Opinion ID: 510320
Heading Depth: 2
Heading Rank: 2

Heading: 1971-1973--The Creation of FEA

Text: 13 In 1971, several officers of HI submitted a plan to USI's management to create a subsidiary finance company that would purchase membership contracts from HI. When USI rejected the proposal Bond and Lee Schoonmaker, an accountant for Continental Alliance Company, began discussing the possibility of establishing a finance company that would purchase paper from HI. In September 1971, these discussions culminated in the creation of Financial Enterprises of America, Inc. (FEA). FEA was in turn divided into numerous subsidiaries--Financial Enterprises of Florida, Financial Enterprises of Minnesota, Financial Enterprises of Delaware, and the like 4 --whose purpose was to purchase contracts from HI's spas for their individual states. In addition, FEA acquired two corporations--Preferred Discount Corporation, in New York; and National Discount Corporation, in Pennsylvania--from HI for the price of one dollar each. With one exception, these finance companies purchased paper only from spas owned by HI. 14 Although much of the initial capital for FEA was obtained from passive investors, the list of shareholders quickly expanded to include seventeen directors, officers or employees of HI, including the president, vice-president and secretary-treasurer of HI. 295-A R. 10144-45; 9 R. 1947-50. Because of the need for secrecy, however, the shares were generally registered to a nominee. 15 In 1971 and 1972, FEA purchased membership contracts from HI. In addition, FEA developed an incentive program to encourage HI regional directors to increase the amount and quality of the contracts sold to FEA. In September 1972, however, USI's management became concerned that the relationship between HI and FEA was not in HI's best interest. 293 R. 9224. USI's management became aware of rumors of possible conflicts of interest between FEA and HI. 293 R. 9224. In December 1972, USI's board of directors ordered that HI's relationship with FEA be terminated. 293 R. 9225. Despite this directive, FEA continued to purchase HI membership paper through February 1973. 295-A R. 10205-08. Between December 7, 1982 and February 1983, approximately $2.7 million worth of membership paper was transmitted to FEA. 291 R. 8831-32. 16 In addition, FEA also held approximately $6,000,000 worth of HI membership contracts, all purchased on a full-recourse basis. 291 R. 8833. When USI attempted to receive payment for the contracts which had been sent to FEA after December 7, 1982, however, Schoonmaker refused either to pay for the paper or to return it. In addition, Schoonmaker implied that he might no longer service the other six million dollars worth of HI paper he currently held. As a consequence, USI's management began negotiations to acquire FEA. 17 On June 8, 1973, HI entered into an agreement with FEA to acquire virtually all its assets for approximately $1.2 million. 296 R. 10,386. For tax purposes HI did not acquire FEA's assets directly. Rather, FEA transferred its principal assets to a wholly owned subsidiary, Financial Enterprises of Kentucky (FEK), and HI then purchased all of FEK's stock. 18 As part of the purchase agreement, HI sought--and received--a warranty from FEA and its officers that none of the present or past officers, directors or shareholders of FEA or its subsidiaries, [was] or at anytime ha[d] been an officer, director, or managing agent of [HI], or any of its subsidiaries. 291 R. 8915. In addition, FEA and its officers represented that no portion of the purchase price ... [would] be paid, either directly or indirectly, to any present or past director, officer or managing agent of [HI], or any of its subsidiaries. 291 R. 8916. Finally, FEA and its officers warranted that to the best of their knowledge and information no officer, director or managing agent of [HI] or any of its subsidiaries [was] or at anytime ha[d] been a shareholder, either directly or equitably, of FEA. 291 R. 8916. All of the warranties were admittedly false. 5 296 R. 10,392-93.