Lawsuit Accuses Nissan of "Destroying” One of Its Top Dealers

One of Nissan’s largest and most successful dealers from 2001-2008 today filed a $250 million fraud and breach of contract lawsuit against Nissan Motor Co., Ltd (Public, TYO:7201) (ADR) (Public, OTC:NSANY), Nissan North America, Inc. and Nissan Motor Acceptance Corp.

The lawsuit filed by Orange County businessman Michael A. Kahn and Superior Automotive Group, LLC (SAG) charges Nissan with destroying his business, which by 2007 had become the 73^rd largest auto dealership group in the United States generating more than $500 million in revenues and employing approximately 800 people.

According to the lawsuit, "Kahn was Nissan’s ‘go-to’ dealer in California. At the behest of Nissan, he acquired troubled or underperforming dealerships and turned them around. When a large automotive company sought to buy out Kahn in 2004 and again in late 2006, Nissan insisted that he not sell and told Kahn he was a key component of Nissan’s future plans in California.”

The lawsuit points out that Kahn’s "dealerships were consistently awarded Nissan North America’s Circle of Excellence Award, handed out to the nation’s top dealers; they won Nissan’s "Global Achievement Award,” given to the Top 40 Nissan dealers worldwide (out of approximately 10,000 dealers). Kahn was flown to Tokyo, honored by Nissan and met with its top executives. The Global Achievement Award was approved by and presented by Nissan’s President and CEO Carlos Ghosn and other top Nissan executives.

"Nissan made millions and benefited greatly from Kahn’s success in selling cars, and Nissan made millions more from financing Kahn to buy Nissan vehicles, to borrow money to operate his Dealerships and to build new dealerships,” states the lawsuit, which was filed in Los Angeles Superior Court. "Nissan even provided a multi-million dollar construction loan to Kahn for the purpose of building his new, state of the art $35 million Toyota dealership in Oakland, California (the ‘Oakland Dealership’).”

"As the economy fell into a recession in 2008, the auto industry was hit hard. Nissan saw its sales in the U.S. plummet,” the lawsuit states. "Nissan laid off tens of thousands of workers and drastically cut back vehicle production. In February 2009, Nissan reported a loss of approximately $800 million in the prior three months and slashed its workforce by 20,000.

"That same month (February), despite Nissan agreeing to a debt forbearance period through March 31, 2009, and despite Kahn’s long history of profitability and success with Nissan, Nissan precipitously cut off financing to Kahn and forced all his dealerships out of business,” the lawsuit states.

"Nissan took this action -- and destroyed Kahn’s business,” the suit continues, "despite its prior promises and agreements to provide Kahn with the funding necessary to support the Dealerships through 2009 so Kahn could survive the economic crisis. Kahn believed Nissan, relied on its promises and was induced and deceived.”

"Given Nissan’s behavior toward and treatment of one of their most loyal and successful dealers, if I were a Nissan dealer, I would have serious concerns about them,” said Kahn’s attorney, Skip Miller of the law firm of Miller Barondess, LLP, in Los Angeles. "We are looking forward to trying this case and cannot wait to empanel a jury.”

The lawsuit goes on, "Because of their prior strong relationship, and because of Nissan’s representations and agreements, Kahn …followed Nissan’s instructions to curtail his dealership operations in order to weather the economic storm.

"Kahn sold one of his Dealerships in order to pay down millions to Nissan, closed his Chrysler-Jeep-Dodge dealership, negotiated rent concessions on two dealerships, borrowed money from Nissan at higher interest rates in order to, among other things, complete the construction of the Oakland Dealership, pledged additional collateral on his and his family’s personal properties, signed multiple forbearance agreements and poured millions of dollars of personal funds into the Dealerships.

"In spite of all the foregoing, Nissan reneged on its promises and breached its contracts with Plaintiffs. Rather than support Plaintiffs through 2009 as promised, Nissan unfairly and unnecessarily caused their demise. Nissan sandbagged Kahn and squeezed him for more collateral, millions in cash payments and other valuable consideration before putting him out of business. Nissan induced Kahn at the optimal time when Nissan could ‘default’ him and go after his and his family’s personal assets.

