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California Court of Appeal Issues Important New Decision For Auto Dealers

By Bruce Nye

    As we often point out to our automobile dealership clients, the retail motor car sales industry in California is a highly regulated one;  in fact, it's mostly regulated by the 
 plaintiff's  bar.  The stereotype promoted by some legislators and trial lawyers that automobile dealers are crooks has resulted in a long series of highly technical legislative enactments directed, in particular, at sales, advertising and financing practices in this area.  And a small number of California lawyers specialize in bringing suit against dealers for what often seem like trivial and technical violations (for further discussion, see the Adams Nye Automobile Dealership White Paper).

    Last week, the Court of Appeal issued a 52-page decision that should be read and absorbed by every California dealer and every lawyer representing a dealer.  The case is Nelson v. Pearson Ford Co. (July 15, 2010) ___Cal.App.4th ___ (Fourth Dist., D054369).  Some of the highlights (or low-lights):

• The case involved a common, "spot-sale" scenario.  The customer purchased the car on October 2, 2004 and signed a retail installment sales contract.  The dealer couldn't get a lender to buy the deal as written, so it called the customer back on October 8, had him rescind the deal in writing and entered into a new contract, which the dealer was able to assign to a lender.  As dealers often do, the dealer back-dated the deal to the original October 2 date.  To which the Court of Appeal said:  this violates Regulation Z, and therefore violates the Automobile Sales Finance Act (":ASFA").  More significantly, by charging interest (less than $20) for six days before there was actually a contract, the dealer imposed and failed to disclose an unlawful interest charge.
• The customer did not have automobile insurance.  So the dealer contacted an insurance broker, who came to the dealership and sold him an auto policy.  This was not itemized in the contract;  instead, there was a separate "Due Bill," (also a common dealership practice) staring that the price of insurance was included in the total vehicle price.  This was also a violation of ASFA, which requires insurance premiums to be separately itemized.  And adding the premium to the cost of the car meant that the customer was charged $30 in additional sales tax and financing charges on the insurance premium. 
• The Court of Appeal ruled that, based on either the unlawful interest charge, or the failure to itemize the insurance premium, the customer was entitled to return the car to the dealer and receive back all of his payments, less an offset for the value of his actual use of the car.  Note that the customer had been driving the car for more than three years.
• The customer brought a class action against the dealership, and classes were certified by the court, meaning the potential disruption of hundreds of existing deals entered into over a five year period.
• In addition to AFSA, the dealership faced liability under California's Unfair Competition Law and Consumer Legal Remedies Act, as well as attorneys fees and costs exceeding $400,000 at the trial court level (with more to come, no doubt, for the appeal).

Moral of the story:  fill out the paperwork correctly.  Itemize everything.  Use the right date.

Full post as published by CalBizLit on July 20, 2010 (boomark / email).