MIAMI -- The economic crisis that swept 2008 has left most retailers hesitating to call this the most wonderful time of the year. With consumer spending down and retail vacancy rates increasing, the retail industry has taken a substantial hit. It's therefore not surprising that as dealers of cars, boats, RV's and large ticket discretionary items feel the effects, more creditors will be negatively impacted as default rates continue to rise.
"We fully anticipate an increase in litigation cases involving dealers defaulting on their loan obligations in this sour retail season," says Jim Foster, Akerman Senterfitt Shareholder and a senior litigation and bankruptcy attorney in the firm's Orlando office. "More troubling though, is the growing trend of dealer fraud instances across many mid-sized dealerships within the marine, furniture, automotive and electronics industries."
It's an unfortunate truth that dealer fraud situations, known as "sold and unpaid" (SAU) or "sold out of trust" (SOT) cases, are increasing and harming many creditors. In prior years, SAU and SOT cases were often seen amongst "brown and white" dealers who would take advantage of standard floorplan checks and pile inventory in tall rows with empty boxes closest to the ceiling to give the impression that all assets were accounted for. Dealers expecting the next sales to cover the losses will seek to hide the fact that they have sold inventory without sending payment. However, Foster notes, "In this economic environment, missing inventory will not go unnoticed this retail season. Creditors and their Field Service Representatives are more vigilant than ever."
For example, before the slump in sales, creditors would permit dealers to hold manufacturer's statements of origin (the document needed to obtain a title), now the lenders are bringing the MSOs in house in the hope that a consumer complaining about an inability to obtain a title to his new car, boat or RV, will alert the creditor to the SOT situation.
In addition to dealer fraud, it is not uncommon in a down market for dealers to default on payment obligations and allow repossession of their inventory rather than declare bankruptcy. In these cases, assets are ending up in the creditor's possession and are ultimately bought back by the manufacturer. Consequently, manufacturers are struggling and may be willing to financially assist the creditor in an effort to avoid a repossession from the dealer that would trigger the obligation of the manufacturer to buy back unsold inventory.
"We understand and appreciate these difficult economic times and the unfortunate repercussions of a struggling retail industry," says Michael McMahon, chair of Akerman's Litigation practice. "With the largest litigation practice in Florida and one of the largest teams of litigators in the United States, we are confident that we can assist in limiting the potential losses to creditors affected by the current economic challenges that will persist into the New Year."
