Federal and state investigators in San Diego are investigating at least two automobile subleasing schemes and may soon charge officials of two local firms in connection with selling subleased cars without the owners' or original lenders' permission, The Times has learned.
The investigations are part of a statewide probe of the auto subleasing business.
The San Diego district attorney's office is investigating the activities of three companies: Lease-1 Financial Services, R&S; Towing and Koala T. Leasing, according to Deputy Dist. Atty. Robert J. Sullivan.
R&S; Towing and Lease-1 Financial, which filed for bankruptcy last October, reportedly were involved in the same subleasing activity, Sullivan said.
Of the 350 cars subleased by Lease-1 as part of the scheme, 150 were sold without the knowledge or consent of the original owners or lenders, claimed attorney Jeff Gardner, who represents 16 people who subleased their vehicles to Lease-1 Financial.
Gardner said the Federal Bureau of Investigation also has been investigating the case.
Two-thirds of the 150 vehicles were sold in San Diego County and the remainder were sold in Arizona, Utah, Texas, Colorado and Minnesota, according to Sullivan. The sales price generally was less than half the book value, he said.
Sullivan said that the state's investigation of Lease-1 and R&S; Towing is in an "advanced" stage. The Koala investigation is in a preliminary stage, Sullivan said, but he declined to give details about the company or how its subleasing operation worked.
Sullivan identified the owner of Lease-1 as Robert Dixon, who was using the name Robert Maguire. He said the towing company owner is Robert Mauer. Neither could be reached for comment Monday.
Koala T. Leasing's phone has been disconnected and officials could not be reached for comment.
Attorney Robert Pasulka, representing Lease-1, said his clients will soon convert its Chapter 11 reorganization bankruptcy to a Chapter 7 liquidation.
According to a letter sent to Lease-1 creditors by Pasulka, 91 of Lease-1 Financial's vehicles were leased to Mauer of R&S; Towing. Last September, Mauer "stopped making payments" on the cars, leaving Lease-1 responsible for $40,000 in monthly car payments.
As a result of the debt, Lease-1 filed for bankruptcy, according to Pasulka's letter.
The company lists assets of $1,400 and liabilities of $5,600. But "nowhere in the (financial) statements or (bankruptcy) schedules does it list the 350 cars or the monthly payments they're contractually obligated to make, Gardner said.
Operators of subleasing businesses claim they provide a service by taking over car and insurance payments from those who no longer can afford them--thus protecting the original owners' credit ratings. The cars are subleased to those who cannot otherwise lease or buy automobiles because they've never established credit or have bad ratings.
It is a cash-rich business, but companies that are in it usually don't stay around for more than six months or so, investigators say. And the payments that are supposed to be made to banks and other original lenders--who generally are not told that the car is being subleased--often are not made, according to a number of law enforcement officials and bankers.
"When you've got several tiers of subleasing, you can't expect to make a profit. It just isn't possible," Sullivan said. "But the last man who ends up selling the car makes the money. Some lien holder five contracts ago is the person not getting the payments and not knowing where the hell the car is."
"Fraud isn't really difficult to prove in a case like this," Sullivan said. "Generally, you have victims on both ends of the transactions. The penal code has a section on money being misappropriated. Also, the victims who are subleasing the cars (to others) don't know the cars are being sold out from under them, so you have a false pretense grand theft case.
"The difficulty is showing who had criminal intent and why," he said. "And attempting to identify and locate business and bank records is time-consuming."
The San Diego investigation is part of a statewide effort by authorities to stamp out auto subleasing schemes that have spread into several major cities.
An Anaheim company that folded last year spawned at least two dozen imitators in California. And the operations of those companies have become the focus of stepped-up civil and criminal investigations in San Diego, Orange and several Bay Area counties.
Meanwhile, the Legal Aid Society of Orange County, representing a victim of an Anaheim scheme, has filed a civil suit aimed at banning the so-far unregulated auto subleasing business throughout the state.
The defunct Anaheim subleasing company was National Security Financial Services of Anaheim, which opened three other branches in Los Angeles and Orange counties in six months of operation and collected an estimated $400,000 in non-refundable service fees and monthly sublease payments--most of it in cash. The disposition of the money--collected from about 400 customers--is one of the issues in the lawsuit brought by the Legal Aid Society of Orange County.
With complaints about National's failure to pass car payments through to the original lenders mounting and with more and more of its customers' cars being repossessed, the company closed its doors last April. Its president, James Trawick II, dropped out of sight.
But another executive, E.T. Strickland, started a similar operation in Los Angeles. And other former salesmen spread throughout the state to start their own subleasing firms.
"The difficulty is that if you can shut them down, you find that they open up down the street or in other states," said Marvin Benowitz, a Security Pacific National Bank vice president. "It seems to me that you've got to get on the record that it's inhospitable in California for this kind of business to exist."
