A couple of eagle eye readers spotted a little article in the Orlando Sentinel which announced the bankruptcy filing of one of the debt relief industry kingmakers.
Tim McCallan has been a major player in the debt relief industry for decades now. Over the many years of this site I’ve written articles about McCallan, his history in debt relief, and some of the companies he’s been involved with. You can see past articles here.
Probably one of the most colossal stories is about how McCallan allegedly recruited attorney Keith “Andy” Nelms out of Alabama to be the face of Allegro Law. Nelms wound up losing his law license for three years and filed bankruptcy. This followed involvement with the defunct debt settlement company Hess Kennedy, which tanked in spectacular fashion. – Source
McCallan went on to be involved in other companies, at least one was the target of renewed FTC action. You can FTC stories here, here, and here. McCallan was also involved with AmeriDebt related companies, the nonprofit credit counseling group that accelerated the implosion of credit counseling industry. The FTC was all over AmeriDebt as well.
Enough of a History Review
The Orlando Sentinel article revealed “A bankruptcy judge in Alabama had McCallan arrested and jailed for a time, and declared that McCallan had committed a fraud on the court.” And stated that, “Most recently, McCallan told the court he’d been delayed because of damage to his home during Hurricane Matthew, which buzzed the Florida coastline in early October. But investigators in the Allegro case said they later learned McCallan’s home suffered no damage.”
It seems McCallan, who owns a $1.5 million home on the Florida, “was hit with a judgment in February for $107 million in an Alabama bankruptcy for a large debt settlement law firm – Allegro Law – that was shut down by a judge six years ago as a massive fraud.” – Source
On October 6, 2016 McCallan was found in contempt by the bankruptcy court dealing with the Allegro Law mess. The Judge said, “Defendant McCallan is found to have willfully violated this Court’s Order of August 9, 2016. Many of his responses are incomplete and known by him to be incomplete. Moreover, McCallan’s position, that he did not have to produce documents because the Plaintiff has obtained documents from his accountants and banks, is without merit. McCallan is under a duty to respond truthfully and accurately to the Interrogatories and Request for Production of Documents. That other persons may be responding to separate subpoenas does not, in any way, relieve him of his obligations. The Court further notes that it finds McCallan’s testimony that he is unaware of his sources of foreign income is incredible.” – Source
On November 18, 2016 McCallan managed to complete his pre-bankruptcy credit counseling session with Denice from Take Charge America. Kind of ironic McCallan had to turn to the credit counseling industry for help. – Source
In almost classic fashion, the Chapter 7 bankruptcy filing McCallan’s attorneys filed on November 18, 2016 was insufficient and the court asked for the missing information. All we can tell from the initial filing is Tim McCallan filed for court protection himself, he has 1-49 creditors, $1-$10 million in assets, and liabilities of $100-$500 million. – Source, Source
Scathing Court Opinion on McCallan and Entities
The background on the massive judgment McCallan is fighting can be found in the 160 page novel the court wrote about the case. The judge in this case slayed McCallan for his history and actions. Here are some of the highlights.
“This is an extraordinary case of fraud on a massive scale that was perpetrated by Defendant Timothy McCallan (“McCallan”) on thousands of victims. McCallan masterminded a debt settlement scheme in which customers were enticed into handing their money to entities controlled by McCallan with a promise that their debts would be either paid or settled.
Thousands of customers signed up for debt settlement services offered by McCallan and paid him more than $100,000,000. Almost none of the money was paid to creditors of the customers as promised by McCallan. Instead McCallan, and those in league with him, siphoned off the money into a vast array of companies controlled by or closely associated with him. Among these entities were McCallan’s co-defendants: AmeriCorp, Inc. (“AmeriCorp”) and Seton Corp. (“Seton”).
McCallan used attorneys as a “front” to perpetuate his scheme and to provide it an air of legitimacy. McCallan’s scheme was most recently fronted by Keith Nelms (“Nelms”), an Alabama attorney whose license has since been suspended for his many unethical activities.
Allegro Financial and Allegro Law (collectively “Allegro”) were instrumentalities controlled by McCallan and fronted by Nelms as a law firm. Prior to Nelms, McCallan’s front was Laura Hess, a Florida attorney who was disbarred for actions she took while fronting a previous iteration of McCallan’s debt settlement scheme, a law firm called Hess-Kennedy.
From the viewpoint of the customer, or victim, McCallan’s scheme began with mass media advertising – television, radio, billboards, etc. – designed to appeal to those in financial distress. The potential customer could call a toll-free number and speak with a representative who would then sign the customer up, promising him that his financial worries would be over.
