Suing Banks – Bad Faith Default Leads to Big Win Against GMAC

This case is one from the archives but the principles and law behind the decision are still valid today. In 2009, a Philadelphia jury awarded Donald Mente and his new and used car dealership, Mente Chevrolet, $4 million after finding that GMAC had used thinly disguised pretexts to declare the dealership in default and seize its assets. Still not satisfied, GMAC (now Ally Financial), attempted to overturn the jury’s decision. Fortunately, the court sided with the jury and Donald Mente and ruled the lender had engaged in a “bad faith default.”

Both the facts and procedural history are useful for anyone asking the questions “Can I sue my lender” or perhaps better phrased, “How can I sue my lender and win”?

2006 and GM’s Plan to Close Hundreds of Dealerships

The year was 2006. Although the housing market and economy had not yet crashed, there were signs everywhere that the bubble was about to burst. In April of that year, GM brought in Cerberus Capital Management, a private equity firm that specializes in “distressed investing” to help restructure. (In Greek mythology, Cerberus is a monster that guards the gates of the underworld and keeps the dead from leaving.)

As part of a corporate restructuring, Cerberus was to acquire 51% of GMAC, GM’s lending arm. GMAC would then later become known as Ally Financial.

As the economy began to grow even shakier in 2007, the GM / Cerberus plan became more clear. Automotive News announced that GM was going to pursue a consolidation plan and reduce the number of its dealerships.

There was one “tiny” problem with GM’s plan. Unless a dealership was in default of its franchise or financing plan agreements, the company couldn’t just shut down dealers. Not legally or ethically.

Donald Mente says that when GM decided to declare a bad faith default and simply shut him down.

Donald Mente and the Mente Dealerships

The facts of this case are largely taken from court’s own findings. Donald Mente owned two car dealerships for over 15 years, Mente Chevrolet Oldsmobile (the Chevrolet Dealership) and Mente Chrysler Dodge.

Don’s parents purchased the Chevrolet dealership in 1971. Fresh from school, Don began working there in 1979. Later in the 1990s, Don Mente assumed full control of the Chevrolet dealership from his parents. Around the same time, his Mente family purchased the Chrysler Dealership.

All financial transactions for the dealerships were managed by Donna Johnson, a woman who had worked for the family for almost 30 years. She was the dealerships’ controller.

Don Mente operated the Chevrolet dealership under franchise agreement with General Motors (GM). Financing for the dealership was through GMAC. In the car industry, these financing arrangements are called “floor plans.”

The Chevrolet dealership's floor plan with GMAC began in 1982 and was governed by a document called a Wholesale Security Agreement (WSA). The Chrysler Dealership's floor plan was also operated pursuant to an identical contract. GMAC was providing the floor plan financing for both the Chevrolet and Chrysler dealerships.

Under the WSA, Plaintiffs were required to repay GMAC “faithfully and promptly” for all cars sold to customers.If you sell a car, the dealer must quickly pay off whatever monies were financed by GMAC. The word “faithfully and promptly” as used in the agreement became a contentious issue at trial. Nowhere in the documents was the term defined. Nowhere did GMAC specify how quickly the dealership must payoff a car after it was sold.

At trial GMAC argued the term required immediate payment, meaning the same day a vehicle was sold. Don Mente claimed, however, that GMAC had always allowed him to wait for the receipt of the car buyer’s funds before paying GMAC.

The payments terms were critical because if the dealership didn’t pay “faithfully and promptly,” GMAC could declare the dealerships “out of trust.”That meant that the dealership would be in default.

Mente testified at the trial that his business relationship with GMAC became problematic in 2006. Not coincidentally, this was the same year that GM had colluded with Cerberus to cut the number of dealerships.

Near the end of 2006, GMAC ordered Mente to reduce the number of used cars on his lot and increase his profits. Around the same time, the parties had disputes related to a revolving line of credit GMAC supplied.

With little warning, GMAC asked Mente Chevrolet to reduce its $500,000 line of credit by half within 30 days. Donald Mente testified that was less time than what GMAC offered to other dealers.

