Rent-A-Wreck, family owners struggle through legal disputes

Robyn Lamb

Rent-A-Wreck's rental cars are cheap and sometimes dated - but they are never wrecks.

It seems the term wreck - judging by court documents that came to light after the company's president was indicted on charges of first- degree assault with a handgun - more aptly describes the Baltimore- area family that controls the multimillion-dollar company.

Behind a company that some franchisees accuse of wielding an uneven, controlling hand is a family with a dramatic history involving guns, murder, brutal custody and divorce cases, alcohol, and domestic problems.

It started innocuously enough. The Blum family, which calls Baltimore County home, took over management of the California-based Bundy American Corp. in 1993, when the company moved from Los Angeles.

Rent-A-Wreck was originally founded in the early 1970s as Bundy Very Used Cars by Los Angeles entrepreneur Dave Schwartz, whose stepson, Jordan Chandler, sued Michael Jackson on charges of sexual molestation and settled out of court in 1994.

According to Rent-a-Wreck's Web site, the business exploded quickly after Schwartz began renting low-profile cars to actors like Henry Fonda who were looking to travel incognito.

The first Rent-A-Wreck franchise was sold in 1978.

At the time the Blums took over management, Rent-A-Wreck was about 250 franchises strong - a little fish in a car-rental pond controlled by the likes of household names Hertz and Avis.

But filling the niche of a low-cost alternative to the major companies, Chief Executive Officer Kenneth Blum Sr. and his son and President Kenneth Blum Jr. cut costs and launched aggressive expansion plans, awarding new franchises around the country and in Europe.

Three years after they were brought in, the company's operations emerged from $400,000 in the red to nearly $500,000 in the black. The business grew from about 250 to about 650 locations, with sales going from $4.7 million in 1998 to $7 million in 2002.

But with the growth came a dark side.

In lawsuits, franchisees say Bundy American Corp. - the business that manages Rent-A-Wreck -forced some of them out of business through harassment and fabricated audits. Bundy would go as far as soliciting business to directly compete with franchisees in an attempt to control lucrative territory, the documents alleged.

From New York to Florida and in Maryland, a handful of lawsuits have been filed against Bundy, alleging abuse of the franchise contracts.

In a Maryland case, Bundy allegedly audited an Owings Mills-area franchise owned by Cliff Blake and, claiming he underreported earnings, coerced him into giving up his business. Bundy already had found a prospect to take over the area, according to court documents.

It appears the audit has been used repeatedly by Bundy as a weapon against any franchisee who steps out of line, warned Donald Rea, a Gordon, Feinblatt, Rothman, Hoffberger & Hollander LLC lawyer who represented Carney franchise owners Martin and Sandra Carter, in a December 2001 letter to other area franchises. Indeed, Bundy regularly uses its audit powers as a hammer to attempt to coerce franchisees into giving up valuable territorial rights.

Within the company, former employees say the Blums used the company to buy cars for personal use to avoid sales taxes, staffed their own businesses with corporate employees and rented out vehicles to girlfriends with no payment in return.

More startling, however, is the melodrama that played out between the Blums.

Drinking to escape

When Bundy President Kenneth Blum Jr. was being served with a court subpoena in July, he allegedly threatened Ryan Smith, who was serving the papers, with a handgun.

After Baltimore County police found several other handguns in Blum's Owings Mills home, he was indicted on charges of use of a handgun in the commission of a felony and use of a handgun in the commission of a crime of violence.

In 2003 state Handgun Permit Review Board records, testimony states Blum needed the guns due to the threats received from disgruntled employees and because of threats received from brother- in-law Bill Bond.

Bond married Blum Jr.'s sister, Alyson Slavin. At the age of 17, Bond admitted to murdering his father in 1981 with a hammer. He then spent four years at Sheppard Pratt Hospital in Towson.

Several years later Bond wrote a manuscript, Self Portrait of a Patricide: How I Got Away with Murder, a fictionalized account of the events around his father's death, his prosecution and time at Sheppard Pratt.

