Ford Motor Credit Company LLC (“Ford Credit”) filed court documents with the Northern District of Texas last week, as part of a lawsuit against Reagor-Dykes Motors, LP claiming the dealerships and other related Debtors entities ran "the largest floor-plan-financing frauds in the history of the United States."

The documents said Reagor-Dykes Auto Group hid a "massive breach" from Ford Credit by fraudulently misrepresenting sales-reporting data to Ford Credit. The company believed Reagor-Dykes was timely paying off cars it sold to the public, however, Ford Credit said the company was selling vehicles on average of 55 days before reporting it to Ford Credit.

Ford Credit is asking Bankruptcy Court to appoint a trustee to manage the Chapter 11 filing, claiming Reagor-Dykes committed "multiple acts of fraud and gross mismanagement." The auto giant's financing unit alleges that Reagor-Dykes stole over $41 million previously advanced by Ford Credit. On July 31, Ford Credit sued numerous companies related to Reagor-Dykes Motors, LP. Shortly after that, those businesses filed for Chapter 11 bankruptcy.

The documents said:

"(Reagor-Dykes) 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 the years of unprecedented car-sale growth is just as telling. Since its (lowest point) in 2009, the automotive market for new and used cars 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 (Reagor-Dykes') operations and turnaround the business."

Ford Credit claimed that Reagor-Dykes engaged in fraud known as “check kiting”.

This is how it worked: vehicles financed by Ford Credit were sold to customers, and Reagor-Dykes would keep the money without reporting the sale to Ford. By not immediately reporting the transaction, the fraudulent company would not have to reimburse Ford immediately. In a July audit, Ford lawyers discovered “an average discrepancy of 55 days” on about 150 vehicle sales. Ford’s policy is only seven days. The documents also said, “Ford Credit has also determined that Debtors [Reagor-Dykes] double-floored at least 85 vehicles.”

“Double-floored means that one dealership took possession of a new vehicle and requested financing from Ford 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,” said NBC Amarillo.

In another bankruptcy document, Ford Credit said it has $46 million in uncollateralized obligations with the dealership; the total debt was reported to be around $116 million.

Bankruptcy documents relating to Reagor-Dykes indicated that an external investigation “in the name of transparency” is welcomed. The dealership said even its owners, Bart Reagor and Rick Dykes, should be subject to investigation. Ford Credit states the contract breach is loan fraud, and if proven in court, could be punishable by years in prison.

Ford Credit requested the motion for a bankruptcy trustee to be heard on an expedited basis in conjunction with the hearing on the use of cash collateral scheduled for August 16, 2018.

While fraud is usually minimized or concealed during an economic boom cycle, it seems as Bart Reagor and Rick Dykes could not continue their fraudulent scheme of check kiting and double-flooring, as it has become apparent the auto industry is heading into a slowdown. At the end of an economic expansion, that is when fraud usually comes out of the woodwork. Which leaves a question: how many other dealerships around the country are committing similar frauds?