The bankruptcy court estate for Reagor Dykes, the Texas dealership group toppled by claims it defrauded lenders in an elaborate Ponzi-like scheme, is suing Ford Motor Credit Co. for $315 million, alleging that the captive lender knowingly turned a blind eye to its illegal dealings.
The estate filed the suit in federal court in Lubbock, Texas, on Wednesday, alleging that Ford’s captive arm could not have acted in good faith, as the lender “unquestionably knew or should have known” about the fraud schemes.
The $315 million sought in the suit is the same amount in interest payments the dealership group made to Ford Credit from August 2016 to August 2018. During the scheme, Ford Credit “racked up millions in profits from interest” that the dealership and its customers paid on vehicle deals originated at the stores, the suit also claims.
The Lubbock group imploded in 2018 after Ford Credit and other lenders sued it for floorplan fraud. Ford Credit in particular said Reagor Dykes, which filed for Chapter 11 bankruptcy the day after the initial suit, sold more than 1,100 vehicles without repaying $41 million to fund their acquisition.
At the time, the group had 12 used-only rooftops in addition to its nine franchised dealerships selling Buick, Cadillac, Chevrolet, Ford, GMC, Lincoln, Mitsubishi and Toyota vehicles. The lender has said it is owed more than $112 million.
‘Obvious red flags’
Reagor Dykes could never sell enough cars to pay its debts because of its out-of-control cost structure, according to the lawsuit, as it was crushed by debt stemming from an “aggressive growth strategy, above-market employee compensation, and unnecessary overhead.”
Long before the group filed for bankruptcy in 2018, “obvious red flags” should have appeared in Ford Credit’s quarterly audits of Reagor-Dykes’ inventory and financials, the suit claims. An example of egregious fraud includes a claim that one Reagor-Dykes store sold 45 percent of its inventory in one week.
By continuing to accept payments from the group, Ford Credit facilitated the “Ponzi or Ponzi-like” scheme of fake floorplanning loans and kited checks, which involves checks cross-deposited between two or more accounts to artificially inflate account balances.
The FBI investigated former Reagor Dykes CFO Shane Smith, who pleaded guilty last June to conspiracy to commit wire fraud and posted $20,000 bond. Smith, who faces up to 20 years in prison and a fine of up to $250,000, still has not been sentenced.
“Reagor-Dykes knew that its creditors would ultimately be left holding the bag when its scheme finally collapsed,” the suit said. “FMCC knew or should have known the same thing.”
The group ranked No. 131 on Automotive News’ 2017 list of the top 150 dealership groups based in the U.S.