Bundy Chairman Kenneth Blum Sr. used the manuscript in a court case involving his daughter. Bond, claiming copyright laws had been infringed upon, sued Blum Sr.

Since then Bond has filed a series of suits against the Blums.

The legal back and forth led up to the scene at Blum Jr.'s Owings Mill home in July in which he was being served a subpoena to appear in court to answer questions about a suit Bond had filed.

But the indictment that followed for Blum Jr. was not the first indication of gun use - or violence, for that matter.

In November 1996, Susan Blum said her husband, Blum Jr., came home drunk, lifted her up by the neck, broke her tooth and called her expletives, according to a petition for a protection order subsequently filed.

In the corresponding crime report filed in Baltimore County, officers said Blum admitted to arguing with his wife, but denied choking her.

On Nov. 13, just days after the alleged domestic abuse incident, a settlement agreement was reached in a Baltimore County court between Blum Jr. and his wife. The parties agreed to ban guns and alcohol from their home.

The studies both confirm that they really aren't big alcoholics, but that they are drinking to get away from things or something of that sort, the settlement agreement said.

Blum Jr.'s other sister, Robin, is married to convicted felon Alan S. Cohn, a major shareholder in Rent-A-Wreck and an executive of an Arizona health care firm in which Blum Jr. also was an officer.

In 1989, Cohn pleaded guilty to kickback schemes, one which involved a $2.3 million federal grant to operate health clinics in Washington. At the time, he was a vice president of United Healthcare Inc., in which Blum was a principal owner. Both agreed to cooperate with federal investigators.

Three years later, Cohn was disbarred in Maryland.

Back to business

While the court battles played out, Rent-A-Wreck was losing momentum.

By Aug. 30, 2002, the company filed to take its shares off Nasdaq after 17 unremarkable years.

For the quarter ended June 30, 2002 - the last quarter for which figures are available - sales dropped 17 percent to $1.7 million from $2 million for the same quarter the previous year, the company reported. At the time, the company reported 642 franchised locations, down from 677 for the same quarter the year before.

Net income for the quarter plummeted from $398,953 to $51,002, a drop of about 87 percent versus the same quarter the previous year.

Citing a lethargic market for the company's stock, Blum Jr. said the delisting was a way to save shareholders the cost of periodic filings with the U.S. Securities and Exchange Commission.

Around the same time, Alan Wagner, a company vice president, and Chief Accounting Officer Mitra Ghahramanlou resigned. The two followed in the footsteps of Lori Shaffron, another company veteran executive, who left after more than a decade with the company.

In his Aug. 21, 2002, letter of resignation, Wagner said he was leaving due to the face that I have been asked to be involved in illegal activities and I refuse to do so. Wagner, who spent eight years with the company, was vice president of sales when he resigned.

In letters to company officials obtained by The Daily Record, Ghahramanlou claimed Rent-A-Wreck officers exploited corporate resources for personal use.

In a January 2003 letter to accounting firm Grant Thornton, she alleged numerous Rent-a-Wreck employees worked for months at a time at the Blum's private franchise in Towson and were paid with corporate funds.

Others spent time staffing other Blum private ventures. One employee, Kathy Incaprera, was even responsible for selling Blum Sr.'s condo, Ghahramanlou wrote.

Ghahramanlou also alleged Blum family members and friends drove, but did not pay for, Rent-A-Wreck cars. Blum Jr.'s girlfriend, for example, ran up a tab of about $8,000 during the course of a year. On another occasion, Ghahramanlou was asked to sign a $259 corporate check for the repair of Blum Sr.'s personal car.

She said Blum Jr. and William Richter, a director who owned 24 percent of the company's common stock as of 2002, bought automobiles - Richter a $163,000 Austin Mini and Blum Jr. a $60,000 Mercedes Benz - and titled them under a company name to avoid the state sales tax.

When Ghahramanlou raised questions about the misuse of employees and the car purchases, she was threatened.

