Floor Plan Fraud — The Wheel That Never Stops Turning
Before the ink from the stimulus checks could dry, COVID-19 scams were already being executed. The frauds range from stealing packages, schemes involving the stimulus checks, to donation scams. These demanding times in uncharted territories for most individuals present an opportunity for scammers to strike. Nationwide, taskforces were created to combat the likely increase of fraud. We have seen this pattern before. Monumental government assistance necessitates governmental oversight to ensure that the funds are dispersed and used according to the law. That governmental oversight is already in effect. News reports have already published accounts of businesses and corporations receiving Paycheck Protection Program (“PPP”) loans, largely because of the loose parameters, and returning the funds because of the potential audit and criminal liability that may follow. We saw the same pattern in 2008. After extensive bailouts from the government, compliance within banks became the top priority and fines soon followed once violations were confirmed.
Fraud does not go away and I am sure the fraudsters recognize that there is no sense in reinventing the wheel. With businesses shuttering and having to choose which bills to satisfy or how to keep their business afloat, opportunities to cut corners present themselves. These cut corners may be the catalyst for civil or criminal liability. Car dealerships, a cash-intensive business, create the perfect environment for an oldie but goodie, floor plan fraud. A seminal case, State v. Damiano, 322 N.J. Super 22 (App. Div. 1999), gives us insight on how the court viewed mistakes versus a deliberate act of deceitfulness; i.e. civil versus criminal liability.
Floor plan fraud involves several components. Since dealerships are cash inventive, oftentimes their inventory is funded by financial institutions. A dealership enters into an agreement with a lender to open a revolving line of credit. Each loan advance for each vehicle is secured by collateral, the title to the vehicle. The lender holds the title while the dealership holds the inventory. Within the language of their agreements are terms providing that once a vehicle is sold, the dealership has a certain number of days to turn over that proceeds of the sale to the lender. One example of floor plan fraud is executed when the proceeds of the sale are not sent to the lender, but diverted for use for an unauthorized purpose. That is an example of a sale out of trust (“SOT”).
Decided in June 10, 1999, State v. Damiano, 322 N.J. Super 22 (App. Div. 1999) cut straight into the crux of the case; the intent of the defendant, Edmund J. Damiano. Damiano was a forty-four count trial involving second, third, and fourth degree charges for theft and sales tax crimes. Comprising of concurrent and consecutive sentences, Damiano’s aggregate prison sentence was eleven years and nine months. Fines and penalties were assessed and he was required to pay restitution in the amount of $204,218.04. Damiano appealed and the matter was elevated to the Appellate Division.
At the Appellate Level, the Court reversed, finding “that substantial error in the charge to the jury, coupled with erroneous evidential rulings, require[d] the reversal of [the] convictions.” Id at 35. The substantial errors committed surrounded around the proofs provided by the State regarding Damiano’s criminal intent. From the onset, the Court recognized that Damiano was “inexperienced in operating a car dealership although he had been involved for many years in other aspects of the automobile business, including leasing.” Id at 30. Effective April 6, 1992, Damiano acquired the dealership from Charles Gallup, the owner and principle of Vehicle Wholesalers and Reconditioners (“VWR”) under the name Newton Chrysler Plymouth Dodge.
The dealership Damiano acquired was undercapitalized, with the dealership’s cash flow issues rapidly increasing. Damiano’s plan was to acquire the dealership and soon after, acquire his own floor plan financing from Chrysler Financial. Ultimately, he was not about to obtain the floor plan financing from Chrysler due to insufficient capital and the inadequacy of his business plan and on October 29, 1992, Damiano left the premises altogether and ceased doing business. Id at 31. The dates of the alleged conduct surrounding the indictment arose between August and October of 1992.
The alleged conduct is categorized in the indictment into five main groupings, conduct involving: trade in vehicles, the sale of vehicles with a lien, floor plan financing, the sale of extended new car warranty, and selling vehicles out of trust (“SOT”).
The Court’s analysis focuses on the important question, when does the conduct cross from the realm of civil liability over to criminal liability? “Obviously the harm caused to the creditors of an insolvent business is always the proper subject of civil litigation. The question is when and under what circumstances it may also fairly be the subject of criminal liability.” Id at 36. What action tips the scale? In Damiano, the Court found that the State did not answer that question clearly, and grouped with the improper jury instructions, ruled that the judgment of convictions was reversed and “remand[ed] to the trial court for the dismissal of Counts 26, 30, 32, 34, 36 and 38 of the indictment and for a retrial of all remaining counts.” Id at 56.
The Court identified the State’s misstep as its inability to clearly demonstrate that Damiano’s actions were criminal in nature. Intent is not only demonstrated through the conduct itself, but also surrounding factors. The pattern of fraud, Damiano’s knowledge of the business and reputation within the industry, or whether Damiano’s other business ventures failed during the same time period are all potential pieces to the puzzle. Thinking outside the box, important circumstantial evidence could be the relationship that the dealership had with its customers and lenders before Damiano became involved in the business. Even though the dealership had prior financial issues, were there any instances of this type of conduct before Damiano took over? Demonstrating that the X factor was Damiano can be used to illustrate his criminal intent to the jury. The State appealed to the Supreme Court but the petition was denied in 2000, leaving the State to either retry the case or resolve the matter in the manner of a plea.
Floor plan fraud comes in all shapes and sizes. Like a swing trader waiting for the charts to show a golden cross, opportunity begets opportunity. In Lubbock, Texas, the Reagor-Dykes floor plan fraud resulted in approximately $40,000,000 dollars in damage. In Denver, Colorado, an ongoing investigation into Tripoli Auto Sales floor plan fraud has uncovered approximately 180,000 dollars in damage. In Helena, Montana, a federal judge ruled that Robert Allen Nissan owes Nissan Motor Acceptance Corp. (“NMAC”) approximately $2,5000,000 dollars for selling vehicles out of trust. These three investigation all had the recipe for fraud, questionable accounting, rising debt issues, and opportunity. Task forces have a difficult task at hand in deciphering whether similar patterns of fraud are a product of mismanagement, a casualty of the COVID-19 pandemic, or just plain old fraud. Floor plan fraud is not going away for the same reason. In small doses, it can be written off as terrible management, but it’s the innocuous facts, inside and outside of the situation, that can be the first piece to the puzzle. Fraud does not have to reinvent the wheel, but it will need a skilled and lucky getaway driver to evade capture.
