Magic Ford, the nation's fifth-largest Ford dealership, filed for bankruptcy protection after allegations that owner Norman Gray diverted $1.8 million to an account for his personal use and owes $20 million to the dealership, according to documents filed in U.S. Bankruptcy Court.
Gray siphoned at least $1.8 million from dealership bank accounts to a secret bank account used, in part, to cash checks at the Del Mar racetrack, according to allegations made in court documents filed last week by Ford Motor Credit Co., a division of Ford that provides financing for Gray.
The money also went to help pay his $1.4-million back-tax debt, the documents allege.
Gray filed for Chapter 11 bankruptcy to ward off an impending seizure by Ford Motor Credit, said Todd Ringstad, Magic Ford's attorney. A trustee has been appointed to take over the dealership and will probably sell it within the month.
Ford Motor Credit said in court documents that loans totaling $20 million that Gray took from his own dealership had severly depleted its operating capital. The documents said Ford was concerned about Gray's ability to repay the loans.
Although Gray borrowed large amounts of money from the dealership, "the suggestion he did it improperly is misleading," Ringstad said. Gray owns 100% of the company, and was entitled to make advances to himself within limits, he said.
Although there were defaults in the past, Ringstad said, they were forgiven by Ford Motor Credit.
Ford Motor Credit finances the purchase of new cars by Magic Ford. Under this arrangement, the dealership is supposed to repay the principal plus accrued interest as each new car is sold. Ford Motor Credit alleges that Gray misspent large amounts of money owed it.
Gray could not be reached directly. He declined to comment through a sales manager at Magic Ford.
Attorneys for Ford Motor Credit also declined to comment, and company officials could not be reached.
The dispute marks an abrupt turnaround for one of the region's most successful businessmen.
Over 18 years, Gray has orchestrated the spectacular rise of Magic Ford and its affiliate, Magic Lincoln Mercury. The Ford dealership sells as many as 1,000 cars a month, has yearly sales of about $230 million and employs about 350 people.
Magic Ford officials argued that the 350 employees would lose their jobs if the dealerships closed, and the bankruptcy judge allowed both to remain open.
Gray, 52, is described as a remarkably talented businessman, a salesman "with this magic touch," in Ringstad's words. Recently, Ford commended Gray for having the second-best sales of any dealership in the West.
But according to allegations in the bankruptcy documents, Ford Motor Credit now claims that it was the very success of Magic Ford--the fact that Gray sold so many cars so quickly--that allowed him to divert large amounts of cash from the dealership without Ford noticing.
In addition to the bankruptcy proceedings, Ford Motor Credit is suing the dealership in federal court in Los Angeles, alleging breach of contract. The lender alleges that Gray "looted" the dealership, bankruptcy court records show.
Ford Motor Credit supports the lawsuit with Gray's 1994 tax return showing a $1.6-million gambling loss, according to court documents.
"Ford Motor Credit is informed and believes that Mr. Gray is siphoning money out of the [dealership] because of his personal financial problems," Ford Motor Credit alleged in bankruptcy documents.
"The current situation was not caused by uncontrollable market forces or from unforeseen business disruption," the lender continued. Rather, the two parties "find themselves in court because of the greed and dishonesty . . . of Mr. Gray."
Ever since past defaults were forgiven by Ford Motor Credit, said Ringstad, "we do not dispute that [Gray] took out more money than he was entitled to . . . but the company was profitable."
Ringstad had no comment regarding a hidden bank account that court documents allege Gray kept.
Nor would he speculate as to why Gray--whose 1994 tax return shows a salary of $3 million--needed so much extra cash. "Where did the money go? I don't know. Mr. Gray could answer that," he said.
Court documents seemed to indicate that Ford Motor Credit first became anxious about Gray early last year, when an audit found that he had failed to repay loans to Ford Motor Credit on cars sold from his lot. He was $10 million in arrears at the time, according to the firm.
Instead of seizing the dealership, the lender gave him a chance to make good under new financing terms, according to Ringstad.
But the deal soon began to unravel. Court records document a meeting in May in which Gray's accountant told Ford that Gray wanted to sell the dealership "because Norm needed to be rid of his IRS problems" and needed cash to "give him enough spending income, take a vacation and exist for a couple years."