I told [the corporate attorney] that the Blums were using our employees for their private companies all the time. On the same day, Ken Sr. came from Florida and called Lori and me to his office and gave us a warning. He told me if I didn't stop what I was doing, I would have 'very high consequences.' I told him I was doing my job, Ghahramanlou wrote in the letter to Grant Thornton.

According to a letter she wrote to Richter in August 2002, the situation became intolerable.

The pressure has reached a level that I am no longer willing to accept. I am concerned about my mental and physical well being; and therefore, I made an agreement with Ken Sr. to stay for three months to train someone to take my place. During this period, I am not functioning as our company's CAO, Ghahramanlou wrote.

Ghahramanlou did not sign financial reports submitted to the Securities and Exchange Commission during her last quarter as an employee with the company.

William McDaniel Jr., an attorney for the company who spoke on behalf of the Blums and the board, said Ghahramanlou's allegations were investigated and found without merit though he declined to elaborate on the details of the investigation.

The downward spiral continued, accented by dissatisfaction amongst franchise owners.

Discontent

As Rent-A-Wreck's popularity grew, so too did Bundy's desire to control franchises, franchisees said.

Using audits and other measures, the Blums tried to put certain franchisees out of business - a motive McDaniel, who represented Bundy in various court cases, denies.

The goal, according to court documents, was to make other franchises more valuable. Bundy could then sell those franchises for exponentially higher prices.

According to a countersuit filed last year in a New Jersey Federal Court, the Blums harassed H-Quad Leasing Inc., a successful New Jersey-based franchisee with locations in New Jersey and Florida owned by the Hanley brothers, with the intent of putting the successful franchisee out of business.

Among other tactics, the Blums used unreasonable audit demands and unfounded termination notices to drive the Hanleys out, the suit said.

In this case, the Blums used Bundy to carry out their own agenda and achieve personal pecuniary gain. Before Bundy could resell H- Quad's territories and put cash in the pockets of the Blums, the Blums needed H-Quad out of the way, said H-Quad's attorney, Miroslaw Smorodsky, in an April brief.

The suit, which settled for an undisclosed sum May 4, the same day it was set to go to trial, detailed alleged abuses spanning many months.

According to the court documents, the antagonistic behavior began in March 2000 when Bundy stopped maintaining buffer zones between competitors and allowed a Rent-A-Wreck store to open less than one mile from H-Quad's Orange Park, Fla., location.

Shortly thereafter it yanked H-Quad's Internet addresses and links from its corporate Web site, making it impossible for customers to locate certain H-Quad stores online, according to court documents.

In May of the same year, Bundy accused H-Quad of failing to pay its March fees - a claim that was followed by an audit request and a termination notice for the company's Orlando, Fla., store, the lawsuit said.

Bundy then hit H-Quad with an onslaught of audit demands, court documents said, that culminated in a 2001 lawsuit, which ultimately forced H-Quad to submit to an audit.

In the meantime, Bundy rebuffed H-Quad's efforts to renegotiate its 10-year licensing agreement set to expire in December 2002. Instead, it slammed the company with a default letter, alleging it violated its contract by using the name Aero Link Auto Rental to do business.

H-Quad argued the existence of the Aero Link name was known and encouraged by Bundy as part of its own marketing policies - using a trade name beginning with the letter A ensured a telephone directory listing ahead of the competition and helped the franchisee get business from customers who might not be inclined to do businesses with an operation with the name wreck in it.

The licensing agreement between H-Quad and Bundy subsequently expired in December 2002 and Bundy filed a second lawsuit against the Hanleys alleging the continuing operation of Aero Link breached the contract.

Calling the allegations levied by the Hanleys the typical litigation of the franchise business, Bundy's attorney, McDaniel, said Bundy never had an interest in driving the highly successful Hanley brothers out of business.

They [Bundy] had a contractual right to conduct audits, they have the right to do that and they were done on a routine basis, said McDaniel.

Very few audits resulted in termination, McDaniel added. And many of them found that franchisees owed large sums of money.

The notion that a franchisor would try to force a franchisee out of business in order to sell to another franchisee is not unheard of, said Philip F. Zeidman, a partner and franchise attorney with Piper Rudnick LLP in Washington.

