Amnon Siegel Quoted by SFV Business Journal in Lawsuit Against Nissan

Amnon Siegel Quoted by SFV Business Journal in Lawsuit Against Nissan

By Andrew Foerch, San Fernando Valley Business Journal – February 3-16, 2020 – The international intrigue surrounding former Nissan Motor Co. chief executive Carlos Ghosn has found its way to the San Fernando Valley.

A now-defunct local automotive franchisee is embroiled in a legal dispute with the Japanese car company, which it accuses of strong-arming it into selling several of its new car dealerships to a hidden partner of Ghosn as repayment for financial favors. Ghosn’s relationship with that partner is at the heart of Japanese charges against him.

The receiver for Sage Automotive Group – formerly a family-owned collection of Nissan, Infiniti, Kia, Toyota, Chevrolet and Mercedes-Benz dealerships – filed a lawsuit in December against Nissan and two of its subsidiaries. Sage Group went into receivership in July 2017 resulting from a disagreement among the three brothers who were operating the car business following the death of their father and company founder, Morris Schrage, in 2011. Sage no longer owns or operates any car dealerships but is still a corporate entity.

Sage’s court-appointed receiver, Byron Moldo, alleges Nissan, under Ghosn’s leadership, concealed a “corrupt” financial relationship with Trophy Automotive Dealer Group LLC, in Glendale, and its owner Nasser Watar. Nissan in September 2017 allegedly coerced Sage into selling four dealerships to Watar for far less than market value. They were Universal City Nissan, West Covina Nissan and two non-Nissan dealerships – Mercedes-Benz of Valencia and Kia of Downtown Los Angeles.

The 31-page complaint filed in Los Angeles County Superior Court also alleges Nissan then wrongfully withheld millions of dollars from Sage following the sale, forcing Sage into another fire sale of two additional Nissan dealerships in Glendale.

“Nissan’s nefarious scheme to oust the Sage Group and award the franchises to Trophy was ultimately successful, causing the Sage Group millions in damages,” the lawsuit states. It estimates the deficit from the Trophy sale at roughly $40 million, not including any subsequent losses resulting from Nissan’s alleged financial squeeze that prompted the second sale.

Both Trophy Automotive and its attorney could not be reached after multiple requests for comment over two weeks.

Amnon Siegel, an attorney at Century City law firm Miller Barondess who is representing Moldo, described the dispute as “a coordinated effort by several Nissan entities … kicking someone while they’re down.”

Siegel said the true value of Sage’s losses hasn’t been defined yet and ultimately may be determined by a jury at trial. The jury’s decision may depend on expert testimonies that will evaluate what the dealerships would have been worth had the alleged misconduct not occurred.

Ghosn, mentioned by name throughout the suit but not listed as a defendant, is hiding in Lebanon, where he seeks refuge from Japanese criminal prosecutors. They have charged him for allegedly underreporting his personal compensation as Nissan’s chief executive, among other financial misdeeds. In late December, after bailing himself out of Japanese prison, Ghosn violated his parole and fled the country via private jet, which he boarded by hiding in a large musical instrument case, making international headlines. Interpol issued a warrant for his arrest in early January.

Concealed relationship

While the Sage transactions in question occurred in 2017, the story began with the market crash of 2008.

According to the lawsuit, Ghosn suffered huge losses when the financial crisis hit, and turned to his personal friend and Saudi Arabian billionaire Khaled al-Juffali for loans. Al-Juffali is not a defendant in the local lawsuit, though he is a central figure in the breach-of-trust allegations brought against Ghosn by Japanese prosecutors.

The lawsuit claims that al-Jufalli and his partner, Trophy’s Watar, were “richly rewarded for helping Ghosn.” For one thing, Ghosn allegedly arranged to have Nissan enter into a joint venture with a Middle Eastern company called Al-Dahana, owned by al-Juffali and Watar; their company, in turn, owns 50 percent of Nissan Gulf, the regional distributor for Nissan and Infiniti in the Middle East. Also, Ghosn sent $14.7 million to Al-Dahana from a “CEO reserve fund” that Ghosn controlled, according to the suit. What’s more, Watar and al-Juffali were actively looking to acquire dealerships in the United States. “Nissan, headed by Ghosn, saw the Sage Group as another bounty and pay-back for Ghosn’s benefactor, al-Juffali,” the lawsuit states.

According to the lawsuit, the Sage dealerships were attractive targets due to their size and central locations in Southern California’s new car market. Nissan was California’s fifth most popular car maker last year, based on figures from the California New Car Dealers Association. Additionally, the lawsuit states the dealerships’ weakened financial position and lack of effective leadership under the Schrage brothers made them vulnerable targets.

The lawsuit alleges Ghosn used his power at Nissan to coerce the Sage Group to sell several of its most valuable dealerships to Watar’s Trophy at a discounted price without disclosing his relationship with Watar.

“Nissan was digging a grave for the Sage Group and simultaneously burying them in it,” the lawsuit states.

Money squeeze

In the automotive industry, dealerships get new cars from manufacturers on credit, then pay the manufacturer once a car has been sold. This is called “floor-plan financing.” Most dealerships couldn’t operate without it.

In 2017, Nissan’s financing branch, Nissan Motors Acceptance Corp., stopped funding Sage’s purchase of new cars from Nissan North America, cutting into the group’s ability to maintain adequate inventory. According to the lawsuit, the financing branch’s explanation was that Sage was behind on roughly $2.2 million in payments for new vehicles.

Siegel, the attorney, said his team “never got a clear explanation” whether this debt was real or fabricated and it will be a focal point of their investigation into Nissan going forward. Sage later resolved the debt using a bridge loan.