"Nissan's deceit left Kahn and his entities maximally exposed to personal liability. After years of rewarding Kahn as a star dealer and inducing him to take numerous actions to his detriment to keep his Dealerships open, Nissan terminated Plaintiffs' financing for doing what Nissan had encouraged and rewarded. Nissan did so because of its own financial problems and selfish, dishonest and dishonorable desire to protect itself and its own finances during the economic crisis.”

The lawsuit outlines what it terms "a pattern of dishonesty and deceit” carried out by the Nissan Defendants.

"In early October 2008, Kahn had a telephone conversation with Steve Lambert, NMAC’s President, to discuss the Dealerships’ financial condition,” the lawsuit states. "Kahn explained to Lambert that the Dealerships needed financial support from Nissan to survive these tough times. Lambert stated that Nissan will lend more money to the Dealerships if Kahn sells one of his Toyota dealerships before the end of the year and pays the proceeds over to Nissan to reduce its loans. Kahn stated that he will do everything he can to close a sale before the end of 2008.

"Later that month, in or about the third week of October 2008, Kahn had another telephone conversation with Lambert to discuss the existing forbearance agreement and what the Dealerships needed to survive the economic crisis. Plaintiffs followed up the phone call with an email to, among others, NMAC’s Lambert and (NMAC Director of Credit Services Kevin) Cullum setting forth the financing and loan modifications necessary to help the Dealerships survive the recession.

"About a week later, near the end of October 2008, Kahn had a telephone conversation with NMAC’s Cullum in which Cullum stated that Nissan was not going to provide Kahn the financing he was requesting. In light of his strong relationship with Nissan and the previous assurances from Lambert, Kahn was surprised to hear this, but within hours of Kahn’s call with Cullum, he received another call from Albert Castignetti (‘Castignetti’), the General Manager of NNA. Castignetti reassured Kahn that Cullum was not speaking on behalf of Nissan and that Nissan was not going to shut down the Dealerships. Castignetti told Kahn to expect to receive a telephone call from Lambert, NMAC’s President and Cullum’s boss, on Monday.

"On Monday, November 3, 2008, Kahn received a telephone call from Lambert, as Castignetti had promised. Lambert asked Kahn to tell him exactly what the Dealerships needed. Kahn reiterated he needed money and reassurances that Nissan would get him through 2009. Lambert stated that Nissan was going to support the Dealerships through 2009 and thus help him get through the difficult economic times. Lambert stated that Nissan would not quit on the Dealerships but that he was worried about Kahn quitting on Nissan. Kahn explained to Lambert that he would not quit and would do what it takes to keep his Dealerships in business. Kahn asked Lambert, if Kahn sold Superior SJC, would Nissan get Superior the money it needed to get through 2009, and Lambert replied that if that occurred, Nissan would ‘absolutely’ fund Kahn through 2009.

"Lambert promised Kahn that if Superior SJC was sold as requested and the proceeds applied toward the NMAC Loans, Nissan would provide the Dealerships the funding necessary to get through 2009. With regard to the $30 million sale of Superior SJC, Kahn told Lambert: ‘I am willing to chop off my pinky to save my arm.’ In other words, Kahn agreed to sell Superior SJC, and use the sale proceeds to pay down millions on the NMAC Loans, in reliance on Nissan’s promise that it would help his other Dealerships survive. In the sale of Superior SJC, Kahn knew that he would likely lose his entire multi-million dollar equity investment, but he was willing to do so in order to save his other Dealerships.

"During this conversation, Kahn also explained to Lambert that Kahn was due to receive additional funds from other sources in the first half of 2009. Kahn told Lambert that Kahn was going to receive a $3 million tax refund in the first half of 2009, approximately $1 million from the sale of shares in a private jet, and another $1 million for a lease buy-out with the tenant at the RSM Dealership, where Superior owned the land. Kahn explained that he was committed to keeping the Dealerships in business, and Lambert promised Kahn that if he sold Superior SJC, Nissan would be there for Kahn and fund the Dealerships through 2009.

