Car Dealers – Confidential – Keepers

Keeper’s necessity

When a lender feels that security is at risk, it often places a holder in the dealership. This action is usually precipitated by the lender losing his “comfort level” at the dealer.

While many dealers interpret the placement of a keeper in their dealership as a hostile act on the part of the lender, their reaction is more based on emotion than logic. The loan manager works for a company and the company is owned by shareholders. The officer has a duty to the company and to the shareholders to protect their safety.

“The dealings with (a lender) in placing its representatives in its debtor’s factory reflected only the natural instincts, interests and diligence of any other creditor who was then in his position, and (the lender) is not in this account alone to remain punished by being declared rector. ” Commercial Credit Co. v. LA Benson Co., Inc. 184 A. 236, 240 (Md. 1936).

Also see: Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599 (2d Cir.) Cert. rejected on: 104 S.Ct. 89 (1983), where the court stated that the banks would have been neglected in their duty to their creditors and shareholders if they did not keep a close eye on the debtor.

The loan checker did not wake up one morning and decide it would be a good idea to put a holder in the dealership. In the typical case, the dealer either had financial difficulties for a period or a number of floor checks revealed that the dealer had “sold and unpaid” vehicles in such an unusually high proportion of monthly sales that the lender classified vehicles as sold out of trust. In both situations, a cautious lender must view the dealer from a different perspective.

No one can predict what a person will do under the continued pressure of serious financial difficulties. By the time a lender puts a keeper in a dealership relationship, the burdens the dealership must have have been growing for some time. The dealer usually does not fully understand the extent of the load in which he or she has been operating; but when faced with numerous negotiations with creditors, endless days of chasing cash to make salaries and paying bills and not having enough cash to buy and keep a good deal, one’s judgment is clouded. An experienced lender knows that a normally rational person can do most when placed under sufficient pressure for a sufficient amount of time.

When the keeper appears, the dealer, rather than revenge or injury, must realize that the dealer needs professional help and seek it. There are many ways to continue operating a dealership with a holder and resolve the situation, recapitalize the store or sell the dealership at a reasonable price compared to a brand sale.

In most cases, a proprietor is placed in a dealership upon mutual consent of the dealership and the finance company. At the meeting prior to such action, it is wise for the parties to identify, agree, and understand the specific duties and associated actions of the keeper.

Keeper’s affirmative duties

Although the primary concern of the holder lies in the care and custody of the floored vehicles, in most cases the lender also has a security interest in all or part of the dealer’s assets. Accordingly, the holder will be and should be aware of the dealer’s attitude to assets other than vehicles and must report to the credit company any indication from the dealer’s disposing of such assets.

The keeper, usually more than one person, will be at the dealership every business day from the time the first employee arrives until the last employee leaves. The keeper must be responsible for:

(1) Condition, location and security of the pledged assets;

(2) Vehicle storage:
a. Ignition keys
b. Dealer’s license plates
c. MSOs and / or invoices and other documentation required to transfer title.

(3) To be present when the mail is opened;

(4) Cash storage and check;

(5) Storage of the unused check warehouse;

(6) Oversee the preparation of the bank deposit and agree who makes the deposit;

(7) Provision of proceeds on contracts with vehicles sold to ensure that the money comes to the right parties;

(8) Arranging third-party finance companies purchasing the dealer’s contracts to include the lender’s name on the provenance check, or, alternatively, refusing to allow the dealer to enter into a sale to other finance companies;

(9) To be responsible for protecting vehicles after the dealership closes; if the vehicles cannot be blocked from exiting the facility via a fence and “lock”, a security guard must be hired;

(10) Establishment of a means of maintaining a running, daily or semi-daily inventory control of unsold vehicles. Only one vehicle at a time for which the lender has not received payment must leave the dealer, regardless of whether the vehicle has not flown;

(11) To be aware of the activities of the Parts Department and its employees.

The courts have approved lenders who control the release of the bank’s collateral, deposit all of the debts in a special bank account and require the counter-signature of the bank’s agent for all payments from the special account[[[[Ford v. C.E. Wilson & Co. Inc., 120 F.2d 614 (2nd Cir. 1942)], receives regular reports on the accounting payment activity, receives estimated weekly spending budgets[[[[Edwards v. Northeastern Bank39 N.C. Appl. 261, 250 S.E. 2d 651 (1979)], advice to the dealer, even combined with a decision to withhold credit[[[[Re re drinks International, Ltd., 50 Bankr 273 (D. Mass. 1985), requiring the debtor to hire a consultant acceptable to the bank in the management and sale of the business, and requiring the debtor to implement a lockbox with respect to its receivables and requiring certain persons pledge their shares in debtor, to the bank[[[[In gen. Technology for Energy Corp, 56 Bankr. 307 (E.D. Tenn. 1985).

Doing a Keeper Should Not Perform

If the training plan ever worsens and / or the relationship becomes hostile between the lender and the dealer, or the creditors or employees of the dealer, the holder comes under the control of a court. In such a case, these actions could be the beginning of a liability or exemption basis for the lender. To best protect the lender, the holder must be aware of the following:

(1) The lender has an affirmative duty not to disclose the debtor’s financial circumstances not unnecessarily, maliciously or promiscuously, and any unauthorized disclosure may be a basis for both damages and punitive damages. Rubenstein v. South Denver Nat’l Bank, Case No. 86CA0840 (Colo. 1988);

(2) Attending board meetings and exercising decision-making authority with regard to the day-to-day running of the business may make the lender liable for all debtor debts. Lurgen, A creditor’s responsibility in a control relationship with its debtor, 67 Marq. Law Review 523 (1984); See also: Reorganization (other) agency, section 14-0, comment “a”;

(3) Evidence of personality conflicts with the borrower may support the debtor’s bad faith. K.M.C. v. Irving Trust Co., 757 F.2d 752 (6th Cir. 1985)

(4) Making threats that the lender is not prepared to take may support a fraudulent act against the lender. state Nat’l Bank of El Paso v. Farah Manufacturing Co. 678 S.W.2d 661 (Tex. App. El Paso 1984).