The representative would promise the customer that they would deal directly with his creditors, that all the customer would have to do is pay his money to them instead of his creditors, and that they would take care of the rest. Instead, the customer’s money would be siphoned off under the guise of hidden fees and costs, the customer would be that much poorer, and he would default on his debts because his creditors would go unpaid. As the District Court has aptly noted, the effect of McCallan’s debt settlement scheme on its victims was “personal economic suicide[.]” McCallan v. Hamm, 2012 WL 1392960, *1, 2012 U.S. Dist. LEXIS 56097, *3 (M.D. Ala. Apr. 23, 2012). This adversary proceeding is an attempt by the Trustee in bankruptcy to recover the money that McCallan defrauded from these victims.
How McCallan Wound up in the Crosshairs from Allegro Law
“Nelms originally started Allegro in 2007 as a small solo practice law firm. Chase Bank v. Nelms (In re Nelms), 2014 WL 3700511, *3, 2014 Bankr. LEXIS 3158, *7 (Bankr. M.D. Ala. Jul. 24, 2014). At that time, McCallan was perpetrating his debt settlement scheme through the Hess-Kennedy law firm in Florida and was introduced to Nelms through that firm. Nelms, 2014 WL 3700511 at *1-2, 2014 Bankr. LEXIS 3158 at *4-7. After the State of Florida moved against Hess-Kennedy in mid-2008, McCallan tabbed Nelms and Allegro to continue his debt settlement scheme in Alabama. Nelms, 2014 WL 3700511 at *3, 2014 Bankr. LEXIS 3158 at *8.
Nelms ostensibly “hired” McCallan and his entities, AmeriCorp and Seton, to handle back-office processing for Allegro; however, McCallan was effectively running Allegro. Nelms, 2014 WL 3700511 at *3-4, 2014 Bankr. LEXIS 3158 at *8. Allegro’s marketing, form letters, and call centers were provided by McCallan’s entities, and payments from Allegro’s customers were controlled by McCallan’s entities, though the paperwork listed Nelms as the customers’ attorney. Through this setup, McCallan charged Allegro’s customers massive up-front hidden fees for merely holding their money, sent a portion of the collected fees to Nelms, and pocketed the rest.
When the State of Alabama learned of the nature of Allegro’s activities and fee structure with its clients, it placed Allegro in receivership under the control of Louis Colley (“Colley”) in July 2009. Cut off from the wellspring of his ill-gotten gains, Nelms filed Chapter 7 bankruptcy on February 22, 2010. (Case No. 10-30430, Doc. 1). Daniel G. Hamm (“Hamm”) was appointed as the Trustee in the Nelms bankruptcy and, upon learning of the nature of Nelms’s involvement in Allegro, pulled its components (Allegro Financial and Allegro Law) into Chapter 7 bankruptcy as well. (Case Nos. 10-30630 and 10-30631). Hamm was also appointed Trustee in the Allegro bankruptcies.
On May 20, 2010, Colley filed a motion for administrative expenses for the payment of almost $400,000 in invoices sent by AmeriCorp and Seton. (Case No. 10-30631, Doc. 74). The Court issued a Memorandum Decision in July 2010 in which it deferred payment, expressed its concerns about the value of the services allegedly rendered, and asked the following questions:
- How much money was taken from Allegro clients?
- How much of that money was taken by Nelms?
- How much was paid to AmeriCorp, Seton and other third parties?
- How much was paid to creditors of the Allegro clients? (Case No. 10-30631, Doc. 105, p. 15).
To answer these questions, one must have the records of the Allegro companies. Yet, Allegro did not keep its own records and it did not own or control the data that its business activities generated. Nelms was incapable of answering these questions because he did not keep his own records. Instead, almost all of the business records of the Allegro companies were kept by AmeriCorp. Therefore, the key to understanding what happened to the money of the victims (creditors in the Allegro bankruptcies) was to get these records from AmeriCorp, which was controlled by McCallan.
As the Court will discuss below, it has taken years of litigation to learn the answers to these questions. However, a review of the Allegro claims register reveals that 5,214 claims have been filed by Allegro’s creditors for a total amount of $102,949,220.72. (Case No. 10-30631). The evidence will support a range of figures both as to the numbers of victims and the amount by which they were defrauded. The Court has heard figures as high as 30,000 victims and $160,000,000.00. As a result of the duplicity of McCallan, Nelms, and those in league with them, the true figures will never be known. The Court will limit its judgment here to the 5,214 claimants in the amount of $102,949,220.72. The undersigned, having spent five years and several thousand hours on this case, is of the view that this number of claimants and this amount of claims are reasonable. The true figures are certainly higher.”