A franchisee in difficulty is likely to strike back, he said. They are going to reach out for any kind of counter claim they can use.

But ultimately, a franchisor's right to audit, to initiate termination or even to pull Internet addresses are all defined in the franchise agreement.

That is not something that is gray. It is black or white. It is absolutely explicit one way or another, he said.

Finger-pointing

Still, other Rent-A-Wreck owners insisted Bundy had an agenda.

They wanted the old people out, the fees at that point were low and they wanted a percentage of our growth, said Kevin Hanley after Bundy filed its initial lawsuit trying to force an H-Quad audit.

If, one day, they decide to put you out of business, there are a lot of ways of doing it in the contract, said Moshe Attias, a Massachusetts-based franchisee, who claims the company was already in talks with a prospective franchisee for his territory in 2002 while his 10-year contract renewal was still under negotiation.

According to Attias, Bundy put in front of him a draconian contract, one that neither he, nor his lawyer, felt was worth the risk. The renewal terms required, for example, that Attias turn over to Rent-A-Wreck power of attorney over his business phone lines and exit the rental car business entirely for two years when, and if, the contract terminated.

The new terms also required that Attias buy all of his insurance through the company - an onerous condition that cut out all possibility for competition, said Donald Bloch, an attorney with Posternack, Blankstein and Lund LLP in Boston.

Bloch ultimately represented Attias when, after refusing to renew his contract, he was sued by Bundy for refusing to relinquish his telephone lines, which had consequently already been promised to his successor for close to two years.

They made me all kinds of promises - that I could step in and take the numbers that go with the franchise. They promised that this gentleman was out of the business, that they had the right to sell, said Daniel Largey, who bought into a Rent-A-Wreck franchise in Marlboro, Mass., just down the street from Attias.

Largey, who said he has spent nearly $50,000, including an initial licensing fee of $15,000, to get his franchise up and running, said he did not receive the telephone numbers he was entitled to as part of his contract.

He consequently stopped paying fees to the company once I realized I was getting nowhere fast, he said.

Faced now with bills from Bundy totaling about $25,000, Largey is consulting with an attorney about filing a lawsuit against Bundy based on the fact that the company was involved in litigation with Attias over the telephone lines when it sold the franchise to him.

It is a tense situation for me because I am a small-business owner in a small town and it took a turn for the worse, he said in an interview. I did my homework on this. I thought that having a national name meant something but I guess I fell for the literature of the company.

In Baltimore, the Carters sued Bundy in 2002 alleging the company allowed a Baltimore County-based competitor to bid on - and subsequently win - a lucrative contract to supply Baltimore City undercover cops with rental cars.

The Carters claim Bundy assisted a Towson-based Rent-A-Wreck operator, Generic Auto Inc., in preparing its bid, sharing inside information on the Carters' proposal.

At the time, Rea, the Carter's attorney, tried, but failed to ignite a class-action suit against Bundy by area franchisees, claiming, among other things, that the Blums used audits as a form of harassment. That he failed to rally a class-action suit may have been a sign that other franchisees were not as unhappy as Rea assumed.

Bundy audited Martin Carter in early 2000, after Alan Wagner had developed a prospect to take on part of Martin's territory in Harford County. We are aware that Bundy has used its audit power in this same manner with regard to franchisees outside of the Baltimore area, said Rea in his letter to five local franchisees.

Ultimately, the Carters settled their lawsuit with Bundy but not before a number of other area Rent-A-Wreck franchise owners got out of the business.

Rent-A-Wreck last reported it had 480 franchised locations, down from a high of around 650 in the late 1990s, according to a survey conducted last September by trade publication Auto Rental News.

Company officials say they have done nothing wrong.

But some franchisees still adamantly disagree.

Ever since these two people [the Blums] took over, they created, by design, a big distance between franchisees so that they don't collaborate or talk, said Attias of his 12-year experience with Rent- A-Wreck.

But what they did is they created a tremendous hardship between the franchisee and franchisor, Attias said. That is a sin in this business.

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