Ford Credit: Reagor-Dykes fraud may be among largest of its type

Ford Credit: Reagor-Dykes fraud may be among largest of its type in U.S. history; GM files to terminate Floydada dealership

Posted: Updated:
LUBBOCK, Texas -

In new court filings, Ford Motor Credit claims Reagor-Dykes Auto Group may have run one of the "largest floor-plan-financing frauds in the history of the United States".

Ford has requested the U.S. Bankruptcy Court appoint a Chapter 11 trustee because Reagor-Dykes has committed acts of fraud, dishonesty and gross mismanagement.

In these new court documents, Ford Motor Credit explains floor plan financing, otherwise known as "flooring". When a dealer sells a floored vehicle, it must repay Ford Credit. The standard is within seven days. Failing to do so is breach of financing agreement, making the dealer "out of trust".

Ford Credit explains vehicles sold out of trust creates unsecured debt a dealership owes. "Ford Credit cannot recover a vehicle sold to a customer in the ordinary course of business under Texas Business & Commerce Code", meaning Ford cannot take back from a consumer a vehicle sold through fault of the dealer.

The latest filing notes Reagor-Dykes had a commendably low percentage of vehicles in violation in its June audit. But a subsequent inspection raised some red flags.

An average of 25.02% of Reagor-Dykes inventory was listed as "Sold Not Due", meaning those vehicles would have been sold days earlier and money not yet due to Ford Credit. Ford states this meant Reagor-Dykes had "either sold 25% of their inventory within the last week, an unlikely scenario, or that the Debtors were falsifying their sales dates." Using government records, Ford investigators determined 147 out of 150 sale dates reported by Reagor-Dykes were falsified. Ford claims the average discrepancy between reported sales date and Texas DMV records was 55 days.

Ford Credit also detailed "double flooring" claims using this example:

"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 financing to Store B."

An internal risk assessment showed 16 double-floored vehicles. With subsequent analysis ongoing, Ford Credit claims "external financers advanced $3.7 million to Debtors for acquisition of the 115 vehicles which were already floored by Ford Credit."

Ford also claims Reagor-Dykes received floor plan financing for several vehicles it had already sold and received money for. Ford has yet to determine how much money was advanced for vehicles already sold.

This latest filing claims there are several instances of fraud, "any one of which would be sufficient grounds for appointing a trustee. First [Reagor-Dykes] current management has already committed several frauds."

An earlier filing from Reagor-Dykes questioned actions of who is now identified as the former R-D chief financial officer. Reagor-Dykes requested the hiring of BlackBriar Advisors as chief restructuring officer. The filing states a chief restructuring officer would look into any wrongdoing by the previous CFO, company ownership and anyone else connected.

Ford's document continues, "current management has also engaged in fraudulent double-flooring of vehicles. Double flooring is more than just a contract breach. It is loan fraud and, if proven to be true, a crime punishable by years in prison."

"There is also good cause to appoint a trustee due to the current management's incompetence and gross mismanagement. Debtors may have caused one of the largest floor-plan-financing defaults in the history of the United States. And while the size of the default is certainly significant, the fact that it occurred during years of unprecedented car-sale growth is just as telling. Since its nadir in 2009, the automotive market for new and used cars and trucks has exploded. Annual U.S. car and truck sales topped 17 million for the third straight year in 2017. But despite the sustained market growth, [Reagor-Dykes]' business has cratered. Indeed, the current management has run [Reagor-Dykes]' operations into the ground, causing a $41 million default. Simply put, a trustee is necessary to take over Debtors' operations and turnaround the business."

Further explaining need for a Chapter 11 trustee, Ford attorneys write a "true fiduciary is necessary to recover and preserve assets for the reorganization of the Debtors, and to provide payment to creditors. Debtors already misappropriated $41 million. Where did that money go? How much of that money was fraudulently transferred? The current management is not the proper fiduciary to address the improprieties that occurred. They will not seek to recover fraudulent transfers. They will not seek to recover preferences. They will not cause the Debtors to sue itself for misappropriation of corporate assets. To the contrary, the current management has demonstrated that they will take any and all measures within their power to frustrate Debtors' creditors."

Ford Credit requests this motion to appoint a trustee be heard during the hearing already scheduled for 10 a.m. Thursday, Aug. 16.

Ford claims R-D is not following court orders, wants end to collateral use

In a separate filing, Ford Motor Credit paints a bleak outlook for Reagor-Dykes operations going forward. This is in response to last Friday's hearing allowing the company to use Ford Credit cash collateral on a limited basis.

Ford claims Reagor-Dykes has not complied with terms of the judge's order. 

