Don Erway and his wife Neva have their own little bundle from a cash-back credit card.  

Now the liquidators of Erway's insolvent National Warranty Insurance Group want it back, all $941,144.26.   That's how much  they say First National Bank of Omaha paid the Erways' National Card Co. in commissions for using a card to pay repair shops that fixed vehicles covered by service contracts National Warranty administered.  

That is, until National Warranty went under in June of 2003.

The money is part of the National Warranty estate and should be recovered from the Erways for the benefit of creditors, said a petition from Joe Badami, a Lincoln lawyer representing the liquidators, KPMG Caymans.

More than half a million vehicle service contracts insured and administered by National Warranty were in force and rendered worthless when the company failed almost two years ago. 

In some cases, auto dealers  who sold the contracts have honored them, even though National Warranty was liable to cover the claims. In many other cases, buyers have been frustrated by their inability to get their vehicle repair claims covered or their money back.

But the Erways still have theirs, according to the liquidators' petition. 

Here's how the National Warranty cash-back credit deal worked, according to the liquidators' petition.

Before June of 2002, National Warranty was paying vehicle service claims using a number of credit cards, not an unusual practice, according to others in the vehicle service contract industry.

Then, either Erway or the company decided to consolidate the payment of claims through First National Bank of Omaha.

First National would pay National Warranty commissions if enough money was transacted through First National's card in specified time periods.

That's how a typical cash-back credit card works. "Sort of like a Discover Card-like thing," said Krista Kester, a Lincoln attorney for the liquidators. "I hadn't thought it in those particular terms." 

First National officials wouldn't comment.   

Presumably, First National got its transaction fees, but the petition is silent on that point. 

In June 2002, Erway and his wife formed National Card, a Nebraska company, and directed First National to pay the commissions to that company, not to National Warranty.

First National then requested assurance from Erway that the National Warranty board of directors had approved that arrangement, which he provided, according to the petition.

The identities of those on the National Warranty board of directors then is not clear.  The court documents say Erway's Pro Distributors owned 99 percent of National Warranty. 

The liquidators also say in their petition, without saying how they know, that the board of National Warranty directors had not been asked, nor did they approve, the payment of the commissions to National Card.

First National opened an account for National Card, and between June 18, 2002, and May 2003, a month before National Warranty sought protection from creditors in the Grand Court of the Caymans, the bank deposited commissions representing 1 percent on the value of credit card transactions processed through First National, the petition said.

Those commissions amounted to $944,144.26 made in five payments, plus an interest payment, according to the liquidators. 

Doing the math, that says more than $94 million in vehicle service claims or other bills were paid through the card. 

From the National Card account, Erway was paid $500,000 on March 5, 2003, and other payments amounting to $13,636.83 were made to "various third parties on various dates," the petition says.

       National Warranty went into provisional liquidation, followed by official liquidation, in the summer of 2003.  In September of 2003, Erway closed the account, at which time $425,049.37 was transferred to another National Card account, according to the liquidators.

A year later, Erway directed the balance plus interest accrued to be transferred to Hastings State Bank, "for the personal use of Donald Erway and Neva Erway," the petition said.

The liquidators say the money is National Warranty's property and demanded its return.  The Erways refused.

The liquidators characterize the process as an improper diversion of money from National Warranty.

Stephen Nelsen, an attorney for the  Erways, declined to comment.   The Erways' answer to the petition acknowledged that they owned 100 percent of Pro Distributors and that Pro Distributors owned 99 percent of National Warranty.   

According to the federal law that authorizes risk-retention groups like National Warranty to operate as special insurers, they are supposed to be owned by the members whose liabilities are insured by them.   The identity of the owners of the 1 percent of National Warranty not held by Pro Distributors has never been disclosed in almost two years of litigation, nor has a list of its members, presumed to be the vehicle service contract programs National Warranty insured.  

Tim Meenan, executive director of the Service Contract Industry Council, said service contract companies often do get cash back from credit card companies for paying claims weekly instead of less frequently, and they normally put the money they get back into reserves to pay claims. 

Auto dealers like getting payments by credit card, so they can immediately credit their accounts, as opposed to waiting to receive a check, and then waiting for the check to clear, he said.

But the liquidators' version of what National Warranty and Erway did is not the norm, he said. 

"Certainly diverting the funds for personal use is not an industry practice," Meenan said.  

The liquidators say Erway breached his fiduciary duty to the company, whether the National Warranty board approved the payments or not, and asked the bankruptcy court to order that money and any other payments like them paid back to the estate. 

The Erways' response says the defendants don't know about First National requesting assurances that the board approved the commissions, and so they deny that allegation. 

In fact, the response says the general counsel would have handled those matters.  Barry Lake was general counsel of the company, and is still working for the liquidator, the partners of KPMG Caymans, according to Keith Blake, director of corporate recovery.

Otherwise, the Erways' response admits most of the details of the transactions, but denies the money is the property of National Warranty, denies that it was an improper diversion and denies that it was a breach of fiduciary duty. 

Reach Dick Piersol at 473-7241 or at dpiersol@journalstar.com