"These discussions ultimately resulted in the parties entering into additional forbearance and loan modification agreements. Throughout these discussions, Nissan assured Kahn that the forbearance and loan modification agreements were part of, and consistent with, Nissan’s long term commitment to provide the Dealerships with the necessary funding to remain in business and ride out the recession.

"As of late October 2008, the Dealerships were allegedly ‘out of trust’ approximately $7.7 million. This amount did not accrue overnight; Nissan permitted it as before.”

(Earlier the lawsuit explained: "In the automotive industry, when a dealership sells a vehicle that is floor-planned, it remits payment to the entity that provided the financing for the purchase from the manufacturer, which in this case was Nissan. If a dealership does not remit payment on its floor-plan after a vehicle is sold, it is considered to be ‘out of trust.’ There is no special ‘trust’ account per se that a dealership uses, as the financing arrangement allows the dealership to commingle funds. The amounts owed by a dealership for vehicles that are sold and unpaid to the entity that financed the vehicles are commonly referred to as sale out of trust amounts, ‘SOT’ or ‘SOT Amounts.’ …

"Since virtually the inception of their lending relationship with Nissan, the Dealerships paid Nissan ‘promptly,’ which was usually between ten to twenty days after the sale. Prior to the economic downturn, Nissan knew about, and permitted, this practice by the Dealerships. Periodically, Nissan would conduct an audit of the Dealerships’ inventory and ask the Dealerships to make payments for amounts outstanding. However, Nissan never strictly enforced any particular time frame within which the Dealerships had to make these payments.”)

"In November 2008, in accordance with the parties’ discussions and agreement, the parties signed a third forbearance agreement (the ‘November 2008 FA’), wherein Nissan agreed to forbear on collection of principal and interest payments for all the NMAC Loans until December 31, 2008. The November 2008 FA superseded the June and July 2008 FAs. In the November 2008 FA, Nissan agreed to lend the Dealerships approximately $7.7 million, in the form of a five-year capital loan, to be applied to the $7.7 million ‘out of trust’ amount allegedly owed by the Dealerships to Nissan.

"The November 2008 FA converted $7.7 million of the Dealerships’ unsecured debt into secured debt owed to Nissan. Kahn agreed to provide additional collateral to secure this otherwise unsecured debt, and Nissan insisted that Kahn provide second deeds of trust on his and his family’s personal properties. Kahn was opposed to this and offered other investment properties as collateral, but Nissan refused, insisting on his personal properties. In reliance on Nissan’s promises to help the Dealerships survive the economic downturn, Kahn agreed to provide his personal properties as collateral. In addition, Nissan agreed to provide additional money for completion of construction of the Oakland Dealership.

"The consent of Superior and the Guarantors to the November 2008 FA was obtained by misrepresentations and fraud. Plaintiffs signed the November FA because they reasonably relied on and believed that Nissan would stand by its commitment to finance the Dealerships through 2009 and ride out the recession as long as Kahn sold Superior SJC and applied the proceeds to the NMAC Loans. That was the deal that Lambert had agreed to with Kahn during previous conversations. While Kahn did what Nissan demanded, Nissan dishonestly strung Kahn along and then stabbed him in the back. Under the guise of asking for additional collateral for a loan, in fact it was seeking additional money and collateral from Kahn so that it could pull the plug on him and then go after him personally for all of his assets.

"On December 4, 2008, just two months before Nissan shut down Plaintiffs, destroyed the Dealerships and put 350 people out of work, Nissan recorded deeds of trust on four of Kahn’s personal properties…Nissan thus recorded deeds of trust securing a $7.7 million loan on more than $30 million of Kahn’s personal properties. Nissan’s scheme was to over-collateralize its loan, default Kahn and then foreclose on him personally.

