Ford Motor Credit Company laid out details in bankruptcy records Thursday as to why it accuses the Reagor Dykes companies of fraud.
“This may be one of the largest floor-plan-financing frauds in the history of the United States,” Ford said as part of its request that a bankruptcy judge appoint a trustee to oversee what’s left of Reagor Dykes (RD).
“[RD] pocketed over $41 million previously advanced by Ford Credit,” Ford said in bankruptcy records.
Ford sued a list of RD companies on July 31. Shortly thereafter, some but not all RD companies filed for Chapter 11 reorganizational bankruptcy.
Ford said RD was engaged in a form of fraud similar to check kiting. Vehicles that were financed by Ford were sold, and RD would keep the money without reporting the sale to Ford, bankruptcy records said. By not immediately reporting the sale, RD would not have to immediately pay back Ford.
Ford found “an average discrepancy of 55 days” on 150 vehicle sales that were audited in the last week of July. The deadline was 7 days.
Bankruptcy records also said, “Ford Credit has also determined that Debtors double-floored at least 85 vehicles.”
Double-floored means that one dealership took possession of a new vehicle and requested financing from Ford Motor Credit. Then, having received financing from Ford, the same vehicle was transferred to another dealership. The second dealership would then apply for financing on the same vehicle.
In other words, the same vehicle was financed twice by Ford. Ford also claimed that RD used other lenders to double finance vehicles that were already financed by Ford.
“As the foregoing shows, [RD companies] have committed multiple acts constituting fraud, dishonesty, and gross mismanagement…” Ford said.
In a separate bankruptcy document, Ford said it is uncollateralized to the tune of $46 million. Ford said the total debt was $116 million.
RD also filed bankruptcy documents this week and invited an outside investigation “in the name of transparency.” RD said even its ownership, Bart Reagor and Rick Dykes, should be subject to investigation.
The RD documents did not lay out specific allegations against its former chief financial officer but did mention him by title several times.
Ford wanted its request for a bankruptcy trustee to be heard on August 16 along with issues already scheduled for a court hearing on that day.
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The following are two portions of bankruptcy court records filed Thursday by Ford.
Up until July 30, 2018, Debtors sold new and used cars financed by Ford Credit and, instead of honoring their promise and contractual obligations to repay Ford Credit the amount it had loaned Debtors to acquire those vehicles, Debtors pocketed over $41 million previously advanced by Ford Credit. This may be one of the largest floor-plan-financing frauds in the history of the United States.
Debtors hid this massive breach from Ford Credit in several ways. First, Debtors fraudulently mispresented sales-reporting data to Ford Credit such that Ford Credit believed Debtors were timely paying off cars it sold to the public. In reality, Debtors had been engaging in a scheme similar to check-kiting whereby it actually sold vehicles on average 55 days before telling Ford Credit, thus allowing Debtors to “float” the debt it owed to Ford Credit.
Second, Debtors fraudulently secured double-flooring from Ford Credit. Double-flooring refers to automobile dealers who receive acquisition funding twice for the same vehicle. This is a serious violation of any inventory financing agreement and represents a significant violation of a dealer’s representations and warranties made to its lenders. See U.S. v. Hoover (5th Cir. 2006) 467 F.3d 496, 497 (double flooring is “an illegal practice whereby a single vehicle is used as collateral for more than one loan.”).
Third, Debtors fraudulently obtained inventory financing for cars it had already sold. In other words, while Debtors no longer possessed and had no rights in the car, they would represent to Ford Credit that they still held the car as inventory and then obtained additional financing.
There is ample cause to appoint a Chapter 11 Trustee. Debtors’ pervasive fraud and dishonesty have harmed the estate and its creditors. Debtors have already squandered more than $41 million on the current management’s watch—through either their own fraud or gross mismanagement. Either way, a Chapter 11 Trustee is necessary to protect what is left of the estate’s assets and to righteously pursue claims of prepetition misdeeds.
Ford Credit compared a total of 150 reported sales by the Debtors and determined that 147 of the 150 sale dates reported by the Debtors did not match the official sale dates identified by the Texas DMV. Of the 147 falsified sale dates, there was an average discrepancy of 55 days between the official sale date as identified by the Texas DMV and the falsified sale date reported by Debtors to Ford Credit. In other words, for nearly every vehicle it sold leading up to the June 2018 audit, Debtors fraudulently concealed (and ultimately misrepresented) the sale date from Ford Credit so that the Debtors could retain (i.e., float) the sales proceeds without having to repay Ford Credit as required under the Wholesale Agreement.
Ford Credit has also determined that Debtors double-floored at least 85 vehicles under its floor plan financing agreements with Ford Credit. In those instances, Debtors obtained floor plan financing for a vehicle at one of their six dealerships, but then did so again for the same vehicle at a different dealership. Here’s an example of how the scheme worked: one of Debtors’ dealerships (“Store A”) represents to Ford Credit that it purchased a Ford Explorer for $40,000. In response, Ford Credit advances $40,000 in acquisition financing to Store A. But then, unbeknownst to Ford Credit, Store A transfers the Ford Explorer to another of Debtors’ dealerships (“Store B”). Store B then fraudulently represents to Ford Credit that it has purchased a Ford Explorer for $40,000, which prompts Ford Credit to advance an additional $40,000 in acquisition financing to Store B.
Ford Credit discovered the double-flooring after an internal risk assessment report discovered 16 double-floored vehicles. While Ford Credit’s analysis of the double-floored vehicles is ongoing, Ford Credit estimates external financers advanced $3.7 million to Debtors for acquisition of the 115 vehicles which were already floored by Ford Credit.
Finally, Ford Credit discovered that Debtors fraudulently sought and obtained floor plan financing for several vehicles it had already sold—and obtained the sales proceeds of. In those instances, Debtors represented to Ford Credit that it possessed certain used vehicles and requested floor plan financing to cover the costs of acquisition. That proved to be untrue. In fact, Debtors had already sold those vehicles, obtained the sales proceeds, and had no further interest or rights in the vehicles. Ford Credit has yet to determine how much it advanced to Debtors for its acquisition of the vehicles Debtors had already sold at the time it requested floor plan financing.
On July 26 and 27, 2018, Ford Credit conducted another audit of Debtors’ vehicle inventory. The July audit revealed that Debtors was significantly out-of-trust. As of July 31, 2018, Ford Credit determined that Debtors had failed to repay Ford Credit as required under the Wholesale Agreement on vehicles totaling over $41 million in unpaid loan advances for which the vehicle collateral is gone.
As the foregoing shows, Debtors have committed multiple acts constituting fraud, dishonesty, and gross mismanagement of the affairs of the Debtors. Accordingly, the appointment of a Chapter 11 Trustee is in the best interests of creditors.
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