Complaint claims Ford knew of RDAG fraud, owes more than $315 million

Updated: Jun. 10, 2020 at 8:35 PM CDT
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LUBBOCK, Texas (KCBD) - Reagor Dykes Auto Groups dealerships have filed a complaint against Ford Motor Credit Company (FMCC), alleging Ford “unquestionably knew or should have known of the Debtors’ fraud," and they are entitled to $315 million in transfers made to Ford.

In a 33-page complaint filed Wednesday, the bankrupt auto group claims: “FMCC racked up millions in profits from interest that the Debtors paid and interest that consumers paid on vehicle deals that Reagor-Dykes originated,” adding the claim that Ford “believed that its documents and position entitled it to turn a blind eye to Reagor-Dykes’ fraudulent practices,” on the basis that the fraudulent practices allowed the credit company to be repaid millions of dollars.

The complaint starts by saying the Debtors are "entitled to avoid and recover from FMCC over $315 million of transfers made to FMCC within the two years prior to bankruptcy.”

As early as 2008, Ford Motor Credit provided primary “floorplan pricing” to the six Reagor-Dykes Auto Group dealerships. Each dealership had a separate credit extension from FMCC, with individual credit line limits on new and used vehicles. FMCC secured that financing with security interests in collateral that included Reagor-Dykes’ new and used vehicle inventory.

According to documents, Reagor-Dykes was required to repay FMCC within seven days of the date they sold a vehicle purchased with funds from the Ford Financing, or within 24 hours after the vehicle sales transaction was funded, whichever happened sooner.

One aspect of Reagor-Dykes’ alleged fraud outlined in the complaint included intentionally failing to make the payoff within those seven days, referred to as “selling vehicles ‘out of trust.’” RDAG would then use those proceeds to payoff business expenses. The complaint also describes a “fake flooring” practice, where RDAG made requests for floorplan advances for vehicles that had already been sold months or years earlier, using the vehicle identification numbers from previous sales for loan advances as though they were purchasing the vehicle again. RDAG has also been accused of “double flooring” or even “triple flooring,” obtaining loans from multiple credit companies for the same vehicle.

Ford attempted to maintain inspection and monitoring through “surprise” third-party audits of Reagor-Dykes’ financials and inventory to determine whether the Auto Group was in compliance with the terms of the floorplan financing agreements.

The complaint claims Ford knew or should have known that RDAG was fraudulently obtaining credit based on “obvious red flags" in quarterly audits, but Ford continued to accept payments from RDAG, alleging Ford of “facilitating the Debtors’ scheme.”

Reagor-Dykes would learn in advance the date when FMCC’s quarterly floor plan audits were going to take place, the complaint states, providing time to falsify sales paperwork to make it appear as if missing vehicles had been sold within the last 7 days (known as “sold not due”) so that the loans would remain in compliance.

FMCC stated that it expects about 5% of a dealership’s inventory to be sold not due at the time of an audit. However, the complaint says Reagor-Dykes routinely reported 20-25% of its inventory as sold not due during audits. FMCC admitted that this was an obvious red flag, stating that selling 25% of inventory in the last week is an “unlikely scenario.”

In one case, Reagor-Dykes reported that 45% of the inventory of one dealership had been sold in the last week.

Reagor-Dykes would also attempt to conceal the missing vehicles by reporting a large number of vehicles as being out on a test drive at the time of the inventory inspection, according to the complaint.

To cover their tracks for the Out of Trust sales and Sold not Due vehicles, Reagor-Dykes would make significant payoffs to Ford after each audit, payoffs that were several times larger than other months. According to the complaint, “In the two years prior to the bankruptcies, Reagor-Dykes’ average net payment to FMCC in months without an audit was $8,979,389.58. The average net payment to FMCC in months an audit was conducted was $23,254,227.77—2.6 times higher net payments in non-audit months.”

The average net payment to FMCC in months an audit was conducted was $23,254,227.77—2.6 times...
The average net payment to FMCC in months an audit was conducted was $23,254,227.77—2.6 times higher net payments in non-audit months.(RDAG FMCC Complaint)

In two years prior to Reagor-Dykes filing for bankruptcy, the complaint states Ford received net transfers totaling $315,429,217.16.

These practices did not go unnoticed by Ford Motor Credit, according to the complaint. They claim a regional manager for FMCC, Gary Byrd, had a personal and professional relationship with RDAG Chief Financial Officer Shane Smith since “the early 2000s." Byrd has testified that he discussed double flooring and out of trust sales with Reagor-Dykes in the year prior to the filing of these cases, according to the complaint.

Ford allegedly confronted Smith about the discrepancies and violations at these Reagor-Dykes dealerships in October of 2016, but according to the complaint, no action was taken as such large amounts of money were always quickly paid in compensation.

The complaint describes Reagor-Dykes as “in a constant cash-flow freefall” due to aggressive growth strategy, above-market employee compensation, and unnecessary overhead. They allege that Shane Smith, at least as early as 2016, devised a scheme to fraudulently obtain floorplan loans from FMCC and other lenders “to provide the needed liquidity to continue enriching himself and others at Reagor-Dykes, and to conceal this fraud through a check kiting scheme.”

Check kiting is a scheme to defraud where checks tendered without sufficient funds are traded or cross deposited between two or more checking accounts to artificially inflate the bank account balances by using the float time in the banking system.

The complaint claims deposits in at least nineteen accounts at eight different banks were 5.5-7.1 times larger than the actual sales: “Smith and his team deposited up to an aggregate of 10,000 checks per month that had no legitimate business purpose into different bank accounts.”

According to the document, Reagor-Dykes’ collapse was “inevitable," as the growing deficit would not be overcome without an influx of legitimate profits.

Following a legitimately surprising audit by FMCC employee James Conlan in July of 2018 that included verification with DMV records, the complaint says approximately $41,000,000 worth of vehicles were missing.

On July 30, 2018, Ford Motor Credit terminated funding, and on August 1, Reagor-Dykes filed for protection under chapter 11 of the bankruptcy code.

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