“More significantly, the Court ordered McCallan to appear in person at a hearing scheduled for March 5, 2012, and advised him that “[t]he Court will consider monetary sanctions, incarceration or entry of judgment by default.” (Doc. 177). The Court ordered Parnell and Spirer to use their best efforts to provide McCallan notice of the March 5, 2012 hearing. (Doc. 177).
McCallan did not appear at the March 5, 2012 hearing. The Court found McCallan in contempt of court and issued a warrant for his arrest. (Doc. 183). On March 7, 2012, the Court granted the motion to withdraw as counsel filed by Parnell, Spirer and Rosenberg. (Doc. 184).
On March 8, 2012, McCallan was stopped by police in New Jersey for speeding. The police officer checked the national NCIC database, discovered the bench warrant issued by the Court, and arrested McCallan. The following day McCallan was released from jail and was ordered to appear in this Court not later than March 14, 2012.”
Court Struggles to Get Access
For a long time the Court struggled to get access to the AmeriCorp databases for Allegro Law. Roadblocks appeared at nearly every request. But the Judge founding this exchange, well, interesting.
Defendant Timothy McCallan also testified on February 21, 2013. McCallan
acknowledged that he was the owner and chief executive officer of AmeriCorp and Seton. (Doc.
259, p. 111). The next exchange was astounding:
MR. OLEN: Where did you move the servers to after the business closed down on March 31, 2011?
MR. McCALLAN: The servers were migrated to Florida into a center called CNI, which is a third-party hosting company.
MR. OLEN: And are they still there today?
MR. McCALLAN: Yes.
MR. OLEN: Are you aware that, until you testified right here a few minutes ago, that nobody told us that the original servers from AmeriCorp and Seton are physically located at CNI in Florida? Are you aware of that?
MR. McCALLAN: I am not aware of – no, I am not aware of that.
(Doc. 259, pp. 113, 118). Testimony by Oscar Nunez, AmeriCorp’s IT manager, was even more illuminating:
MR. OLEN: Now, in October, you just testified that in October 2011 you had all of the infrastructure in place for someone to work from home on those AmeriCorp servers; is that right?
MR. NUNEZ: Yes.
MR. OLEN: And so the system was essentially rebuilt in Florida, right?
MR. NUNEZ: Rebuilt in Florida?
MR. OLEN: In other words, when it went to CNI, it was fully functioning and someone could have remoted into the servers and operated QPS and CreditSoft [AmeriCorp’s front-end applications] just like you would if you had been in New York, right?
MR. NUNEZ: Yes.
MR. OLEN: Was the system in Florida that was fully operational ever dismantled?
MR. NUNEZ: No.
MR. OLEN: So it has worked just like that from October 2011 to at least eight months ago [June 2012], which is the last time that you had any knowledge of it, the last time you were employed there?
MR. NUNEZ: Yes. (Doc. 259, p. 182) (bracketed matter added).
Oscar Nunez’s testimony shows that the representations made by the Defendants’ counsel, Meredith Lees and Thomas Mancuso, were false in two respects. First, their assertion that it was impossible to provide access to the database was proven false because the servers containing the database were fully operational and were being maintained in Florida. There was no reason why the Defendants could not comply with the Court’s Second Discovery Order by providing Hamm access to the servers. Second, the Defendants’ assertion that they needed a continuance due to Hurricane Sandy was shown to be false, again because the servers were in Florida, not New York.”
Court Slays Alabama Attorney Keith “Andy” Nelms
“Defendant Timothy McCallan operated a fraudulent debt management and debt settlement business. The primary vehicle through which McCallan operated his scheme was Defendant AmeriCorp. The “front” for the scheme – that is, the face actually shown to the public – was Allegro Finance and Allegro Law. Both of the Allegro entities were owned by Keith Nelms. Nelms was a practicing lawyer with an office on Cobbs Ford Road in Prattville, Alabama. Nelms had no experience in the debt management business and, in his testimony in several proceedings before this Court, Nelms made it clear that he did not have any idea how the business actually works. Indeed, the only reason McCallan used Nelms was because his previous “front,” the Hess-Kennedy law firm, had been shut down by the State of Florida.”
“Virtually all of the money paid by Allegro customers toward the goal of debt settlement was siphoned off by McCallan and those in league with him. The Court finds that AmeriCorp, Seton, and McCallan defrauded their victims out of $102,949,220.72.”
