Fleet Financial Group has sued Advanta Corp. for alleged improprieties in Advanta's sale last year of $10.5 billion of credit card receivables.

The complaint, filed last Friday in Delaware Chancery Court, said Advanta misappropriated funds and misrepresented the portfolio's condition. Fleet is seeking $126 million in damages.

Advanta issued a vigorous denial Monday and questioned why Fleet had not chosen to "follow the dispute resolution procedures" agreed to in their deal.

Fleet, which used the transaction to stake out a position in the credit card industry's Top 10, said it was forced to pay Advanta cardholders $3.9 million to compensate for "excessive and improper interest rate charges" that were discovered after the deal closed.

Fleet also accused Advanta of not submitting a balance sheet describing the card business' holdings at the time of the closing, last Feb. 20. This document was due April 30, Fleet said, and was supposed to have been independently audited.

"As it waited in vain, Fleet became increasingly concerned that the credit card business assets and liabilities transferred to Fleet were not what they had been represented to be," according to the complaint.

Fleet, which paid a $500 million premium for the Advanta card portfolio, then hired KPMG Peat Marwick to analyze the assets and liabilities it purchased. The accounting firm concluded that Advanta had "converted $78.7 million of Fleet funds to its own use and overstated the assets and underestimated the liabilities transferred to Fleet by a total of at least $47.6 million," according to the complaint.

"Fleet is saying it overpaid for the portfolio relative to the formula they agreed to," said Fox-Pitt Kelton analyst Michael Granger.

In addition Fleet accused Advanta of wooing back former employees who moved on to the Fleet payroll. Thirteen are named in the court filing. They were said to be "critical to Fleet's ability to realize the full benefit of its bargain with Advanta."

Though Advanta had suffered above-average delinquencies, Fleet said the performance of the loans was not a central issue.

"We are very pleased with the portfolio," said Fleet spokeswoman Rena Desisto. "It has generated net income that exceeds our expectations."

Fleet's $16 billion card portfolio generated $92 million in net income for 1998.

Fleet is contesting the final settlement process, known as post-closing adjustments, which involve certain reserves Advanta set aside to pay Fleet.

Michael Auriemma, president of Auriemma Consulting Group in Westbury, N.Y., said this type of dispute is unusual. "I have heard of disagreements, but $126 million in disagreements sounds pretty major."

Philip Browne, chief financial officer of Spring House, Pa.-based Advanta, said the reserves "would have reduced the final payment that Fleet made for the portfolio." But he declined to disclose the amount of reserves Advanta set aside.

Advanta, now focused on business credit, mortgages, and other noncard activities, vowed to defend itself and accused Fleet of "misconstruing the settlement process."

Card industry executives said there has been acrimony between the companies for some time, in part because of the complexity of the deal. With the card accounts, Fleet took on 1,900 employees, technology and information management, direct marketing, and treasury finance operations.

"From what I understand, this was really complicated," said Irving J. Levin, chief executive of Renaissance Holdings Inc., Beaverton, Ore.

Advanta sold its card business after suffering losses in 1997-$20 million in the first quarter alone.

Compounding its problems was a class action filed in 1997 on behalf of customers who held Advanta's SmartMoves card. The suit followed Advanta's decision to raise the price on this program, which promised a certain low interest rate on transferred balances.

The case was settled Jan. 15, with Advanta agreeing to set aside $7.25 million to be distributed to SmartMoves cardholders.

Advanta spokeswoman D'Arcy Rudnay said the company admitted no wrongdoing and settled because "of the amount of energy, time, and resources it would take to defend ourselves."

A separate class action filed by Advanta shareholders and related to the credit card sale is still pending.

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