Partner sues megadealer Terry Taylor for fraud

Partner sues megadealer Terry Taylor for fraud

- in Automotive

Terry Taylor, who built a dealership empire in part by granting equity stakes to his general managers, is being sued by one of his former managers, who accuses him of fraud. The suit alleges Taylor inflated expenses and withheld revenue that should have been shared with the minority partner.

Other minority partners say that if the revenue-hiding charge is true, they will want recompense, too.

The charges threaten to drag the publicity-averse Taylor into the spotlight and undermine a key strategy that he has used to accumulate more U.S. dealerships than any individual.

The exact number of stores that Taylor owns remains unclear. But former and current partners and business associates estimate he owns anywhere from 120 to more than 150 U.S. rooftops, which would trail only four publicly traded dealership groups.

His company, Automotive Management Services Inc. in West Palm Beach, Fla., provides support for his dealerships. Taylor, through his lawyer, did not respond to questions as to whether AMSI provides those services to other dealerships as well. The lawsuit contends AMSI inflated the cost of the services it provides, thereby fattening Taylor’s wallet at the expense of his store manager equity partners.

The charges are in a counterpunch lawsuit filed Nov. 16 in Putnam County, Tenn., by Michael Petrello, a former general manager at a Taylor-owned dealership. A related suit has been filed in West Palm Beach as well. Petrello is represented by the Orlando office of the law firm of BakerHostetler. It was one of a dozen law firms that helped to unravel Bernie Madoff’s Ponzi scheme and win financial restitution for his victims.

Petrello, 36, ran Taylor’s Ford-Lincoln of Cookeville, in Tennessee, about 80 miles east of Nashville, until being terminated in July. Petrello, who still owns a 20 percent minority interest in the store, says he was fired without cause.

Taylor vs. rivals

If estimates of the size of Terry Taylor’s auto-retail empire are correct, here’s how it ranks against other large dealership groups.
  Number of dealerships New and used vehicles retailed, 2016
Penske Automotive Group 294 457,251
AutoNation 260 563,335
Group 1 Automotive 159 301,184
Lithia Motors 154 259,270
Terry Taylor 120-150* 300,000-350,000*
Sonic Automotive 112 253,462
Hendrick Automotive Group 103 206,404
* Estimates by sources familiar with Taylor’s operations
Source: Automotive News Top 150 Dealership Groups list published March 2017

Suit, countersuit

  • The lawsuit: Terry Taylor sued Michael Petrello, one of his former managers, in September, alleging he violated the noncompete, nonsolicitation and no-hire provisions of his contract.
  • The countersuit: Petrello countersued in November, accusing Taylor of fraud and creating “fictitious” and inflated costs to profit at the expense of his dealership partners.
  • The fallout: Several of Taylor’s partners say they will want recompense if the suit’s outcome shows that Taylor withheld reinsurance profits that they were due.

In an email to Automotive News, Taylor’s lawyer wrote, “It was only after Mr. Taylor learned that Mr. Petrello was actually spending very little time at the dealership attending to its business, and after Mr. Taylor confirmed with several co-workers that Mr. Petrello was only coming in a few days per week and then only for a few hours, that he lost trust in Mr. Petrello and decided to terminate his services.”

In an email, Petrello wrote: “For three years, it’s all-day, every day.” In his last two years, he said, “I didn’t have to work 100 hours a week … only 40.”

A month after being fired, Petrello took a general manager job at a Chrysler-Dodge-Jeep-Ram dealership in Kingsport, Tenn., about 200 miles east of his former store. This prompted Taylor to sue Petrello in September, alleging he violated a noncompete clause. Petrello says his noncompete was valid only within 25 miles of his former store, but he quit the job in Kingsport to protect that store’s owner from any legal problems.

Petrello’s multimillion-dollar countersuit seeks to have Taylor buy out his 20 percent stake in the Ford-Lincoln dealership, pay him $90,050 for his last 45 days of work and to pay out other monetary damages. Taylor has not yet filed a response to the counterclaim.

Speaking “on behalf of Mr. Taylor,” Nashville lawyer James Cameron III wrote Automotive News in an email, “The allegations in the counterclaim are demonstrably false. Mr. Petrello’s claim is nothing more than a retaliatory action made by a terminated employee to draw attention away from the original complaint filed by the Company alleging violations of the non-solicitation/no hire provisions of his contract.”

Cameron said that in addition to competing directly with Taylor’s store, Petrello hired away employees. Petrello says they followed him of their own volition.

Other partners watching

Two aspects of the suit are drawing attention from minority partners in Taylor’s other dealerships. First is the allegation that Taylor and AMSI overcharged for rent and services rendered, thus watering down the store profits that partners such as Petrello can share. Second is an accusation that Taylor hid millions of dollars in reinsurance profits from premiums paid on finance and insurance products sold at Taylor’s stores.

