Faulkner v. Ford Motor Credit Co. (In re Reagor-Dykes Motors, LP), 18-50214-RLJ-11

• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
• Parties: In re:REAGOR-DYKES MOTORS, LP, [1] Debtors. v. FORD MOTOR CREDIT COMPANY, LLC, Defendant. DENNIS FAULKNER, Creditors' Trustee of the Creditors Trust, Plaintiff,
• Docket Number: 18-50214-RLJ-11,Adversary 20-05005
• Decision Date: 03 June 2022

In re:REAGOR-DYKES MOTORS, LP, ^[1] Debtors.

DENNIS FAULKNER, Creditors' Trustee of the Creditors Trust, Plaintiff, v. FORD MOTOR CREDIT COMPANY, LLC, Defendant.

No. 18-50214-RLJ-11

Adversary No. 20-05005

United States Bankruptcy Court, N.D. Texas, Lubbock Division

June 3, 2022

MEMORANDUM OPINION

Ford Motor Credit Company, LLC ("Ford Credit"), the defendant, moves for summary judgment on the fraudulent transfer and preferential transfer claims of the plaintiff Dennis Faulkner, Trustee of the Reagor-Dykes Auto Group Creditors Liquidating Trust ("Trustee").^[2] As explained below, the Court concludes that Trustee's use of the Ponzi-Scheme Presumption is improper and grants summary judgment on that point; the Court denies summary judgment on all other points raised by Ford Credit.

BACKGROUND

This adversary proceeding arises under the bankruptcies of the Reagor-Dykes auto dealerships ("Reagor-Dykes").^[3] Reagor-Dykes is a group of affiliated entities that were in the business of selling new and used motor vehicles. Reagor Dykes was owned by Bart Reagor and Rick Dykes. Prior to August 1, 2018, Ford Credit provided floorplan financing to Reagor-Dykes to finance the purchase of new and used vehicle inventory. To secure the financing, Ford Credit obtained security interests in all of Reagor-Dykes' assets, including its vehicle inventory proceeds from sales of vehicle inventory, furniture, trade fixtures, equipment, accounts, general intangibles, and contract rights. On advances made under the floorplan Reagor-Dykes was required to repay Ford Credit on the earlier of (a) seven business days after the date that Reagor-Dykes sold a vehicle, or (b) 24 hours after the dealership received funding of a customer loan or customer payment on a vehicle sale.

Reagor-Dykes was a top-performing dealership in terms of gross sales of Ford vehicles with a revenue stream reaching into the hundreds of millions of dollars. Most of its income came from the sale of vehicles that it obtained through the floorplan financing, but it also earned income by servicing customer vehicles, selling parts, and collecting accounts receivable. Despite enormous gross revenues, Reagor-Dykes was unprofitable and substantially undercapitalized due in large part to excessive partner draws, employee compensation, and overhead. For the two years before it filed bankruptcy, Reagor-Dykes lacked sufficient liquidity from its business operations to continue to service its obligations.

To cover Reagor-Dykes' constant cash-flow shortfall, Reagor-Dykes' Chief Financial Officer, Shane Smith, orchestrated sundry fraudulent acts to raise the funds needed to keep Reagor-Dykes operating. Such frauds took several forms:

• Reagor-Dykes routinely and intentionally failed to make timely payoffs to Ford Credit, known as selling vehicles "out of trust." During Ford Credit floorplan audits, Reagor-Dykes employees would falsify sales dates in vehicle paperwork in an attempt to hide out-of-trust sales, which resulted in large payoffs due to Ford Credit following each audit. Reagor-Dykes would also falsely represent that a large number of missing vehicles were out on two-day test drives during audits.

• Reagor-Dykes requested floorplan advances for vehicles that had already been sold months or years earlier, a practice known as "fake flooring."

• Reagor-Dykes received floorplan loans from Ford Credit and other lenders on the same collateral, a practice known as "double flooring."

• Reagor Dykes engaged in a "check-kiting" scheme involving at least nineteen accounts located at several banks.

"Check-kiting" is a systematic scheme to defraud, whereby nonsufficient checks are traded or cross deposited between two or more checking accounts in order to artificially inflate the bank account balances. This is accomplished by using the float time in the bank system. Once bank accounts are artificially inflated, checks that would normally be returned for nonsufficient funds are, in fact, paid or honored by the issuing banks. There are no actual good or services provided in exchange for a kited check, nor is there a legitimate or well-documented loan between the two account holders. The purpose of the check-kiting is to falsely inflate the balances in two or more checking accounts in order to allow payroll checks, vendor checks, and other legitimate debits to clear. In this way, rather than negotiable instruments, checks are misused as a form of unauthorized credit.

