$1.7M invested in failed firm not authorized, sources say

Trade groups that host the Indianapolis Auto Show and represent 600 car dealers in the Legislature stand to lose $1.7 million they loaned to a local debt-collection agency–loans that sources said were made without the knowledge of the groups' boards or membership.

The Indianapolis Auto Trade Association and the Automobile Dealers Association of Indiana are "not optimistic" about getting much back from New Horizon Credit Inc., said Pat O'Brien, president of the state association. It and the affiliated Indianapolis Auto Trade Association are based at 150 W. Market St.

The dealer groups on July 20 filed an involuntary Chapter 7 bankruptcy petition against 3-year-old New Horizon in an effort to recover their money.

Just why dealer trade associations would lend money to a credit-card collections firm is unclear. Also murky is the involvement of Timothy J. Dowling, who was the longtime executive director of both trade associations.

Dowling recently resigned or was fired. Association principals won't say which.

But court records point to Dowling as the link between the groups and New Horizon, which has ceased operations.

In March 2004, Dowling made a $100,000 loan to New Horizon and in return received a 20-percent ownership stake in the company, according to a Marion Superior Court lawsuit filed against New Horizon by one of its creditors.

It's not clear whether the money Dowling invested belonged to him or the dealer groups.

New Horizon's bankruptcy records list Dowling personally as a creditor. A filing in the case says he claims he's owed $350,000.

Dowling did not return phone calls left at his home.

An attorney for the trade groups, Ronald Smith with the Indianapolis firm Stewart & Irwin, cast Dowling as a victim.

"The association definitely feels that Tim Dowling was defrauded," Smith said.

Added O'Brien: "The person who made the investment … was kind of snookered by this."

O'Brien said the dealer groups' loans to New Horizon were secured by a claim that, legally, turned out to be worthless. As a result, the groups are unsecured, non-priority creditors, putting them at the end of the line to be paid, behind banks.

"The idea that you wouldn't have a security interest in this is unfathomable," said a source knowledgeable about the matter who spoke on condition of anonymity. "This is unbelievable. [The associations] put a million dollars into this thing and they don't have a lien?"

The source said the lack of default protection in the dealer groups' loan documents seems to support the groups' contention that loans were made without their knowledge or participation.

The Automobile Dealers Association of Indiana is owed $100,000, according to court records, and the association's auto lending unit–Auto Trade Acceptance Co.–is owed $1.08 million. The Indianapolis Auto Trade Association said it's out $561,000.

An Indianapolis car dealer said he was surprised Auto Trade Acceptance Co. had money on hand to sink into New Horizon. He said Auto Trade was established more than a decade ago to make loans to high-risk borrowers, but has been inactive in recent years.

New Horizon, formerly at 6340 Castleplace Drive, has assets of $478,306 and liabilities of $4 million, according to Indianapolis bankruptcy court records.

IBJ reported last year that members of the Goodnight family of Indianapolis, and one silent investor, owned New Horizon. That silent investor now appears to be Dowling.

Former New Horizon principals, brothers Fred and William Goodnight, could not be reached for comment.

Fred Goodnight, in particular, has drawn the wrath of two San Francisco-based creditors–Florentine Siena Partners and Persolve LLC. Florentine is a lender and Persolve buys books of bad debt.

In a Marion Superior Court lawsuit seeking repayment on nearly $1 million in loans, the firms allege he misrepresented New Horizon's financial condition.

Specifically, New Horizon did not disclose that it borrowed $100,000 from Dowling and $1.4 million from other sources, according to the suit. The suit does not state whether any of those loans came from the dealer trade associations.

In addition, according to the suit, Fred Goodnight committed a fraudulent wire transfer. It alleges he accepted $250,000 from a debt collector for the purpose of buying another debt portfolio, but instead wired the money to Florentine as a loan payment.

When confronted, the suit alleges, Goodnight presented a fraudulent loan agreement "which purported to be a $1.5 million line of credit to Fred Goodnight, as an individual, purportedly signed by Tim Dowling."

But the $1.5 million loan document was a forgery, according to the suit, which suggests Dowling had not signed his name. The document "was wholly fraudulent."

Indianapolis attorney Elliot D. Levin has been appointed as trustee in the bankruptcy case.

Levin has hired an accounting firm, Fouts & Co., to look at the books of the collection agency and its principals for other potential assets–and to look into creditors' allegations of irregularities.

The Goodnights told IBJ last year that they founded the firm to purchase credit card receivables. Credit card companies unsuccessful in collecting customers' bad debt often sell the accounts to debt brokers.

Hard-to-collect receivables are often resold several times. New Horizon said its goal was to pay as little as half a cent to 3 cents per dollar of debt, which maximized its profit potential for successful collections.

"No other collection agency–unless they're the FBI–can find as many people as we do," Fred Goodnight, 32, boasted at the time.

According to bankruptcy court records, New Horizon revenue was $750,000 in 2004, $3.5 million in 2005, and nearly $1.4 million in the first eight months of this year.

At one point last year, the firm employed 49, with plans to move to larger offices and employ 250 within 12 months.

Fred Goodnight has said he graduated from Kansas Wesleyan University in 1997, then moved back to Indiana to work for a collections agency. The brothers, and members of their family, raised cash to start the company in 2003.

According to bankruptcy records, New Horizon plans to sell collection accounts to another debt collection agency. Fifth Third Bank stands to get a big chunk of any proceeds–it has a secured claim of $237,206 stemming from an outstanding loan, plus interest. Fifth Third has filed a suit in Marion Circuit Court to foreclose on several residential properties owned by the Goodnights.

O'Brien, owner of O'Brien Toyota in Indianapolis, said the auto associations' finances remain strong, despite the New Horizon situation. Financial information on the associations was not immediately available.

Auto dealers pay annual dues ranging from about $200 to $700 to join the state association, depending on the size of their operations.

The state's 615 franchised car dealers sell an estimated $12.5 billion in vehicles each year.