(5) Misleading a lender intending to refinance the debtor, with regard to the debtor’s financial condition, may result in liability to a third party lender. General Motors Acceptance Corporation v. Central National Bank of Mattoon, 773 F.2d 771 (7th Cir. 1985).

Also note: While a factory does not appear to owe a duty to protect a lender’s floor plan status, to inform the lender of the fact that the dealer will sell, there is a testable fact about the factory or not having the obligation to disclose the predictability of the dealer goes out of trust. Beneficial Commercial Corp. v. Murray Glick Datsun, Inc. 601 F. Supp. 770 S.D.N.Y. 1985).

Procedures for handling insurance and service contract money

Some lenders have experienced staff who understand the above issues and problems. In any case, the dealer should be aware of them and open new trust accounts. The accounts must be opened in a separate bank to avoid misunderstandings. If the lender wants to audit these new accounts, that’s fair. If a lending officer threatens to punish the dealer for protecting the client’s money, he or she is unreasonable and the dealer must step up the chain of command until reason prevails. If the reason does not prevail, the dealer has hard evidence that the lender is creating an unsustainable position, which evidence may prove useful at a later date.

Managing the premiums for life, accident and health insurance and for service contracts does not create a problem if a routine is established. Sales are always covered by a security agreement with regard to insurance premiums and usually with service contracts. The lender and dealer must agree that all “time sales” will be limited to the lender unless a third-party financing company agrees to place the lender’s name on the provenance check, which usually does not happen.

When a time sale is arranged, prior approval by the lender is required. When the contract is then offered to the lender for purchase, the lender must deduct the necessary amount to free the floor. If the proceeds from the sale are insufficient to clear the floor covering, the holder should have already deposited the cash payment and / or taken possession of the title for the exchange.

Proceeds of sales exceeding the floor covering are given to the holder who monitors the payment of the service contract and insurance money to the trust account and the shipment of the premiums to the relevant insurers. If possible, the settlement for the traded vehicle is also made from the dealer’s general account.

The above process, although taking time, is necessary. The parties need to appreciate the understanding, patience and cooperation needed to make the operation work smoothly. If either the keeper or the dealer has a problem working with the other, the problem must be discussed with the goalkeeper’s superior and resolved, or a new goalkeeper assigned.

Procedures for managing payroll

With regard to payroll, the dealer must continue with a separate payroll and the lender should agree to allow a payroll large enough for sufficient staff to lead the dealership to complete whatever step of the training plan reached by the parties . If the dealer is wound up, there must be sufficient payroll for a “skeleton crew” to prepare the dealer for sale or closing. Equipment must be protected and maintained. Secretariat and accounting work must be completed. Although they fall within the minimum wage legislation, they only get a commission paid if they sell, and if they do, they probably sold the asset for more money than the lender would get for an auction. The source of funds to cover the dealership business is discussed in the next section.

Commissioned salesmen

As mentioned, the commissioned seller gets a commission and only if a contract for the sale of a vehicle pays. They represent the best means of achieving full value for the lender’s security. Therefore, whatever the security interest of the lender, the lender would probably be wise to subordinate its interest to the extent necessary for the sellers to earn a reasonable commission.

Closing a dealer is covered in another article. At this point, suffice it to mention that a lender liquidating foreclosed vehicles would have to deduct transportation, insurance, storage and auction fees from the forced settlement sale prices of all vehicles it sold before he even received any money. Therefore, the size of a seller’s commission for the sale of vehicles, net of foreclosure costs, seems to be a good investment on the part of the lender.

An interesting question arises as to whether the lender has an implied duty, knowing that sellers will settle the stock for the benefit of the lender, to inform sellers that it, the lender, intends to keep the entire gross profit from the sale; and further, if the lender, knowing that it does not intend to allow sellers to be reimbursed for their efforts, does not say, do the sellers have an action against the lender?

In any case, the payment of employees (paid or ordered) must be made by the dealer from a separate payroll account. The account must be financed under the supervision of the holder, but the lender’s employees should not participate in the distribution of the funds. Note: Participation in the distribution of company payrolls may make the lender liable for tax. 26 USC 3505 and 6672.

Breakdown of the discretionary income

Vehicle income

If a lender maintains a security interest in the dealer’s vehicle inventory and if the dealership has collected and spent money on vehicles sold without repaying the lender for these vehicles, the dealer’s gross profit from all future vehicle sales should be used to reduce the number of units sold and unpaid. The cash proceeds from such sales must be immediately applied to the lender’s debt, such as gross vehicle revenues, financial and insurance commissions, and profits from service contracts. Factory rebate money and incentive amounts must be allocated to the lender and applied only to the borrower’s debt upon receipt of the actual cash.

Service department income

Unless the dealer represents, on average, a 100% service absorption rate of the fixed fixed cost, which is unlikely, it will be difficult, if not impossible, to try to operate a retailer on the service department’s income. If the lender is unable or unwilling to allow this money to be spent on the dealer’s general operating fund, it means that the lender has decided to close the dealership, whether or not it thinks so.

The service department includes gross profits from parts, service, labor and body shop if the dealer has one. The percentage of all fixed overheads covered by this profit reflects the degree of absorption of the dealer.

If the dealer is sold or closed, this money must be used to fill the wages needed to complete an orderly transition or liquidation.

As always, you should consult a qualified attorney when dealing with out of trust situations.