ECF No. 259-6, Def's. Ex. D-4 at App. 1026.^[4]

Under its floorplan financing agreements, Ford Credit conducted quarterly inventory audits of Reagor-Dykes through a third-party, Alliance Inspection Management, LLC. Ford Credit also had the right to conduct periodic surprise audits of Reagor-Dykes' inventory. In June 2018, Ford Credit determined that approximately 150 vehicles allegedly sold by Reagor-Dykes had reported sales dates that did not match sales and/or registration dates with the Texas Department of Motor Vehicles and other sources. In response, Ford Credit ordered an emergency audit at the Reagor-Dykes' dealerships, which occurred on July 26 and July 27, 2018.

The emergency audit revealed that Reagor-Dykes had falsely reported sales dates for certain vehicles and could not produce more than $40 million of collateralized inventory for inspection. Ford Credit demanded immediate payment of that amount, but Reagor-Dykes was unable to pay. On July 30, 2018, Ford Credit suspended floorplan financing and sued Reagor-Dykes and its principals, seeking to sequester all collateral remaining at the dealerships and to recover more than $116 million of debt due under its financing. Reagor-Dykes filed for Chapter 11 protection on August 1, 2018.

Starting in February 2018, the Federal Bureau of Investigation began covertly investigating Reagor-Dykes, following an anonymous tip that it was engaged in fraud. The FBI investigation ultimately led to multiple federal fraud and fraud-related charges against at least fifteen Reagor-Dykes employees, including Shane Smith, all of whom have pleaded guilty. These individuals stipulated that they knowingly, and with intent to defraud, obtained financing from Ford Credit by means of materially false representations or pretenses and engaged in an extensive check-kiting scheme to conceal the fraud. Most of these individuals are serving federal prison time and have been ordered to pay more than $40 million in restitution to Ford Credit.

After Reagor-Dykes filed bankruptcy, Ford Credit pursued Reagor Dykes and its guarantors in this Court and the District Court to recover amounts owed to it and related damages. Ford Credit has made substantial recovery but remains Reagor-Dykes' largest unsecured creditor with a claim in the bankruptcy case for $48 million. In November 2021, Trustee estimated that the remaining unsecured and administrative claims in Reagor-Dykes' case, excluding Ford Credit's, totaled approximately $70 million. See In re Reagor-Dykes Motors, No. 18-50214-rlj-11, ECF No. 2295. The claims objection process is still ongoing; Trustee has, since November 2021, successfully objected to numerous claims.

On June 10, 2020, Reagor-Dykes, then as debtor-in-possession, filed this adversary proceeding to recover allegedly fraudulent and preferential transfers by Reagor-Dykes to Ford Credit.^[5] Trustee, appointed under Reagor-Dykes' confirmed chapter 11 plan, now owns the claims that are the subject of this adversary proceeding and thus stands in Reagor-Dykes' shoes. ECF No. 102. Trustee seeks to recover through his fraudulent-transfer claim $315, 429, 217.16, which amount accounts for all of Reagor-Dykes' transfers, almost 3, 000, made to Ford Credit during the two years before Reagor-Dykes filed bankruptcy. For the preference claim, he aims to recover $44, 509, 155.22, which constitutes transfers Reagor-Dykes made to Ford Credit during the ninety days before Reagor-Dykes filed bankruptcy. Ford Credit now moves for summary judgment on Trustee's fraudulent and preferential transfer claims.

DISCUSSION

I. Standard for Summary Judgment

"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a).^[6] "A fact issue is material if its resolution could affect the outcome of the action." Peel & Co. v. Rug Mkt., 238 F.3d 391, 394 (5th Cir. 2001). The movant bears the initial burden of identifying portions of the pleadings and discovery that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "If the movant does meet its burden, the nonmovant must go beyond the pleadings and designate specific facts showing that a genuine issue of material fact exists for trial." Roberson v. Game Stop, Inc., 395 F.Supp.2d 463, 468 (N. D. Tex. 2005), aff'd, 152 Fed.Appx. 356 (5th Cir. 2005).

"[T]he court must review all of the evidence in the record, but make no credibility determinations or weigh any evidence." Peel & Co., 238 F.3d at 394. The facts and inferences to be drawn from the evidence must be viewed in the light most favorable to the nonmoving party. Id.

II. Ponzi-Scheme Presumption

Trustee brings his fraudulent-transfer claim under § 548(a)(1)(A), which provides that a "trustee may avoid any transfer … that was made … within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily … made such transfer … with actual intent to hinder, delay, or defraud any [creditor]."^[7] A plaintiff must provide evidence that the debtor made each transfer with intent to hinder, delay, or defraud creditors. Furr v. TD Bank, N.A. (In re Rollaguard Sec., LLC), 591 B.R. 895, 918 (Bankr. S.D....