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How this $2.5 Million Law Suit Could Have Been Avoided with Enhanced Business Screening

  Sue McConnachie   |     Aug 02, 2017

Imagine a potential dealer comes to you indicating that they are quickly growing and are interested in floorplan financing.

After some negotiation, you enter into a dealership agreement in which your company will maintain ownership of the inventory and the dealer will accrue 18% interest on the financing until the inventory is paid in full. You also require them to submit an online warranty for registration within seven days of each sale.

A deal is struck.

A few years later, you’re filing a claim against the dealer for $2.5 million in damages, plus interest owed.

Seems unimaginable, but this is exactly what happened to luxury power and sail manufacturer, Beneteau America.

In 2012 Hillman Yacht Sales of Vancouver, BC entered into a floorplan agreement with Beneteau America, financed through third party lenders.

From then until late 2014, Hillman Yacht Sales implied that business was flourishing and expanding. They never informed Beneteau that they were struggling financially.

In 2014, Beneteau America delivered five luxury yachts, valued at a total $2.15 million to Hillman Yacht Sales, under the previously discussed terms.

By the end of 2014, Hillman Yacht Sales was unable to turn over inventory. Without alerting Beneteau, Hillman Yacht Sales sold at least four of the yachts, for cash and trade-in, and kept the proceeds. The ownerships were then transferred to the buyers without warranty form submission.

In 2015, Hillman Yacht Sales went into receivership at the request of one of their lenders and within 18 days, Hillman Yacht Sales was assigned into bankruptcy.

Beneteau Yachts was left with US $2.15 million in debt and received zero proceeds from the bankruptcy.

Hillman’s actions (and lack of communication) not only resulted in no opportunity for Beneteau to recover the assets or restructure financing with the third party lenders to preserve value, but also created substantial losses and legal expenses, and injured the Beneteau brand within the Vancouver area.

While it is unclear what process Beneteau and the lenders used to screen Hillman Yacht Sales, enhanced screening could have helped protect Beneteau and the lenders.

How Credit Reports Can Help

Enhanced credit screening goes beyond the typical database report and looks deep into each applicant’s history and ongoing situation. Investigative-style approaches help to identify areas of questionability and highlight important findings so that you can make the best decision possible.

In this specific situation, thorough screening could have been used for three purposes.

1. Initial Negotiations

Firstly, in-depth screening can ensure that your potential dealer has the ability to meet financial requirements prior to entering into a contract.

Your candidate may appear to be ideal but many times there is information that the prospective dealer/operator may not be disclosing. By ensuring you effectively and thoroughly screen each candidate, you can reduce risk and protect yourself from fraud and a myriad of other troubles.

2. Ongoing Ability to Satisfy Obligations

Regular screening throughout your ongoing relationship verifies your dealers’ continued ability to meet obligations. While screening applicants at the outset is incredibly effective in managing risk, you should not stop there. Even if your dealer has been reliable to date, there are a number of changes that could occur after the contract is signed.

To further protect your company, it is recommended that you regularly complete an in-depth background check on customers. This will ensure that you are aware of critical changes as they happen. 

3. Probability of Recovery and Collection

Thirdly, enhanced screening could, after the contract violation, determine the probability of recovery and collection.

Establishing a debtor's financial worth and whereabouts is key when considering launching a legal action and when trying to enforce a judgment. The costs often outweigh the benefits if the debtor does not have the assets needed to collect the outstanding debt.

Prior to commencing a legal action, when preparing for discoveries or an examination in aid of execution, or during pre-litigation settlement discussions, garnishment proceedings, or post-litigation settlement discussions, consider reassessing your debtor to ensure you will be able to collect.  

Doing so will minimize risk, increase profits and ensure your good reputation is maintained.

Auto Dealership Screening Solutions

By Sue McConnachie

 Tags: OEM Dealerships

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