Dealer Services Corporation Automotive Finance Corporation Supreme Court, Fraud, Dealer Floorplan, Used Cars, Attorney General Carmel, California

Double Floor Plan Gets Used Car Dealers Convicted - AFC & DSC Walk

The Hofers operated a used car dealership in Mitchell, South Dakota that was financed through a longstanding arrangement with the Farmers State Bank of Parkston, South Dakota (the Bank).

Initially, the Bank did not have a security agreement with the Hofers for each specific vehicle in their inventory, but rather, the Bank filed a blanket UCC-1, on all of the inventory, fixtures, and other assets of the car dealership, including the vehicle inventory and proceeds thereof.

The Hofers used car inventory sustained substantial damage during a hail storm in 2003. Although it did not file a lien, the Bank required the Hofers to enter into separate security agreements for each vehicle in inventory.

Unbeknownst to the Bank, the Hofers began arranging financing through Dealer Services Corporation (DSC) and Automotive Finance Corporation (AFC), two Indiana based corporations specializing in dealer inventory finance.

Using DSC and AFC financing, the Hofers floorplanned their inventory and pledged individual vehicles as collateral for the loans. DSC and AFC perfected a purchase-money security interest in the individual vehicles, and the corresponding titles then identified DSC or AFC as the lien holder.

Before the titles could be so marked, Hofers made copies of the original, clear, title to provide to the Bank along with their monthly inventory list, from which, the Bank then required Hofers to sign individual security agreements for the newly acquired inventory items.

This scheme is known in the trade as a double floor plan (DFP). In addition to buyer payments for these vehicles, Hofers also took vehicles in trade. The Hofers generally sold the trade-in vehicles at the Sioux Falls Auto Auction (the Auto Auction).

While the Auto Auction usually issued checks to the Hofers for the sale proceeds, on other occasions the Auto Auction issued payment directly to lien holder, AFC. When Karla was asked why this was done, the following exchange occurred:

    Karla:                    AFC had asked the [Auto A]auction not to give us the money because  they knew that, you know, we were closing.

   Defense Counsel:    They were aware of your situation with the [Bank].

    Karla:                   Yes.

IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA - APPEAL OPINION FILED 11/12/08 #24718-aff in pt & rev & rem in pt-DG