The California Bankers Assn., which considers the suit to be the lead case in the state, might seek legislation to regulate or outlaw the subleasing business if the Orange County action doesn't succeed, according to Blair Reynolds, CBA's vice president and general counsel.
On March 10, Orange County Superior Court Judge Judith M. Ryan ruled that Trawick, Strickland and their agents can no longer sublease cars unless they first get the approval of banks and other lenders who hold the original leases or liens. The ruling is to remain in force until a trial is held on the merits of the Legal Aid suit.
Bankers say their lending officers are unlikely to give such operations permission to sublease the cars they have financed, meaning National Security's imitators may soon have to find other lines of work.
In addition to the probes in Orange and San Diego counties, the state Department of Motor Vehicles is looking into several subleasing operations in the San Francisco Bay area.
"It's becoming more and more of a problem," said John Parino, a DMV supervising investigator in Sacramento.
The pitfalls for consumers are numerous, say bankers, lawyers and government officials.
Those who turn over their cars to subleasing companies remain on the hook for any missed payments to the original lender. And, as the registered owners, they could find themselves liable for parking tickets and even civil damages arising from car accidents when subleasing companies fail to get insurance.
They also could face lawsuits by their banks or leasing companies for breaching standard clauses in lease and loan contracts that forbid them to transfer possession of the cars.
Those who rent from the subleasing companies can find their cars repossessed if the subleasing company doesn't pass payments on to the original lender--as was the case with National Security. They also can lose "down payments" of $500 to $5,000 or more, which they paid to the subleasing companies just to get into the cars.
"It's a strange monster we're dealing with," Parino said. "A question has to be raised in the mind of anyone dealing with these people. Very few of them are actually business people; they're in it for the quick buck. Most of them operate out of suitcases in the trunks of their cars and insist on bringing the (subleased) car to you or meeting you at the corner grocery store."
Yet some operators maintain there is a "clean" way to run the business. Former National Security salesman Michael S. Jacobs said the Downey company he runs, Allied Auto Brokers, simply charges a finder's fee for putting a person who wants to get rid of a car together with a person who cannot get a car through conventional loans or leases. He does not take over any payments, leaving that to the customers to arrange for themselves.
"If it's done morally and with good conscience, and you do everything correct on the part of the (registered car) owner, it is certainly far from immoral," he said.
(But Darlene Meyer of Playa del Rey complained that Jacobs failed to get her car back for her after the person who subleased it failed to make any payments. Jacobs said he has hired private investigators to find and return the car. The investigators found the car once but, because of faulty paper work, police would not let them take it, he said.)
Jacobs and others acknowledged, however, that the "no transfer" clause in loan and lease agreements remains a major obstacle. But Jacobs said that the clause does not apply to the subleasing company, just to the original borrower.
Joseph Angelo, a Newport Beach lawyer who represents a number of subleasing companies, maintains that the "no transfer" clause is illegal, in much the same way that outright bans on apartment subleasing are unenforceable.
Auto subleasing companies "hurt poor people more because they are forced to deal with these companies," according to Robert J. Cohen, director of the Legal Aid Society of Orange County.
Cohen puts part of the blame on the banks because most of the cars involved in subleases are leased from banks or other leasing agencies. And the contracts are so restrictive that simply returning a car could put a borrower in bankruptcy, he said.
Most leases require a 12-month minimum payment and carry provisions for penalties for early cancellation of the lease, said Security Pacific's Benowitz.
"Banks created the problem with their practices as well as (with) their contracts," Cohen said. "If they could find some way to get cars to those with no credit, the subleasing business would dry up."
In the San Francisco Bay area, a number of auto subleasing outfits have opened in the last six months or so, said Robert Friedland, a DMV supervising investigator in Vallejo.
"Right now, we're monitoring it," he said. "One company is in financial trouble. Because he's not licensed, we'll probably go after him for engaging in an unlicensed business activity."
According to Angelo and Cohen, the subleasing concept started out in Texas four or five years ago. A Texas court, however, has since issued an injunction against a Dallas company, and the business has dwindled there.
The Ohio Bureau of Motor Vehicles also determined last year that an effort by an Ohio man to start a subleasing business in that state under a franchise agreement with Trawick was "possibly tainted by illegality."
Glen Oaks, now an Ohio insurance salesman, said in a telephone interview that he paid Trawick nearly $7,000 to be trained in the business and to be allowed to handle all auto subleasing operations in Ohio. But he said he never saw Trawick or his money again.
A California lawyer Oaks hired to help find Trawick told him that "Trawick was probably in Florida under an assumed name," Oaks said.
Staff Writer James Granelli reported from Orange County and San Diego County Business Editor Bill Ritter reported from San Diego.