Tricolor Implosion Creates First-of-Its-Kind Auto Loan Securitization Litigation With Industrywide Implications

Reporting: Diana Bravo

Relevant Documents:
Complaint Against Wilmington Trust & Vervent
Complaint Against Warehouse Lenders / Amended Complaint (Blackline)
Warehouse Lenders Motion to Dismiss / Supplement
Fifth Third Supplement

Once a billion-dollar subprime auto dealer and lender, Tricolor plummeted into a chapter 7 liquidation in September 2025 after its lenders discovered a massive fraud. At the time of its collapse, Tricolor’s off-balance-sheet financing, fueled by asset backed securitization, or ABS, allegedly implicated about $2.2 billion of auto loan receivables. Federal prosecutors say, however, that more than $800 million of those receivables were “bogus.”

It’s been nearly eight months since Tricolor filed for chapter 7. The chapter 7 trustee is overseeing an orderly liquidation of Tricolor’s remaining auto inventory while backup servicer Vervent continues to service outstanding customer loans (Tricolor itself was the initial servicer). Former Tricolor executives, including founder and former CEO Daniel Chu, are being criminally prosecuted. Chu is scheduled to stand trial on Oct. 19, and he also faces a civil suit commenced by the chapter 7 trustee.

Some of the hardest hit stakeholders in Tricolor’s collapse are the purchasers of Tricolor’s subordinate asset-based security, or ABS, notes. A group of those noteholders, advised by Quinn Emanuel, say their notes plummeted in value upon the bankruptcy, going from par to “less than 10% of their face value.” The group is now waging a litigation campaign against major third-party participants in Tricolor’s securitizations in an attempt to recover their losses. The litigation – a first-of-its kind for auto ABS – could have wide-ranging effects for the industry.

The group’s litigation campaign currently revolves around two separate suits. One is against custodian and ABS indenture trustee Wilmington Trust (alleged to have been “asleep at the wheel”) and backup servicer Vervent (which allegedly “refused” contractual post-default obligations). The other suit is against Barclays, JPMorgan Chase and Fifth Third Bank, so-called “warehouse lenders” and ABS “underwriters” that allegedly “concealed and misrepresented clear evidence of Tricolor’s fraudulent conduct” as they sold Tricolor ABS to investors.

These suits appear to be the first litigation of this type in the auto ABS space. There are parallels to the wave of litigation around mortgage backed securities, or MBS, that followed the Great Recession, where plaintiffs targeted defendants for failing to adhere to their underwriting standards when they packaged the underlying mortgages into MBS (among other reasons). Similar parallels could be made to ABS fraud cases such as National Century Financial Enterprises, or NCFE, where a healthcare financing company’s executives perpetrated a fraud on ABS investors.

NCFE is particularly notable because ABS noteholder plaintiffs sued Credit Suisse, which “had helped devise the note programs [and] helped draft the offering materials.” The suit largely survived a motion to dismiss, and the plaintiffs also reportedly recovered hundreds of millions through settlements, including from indenture trustee JPMorgan.

Regardless of the success of the Tricolor litigation, the events underlying the company’s downfall seem likely to alter industry practices going forward. We expect the costs and risks of the suit will prompt institutional investors and agents in the auto ABS space to rethink the scope of their obligations, indemnities and practices for similar auto ABS models, not to mention increasing the level of due diligence among all the parties.

It’s possible some market participants will even exit the market altogether. In its complaint, the subordinated ABS noteholder group alleges that indenture trustee Wilmington Trust is reportedly shutting down “its entire non-mortgage custodial business,” which spans “billions of dollars of asset backed securities” (emphasis added).

At a recent CLO industry conference, one source told Octus that while Wilmington may not be completely leaving the structured finance market, it is almost certainly reducing its presence in the industry.

“It’s almost impossible to get completely out,” the source said, adding that “they’re definitely not a trustee of choice in this market.” Another source put it more succinctly, saying, “If they were a trustee on Tricolor, then who’s gonna ever hire them?”

Tricolor’s Subprime Auto ABS Model

Tricolor founder and former CEO Daniel Chu allegedly masterminded the Tricolor fraud. Chu, a former college basketball coach, built Tricolor (pronounced “tree co-lore,” an homage to the Mexican flag) into a facially successful “buy here pay here” automotive seller.

“Buy here pay here” auto dealers tend to transact with purchasers with subprime credit ratings and often have their own collection operations. For example, Tricolor’s customers took out high-interest loans from Tricolor and would continue to transact with the company as their servicer.

