One of my more intriguing cases while serving at the Florida Attorney General’s Office began when I was contacted by a major captive finance company seeking assistance with a dealer who had been completely financed by this captive finance company, including his floorplan, was discovered to be several million dollars “out of trust,” a term to be defined.

 Moreover, this dealer principal had sold vehicles to significant politicians whose down payments and trade-ins had mysteriously been diverted.

In a similar matter, a dealer who owned several stores selling the same make of vehicle in multiple states misled his financing source.

To earn extra incentive payments on additional sales, he rotated inventory from state to state and filed fictitious titles. The floor plan auditor would presume more sales were made than there had been in reality. A finance manager reported the scam to me in my office.

Neither case was ultimately prosecuted by me; other agencies took them on.

Recent Cases

Recent cases reminded me of these investigations. In one, two captive finance companies acted against the same dealer over millions of dollars.

Out-of-trust cases usually involve large sums of money. This errant dealer engaged in similar fraudulent behavior in sales and lease transactions. When vehicles were sold or leased, the dealer did not send payments to the underwriters or floor planners, nor did it pay off consumers’ remaining balances on their trade-ins.

Definitions

Understanding the relevant terms provides insight into these legal infractions.

• A trust is a fiduciary arrangement in which one party, the trustee, holds and manages assets for the benefit of another party, the beneficiary.
• A dealer floor plan is a specialized revolving line of credit that a dealership uses to buy vehicle inventory. It works similarly to a trust but is not technically one.
• A trust receipt is a legal agreement tied to that floorplan. It proves that the financing source holds asecurity interest in the vehicles on the lot until the dealer sells them and repays the line of credit to the financing source.
• "Out of trust" describes a financial situation in which a dealer uses the underwriter-financed vehicle funds for unauthorized purposes instead of repaying the financing source as agreed.
• "The Man" is slang for a figure of authority, typically in a derogatory connotation. In this context, The Man is the financing source.

Other Examples

In recent years, dealers in Iowa, Florida and Georgia have been prosecuted for being out of trust. Each case involved millions of dollars. In the Georgia case, a dealer was convicted of a federal crime after an FBI investigation, and he is now serving time in prison.

Legal Consequences

Intentionally being out of trust can lead to staggering legal trouble, including criminal and civil charges for theft and fraud, Unfair or Deceptive Acts or Practices violations, RICO, or racketeering, claims, breach of contract, mail fraud, wire fraud, criminal conspiracy, breach of fiduciary duty, and conversion, or wrongfully taking or using someone else’s property.

In my Florida cases, above, I would have charged the dealers with criminal and civil fraud, theft and RICO counts. Under Florida law, theft includes the temporary taking of money. Some dealers may think it is legal to use money owed to others for a short time, but it’s not. Other states have similar laws.

Recommendations

Dealership employees, in any department, should report out-of-trust violations internally or through an anonymous whistleblower channel.

Employees should document their communications and consider separating from the business to protect their own professional integrity. They should also be aware they could be implicated in the dealership’s violations; joint and several liability and criminal vicarious liability may apply.

Generally, a financing source will not financially reward a dealership employee for reporting an out-of-trust violation. However, some federal laws and programs do, such as the IRS Whistleblower Program for tax evasion and the False Claims Act (qui tam) for fraud against the federal government. Both have strict requirements.

Final Word of Advice

Don’t hoodwink anyone, especially The Man. There could be criminal and civil anguish.