McCallan Asks the Judge to Go Away
The Defendants assert recusal is mandated pursuant to 28 U.S.C. §§ 455(a) and (b)(1). (Doc. 332). They also attached an affidavit by McCallan, asserting that he is “an objective, disinterested, lay observer,” and listing numerous examples from the Court’s prior rulings and statements during hearings that purportedly demonstrate the undersigned’s bias and prejudice against the Defendants. (Doc. 332). The remarks made by the undersigned that McCallan complains of in his affidavit consist of the following:
That the Defendants “have a long history of masterminding, orchestrating and facilitation of debt settlement schemes across the United States.”
That Nelms “perpetrat[ed] McCallan’s established, fraudulent debt-settlement scheme” and that “[t]he product of this unholy conspiracy . . . was Allegro[.]”
That the benefits to consumers of the “lengthy dense contracts” between them and Allegro “appear to be largely illusory.”
Questioning Ed Reed, General Counsel of the Alabama Securities Commission, why he thought it was a good idea to continue to operate Allegro and work with AmeriCorp after Allegro’s business model had been revealed.
Reporting to the District Court that “the contract between Allegro Law and . . . Seton is part of a smoke screen used to conceal the true nature of the relationships among between [sic] the parties.” Referring to the relationship between Allegro and AmeriCorp as a “Ponzi Scheme[.]”
Admitting that the undersigned “has got a very jaundiced view” of the debt settlement services offered by Allegro and AmeriCorp. Mentioning a conversation with U.S. Senator Jeff Sessions at a cocktail party in which the undersigned stated “one of the worst things [Congress] did . . . was to give, you know, these debt settlement outfits an air of legitimacy” and that debt settlement was “a horrible business, horrible idea[.]”
Questioning why the Receiver wanted to continue operating Allegro and referring to it as “a completely flawed business model from the start[.]”
Stating, in reference to McAlpine’s filing of the motion to quash McCallan’s deposition, that “bad faith would be a colossal understatement.”
Stating that the “Defendants sabotaged the [discovery] process, producing large quantities of gibberish, in an effort to obstruct the Trustee’s access to the database.”
Stating that McCallan “flouted the [Court’s] order and went on the run, ignoring both orders to produce the database and to appear in Court.”
“Impugn[ing]” the Haskell Slaughter lawyers by stating they “continued to misrepresent and stonewall the Trustee and the Court” after McCallan got out of jail.”
But it appears that effort failed as well.
“A lay observer who was fully informed of the nature of the Allegro business model, the ruinous effect Allegro had on its clients, Allegro’s relationship with AmeriCorp and McCallan, and McCallan’s (and his lawyers’) conduct in this litigation would not reasonably question the Court’s impartiality based on the remarks the Defendants complain of. A lay observer with even a modest understanding of finance and credit would conclude that Allegro’s activities with AmeriCorp and McCallan were predatory and fraudulent. Moreover, a fully informed lay observer would not reasonably expect a court to disregard a litigant’s or lawyer’s misbehavior in front of it, or ignore when a litigant violates its orders or intentionally provokes it. All of the statements the Defendants complain of have been made by the Court in response to what either Allegro or the Defendants have done in conducting their businesses and this litigation. That is not a sufficient reason to question the Court’s impartiality.”
On February 16, 2016 the Judge stated, “The Plaintiff offered a mountain of evidence in support of his claim that the Defendants defrauded a large number of individuals. After almost three years of protracted and often spiteful litigation, the Defendants refused to show up at the trial. The Court will, by way of a separate document, enter judgment in favor of Plaintiff Carly Wilkins, and against Defendants Timothy McCallan, AmeriCorp, Inc., and Seton Corp., in the amount of $102,949,220.72.” – Source
The same court document referenced above contained information that named other related debt relief entities.
“Allegro Law Replaces Previous Scams Associated With The Defendants, Including Hess Kennedy and Consumer Protection Law Center
Allegro Law was simply another iteration of the same scam that Defendants have been perpetrating for years. Defendants processed and mailed the same letters on behalf of Allegro Law that they did for Hess Kennedy, Consumer Protection Law Center, and Campos Chartered Law Firm. (PX 128).
Defendant Americorp’s customer service representatives answered the phone on behalf of Allegro, Hess Kennedy, Campos Chartered Law Firm, and Consumer Protection Law Center all in the same day. (PX 336C; Transcript, page 77, lines 5-6). When one entity was shut down by regulators, the Defendants simply moved the scam – and many of its victims – to another.
In an email dated February 23, 2008, Defendant Timothy McCallan and a man named Joel Carlsen exchanged correspondence evidencing their plans to abandon Hess Kennedy and Consumer Protection Law Center and carry on with Allegro:
Carlsen: “[W]e have to come from the perspective that we see both HK [Hess Kennedy] and CPLC [Consumer Protection Law Center] go down. What would we do?”
