Falk group settles bankruptcy case, will repay London bank

NORFOLK

Owners of the Charlie Falk group of used-car lots will repay a London bank $11.5 million and retain control over a portfolio of customer loans acquired as part of the company's auto sales, according to a settlement in the bankruptcy of a Falk-owned finance company.

The settlement, approved by the U.S. Bankruptcy Court in Norfolk this week, wrapped up a rancorous legal battle, including detailed allegations that Falk Motor Co.'s founder diverted assets from the finance affiliate for his personal use.

Falk Motor's "buy here, pay here" used-car lots in Hampton Roads sell and finance vehicles for buyers with tarnished credit records and

limited access to other sources of credit. With each sale, the Virginia Beach-based auto retailer sold its loan contracts to Auto Finance Co., an affiliate that received borrowers' loan payments.

Auto Finance, along with a subsidiary, filed in January for Chapter 11 protection from their creditors in U.S. Bankruptcy Court. Under Chapter 11 of the bankruptcy code, a company attempts to restructure its debts while continuing to do business.

Auto Finance's largest creditor, the London-based investment bank N.M. Rothschild & Sons Ltd., had provided financing for the Falk-controlled portfolio of loan contracts since 2003, but its relations with Auto Finance became increasingly strained prior to the bankruptcy filing.

The Falk organization had gone through a similar exercise in bankruptcy court six years ago before it lined up financing for its loan portfolio from Rothschild.

The Auto Finance case was marked by bitter exchanges among the competing parties and a prolonged dispute over who controlled certain Auto Finance assets. A trial to address some of these issues had been scheduled to start next month.

Meanwhile, Rothschild contended that company founder Charlie Falk had misappropriated millions of dollars from Auto Finance in recent years and spent the proceeds for personal use, including country club fees, airplane maintenance and purchases of luxuries before the bankruptcy filing.

A trustee appointed to oversee the bankruptcy case contended in a complaint against Falk and a former Falk Motor manager that the two had diverted assets from Auto Finance for construction of a Falk home in Florida, Falk's housekeeping and other expenses unrelated to Auto Finance. The trustee, Mark Roberts, asked the bankruptcy court for judgments totaling $6.8 million against Falk and Robert Upton Jr., the former manager.

The Falks were prepared to vigorously dispute these allegations in court, said Karen Crowley, an attorney who represented Falk Motor in the case, on Friday. Upton, too, had disputed the allegations.

The settlement allows Upton, who now owns a rival auto financing operation, to buy loan contracts from the Falks. Earlier this year, the trustee sought to sell Auto Finance's assets at auction, and Upton submitted a bid to buy most of them. The Falks, however, challenged the sale.

As part of the settlement, Upton will surrender his 10 percent ownership stake in Falk Motor. Each of the company's other owners - Charles E. "Eddie" Falk and his mother, Kathryn Falk - own a 45 percent share of Falk Motor. Founder Charles Sr. is no longer an officer.

Under the settlement terms, the Falks will finance their purchase of the majority of Auto Finance assets and pay Rothschild by borrowing $11 million from the Bank of the Commonwealth in Norfolk. In addition, the Falk-controlled companies agreed to withdraw a bankruptcy reorganization plan for Auto Finance that they filed in May.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com