Bankruptcy Gavel

AutoSlash founder Jonathan covered the bankruptcy filing of Rent-A-Wreck last July but a funny thing happened on the way to reorganization. The bankruptcy filing was contested at the time of filing and led to evidentiary hearings. And while you might expect to hear a debtor complain that a bankruptcy filing was frivolous and shouldn't have been filed, it's exceptionally rare for a bankruptcy judge to make the determination "No, Your Company is Not Bankrupt and you're really just trying to steal equity from another party". So what's the full story?"  

Recently, U.S. Bankruptcy Court Judge Laurie Selber Silverstein made the determination that Rent-A-Wreck's Chapter 11 reorganizational bankruptcy wasn't really a bankruptcy and went on to state the case was filed primarily to take assets from the founder of the firm! Throwing out the bankruptcy case, her opinion included the slap-down line of:

"These privately-owned debtors are not in financial distress (or at least have not proven they are), and they seek to use 11 U.S.C. § 365 to redistribute value from a long-time adversary to enrich their ultimate shareholder." 

Ouch. There's clearly a backstory here and according to the narrative created by Judge Silverstein, it's really about two individuals -- Rent-A-Wreck Founder Dave Schwartz and current Rent-A-Wreck primary owner John. J. Fitzgerald, Jr. (of JJFMS), who has owned the company since 2006 as an entity referred to as RAWA (Rent-A-Wreck of America, Inc.) and Bundy American, LLC. 

The antagonistic relationship between the founder and new corporate parent JJFMS/RAWA/Bundy has existed since then, as Mr. Schwartz owns a free license to continue using "Rent-A-Wreck" in West Los Angeles as he so choses for the remainder of his lifetime. And Schwartz completely ignores Rent-A-Wreck corporate because he was the founder of the company and no requirements were placed on his franchise. The new ownership has many previous court losses on this issue under U.S. District Court of Maryland Judge Peter Messitte between 2006 through 2017 (a decade of losing). The new ownership was even found in contempt for telling customers there was no West Los Angeles location operated by Mr. Schwartz, even hiring a mystery shopper for the West Los Angeles location (and only the West Los Angeles location). In their decade-plus of being the rental car equivalent of the Cleveland Browns, the corporation spent an estimated $2.7 million in ill-advised legal fees losing cases to Schwartz.

Rather than use the skill of self-reflection and accept the consistent failures in U.S. District Court, the owners of Rent-A-Wreck decided to file for bankruptcy. Founder Schwartz asserted that the company primarily filed the bankruptcy case to get rid of him and the only possible reason for Rent-A-Wreck being in financial distress was their insistence on paying lawyers to repeatedly lose cases against him in the Maryland courts!

So the judge held evidentiary hearings where the current ownership admitted the company wasn't insolvent, there wasn't any unsecured debt factoring in the bankruptcy filing, and the secured debt was owed to (effectively) itself (and was due six years ago).  The court even analyzed financial statements and found that the assertion the business was cash-flow negative didn't hold water. In fact, the "historical losses" were found to be primarily the company's insistence upon litigation against Schwartz (that $2.7 million)! The judge even determined that the reason for filing the petitions were to get rid of franchisees with minimal litigation and closed with:

"But here, I have no doubt these petitions were just another chapter in the attempt to terminate Mr. Schwartz's franchise and obtain the benefits for JJFMS. These bankruptcy petitions fall on the dark side of the spectrum ranging from the clearly acceptable to the patently abusive."

And with that, Rent-A-Wreck's bankruptcy case was tossed but we're confident there will be more legal fees (and fireworks) in the future! In a previous life, I might have converted Judge Silverstein's opinion letter into a case study of "unethical business practices" but it's definitely a phenomenal read about business intrigue! 

 

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