McCallan: “Nelms is on tap. I have already reached out to him this morning advising him to get ready and asking him for all the details on the legal entities he has ready to go that we can use.”
Carlsen: “I can have the network attorneys sign contracts linking them to Nelms entity should take 30 days. We move forward with our plans of separate contracts for each attorney, tasking out, etc. We take the 30 companies you have on tap and get them under Nelms asap. (Neil can help here). We get your people trained on HK techniques asap to learn aggressive settlement techniques and legal arguments. We use this experience with our Nelms operation. This way if in the future Camp[os] has challenges, we can roll directly into Nelms. Now big question. IF, CPLC or Camp has challenges in the future, and we are ordered to stop, which in theory could freeze Americorp operations, does it make sense to set up Nelms using processing under a completely different name, roof? Meaning not process CPLC and HK under the same roof as Nelms so if something occurred, Nelms would not be implicated?
. . .
We should do this quietly as it could be seen as a “jump ship” move by Ed [Kennedy] at a time of pressure and could be misread.”
Both Consumer Protection Law Center and Campos Chartered Law Firm were named in the FTC Operation Short Change.
It remains unclear exactly how much consumer benefit AmeriCorp provided. “In fact, when asked, Americorp’s Chief Financial Officer, Vanessa Vinicome, testified that the she did nothing to validate any of the initial figures provided by referral agencies on behalf of customers, claimed she had no idea how the customers’ monthly payments were calculated, and stated that it was not important to her to know how the fees were calculated. Deposition of Vanessa Vincombe, page 53, lines 8-15, 20- 22; page 51, lines 15-19; page 52, lines 6-15; page 72, lines 8-14. In fact, Ms. Vinicombe testified that, as CFO of Americorp, she never once conducted any kind of evaluation or audit to determine whether or not the amount that customers paid in fees was even justifiable. Deposition of Vanessa Vinicombe, page 92, lines 12-23.”
The court documents name yet another debt relief entity, The Achievable. “As part of the Allegro debt elimination program, Seton was paid $9,994,580.25 in fees, Americorp was paid $2,622,610.60 in fees, and The Achievable was paid $2,755,703.73 in fees.”
Debt Settlement and Debt Management Performance
Allegro Law, run by AmeriCorp also ran a debt management (credit counseling) operation. Court records say both efforts were unsuccessful.
“The testimony and evidence at trial established that, of the 18,884 customers enrolled in the Allegro debt settlement program, 59% made payments into the program. (PX 340; PX 89; Transcript, page 102, lines 18-22). The testimony also established that, with a 95% confidence interval, between 95% and 100% of the individuals in the Allegro debt settlement population who actually paid money into the program do not have a single settlement in full letter in their file. (Transcript, page 103, lines 21-25; page 104, lines 1-19). Given that each customer had an average of 5 creditors (Deposition of Timothy McCallan, page 42, lines 22-25), and given a 59% payer rate, this Court concludes that with respect to over 50,000 of the 50,700 accounts enrolled in the Allegro debt settlement program, no legally enforceable settlements were obtained by Defendants.
Similarly, on the debt management side, the testimony and evidence established that, of the 21,623 customers enrolled in the Allegro debt management program, 81% made payments into the program. (PX 339, PX 88; Transcript, page 108, lines 15-19). Of the 81% of customers who actually paid money into the program, the testimony was that at least 63% and as many as 83% did not have an agreed upon proposal in their file. (Transcript, page 109, lines 21-25; page 110, lines 1-9). However, this testimony assumed that the “proposals” contained in the files of the representative debt management customers were worth the paper on which they were written. (PX 342B). This Court has reviewed those proposals and concludes that they are not. None of these proposals are accompanied by any proof that the person who purportedly signed19 on behalf of a creditor was authorized to do so. There is no proof that any of these proposals were provided to Allegro debt management customers. There is no proof that the creditors would not collect money owed, but which had been temporarily deferred, at the conclusion of the debt management program. Thus, this Court concludes that none of the proposals in PX 342B constitute a benefit to the debt management customers and therefore the “error rate” on the debt management side is, in fact, 100%. Thus, of the 81% of debt management customers that paid
into the program, which translates to over 87,000 separate accounts with creditors, this Court concludes that none contain a legally enforceable agreed upon proposal in their file.
It is both shocking and appalling to this Court that Allegro debt settlement customers paid an average of at least 56% of their total payments in fees and that debt management customers paid an average of at least 21% of their total payments in fees for “services” that they never received. (Transcript, page 105, lines 22-25; page 106, lines 1-10; page 111, lines 12-19).
Even worse, in both the debt settlement and debt management programs, the Defendants claimed to perform services that they knew they could never perform.”
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