Tricolor, however, would not hold the underlying risks and benefits of the loans it originated. Instead, according to the Quinn Emanuel noteholder group, Tricolor would sell the loans to warehouse special purpose vehicles, or warehouse SPVs, which would fund their purchases by tapping a third-party funded borrowing base facility.

Even though Tricolor would sell the loans to warehouse SPVs that it set up (and ostensibly held equity interests in), the sales would be considered “true sales”: so-blessed by a law firm’s legal opinion that the sold asset would not form part of Tricolor’s bankruptcy estate.

The Quinn Emanuel noteholder group says that Tricolor ultimately set up six warehouse lines. After a particular warehouse SPV accumulated sufficient loans, Tricolor would securitize the loans by selling the loans to another SPV in the Tricolor structure. That SPV would fund its purchase with proceeds from ABS notes issued to third-party investors. The proceeds of the securitization transaction would be used to pay off the warehouse lenders’ loans, freeing up borrowing capacity to continue the cycle.

Barclays, JPMorgan and Fifth Third are alleged to have functioned as the major warehouse lenders, collectively advancing more than $1 billion to the warehouse SPVs from 2020 through 2025. The banks are also alleged to have functioned as the “underwriters” of the ABS notes by first purchasing the ABS notes from a Tricolor intermediary (known as the “depositor”), before marketing and on-selling the ABS notes to ABS investors.

An illustration of Tricolor’s ABS structure was provided in the company’s March 2022 ABS presentation:

All in, Tricolor is said to have “sponsored over $2 billion” in ABS from 2022 through 2025, with about $945 million principal amount of ABS notes outstanding as of earlier this year.The Fraud

As Tricolor’s fortunes rose through leveraging its ABS model to sell more cars to more subprime borrowers, so too did Chu’s. According to the chapter 7 trustee’s lawsuit, Chu’s collection of real estate is reportedly valued at about $38 million. The fraud, however, looms over Chu’s real estate, which is now being sold with proceeds to be held in escrow.

Chu and Tricolor’s former COO David Goodgame were indicted in December 2025 by the U.S. Attorney for the Southern District of New York. Two other former Tricolor executives, including former CFO Jerome Kollar, pleaded guilty and are cooperating with prosecutors.

The alleged fraud boils down to this: Chu and his co-conspirators made it seem like business was booming when it wasn’t. As alleged in the DOJ indictment, Chu caused some Tricolor receivables – car loans advanced to customers – to be fabricated out of thin air. He directed that other worthless or near-worthless receivables (deemed “ineligible” loans for securitization purposes) appear valuable.

Chu is also charged with “double pledging collateral” – a fraud scheme similar to fabricating receivables, where one receivable is deceptively used by Tricolor more than once to get multiple lenders to lend against the same asset.

According to the ABS noteholder plaintiffs, the fraud was discovered in August 2025 by a “junior analyst” at a mezzanine lender of one of the warehouse facilities.

The plaintiffs say the extent of the alleged fraud eclipses half a billion dollars.

Litigation Against Wilmington Trust and Vervent

The Quinn Emanuel-represented plaintiffs group consists of holders of about $270 million of subordinated ABS notes. In January, the noteholder plaintiffs filed their first suit against notes custodian and indenture trustee Wilmington Trust and backup servicer Vervent. The suit was originally filed in New York state court and subsequently removed to the U.S. District Court for the Southern District of New York, but a venue fight remains pending.

The plaintiffs primarily make two allegations: first, that Wilmington Trust and Vervent breached contractual obligations to make post-default payments from a reserve fund, and second, that Wilmington was “asleep at the wheel” when it acted as custodian during the Tricolor fraud.

According to the plaintiffs, their securitization documents built in the reserve to “allow continued performance” of payment obligations in the event of a “temporary, but significant, disruption in cash flow.” Wilmington and Vervent, however, refused to make payments from the fund, and that led to certain senior ABS noteholders accelerating the notesfor five of seven of the trusts, “forever cutting off interest payments to the subordinate Notes,” the complaint explains. The acceleration also provided those senior noteholders with the right to liquidate the trust “to the extreme detriment of the subordinate Noteholders’ ability to recover any of their investment,” the complaint adds.

The thematic drive of the plaintiffs argument, however, is that Wilmington Trust was “asleep at the wheel” when it was supposed to be acting as custodian for the securitization trusts.