After notifying the Sage Group of its debt, Nissan introduced the possibility of selling the dealerships to Trophy, a buyer it said owned a Mercedes-Benz dealership in Encino and was looking to expand its footprint. Neither Nissan nor Trophy disclosed Watar and Ghosn’s relationship, according to the suit.

In March 2017, after discussing terms, Sage and Trophy signed a letter of intent for Trophy to purchase from Sage eight dealerships, including Universal City Nissan, for more than $200 million. But according to the lawsuit, Nissan and Trophy had no intention to buy the dealerships for the agreed-upon price. Nissan subsequently ramped up Sage’s supposed debt to $4 million, saying Sage was “out of trust,” or in violation of finance standards – despite Sage having already paid back the original outstanding balance of $2.2 million with the bridge loan. According to the lawsuit, this further interrupted Sage’s normal operations and allowed Trophy to drive down the price substantially.

“The Sage Group was not out of trust for any amount,” the lawsuit states. “NMAC was not going to reopen the Sage Group’s floor-plan; it was acting to cripple the dealerships and help Nissan deliver them to Trophy.”

The deal closed in September 2017. Rather than buying all eight dealerships named in the letter of intent, Trophy bought just four – Universal Nissan, West Covina Nissan, Mercedes-Benz of Valencia and Kia Downtown Los Angeles – for much less than had been agreed to earlier.

After the sale, Sage still owned two Nissan-brand dealerships – Glendale Nissan and Glendale Infiniti. It had planned to use the proceeds from the sale to clear its debt and reopen its lines of financing at those two dealerships. But according to the lawsuit, Nissan continued to withhold at least $2.7 million from Sage.

“The Sage Group requested an accounting from NMAC for the suspense funds. NMAC refused. … Indeed, to date, NMAC has not provided this information to the Sage Group, despite multiple requests,” the lawsuit states.

Sage determined that selling the Glendale dealerships would be the best way to recoup some liquidity. The only problem? Nissan allegedly wouldn’t approve any potential buyers but one – an established Nissan dealer brought to the table by Nissan.

According to Siegel, “(Sage) had another offer that was higher,” but Nissan wouldn’t approve that buyer as a viable franchisee.

Sage ultimately sold the Glendale dealerships to Nissan’s favored candidate for unspecified losses and no franchise value, which the lawsuit characterized as “unheard of.”

According to Siegel, “Car dealerships have significant franchise value, sometimes called goodwill or blue-sky value. It’s essentially the value of owning a particular franchise in a particular location and having the exclusive right to sell vehicles in that market area. It’s extremely valuable. … These franchises typically sell for between four and 10 times their earnings. (Sage) didn’t get close to that.”

Both deals were asset sales in which the buyers received the dealerships’ franchise deals with Nissan, property leases and existing inventory. The buyers then set up new corporate entities to run the dealerships. The corporate entities represented by Moldo as plaintiffs in the lawsuit no longer operate businesses but have been alive and in receivership since the sales. Moldo filed suit attempting to collect as much money as possible for the Sage equity holders and creditors.

The lawsuit attributes Sage’s experience to “an unethical corporate culture” at Nissan.

According to Siegel, “The culture was – everybody did what (Ghosn) wanted. He got his way for years.”

Additionally, the lawsuit names as defendants three former Sage executives allegedly recruited by Trophy to work for it, all of whom are accused of breaching their fiduciary duties.

‘Juicy prize’

“I’ve been doing this since the early ’80s and … I’ve never seen anything like this before,” said Barry Kurtz, a franchise attorney who is not involved in the case. He is chair of franchise and distribution practice at Encino law firm Lewitt Hackman.

Kurtz said that franchisors can and do put pressure on franchisees to take certain action, such as selling their business, if they feel it’s in the best interests of the franchise, but not with such “extreme and blatant tactics” as those alleged by Sage.

Kurtz wasn’t aware of any comparable legal cases and posited that it would be easier for smaller franchisors with close relationships to their franchisees to act this way.

But with more than 1,000 dealerships in the U.S., Nissan certainly isn’t a small franchisor. And considering Ghosn’s position of influence, Kurtz said “it’s hard to believe he would get involved in this. On the other hand, there’s so much money involved … people will do anything for the right price.”

Bob Bailey was the general manager of Universal Nissan for 27 years, helping grow the dealership to its heights as one of the premier Nissan dealers in the country, located at the epicenter of California car culture. He said he never felt any pressure from the manufacturer to act one way or another during his tenure, which ended in 2011 following the death of Morris Schrage.

“When I left, we were in good standing,” he said. “We were solid.”

After Schrage passed away, the Sage dealerships were left in the control of his three sons, Leonard, Michael and Joseph. They found it difficult to share control at the company; two of the brothers ousted the third, who filed suit against them. By 2017, Sage was struggling.

Siegel said family disputes were the primary reason Sage went into receivership in 2017. He said Nissan had started putting pressure on the group by that time, but the extent of their alleged manipulation wasn’t clear for years.

“I don’t think there was a full appreciation of it. Nobody knew about the relationship between Ghosn and Trophy,” Siegel added.

Despite the Schrage brothers’ difficulties running the business, the lawsuit posits that “in time, the Sage Group could have recovered its former strength,” absent Nissan’s alleged meddling.

“But Nissan saw the Sage Group as a juicy prize to award to an insider,” the lawsuit continues. “Nissan took advantage of the Sage Group’s weakened position and made sure that it could not recover and would be forced to sell to Nissan’s dealers of choice.”

Siegel described the lawsuit as “another major black eye for (Nissan).”

Kurtz said the saga “makes a lot of (Nissan’s) transactions suspect and could put a real hit on their stock if they prove this kind of double dealing.”