Calif. group struggled for years, records show

After Momentum Auto Group in November abruptly shut seven dealerships in Northern California, it blamed the bankruptcy of a primary lender, delays in permits for a renovation of its Toyota store and revenue losses caused by a wildfire that burned more than 120 miles away.

But court records in Solano County Superior Court in California and a federal court in Florida break through that smokescreen: The dealership empire in Fairfield and Vallejo was on the brink of failure long before the wildfire.

Momentum had a history of defaults to lenders dating at least to 2016 and had sought alternative financing to prop up its bank accounts and pay off floorplan lenders. A lawyer for Toyota's credit arm in a March 2017 letter indicated the dealership group owed Toyota Motor Credit Corp. more than $30 million and described its cash-management system as "analogous to a black hole."

Three floorplan lenders in November sued Momentum for breach of contracts, with Toyota Motor Credit, BBVA Compass and BMO Harris Bank each alleging the dealership group sold vehicles, but failed to repay millions of dollars in loans on those vehicles. That's known as being out of trust. A court-appointed receiver is working to help sell some lender assets.

Loan defaults with Toyota Motor Credit began in 2016, according to court records, while defaults with BMO Harris started in October 2017.

Momentum and Toyota's credit arm entered into an agreement last March that increased the group's loan interest rate and required daily deposits, but more defaults occurred, according to court records.

Toyota conducted an audit Nov. 13 at the Momentum Toyota of Fairfield store and found it had sold 33 vehicles with debt of $1.2 million, but failed to repay the lender. It filed a lawsuit against the company days later and sought to recover vehicles, parts and other items valued at about $6.7 million. As of Nov. 20, Toyota Motor Credit said Momentum owed it nearly $10.5 million.

A Dec. 4 declaration by Aaron Nelson, dealer sales and services manager for Toyota Motor Credit, said the Toyota dealership closed Nov. 16 "causing severe distress in numerous ways to Toyota customers, including: cars locked in service bays of the dealership, waiting for the delivery of cars they have purchased, and the inability to complete financing and insurance arrangements because title to their cars has not been cleared by the dealership."

BMO Harris and the dealership group also entered into agreements last year after Momentum racked up as much as $14.3 million in out-of-trust balances on vehicles. Momentum was chipping away at its debt, including reducing the out-of-trust amount to $5.2 million, but failed to pay down all of it by an Oct. 15 deadline, according to court documents.

Meanwhile, BBVA Compass alleged in court records that the dealership group sold vehicles out of trust worth $8 million to $9 million.

Momentum is owned by Rahim Hassanally, who was featured in Automotive News' 40 Under 40 listing in 2013 and was on the American International Automobile Dealers Association's board.

Momentum ranked 124th on Automotive News' 2018 list of the Top 150 Dealership Groups in the U.S. Only its Chevrolet store in San Jose remains open, as it is majority owned by General Motors. GM changed the outlet's name to Chevrolet of Stevens Creek in December, a Chevrolet spokesman confirmed.

After the sudden store closings and lawsuits, Solano County Superior Court appointed an independent receiver to oversee and manage property at four of the dealerships that had floorplan financing through BBVA Compass, according to court records. The four stores had vehicles on their lots totaling more than $36 million.

Mike Issa, the receiver named for Momentum Chrysler-Dodge-Jeep-Ram of Fairfield, Momentum Nissan in Fairfield, Momentum Chrysler-Dodge-Jeep-Ram of Vallejo and Momentum Kia in Vallejo, told Automotive News Jan. 17 that he had sold "millions of dollars" worth of vehicles for BBVA Compass. The funds are being used to lower the balance owed by Momentum, he said.

Issa said he believes all customers who wanted to retrieve their vehicles from the four dealerships have been able to get them. He confirmed that some customers may still be having trouble getting titles to vehicles because of problems such as unpaid trade-ins.

Issa, California managing partner with GlassRatner Advisory & Capital Group in Irvine, Calif., pending court approval, will be named receiver of Momentum Toyota after reaching an agreement with Toyota Motor Credit.

There's no agreement by BMO Harris on appointing him as receiver for the dealerships for which it provided floorplanning, though they are in discussions, Issa said in an interview.

BMO Harris provided floorplan financing for Momentum Mitsubishi and Momentum Hyundai, which have the same address in Fairfield, and Infiniti of Fairfield and Volkswagen of Fairfield, which also share an address.

Momentum and BMO Harris entered into an agreement in late November that allows the bank to take possession of the millions of dollars of vehicles and sell inventory.

A spokesman for BMO Harris and a spokeswoman for BBVA Compass declined to comment on Momentum.

While what gets sold to whom and at what price is up to the receiver and the courts, Hassanally and Momentum in court documents have argued for selling the dealerships as a group to maximize value.

In a Nov. 15 declaration in the BMO Harris case, Hassanally, founder and president of dealerships, said Momentum had received a letter of intent to buy all of the stores' assets "from a reputable local car dealer for a sum that I believe would insure payment in full of plaintiff's loan."

It was one of three offers it received in early November, Momentum said in court documents.

Issa, who said he has sold dozens of dealerships, said he plans to work with Toyota to sell its nonauto assets. The store had been undergoing an extensive renovation at the time of its closing.

"We're in discussions with buyers," he said. "Toyota is glad to let us work on that."

Toyota Motor North America and Toyota Motor Credit confirmed the agreement to work with Issa as receiver, but declined further comment.

Issa said the prospective buyer of all of the Momentum stores "got buyer's remorse" and walked away. He said it's likely the stores will be sold to two or three buyers. Issa said he has someone interested in buying two of the dealerships, though he did not disclose which ones. The offer is before the related lender, he said.

The plan is still to try to sell the stores as a group, Christian Scali, a lawyer for the dealerships, told Automotive News in an email.

Momentum says it shares a back office in the Toyota store, plus overhead and management.

"We have received multiple bids," said Scali, managing partner at Scali Rasmussen in Los Angeles. "As is often the case with a valuable dealer group and multiple suitors, it is a fluid and confidential situation that makes it difficult to comment on. Momentum Auto Group is entertaining all reasonable offers."

One potential hiccup is a recent federal lawsuit tied to a separate company's bankruptcy, which may impact the dealership sales.

Momentum, Hassanally and other financing companies were sued for $40 million in December by bankrupt 1 Global Capital in federal court in Florida. The Hallandale Beach, Fla., company sought Chapter 11 protection from lenders in July in the Southern District of Florida.

Issa said he has been communicating with the trustee in the Florida case and plans to meet soon to discuss issues and proceedings.

He said it could take four to five months to sell dealership assets and collateral. In addition to manufacturer approvals, he also requires approvals from the court and landlords.

Issa said, "There's just a lot of stuff here that will require a little more time rather than less."