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When You Sell For Less Than Your Debt

Guest post by: Mark Johnson

Article Overview: Automotive Dealers Are Being Forced To Sell For Less Than Their Debt.

When You Sell For Less Than Your Debt

Like homeowners, many auto dealers are being forced to sell for less than their dealership debt. Dealers who have lent their businesses money need to be sure they have proper documentation.

To have any chance of repayment, you must have clear documentation of lending. You'll need to ensure that you have:

a) Clear security agreements;

b) Filed appropriate UCC-1s;

c) Maintained minutes in corporate (or LLC) minute books along with clear and executed corporate (or LLC) resolutions regarding the details of cash contributions and cash borrowed from non-banking sources; and

We have seen some selling dealers who don't have sufficient funds to pay off all the unsecured creditors, but will have some proceeds at closing. You can't just assume that you can pay yourself before other creditors. In this situation, we often ask about corporate (or LLC) minutes properly documenting the loan, and whether payment of interest and the filing of a security agreement have occurred. In other words: Have you treated the loan arrangement as a real arm's length deal?

Too often, these housekeeping items are not being performed. Auto dealers "selling short" typically assume that they can simply write themselves a check at closing and not pay other unsecured creditors. But without a clear, documented and valid debt obligation, documented at the time of the inception of your loan, you can't simply pay yourself the proceeds of the sale and not pay other unsecured creditors. We have seen such impermissible payments treated as preferences and unlawful distributions. But the dealer does not get to keep the proceeds he paid to himself.

Secured creditors are generally required to be paid. Until they are paid they won't release their security interests/liens that encumber dealership assets.

Whether the dealer or family members are lending to the dealership, it's critical to make sure they are secured creditors.

The lesson: Document related-party loans and make sure your lawyer is a part of this process up front. ALWAYS Get Legal Advice.

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Article Tags: auto, automotive dealerships, buy, dealerships, due diligence, mdjohnsoninc, nbb, sell, short sale



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