"On December 18, 2008, based on Nissan’s promises, Kahn sold Superior SJC (and the underlying real estate). Because Nissan demanded that Superior SJC be sold before the end of the year (and at the height of the recession), Kahn sold the Dealership at a fire sale price, which resulted in an approximately $8 million equity loss for Kahn. Nissan received the proceeds of the sale directly from escrow, which resulted in a pay down of approximately $28.5 million of existing NMAC Loans.

"On the same day as the closing of the Superior SJC sale, Kahn requested to have a meeting with Nissan regarding the go-forward plan for 2009. Nissan advised Kahn that there was no urgency and that a meeting could be held after the New Year.

"On January 5, 2009, Kahn had a telephone conference with Lambert. During that call, Kahn estimated he would need approximately $12 million in financing for his Dealerships to get through 2009. Lambert responded that Kahn should prepare pro forma financial projections for the Dealerships for the first half of 2009 and that Nissan would determine how to provide the money to the Dealerships. Kahn told Lambert that Superior was going to show large losses on the December 2008 financial statements because Superior was writing down, or marking to market, the value of the Dealerships’ assets; Kahn explained that he wanted to start 2009 with a clean slate.

"Lambert assured Kahn that Nissan intended to abide by its promises to see the Dealerships through the economic downturn. That was a lie, and Lambert knew it.

"Earlier that same day, January 5, 2009, Cullum had sent an email to Bob Westlake and Danny Anderson of Nissan stating that Nissan had no intention of continuing to fund Kahn through 2009. Cullum wrote: ‘I fully suspect [Kahn] is going to ask for money again which Steve [Lambert] agrees will not be offered. Additionally, a hard SOT should occur anytime now based on his cash flow and sales efforts.’

"Cullum and Lambert knew that Kahn and the Dealerships needed more money; the parties had already had numerous conversations about this. At all times, Nissan concealed its true intent to deny Superior further financing. Nissan’s true intent was to string Kahn along, induce him to pay down the NMAC Loans and provide additional collateral for Nissan to seize, all the while waiting for an ‘excuse’ (SOT Amounts)—that it knew was going to occur without new funding—to shut down the Dealerships.

"In reliance on Nissan’s multiple promises, Kahn and Superior acted honorably, but to their own detriment by, among other things: (1) investing personal funds into the Dealerships to keep the Dealerships in business; (2) selling assets, including the Superior SJC Dealership, at distressed prices to pay down the NMAC Loans; (3) paying an increased interest rate on the NMAC Loans; (4) pledging additional collateral on personal properties to secure the NMAC Loans; and (5) borrowing additional funds from Nissan at increased interest rates to, among other things, complete the construction of the new dealership in Oakland.

"Kahn and Superior further relied on Lambert’s promise to fund the Dealerships in 2009 by not raising cash in other ways. As of May 2008, Kahn could have sold other assets, which include real property, cell sites and billboards, to raise the necessary cash for his Dealerships. Kahn also was set to receive a $3 million tax refund in the first half of 2009 and informed Nissan about this. Kahn could have obtained financing to be secured by this $3 million tax refund had he known that Nissan was not going to finance his Dealerships through 2009.

"If Kahn had known that Nissan would not uphold its promises, Kahn could have raised enough money to get the Dealerships through the economic crisis. Instead, he relied on Nissan’s promises and did not pursue these other options.

"On or about January 16, 2009, at the demand of Nissan, the Dealerships signed another forbearance agreement (the ‘January 2009 FA’). In the January 2009 FA, Nissan agreed to extend the forbearance period (which had already expired on December 31, 2008) to March 31, 2009, in exchange for the rollover of the claimed deficiency from the sale of Superior SJC into a five-year loan.

"At the time the parties entered into the January 2009 FA, Nissan was fully aware that the Dealerships had a claimed SOT Amount of approximately $1.5 million.

"As of December 2008, Nissan took measures to keep an eye on the daily SOT Amounts at the Dealerships. Nissan put its own employees into each Dealership to review daily transactions of what was sold and collected. Nissan had access to the Dealerships’ daily vehicle inventory and records, and closely monitored the Dealerships’ SOT Amounts. Thus, Nissan knew what was going on at the Dealerships on a daily basis.