This filing also states before its bankruptcy petitions, Reagor-Dykes "sold or transferred hundreds vehicles and failed to pay Ford Credit". Ford claims the value of these vehicles total over $41 million in unpaid loan advances for which the collateral is gone. 

Ford notes the principal loan balance owed to Ford Credit is approximately $116 million, but the total value of all vehicles in Reagor-Dykes' inventory is nowhere near that amount. Ford Credit estimates it to be $66 million, with total value of non-vehicle collateral at less than $3.5 million. 

Ford states there is no value attainable to Reagor-Dykes franchises because any value could be gained through sale of dealership assets and ongoing future sales. But "there is no prospect for any such sale".

"The Debtors are struggling operating as a going concern. They are severely undercapitalized and is unable to pay their ordinary business expenses except through the use of Ford Credit's cash collateral. Under these circumstances, there is no prospect for a reorganization."

Among violations Ford Credit claims Reagor-Dykes has made since last week's hearing and subsequent court order, "[Reagor-Dykes] appears to be moving demonstrator vehicles between Debtors and non-Debtors entities." The order stated "demo" vehicles should be returned to the dealership. This latest filing states Ford Credit is concerned "assets belonging to the bankruptcy estate are being dissipated."

The permission to use cash collateral expires Aug. 16. Ford Credit states Reagor-Dykes does not appear to be generating the necessary operating capital to keep the dealerships in business. Because of this, Ford Credit does not want further use of its cash collateral after Aug. 16.

General Motors files to terminate Floydada dealership

General Motors has filed notice that Reagor-Dykes filing for bankruptcy protection is "a violation of the Dealer Agreement that permits GM to terminate the dealership". This is specific to Reagor-Dykes Floydada, LP. 

According to GM's filing, "Debtor Floydada, by breaching its agreements with GM has created cause to terminate their ability to operate the dealership in Floydada, Texas.

"GM asserts that it is imperative that GM be permitted to take action to protect its interest by:

A. Terminate shipments of new vehicles to Debtor Floydada;
B. Freezing accounts of the Debtor Floydada related to dealer holdbacks and other
accounts; and
C. Send a notice of termination to Dealer Floydada providing notice of the
termination of the dealership franchise, as provide in Tex. Occ. Code § 2301.453."

GM's filing continues, "moreover, GM is concerned that given serious allegations that sales out of trust have occurred, and that the Debtor Floydada is unable to reconcile its obligations, GM requests that it be permitted to freeze payments of dealer hold back funds until there can be a full accounting between the parties. Moreover, as permitted by the Dealer Agreement and Texas law, GM has sent the notice of termination of franchise subject to the requirements of Tex. Occ. Code § 2301.453, and requests that it be permitted to proceed with the termination process."

Reagor-Dykes purchased what was Oden Chevrolet in Floydada in 2016. FOX34 looked at the prospects of losing a smaller community's dealership Thursday, with a visit to Lamesa

Vista Bank objection to use of cash

Similar to another objection filed by Universal Underwriters Service Corporation, Vista Bank has filed an objection to part of Reagor-Dykes' motion to use cash collateral. Vista is a secured creditor of Reagor-Dykes. It notes a hearing last week to use cash collateral for limited company operations is specific to Ford Credit cash collateral.

"However, the Cash Collateral Motion and accompanying proposed budget lack sufficient detail on the specific assets and sources of cash funding the Debtors’ budget. Further, neither the Cash Collateral Motion, nor the budget acknowledge that FMCC’s liens are not in first position on all of the Debtors’ variety of assets. Accordingly, Vista Bank cannot confirm whether or not its cash collateral is being used under the Debtors’ proposed budget."

Similar to Universal's filing, Vista Bank states its cash collateral is not available for use. The bank also requests that if Reagor-Dykes requests use of Vista Bank collateral, it be provided protection in form of "replacement liens, a super-priority administrative expense claims and such other protection as is provided to FMCC and any other secured party in these Bankruptcy Cases."

THURSDAY: Reagor-Dykes questions former CFO’s actions; Contractor claims $700,000 due now
TUESDAY: Former Reagor-Dykes employees claim they were not paid
MONDAY: Customers concerned over Reagor-Dykes 'unwinding' process
MONDAY: Ford suit against Reagor-Dykes on hold while bankruptcy case proceeds
AUG. 3: Judge approves Reagor-Dykes employee pay
AUG. 2: Mayor: Downtown Lubbock growth to remain strong regardless of Reagor-Dykes future
INITIAL STORY: Ford Motor Credit sues Reagor-Dykes; R-D files for chapter 11 bankruptcy

Court documents

These are two of the latest filings from Ford:

This filing is from General Motors

This filing is from Vista Bank

Powered by Frankly