Donald Mente told GMAC that he simply couldn’t cut his line of credit in that time period. To reduce the line by half, Mente would need to raise a quarter of a million dollars in just 30 days. Remember, this at a time when GMAC was demanding he make more profits.

Two days after Don Mente told GMAC that he could never agree to these terms, GMAC sent auditors to the dealership. On that same day, one of the auditors demanded immediate payment of $317,841.20 for the cars “missing from the dealership's lot”.

Do you remember Donna Johnson, Mente’s controller for 30 years? The audit took place while Johnson, the sole person responsible for managing the dealerships' financial records, was on vacation. Lest you think that was mere coincidence, Johnson always told GMAC of her absences to ensure it would not audit the dealerships while she was awayand to inform them payments for sold vehicles would not be made in her absence. For over 20 years, this was never a problem. Following her customary practice, Johnson gave GMAC written notice that she was leaving for vacation on July 16, 2007, and would return to work the following Monday, July 23, 2007.

Is it a coincidence that GMAC decided to an unannounced audit as soon as Johnson left? You be the judge. (The jury clearly didn’t see it as a coincidence.)

Mente asked GMAC to give him just 24 hours to raise the money and call in Johnson from her vacation. GMAC refused to wait and immediately declared the dealerships in default. Had GMAC waited until Johnson’s return, Mente testified he would have had approximately $400,000 to satisfy the demand for $317,000.

On that same day, GMAC sent eight guards to the Chevrolet Dealership and GMAC agents seized the titles, keys, and manufacturer's certificates of origin for all cars at the Chevrolet Dealership. GMAC took control of both dealerships' open accounts with GM and all of the funds in those accounts. It also instructed GM to cease its vehicle shipments to the dealerships.

If that wasn’t enough, GMAC also forbade the dealerships from adding used cars to the floor plan or selling used cars at auctions to quickly generate income. Adding insult to injury, under the terms of the wholesale security agreement, GMAC expected Mente to pay for all of this including the eight guards. They took away his ability to make money while at the same time dramatically adding to his costs.

Days later GMAC demanded he immediately pay $7,592,393.59. Failure to pay meant GMAC could take all of the dealerships’ property. On July 25, 2007, Mente received three letters from William Tierney, GMAC's Director of Commercial lending, demanding he pay the $7,592,393.59. He was given just one day to pay. 

Without money and cars, the Mente family of car dealerships closed down two days later. Long time employees were suddenly without jobs. A lifetime in the car business for the Mente family had come to an end.

Ultimately, GMAC agreed to return a measly $59,000 of the funds it seized if Don and the dealerships agreed not to sue GMAC. With employees needing to get paid and customers owed for refunds, Don reluctantly signed.

Despite agreeing not to sue, Mente sued GMAC 3 months later.

The litigation was contentious. Even the judge claims it was difficult. The court found that GMAC twice tried to delay and move the trial date. The company also refused to produce discovery. At almost every juncture, Mente had to fight to get discovery.

Ultimately, a Philadelphia jury heard the evidence and awarded Mente $4,000,000. Although it was too late for Mente to ever reopen his doors, the jury listened to an expert calculate the value of Don’s lost profits, the value of the franchise and the value of the dealership itself. Donald Mente was vindicated.

Actually, not quite yet. Although the dealership lost at trial in November of 2009, GMAC would prolong payment for years. An appeal, motion for new trial and motion to overturn the jury were all rejected. Ultimately, the court sanctioned GMAC for over $60,000 in legal fees caused by GMAC’s bad faith in its post verdict maneuvering.

Bad Faith Default

Central to the jury’s verdict was whether the Mente dealerships were really in default of the security agreement or if GMAC’s actions amounted to a bad faith default. Loan documents are frequently written to favor the lender (creditor) and disfavor the buyer. Although GMAC wasn’t a bank, it acted like one. (Actually, GMAC had a bank called GMAC Bank that later became Ally Bank).