"On January 20, 2009, Plaintiffs sent an email to Lambert, Cullum of Nissan, attaching Superior’s signed copies of the January 2009 FA. The email states: ‘We wanted to let you know that we [Superior] continue to execute on our plan.’ The email discussed the Dealerships’ current SOT Amounts, which were approximately $1.5 million, and explained that Kahn would be applying the $800,000 proceeds from the sale of his aircraft assets to pay down the SOT Amounts and that this would leave an approximate SOT Amount of $700,000 as of January 22, 2009. The email concluded that SAG ‘continue[s] to work diligently and make every effort to pay this [SOT Amount] off in a timely fashion.’ Nissan never responded to this email.

"It was business as usual from Plaintiffs’ perspective. Plaintiffs believed that Nissan, consistent with Nissan’s promises and the parties’ course of dealings, would support the Dealerships as long as Kahn was paying down the indebtedness. With its own employees in each of the Dealerships, Nissan knew exactly what was going on and could have informed Kahn regarding its true intentions. Instead, Nissan did just the opposite.

"On or about February 11, 2009, in the middle of the new forbearance period, Kahn received a call from Cullum. They informed him that because the Dealerships were out of trust, Nissan was ceasing all funding to them. Kahn protested that Nissan had always been fully aware of the existence of SOT Amounts and that it was improper to cease funding and force all the Dealerships to shut down for this reason.

"On February 11, 2009, Nissan sent a Notice of Default letter to Kahn (‘February 11 Letter’) seeking payment of approximately $1.6 million in SOT Amounts by the close of the next business day, which they knew could not be done. Nissan’s timing was not coincidental. Nissan knew that Kahn’s CFO, Jay Larsen, was scheduled for heart surgery on the morning of February 12, 2009.

"On February 12, 2009, Kahn requested a meeting with Nissan. Nissan refused. Then, on February 13, 2009, Nissan gave notice of termination of the Wholesale Agreements for failure to receive payment for the $1.6 million alleged SOT.”

"This was a trumped up excuse to pull the financing,” said Kahn’s attorney, Skip Miller. "Over the course of Kahn’s relationship with Nissan, he usually carried a balance for inventory sold. That is how the parties operated.”

The lawsuit continues, "Days before the Dealerships shut down, Kahn entered into a letter of intent for the sale of the Puente Hills Dealership with the Dealership’s landlord, Sang Ho Lim. But Nissan refused to permit the sale to go forward. Nissan blocked the sale of Superior Puente Hills, and the deal with Mr. Lim fell through, leaving Superior with a $28 million lease on the property but no Dealership.

”Without any funding, the Dealerships were forced to close their doors on February 24, 2009. This included the six-day old Oakland Dealership, for which Kahn had borrowed $4 million from Nissan just two months earlier to complete construction. If Kahn had known that he was going to be shut down in February 2009, he would not have borrowed an additional $4 million to complete the construction of this Dealership.

"Moreover, Nissan knew that Kahn was set to receive a $3 million federal tax refund in the next couple of months. Indeed, Kahn received a check for approximately $785,000 in March 2009 and another for approximately $2.2 million in June 2009 from the U.S. Treasury. Nissan was also aware that Kahn was set to receive an approximately $1 million payment from the Asbury Group to buy out its lease with Kahn at the RSM Dealership (Kahn owned the RSM Dealership property with a mortgage from Nissan).

"Nissan arbitrarily, capriciously and contrary to its own promises and agreements pulled the plug and refused to allow Superior to continue operating the Dealerships and pay down the SOT Amounts. Left without sufficient capital to operate his Dealerships, Kahn paid his employees’ final payroll checks out of his own pocket; and they all lost their jobs.”

According to the lawsuit, Kahn and the Dealerships have suffered damages in excess of $250 million, with the exact amount to be proven at trial.

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