“I’m not a vindictive person, and I think Mr. Taylor is a smart person,” Petrello told Automotive News. But he contends in his countersuit that “Taylor had the fraudulent intent to divest the Company of its expected gross revenues thereby causing the Company to pay less dividend payments to its shareholders.”

Petrello’s lawyer declined to comment in detail, saying the lawsuits are active litigation.

But Cameron, Taylor’s lawyer, wrote, “Mr. Petrello worked at the dealership for almost a full year prior to becoming a shareholder and should have had a complete understanding of the rent, the sale of warranty products and the benefits received from the many services provided by AMSI.” In addition, “It is unfortunate that Mr. Petrello is now, only after he was terminated, raising questions about the written agreements he made and confirmed over and over that he fully understood,” Cameron wrote.

Several other minority partners said they, too, have seen business practices similar to those alleged in the lawsuit, such as inflating costs above market values to benefit Taylor at the expense of the partners. Those who agreed to speak about the lawsuits generally requested anonymity for fear of losing their jobs. Those who did speak on the record did so, they said, with the hope that Taylor will improve the culture and offer fairer treatment to the partners.

The allegation that there are reinsurance profits Taylor has withheld from the partners has captured the most attention among those partners.

“I want to see this lawsuit go class action,” said Greg Brown, 56, a partner in Taylor’s Ford-Lincoln of Franklin, in Tennessee. He was in the process of transitioning his shares to Taylor’s Volkswagen of Clarksville, in Indiana, when, on Dec. 6, he served a 45-day notice of intent to quit. “I don’t want to see Mr. Taylor go poor, but he has the reinsurance money in reserve, and we want our percentage of it.”

Higher costs

Petrello’s suit describes a pattern of inflated costs. It contends that in January 2014, after he agreed to buy 20 percent of the Ford dealership for $493,600, Taylor raised the net book value of the dealership “just prior to the closing,” forcing Petrello to borrow $920,000 from Taylor to buy the 20 percent. The suit alleges Taylor’s increased net book value was false.

The suit contends Automotive Management Services Inc., shown, inflated the costs of services it provides — fattening Terry Taylor’s wallet at the expense of his partners.

The suit contends that during Petrello’s tenure as general manager from Feb. 1, 2013, to July 13, 2017, annual gross revenues “greatly increased.” But the store’s net profits did not because they were suppressed by Taylor repeatedly boosting costs that the dealership had to pay him, the lawsuit contends. These were “fictitious and fraudulent” expenses that profited Taylor, the suit alleges.

For example, Taylor required the dealership pay management fees averaging $50,000 a month, yet his management companies “did not provide management services” to the dealership, according to the counterclaim.

Taylor also owned the land the store sat on and raised the rent, charging $30,000 a month above average market rents, the lawsuit alleges. Taylor’s lawyer denies the rent was raised during Petrello’s tenure at the store. The lawsuit also contends that Taylor required Petrello to sell used vehicles through Taylor’s auction company even though it cost the dealership $350 per vehicle more than to use a local auction.

Brown and other partners who spoke to Automotive News say the lawsuit’s charges ring true.

When Brown started running Ford-Lincoln of Franklin in May 2011, he said, his expenses were about $600,000 a year. The amount he pays Taylor has risen 40 percent since then, he said.

“He controls rent and depreciation,” said Brown. “He also charges you $144 per car as a management fee for him being your partner. If you sell 200 cars, you send him a check for $28,800 from the dealership. That’s extra net profit that the partners aren’t getting.”

A former employee of a different dealership Taylor owns said Taylor more than doubled the rent at that store over a five-year period.

In contrast, the average U.S. dealership saw its rent rise 32 percent between 2010 and 2016, according to data from the National Automobile Dealers Association and buy-sell firm Kerrigan Advisors.

Hidden profits

Then there are the reinsurance allegations.

Taylor forced Petrello’s dealership to buy vehicle extended service contracts through Taylor’s Total Warranty Services Inc. and charged the dealership $700 more per policy than the average market price for those contracts, the suit contends.

The claim that Total Warranty Services overcharged “is preposterous,” Taylor’s lawyer wrote. “The dealership’s pricing is similar to its competitors or better, and there are no facts otherwise.”

The policies are covered under a reinsurance arrangement whereby the premiums are deposited in a bank in Ireland, according to documents in the suit. After four years, the portion of the premiums that have not been paid out to cover claims are returned to the U.S. and counted as revenue, the suit contends.

But the minority partners never saw a penny of that reinsurance money, said Brown and other partners.

Petrello “was paid everything he was due as compensation for the sale of warranty products according to his pay plan and the documents that he signed,” said Cameron, Taylor’s lawyer.

A former partner who worked with Taylor for five years said he was unaware of the reinsurance profits: “I am very upset.”

This person, who owns a store and sits on an automaker’s dealer council, asked that his name not be used but added, “I am hoping it goes class action because he owes me $4 million to $5 million based on the numbers I’ve seen.”

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