When we think of financing motor vehicles in the auto industry, our minds often draw to compliance with consumer protection laws and avoiding the attention of enforcement agencies on both the state and federal level—states’ attorneys general, the Federal Trade Commission, the Consumer Financial Protection Bureau and the Department of Justice all may investigate and prosecute dealerships who take advantage of consumers in the terms for financing the sale of a motor vehicle.

The financing of motor vehicles, however, also creates dealer obligations to financial institutions and creditors, including those creditors financing vehicles as dealer inventory. A dealer’s failure to uphold obligations to creditors can create other legal troubles for that dealer. Two pending Federal court cases reveal that a dealer who makes misrepresentations when selling vehicles to a customer can have problems—ones that don’t stop at the government’s efforts to protect the little guy, but which extend to banks and other financers.

Reagor-Dykes Auto Group and Ford Motor Credit

Ford Motor Credit Company, LLC is credited with discovering a pattern of fraudulent behavior that is contributing to the collapse of a major auto dealer in Texas. Bart Reagor and Rick Dykes, the two namesakes of the Reagor-Dykes Auto Group, personally guaranteed loan agreements for floor plan financing at the Group’s various dealerships. After Ford Credit sought an emergency audit of the Dealership Group in July 2018, the Group’s CFO admitted that he had fraudulently reported the auto group’s financial information to Ford Credit. Ford Credit became suspicious of the fact that the group’s dealerships would report an unusually large amount of sales the week before each quarterly audit. Shortly after the emergency audit, the Reagor-Dykes Auto Group entities filed for bankruptcy, and Ford filed a lawsuit in the United States District Court for the Northern District of Texas, alleging that Reagor-Dykes engaged in the following practices, each of which constitute breaches of the Group’s loan agreements:

  • Reagor-Dykes sold vehicles sometimes 55 days before reporting to Ford Credit (as reflected by Department of Motor Vehicle records) in violation of the Dealerships’ obligation to repay the sale price for the vehicle within 7-day of the sale;
  • Reagor-Dykes sought floor financing for a vehicle at one dealership, then moved the vehicle to another Reagor Dykes dealership for additional floor financing; and
  • Reagor Dykes obtained floor financing for vehicles which had already been sold to customers.

Ford claims that the personal guarantees permit Ford to seek immediate compensation from Reagor and Rick Dykes as guarantors for the violations alleged. Ford filed a motion for summary judgment against the Guarantors for more than $112 million in damages plus post-judgment interest and attorneys’ fees. Ford claims that the fact that the amount owed by Reagor and Dykes is undisputed entitles Ford to immediate recovery.

Guarantors and former owners of the Auto Group, Reagor and Dykes, do not appear to deny that the fraud occurred in their responsive pleadings. They claim, however, that Ford knew about the out-of-trust sales long before the June 2018 audit. Thus, they argue that Ford actively permitted the fraudulent sales to occur and materially altered the terms of the underlying loan agreement. Under Texas law, where a creditor and debtor materially alter an agreement without the guarantor’s consent, the guarantor is absolved of liability on the debt. Reagor and Dykes argue that Ford’s knowledge and consent to the Dealerships’ fraudulent behavior relieves the Owners’ of liability on the Guarantees. The District Court‘s determination of the merits of Ford Credit’s claims and the related defenses is still pending.

Coad Toyota and Capital One

Capital One Auto is suing Missouri dealership Coad Toyota for misrepresenting the value of certain financed vehicles, seeking more than six hundred thousand dollars in damages. Capital One alleges that Coad inflated the state sales tax owed on financed vehicle purchases, represented that customers made down payments where they actually had not, and engaged in “powerbooking” (misrepresenting the existence of vehicle features or options in order to inflate the overall value of the vehicle). As a result, Capital One claims that it suffered monetary losses in the form of diminished value of the liens it holds on those vehicles. Should Capital repossess a customer’s vehicle on default, Capital One may not be able to recover all that they are owed because the resale value of the vehicle would not fully cover the balance. Coad has until April 29, 2019 to file an answer to Capital One’s Complaint.

It is important to remind dealership employees involved in sales and financing that despite the pressure to make sales happen, they should always provide truthful information in the sales documents. Fudging the numbers might seem to help a customer in the moment, but the potential effects of such misrepresentations can damage the dealership’s relationships with financers and can still hurt the customer later. The Federal Trade Commission notes that inflating the numbers for a borrower to obtain approval for a loan increases that borrower’s risk of default by obligating them to greater debt than they may be able handle. Additionally, when a purchase money loan is secured by a vehicle whose true value does not cover the amount borrowed, there is greater risk that the lender will need to obtain a deficiency judgment against the customer even after repossession to cover the amount owed on the loan. In the end, no one wins when the value of a transaction is inflated.

Moreover, both cases demonstrate the importance of reporting accurate information to all third parties in relation to a transaction, including the relevant state agencies. Both Ford Credit and Capital One cite information that the dealers reported to state agencies as evidence of fraudulent activity. Both dealerships are facing or likely to face additional problems correcting the bad information they provided to the agencies and any violations that may result.