Okay, so I've been banging my head over this and here are the results.
I double checked the algorithms, tried a number of smoothing group configurations, tried changing weights on the relevant verts... while some attempts produced better results than others, I never could get the seam to go away. I may have fixed the algorithm at least a bit though, so you can fetch the latest BETA at the bottom of this post.
So then I looked at the vanilla model. Here's the debug info for the vert in the middle of the back where the seam is (that's actually 4 verts). Their vertex normals do not correspond to any combination of the corresponding face normals.
If we look at the situation from the side, we see this (sorry for the bad drawing – it's just an approximation, though I did try to get the ratio between the normals right). The arrows are vertex normals, the lines are edges ending in the relevant vert. As you can see, the vertex normals of both vertices that belong to the Cape are the same and point outwards away from the body. The vertex normal of the vert that belongs to the lower part of the torso (the part under the cape) is equal to the cape's vertex normal, except it is mirrored along the Y axis and so it points inwards. Also the vertex normal of the vert that belongs to the upper torso (the part not hidden by the cape) points inwards, but at a different angle.
I don't know why this has to be so. Usually when you want smoothing between faces that share a vertex, you make sure the vertex normals in that location are all the same, pointing in the same direction. But if you try to do the same in this situations, you'll get a seam instead. I also can't see how these normals could be automatically calculated from face normals and smoothing groups (if someone can, please enlighten me). So, the only way out that I can see is to enable the export of vertex normals from max into the ascii and then direct import into the binary model. This needs to be discussed, but if we decide to go this way with all the tools, it'll take a while before everything is synced and ready.
mdledit_v1.0.7b.zip