According to the complaint, “Wilmington had the obligation to certify to the Trusts that it had actually received and was holding the original loan documents for the auto loan receivables that were sold to the Tricolor trusts and that were supposed to be backing Plaintiffs’ investments.” However, “Wilmington utterly failed to fulfill this most-fundamental of tasks,” the complaint says.

The plaintiffs allege that under the governing agreements for the Tricolor trusts, Wilmington was obligated to “review the Receivables Files delivered to it” and “verify the presence of (i) an executed original of each related Receivable and (ii) an original certificate of title, or evidence of any electronic filing, for the related Financed Vehicles.”

The plaintiffs seek damages for Wilmington’s alleged contractual breaches, which the complaint paints as “systematic verification failures spanning at least seven years (2018-2025).” The Quinn Emanuel-advised group also tacks on a count for breach of fiduciary duty, which it says derives from the indenture’s imposition of “heightened duties” on Wilmington as indenture trustee following an event of default.

The plaintiffs, “who invested millions of dollars in the Tricolor Trusts based on the belief that Wilmington and Vervent would honor their contractual and fiduciary obligations,” say they are entitled to money damages for their “substantial losses.”

The plaintiffs also allege that Vervent capitalized on Tricolor’s implosion by collecting about $2.5 million of “impermissible” transition costs.

Wilmington and Vervent are due to respond to the allegations after the venue dispute is resolved.

Litigation Against Barclays, JPMorgan and Fifth Third Accuses “Underwriters” of Securities Fraud

The ABS noteholder plaintiffs’ second suit is against Barclays, JPMorgan Chase and Fifth Third, each in their capacity as a warehouse line lender and “underwriter” for the ABS notes. The banks are alleged to have acted as the “initial purchasers” of Tricolor ABS notes in their “underwriter” roles, purchasing them from a Tricolor intermediary “depositor” entity before selling the notes to investors.

The plaintiffs say that the banks obtained information through their warehouse and underwriter roles that should have led them to discover the Tricolor fraud. In addition, they argue that the initial purchaser roles “carried corresponding obligations” to investors.

The ABS noteholders paint a picture of the institutional banks knowing about, or willfully ignoring, warning signs of fraud at Tricolor for years to protect their own self interests in the securitization pipeline.

According to the plaintiffs, defendants deliberately concealed the fraud “to protect their massive warehouse facilities with Tricolor” and to “sustain the flow of lucrative fees that Defendants reaped from their services for Tricolor.”

Among the factual underpinnings of the complaint are the results of two audits that the plaintiffs say were conducted in 2022 and 2024. According to the complaint, these audits reported “alarming issues,” including that “nearly half” the payments made on customer loans were posted to the “wrong bank account for the wrong lender,” that defaulted loan accounts “showed recoveries that were never actually obtained” and that loan delinquencies were “inaccurately reported and aged.”

“Rather than risk a massive loss on their warehouse lines and forfeit the millions of dollars of fees and income derived from Tricolor’s fraudulent enterprise, Defendants responded by hiding what they had learned and sticking their heads in the sand to avoid learning more,” the complaint states.

The plaintiffs also allege that JPMorgan had been tapped as an advisor to take Tricolor public in 2024, but the team at JPM tasked with that effort, distinct from the ABS team, backed out because it discovered that Tricolor’s CFO was previously associated with a “large accounting fraud” that resulted in a criminal indictment. The JPMorgan team allegedly pushed CEO Chu to replace the CFO and ultimately abandoned the IPO, the complaint states.

Fraud-Based Theories of Liability

The plaintiffs assert five theories of fraud-based liability against the defendants: federal securities law fraud, state securities law fraud, common law fraud, and actual and constructive fraudulent transfer under state law.

The fraud theories derive from “multiple misstatements of material fact” that the “underwriter” defendants allegedly made in the ABS offering memorandums, as detailed by the plaintiffs HERE.

The actual fraudulent transfer theory rests on the idea that the securitization was a “Ponzi-like” scheme: The securitization trusts were allegedly controlled by Chu and other Tricolor executives, who used cash obtained through ABS note issuances to pay for receivables that did not exist. The effort was done with the “actual intent to defraud” the purchasers of the notes, the complaint asserts.

Similarly, the constructive fraudulent transfer theory alleges that the receivable purchases conducted with the ABS notes proceeds were not for “reasonably equivalent value” and left each trust “balance sheet insolvent.”

