Auto Auction blames TCB for collapse. (Banking/Finance).
Arkansas Auto Auction claims in a lawsuit that it let an investor who was going to pump $1 million into the company slip through its fingers based on the advice of a TCB vice president.
On Sept. 6, Arkansas Auto filed a counterclaim against TCB in which it alleges fraud and asks for $5 million in damages. TCB, which had previously sued Arkansas Auto for $1.95 million for defaulting on a loan, denies that it did anything wrong.
Meanwhile, Arkansas Auto's president, Jody Lee Harris, and an employee, Brian K. Stevens, still are awaiting trial for writing more than $250,000 worth of hot checks to Arkansas car dealerships.
Harris declined to comment and referred questions to his attorney. TCB president and CEO Bob Birch also declined to comment.
In its lawsuit, Arkansas Auto said that just as the business was getting off the ground in December 2001, TCB vice president Gordon Silaski told Harris to "hold off" bringing in an investor until a Small Business Administration loan closed. Bringing in an investor "could jeopardize" the SBA loan and "it will be just like starting over again," Harris said Silaski told him.
The complaint, filed by Little Rock attorney Richard Downing, said Silaski knew the statements "were false or there was insufficient evidence upon which to make the representations." As a result of Harris stalling the investor the company went into a tailspin and closed months later.
Harris' parents, Mike and Cindy Harris, said they lost $600,000 they invested in the company as well.
TCB said in its response that Silaski only told Harris that he would have to coordinate any sale of any interest in Arkansas Auto with the SBA and Arkansas Certified Development Corp. And Silaski points to the loan application to support his position: "Prior to closing, [SBA and Arkansas Certified Development Corp.] must obtain from borrower and operating company [Arkansas Auto Auction]: (1) Ownership: Evidence that borrower's ownership and managers are as stated in the application, and have not changed since the application was submitted."
If Silaski told Harris that a new investor could jeopardize the SBA loan and force the company to start the process over again, those statements "are not false or negligent; rather, they are rational and unavoidable deductions," said TCB.
But Downing said the loan paperwork only said a borrower couldn't sell a portion of the business without the SBA's consent.
"It didn't say that the sale itself was illegal, it says you couldn't transfer without the consent," Downing said in an interview.
A court date is pending.
Documents filed in the Arkansas Auto Auction case indicate the company's finances were a mess even as it was opening its doors on 27 acres at 10600 Maybelline Road in October 2001.
Jody Harris had first set up JLH Properties LLC to buy the land for Arkansas Auto. Arkansas Auto would then pay JLH rent.
In September, the SBA authorized a $700,000 loan to JLH Properties. And JLH received a loan from TCB for $1.7 million, the balance of which was to have been reduced to $1 million upon closing of the SBA loan.
In a Dec. 31 letter to Silaski, Rex Bouldin, an accountant who invested in Arkansas Auto, said the companies' books were in a mess, despite assurances from Brian Stevens, who was hired to be the accountant.
"I asked each week how we were doing on budget, to which I was assured that we had money to spare," Bouldin said in the letter. "I asked if we were paying the note payment, and was assured we were. I asked if all tax liabilities had been properly disbursed, and was told we had. Problem was, Brian had no idea what I meant."
Stevens referred questions to his attorney, Jeff Rosenzweig, who declined to comment on the statement. But he said Stevens has entered a plea of not guilty and plans on contesting the hot check charges.
Bouldin said he discovered in December that the books for JLH Properties had never been set up at all, and the Arkansas Auto Auction and JLH balance sheets were commingled.
"I found that the note payments had been made with loan advances, and that the payroll taxes, while identified, had never been set up," Bouldin wrote.
Bouldin told Silaski that the problems were being corrected and that he would spend one day a week working to correct the problem.
"No problem, I have seen worse," he said.
But Bouldin warned that Arkansas Auto was already $415,252 over budget on total costs.
Bouldin asked Silaski's advice on how to come up with the extra money to cover the claims.
"We will do whatever is necessary to get this done," Bouldin said. "This is going too well to soil our reputation for this."
TCB agreed to loan JLH Properties an additional $255,000 to cover the extra construction costs and the SBA approved a $75,000 increase in the amount of the SBA loan.
But the business didn't improve.
Earlier in December Iowa car dealer William J. "Billy" Moyer, a longtime acquaintance of Harris, expressed an interest in investing $1 million in Arkansas Auto in exchange for 25 percent ownership.
Harris agreed, and Moyer began meeting with his bankers to borrow the money. But Harris stopped the process after talking with Silaski about waiting for the SBA loan to close. It never did.
In January, TCB noticed that Arkansas. Auto was writing checks it couldn't cover Silaski called Harris, who said the overdrafts were "merely a 'timing' problem resulting from (i) Brian Stevens ... failed to make deposits on time, and (ii) checks being released to vehicle sellers before the purchasers' checks (or sight drafts) necessary to cover same could be deposited and processed," according to TCB's response.
Silaski said TCB would, as a temporary accommodation, pay the checks rather than return them.
But the overdraft problem continued into March even though Harris had assured Silaski that Arkansas Auto was doing well. It was selling 80-100 vehicles a week, Harris told TCB.
In March, TCB said there was a "noticeable escalation in both the frequency and size of the overdrafts."
Harris told Silaski the increase in overdrafts could be tied to the company's growth and the continuing timing problem created by Arkansas Auto releasing checks to vehicle sellers before the purchasers' checks could be deposited or processed, TCB said.
During the first part of April, Silaski requested the first-quarter financial statements for the company. The records showed an operating loss of $180,000.
When quizzed about the financial statements by TCB representatives, Stevens contradicted Harris' explanation. He said checks were never released to sellers prior to Arkansas Auto's receipt and deposit of a buyer's check or sight draft.
Silaski then called for a meeting with Harris and said the bank would no longer cover the company's overdrafts. The day after the meeting, on April 23, Arkansas Auto had $145,000 worth of checks returned, TCB said.
Within a month, Arkansas Auto shut its doors, leaving several dealerships holding hot checks, according to other court records.
Downing said there has been no discussion of bankruptcy for Arkansas Auto Auction and the company is going to wait to see the outcome of the trial to decide what to do.
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|Title Annotation:||Twin City Bank; Arkansas Auto Auction|
|Date:||Oct 14, 2002|
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