Matco Tools, TD Bank Franchise Class Action Lawsuit: Something Screwy?

December 6th, 2011. By AbiK

Here’s a scenario: it’s 2008. You’ve lost your job. The economy sucks. Jobs are few. You’d love to be in business for yourself—if only the right opportunity were there. And there it is—bingo! A Matco Tools franchise!

Franchising has always had its allure—just invest upfront, play by the rules, and watch the money roll in. Sounds like a no-brainer. Assuming the franchise is a successful one.

And therein lies the rub of the Matco Tools class action lawsuit that’s been filed. TD Bank’s also in on this one—as a defendant.

The lawsuit, filed by David Villano III and his father, David Villano, Jr., alleges that Matco Tools and TD Bank (Commerce Bank at the time—TD Bank has since acquired Commerce) conspired to make Matco Tools franchise opportunities appear a bit rosier than perhaps they really are. The idea, the lawsuit claims, was that by inflating the appearance of Matco’s annual performance projections, lenders would approve small business loans, allowing the sale of the franchise to the franchisee.

Only thing was, the class action lawsuit claims, that the soon-to-be-franchisees weren’t shown those inflated projections—and so they received their loans and set off to start what they thought was a viable business. Hell, if the bank loaned the money, it must be viable, right? However, according to the lawsuit, that business was destined to fail and the money never should’ve been lent in the first place. Financial fraud? Where have we heard that before…?

According to an article that ran in the New York Post a while back, loans to Matco franchisees had a default rate of 37 percent in 2004. That compares to an eleven-year average Small Business Administration (SBA) loan default rate of 11.64% according to a study done by the Coleman Report. Something seem a bit screwy? (forgive the tool pun…)

Ahh, but you ask, wouldn’t the bank have raised a red flag or denied the loan? Well, here’s the thing—small business loans are granted by SBA-approved lenders who in turn receive an SBA guarantee on the loan in the event of default. Bottom line: if the loan then defaults, the lending bank can recoup its losses up to the amount of the SBA guarantee. Not a bad deal, eh?

And for Matco, the allegations would mean they could simply re-sell the franchise once the initial franchisee defaulted.

So, the bank would allegedly reap the interest paid on the loan prior to default—with minimal risk, and Matco would allegedly get to basically flip its franchises.

And, if you’re one of those franchisees caught in the middle of it all, that just might make you flippin’ mad.

So franchise, business and estate attorneys Marks & Klein are representing the plaintiffs, and the class action has been filed. Stay tuned.

Tags: Commerce Bank, Matco Tools Class Action Lawsuit, Matco Tools Franchise, TD Bank

This was posted on Tuesday, December 6th, 2011 at 1:48 pm and is filed under Class Action, Emerging Issues, Financial, lawsuits . Feel free to respond, or trackback. Read our comments policy.