the nonprofit status if it determined AmeriDebt didn't comply with its obligation to counsel and educate consumers or that AmeriDebt transferred "excess compensation" to Pukke through the DebtWorks deal, he said.

AmeriDebt's management has no current plan to reorganize, the examiner reported. AmeriDebt faces the prospect of transferring its clients to another counseling agency if customer needs can't be met cost effectively, he said.

Missouri's attorney general, Jay Nixon, who sued AmeriDebt last year, said he doesn't expect full restitution from AmeriDebt.

"At this point, with the assets that are there, it doesn't appear to be 100 cents on the dollar," said Nixon, adding that the state will press its case.

"We are like the Royal Canadian Mounties," he said. "We always get our man. Sometimes it takes a while. It would appear that we would have to follow the money through Ballenger and Pukke."

-- -- --

Information from: The Sun, http://www.baltsun.com

AP-ES-09-14-04 1111EDT


© 2004 The Washington Post Company