THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Saturday, September 14, 1996 TAG: 9609140215
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY MARC DAVIS, STAFF WRITER
DATELINE: NORFOLK LENGTH: 50 lines
An appeals court has reinstated the racketeering lawsuit against TranSouth Financial Corp. in connection with an alleged used-car scheme at Charlie Falk Auto Wholesaler.
That means the class-action lawsuit against TranSouth will return to Norfolk's federal court for possible trial.
Falk, the biggest used-car dealer in Hampton Roads, settled its part of the case in January 1995. The company forgave about $10.5 million in defaulted loans by former customers and paid them $400,000 in damages, mainly for legal fees.
But the case against TranSouth, which financed the used-car purchases, was thrown out early. The company was not a party to the Falk settlement.
This week, the 4th U.S. Circuit Court of Appeals reinstated the case against TranSouth. The court ruled that customers who filed the original lawsuit can amend their complaint to target TranSouth more specifically.
The original lawsuit was filed in 1993 by four Falk customers. It accused Falk, TranSouth and JB Collection Corp., which is owned by Falk, of defrauding customers in a complex repossession scheme. It said thousands of customers were cheated.
According to the lawsuit, the scheme worked like this:
Falk sold used cars at high prices and arranged customer financing with TranSouth at high interest rates. When a customer missed a payment, TranSouth repossessed the car and mailed the customer a default notice. That notice told the customer that he could get the car back by paying the amount due, or the car would be sold at a ``private sale.''
The cars then were ``sold'' back to Falk at an artificially low price. Falk's collection agency then would obtain a ``deficiency judgment'' in court against the customer for the amount due over and above the artificially low sale price. Falk then would resell the car at full price, starting the cycle again.
The case against TranSouth hinged on the default notice to customers. The lawsuit claimed that this was mail fraud because it concealed the phony nature of the ``private sale'' to Falk.
In 1993, Magistrate Judge William T. Prince ruled that there was no racketeering case. He ruled that even if there was mail fraud, customers could not prove that they relied on TranSouth's fraudulent mailings as part of the scam. Proof of ``reliance'' is required in a racketeering case.
This week, however, the appeals court ruled that ``concealment of the nature of the `private sales' was the very linchpin of the scheme.'' The case now returns to Norfolk, where the lawsuit will be amended and TranSouth, presumably, will challenge it again.
KEYWORDS: USED CARS LAWSUIT APPEALS TRANSOUTH by CNB