In each instance, the warehouse lenders are alleged to have received hundreds of millions in the proceeds of these transfers, which paid off their warehouse lines of credit.

Defendants Say They Are Not Underwriters and Are Fraud Victims, Too

The institutional bank defendants contend in their joint motion to dismiss the suit that they did not act as “underwriters” for the Tricolor securitizations. They explain that the Tricolor ABS deals “were not SEC-registered offerings” with the attendant “due diligence obligations.” Instead, the defendants say they bought the ABS notes in private placements and later resold the notes to “highly sophisticated qualified institutional buyers” under SEC Rule 144A.

Nonetheless, the defendants assert that the plaintiffs’ federal securities law fraud claim is “woefully deficient” because it lumps 30 individual plaintiffs’ claims together – as if it were a class action concerning public securities – without pleading the circumstances of each. (The plaintiffs subsequently amended their complaint in an apparent attempt to rebuff this argument).

The warehouse lender defendants counter the narrative that they were bad actors in the Tricolor securitization fraud. They state that they too “incurred significant losses on the warehouse credit lines” after the fraud was discovered, insisting Tricolor “allegedly defrauded [Tricolor] noteholders the same way it defrauded defendants.”

Moreover, the banks argue, the plaintiffs’ allegations that they were motivated to continue the securitizations “make no sense.”

“Under Plaintiffs’ theory, because Defendants always remained massively exposed to Tricolor’s ever-growing house of cards, Defendants actually had every incentive to avoid being part of any such scheme – the precise opposite of the untenable inference Plaintiffs assert,” the banks state.

According to the defendants, that takes the legs out of one of the elements that plaintiffs must plead for their fraud claims to survive: the element of “scienter,” a legal term for a “knowing” intent to perpetrate fraud.

“[M]erely alleging that ‘defendants should have been more alert and more skeptical,’ as Plaintiffs do here, does not establish that Defendants were ‘promoting a fraud,’” their motion to dismiss brief states.

Similarly, the defendants argue that the “‘red flags’” plaintiffs point to – the 2022 and 2024 audits – are just revelations of “tangential discrepancies” that courts have found do not constitute red flags of fraud. The defendants also argue that they did not make any of the statements in the Tricolor ABS offering memorandums, noting “[e]ach Offering Memorandum states that it ‘has been prepared … by the Depositor [a Tricolor entity]’” and that “the Initial Purchasers make no representation or warranty as to the accuracy or completeness of such information.”

The state law fraudulent transfer claims fail for technical reasons, according to the defendants. Specifically, the defendants argue that the transfers the plaintiffs seek to challenge are “transfers of ‘cash’ raised by ‘selling the Notes’ in exchange for ‘auto loan receivables.’” The defendants contend that those cash transfers were not made by the securitization trusts but instead were made by “separate Tricolor-related entities to which Plaintiffs allege no relationship at all and for which they have no standing to sue.”

The warehouse lender defendants illustrate the picture of the securitization as follows, noting where they believe the ABS noteholders maintain a debtor-creditor relationship:

The defendants contend that even if the plaintiffs could allege the trusts made the cash transfers, the fraud alleged in the complaint “relates to the manner in which Tricolor obtained funding from the Noteholders,” as opposed to any fraudulent transfer made by Tricolor. Fraudulent transfer law “is not ordinarily concerned with” the “manner in which the original debt to [plaintiff] arose,” the banks argue.Fifth Third also submitted its own supplemental motion to dismiss, arguing that it “served as a junior, secondary co-manager” and therefore was “the most peripheral participant” in the offerings. Fifth Third contends that it “had no involvement with the subordinate Notes that form the primary basis for Plaintiffs’ claims, and Plaintiffs do not claim that they purchased any Note of any kind from FTS.”

Tricolor Implosion May Lead to Changes in ABS Market

The Structured Finance Association was quick to say in September 2025 that Tricolor’s “securitization itself” was not the culprit for Tricolor’s downfall. That may be true, but the case exposes the latent legal liabilities that those who structure ABS securitizations can face if fraud implodes a particular model. If anything, Tricolor serves as a wakeup call for those that may have forgotten the wave of MBS litigation following the Great Recession as well as the NCFE litigation.

Putting aside the obvious case that can be made post-Tricolor for taking a hard look at current reporting, audit and oversight standards for ABS structures, it remains to be seen whether litigation cost and risk will be properly accounted for by investors and their advisors.