A U.S. Bankruptcy judge said Monday that the Rea Keech Buick dealership lacks "clean hands" and ruled it must liquidate its property.
The ruling came less than two weeks after sheriff's deputies shut down the Ellicott City dealership amid charges that it defrauded its lender.
Keech filed last week for bankruptcy protection, seeking to reorganize the business. But Judge James F. Schneider granted a request this week by Pittsburgh-based Mellon Bank to convert the case from a reorganization to a liquidation.
Schneider cited evidence presented by Mellon, and unrefuted by Keech, that the dealership had sold half of its inventory of cars without repaying the bank under its loan agreement.
The bank claimed Keech sold 70 cars that way, hiding the sales from loan officers who were auditing the dealership. In at least31 such sales, the cars were sold for cash to other dealers, but owner Rea Keech Jr. or his employees falsified sales documents to suggest the dealership was waiting for payment from customers, Mellon said in court papers.
"It seems to me that the debtor has not come forth with clean hands," Schneider said.
Neither Keech nor his attorney, W. Michel Pierson, would comment on the judge's decision. Mellon attorney Joel Sher also declined comment.
In explaining his decision, Schneider cited Keech's timing in filing for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, which allows a company to continue to operate and reorganize under court supervision. Keech filed exactly one week after deputies closed the dealership, froze its accounts and impounded more than 140 vehicles. The seizure put50 employees out of work.
Some of those employees had been on thejob for more than five years, and one for 37 years, said former Keech office manager Susan Fador.
County Circuit Judge Raymond J. KaneJr. ordered the shutdown pending resolution of a $3.5 million lawsuit Mellon Bank filed against the dealership. The bank claimed in the suit that the dealership falsified records to avoid paying on $2.75 million in debt.
"In an obvious effort to stymie the state court, the debtor filed a bankruptcy petition," Schneider said. He said he saw"absolutely no chance for a reorganization," and "this court is not going to authorize the turnover of property to the debtor."
In converting the case to a Chapter 7 liquidation, Schneider will appoint atrustee to take charge of all of the business' property, which the trustee will sell for the benefit of creditors.
Mellon attorney Joel Sher estimated in court that the bank could recoup its total of $4 million in property from the sale of the dealership's real estate, valued at $3 million, and its auto inventory, valued at $1 million.
Pierson argued that only Mellon would be served by the liquidation, and not Keech's other creditors, which include Citizens Bank, First American Bank, and the troubled county developer, McCuan Development Group.
"There are several people who are interested in buying the franchise," who could lease the Keech property to help pay off debts, Pierson said. Keech declined to name them.
Pierson argued that it would be premature to convert the case to a Chapter 7 liquidation before his client has a chance to come up with a reorganization plan.
But Edmund Goldberg, senior attorney adviser for the U.S. Trustee's office, told Schneider that Keech was a "hopeless cause," and could not be reorganized because it was no longer in possession of its property, and no bank would agree to finance its sales operations.