Most defaults declared by lenders occur after a borrower fails to pay money when due. Think about a traditional loan… let’s say you borrowed money and owe a balance of $10,000. If you owe $1000 on the first of each month and fail to pay, your lender can declare you in default and accelerate the entire unpaid balance of the loan. The lender doesn’t have to wait each month to sue you for that month’s payment. In our example, the entire balance of $10,000 becomes immediately due.

Floor plans by car dealerships are a bit different. Here the agreement said that Mente had to “faithfully and promptly” pay as each car is sold. Mente testified that in the typical new car deal, a buyer might trade in an older vehicle and obtain financing for the balance. That means that the dealership would have to wait to get the money from the buyer’s bank and to get the proceeds from a car auction for the value of the trade in.

For years that arrangement worked without a hitch. That is, until GM apparently decided to close hundreds of dealerships.

Ultimately the jury had to decide if Mente had failed to promptly pay. In our opinion, the jury got it right. GMAC’s decision to demand Mente cut his line of credit, their demand of same day payment and their audit while it knew the comptroller was on vacation was the equivalent of a bad faith default. 

GMAC’s Claim that Mente Waived His Right to Sue – “Unclean Hands”

After finding that GMAC’s had used a pretextual or bad faith default, the jury had to next decide if Mente had waived his right to sue by signing a forbearance agreement and accepting $59,000. Obviously in awarding Mente $4 million dollars, the jury wasn’t troubled by the forbearance agreement.

Neither was the court. In one of the post verdict appeals, U.S. District Court Judge Juan Sanchez said, “The jury verdict, however, also invalidated the Forbearance Agreement by applying the doctrine of unclean hands."

The doctrine of unclean hands can be traced back in common law to ancient England. As applied today, the doctrine requires that a claim is barred when “(1) a party seeking affirmative relief (2) is guilty of conduct involving fraud, deceit, unconscionability, or bad faith (3) directly related to the matter in issue (4) that injures the other party and (5) affects the balance of equities between the litigants.”

All those requirements were certainly present here.

Bad Faith Default and Banks

As already noted, although GMAC was not acting in its capacity as a bank, it was a creditor. The lessons learned from this case are equally applicable to banking cases. As credit markets again tighten, we see some banks engaging in bad faith defaults simply to get out of unprofitable loans. Some banks will sell loans if profitable but try and claim some flimsy pretext and simply declare a default even if the loan is otherwise current.

That a lender or bank is simply unhappy with the deal it made or shifting economic conditions doesn’t mean they can simply declare a default and close down someone’s business.

Even more sinister, we have seen some banks and special servicers decide they want to acquire the property or collateral backing the loan. They too will use a bad faith default as a way of getting pushing the borrower out of the way.

Courts don’t like non payment defaults and as we see from this and many of our cases, juries don’t like them either. Unfortunately, banks have learned that by putting a borrower out of business, many borrowers can’t afford a long and protracted battle. That is why banks fight their battles outside the jury with expensive lawyers, motions to dismiss and by failing to produce needed discovery. Get your case in front of a jury, however, and you can win big.

If you are being bullied by a lender, bank, mortgage company or creditor, it is possible to fight back and successfully sue your bank. Unfortunately, most lawyers we know won’t sue banks. In fact, there are very few true lender liability lawyers in the U.S. and most of those defend banks.

Not us. The lawyers at MahanyLaw and Judge, Lang & Katers sue banks. We have helped individuals, private companies and the government collect billions of dollars. Because we are two national boutique firms, our rates are reasonable, we are often willing to put our own “skin in the game,” we have experience and we get up to speed faster than most other lawyers.

Interested in learning more? Read about another car dealer who claims that he was ripped off by GMAC and illegally forced out of business. Unfortunately, that dealer waited to long to sue. You can also read about the cases we handle including improper defaults here

We would love to talk to you if you think you have a case. (Unfortunately, we are not equipped to handle residential foreclosures, consumer credit problems and cases where the actual loss is less than $5 million.) For more information, contact attorney Chris Katers at [hidden email] or by telephone at (414) 777-0778. The author of this post, Brian Mahany, can be reached at [hidden email].

MahanyLaw and Judge, Lang & Katers -  We Sue Banks