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Car dealer bankruptcy clouded by allegations of fraud

The bankruptcy process depends in many ways on cooperation between the debtor and its creditors to resolve issues about asset value, existing debts and the history of the business before the petition is filed. When the parties cannot reach agreement, or when the disagreements become particularly intense, the bankruptcy court often takes a more active role in monitoring the parties' behavior. The commercial bankruptcy of Auto Masters, a group of used car lots in and around Nashville, has recently taken such a turn.

Believing that persons with motives antithetical to the interests of the company, Auto Owners' CEO recently dispatched armed security guards from another enterprise he owned to the main Auto Owners' lot in Nashville. The move prompted the convening of a special court session in front of the bankruptcy judge. The judge severely criticized the Auto Owners' CEO for taking action intended to intimidate parties that he believed were acting contrary to his interests. The judge found the owner in contempt of court and ordered him to turn over access to the main Auto Owners lot on pain of otherwise paying a daily fine of $10,000.

An earlier red flag from accountants examining the company's books may create even more serious problems for the family that owns Auto Owners and its related entities. According to court documents, a review of the companies' books revealed an overvaluation of collateral pledge by the company in the amount of $30 million. The auditing of the company's accounts show that it entered payments on long-closed accounts, thereby allowing the company to claim these accounts as active and available as security. Auditors have also found that members of the family that owns Auto Owners have stripped millions of dollars from the company in unlawful payments to themselves. Creditors are claiming that all of these actions are fraudulent.

These issues may be resolved by the sale of Auto Owners' assets, including its accounts receivable, to other companies, nothing is certain at the case. When Auto Owners filed its bankruptcy petition in 2017, its attorneys stated that the company was solvent. That claim now seems shaky. In any event, this case shows how convoluted a bankruptcy proceeding can become and how creditors may need legal representation to protect their interests.

Source: Nashville Post, "Multimillion dollar fraud alleged in Auto Masters bankruptcy," Stephen Elliott, April 23, 2018

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