By Thomas B. Hudson and Nicole Frush Munro
Hello again! This month, we feature developments from the Consumer Financial Protection Bureau, the Federal Trade Commission, and the Department of Justice we thought might interest those in the auto sales, finance or leasing business. We also recap some of the auto sale and financing lawsuits we follow each month. Remember – we aren’t reporting every recent legal development, only those we think might be particularly important or interesting to industry.
Why do we include items from other states? We want to show you new legal developments and trends. Also, another state’s laws might be a lot like your state’s laws. If attorneys general or plaintiffs’ lawyers are pursuing particular types of claims in other states, those claims might soon appear in your state.
Note that this column does not offer legal advice. Always check with your own lawyer to learn how what we report might apply to you, or if you have questions.
This Month’s CARLAWYER© Compliance Tip
Do you use mandatory arbitration agreements to help protect your company against class action lawsuits? If you do, go fetch a deal jacket and count the number of different arbitration agreements you find. Is there one in the retail installment sales contract? Another free-standing one? Another in your buyer’s order? Yet another in the GAP contract you are selling? Courts don’t like it when this happens. Your customer’s lawyer will argue that the customer could not possibly have agreed to all those different arbitration agreements, and the court will be tempted to say that none of the agreements is enforceable. That would be a good day for the class action lawyer and a bad day for you.
Fool Me Twice, Pay $80,000. On September 18, the FTC announced that Ramey Motors, Inc., a West Virginia dealership, agreed to pay an $80,000 civil penalty to resolve claims that it violated the terms of a 2012 consent order barring it from deceptively advertising the cost of buying or leasing vehicles. The dealership allegedly concealed important terms of sale and lease offers, such as a required down payment, and allegedly failed to clearly and conspicuously provide the terms of credit.
Time to Review (or Create!) Your Furnisher (Credit Reporting) Policies and Procedures. On September 16, the FTC announced that the loan-servicing arm of Texas-based auto dealership Tricolor Auto Group will pay $82,777 in civil penalties to settle charges that it failed to have written policies and procedures regarding the accuracy of reported credit information and failed to properly investigate disputed consumer credit information. The FTC alleged that Tricolor Auto Acceptance, LLC (“TAA”), violated the Furnisher Rule, implemented under the Fair Credit Reporting Act. The Rule requires companies reporting information about consumers to consumer reporting agencies to maintain policies and procedures to ensure the information they report is accurate and to allow consumers to dispute information they believe is inaccurate directly with the company furnishing the information. The FTC alleged that TAA had no written policies or procedures addressing how to ensure the accuracy of that information, and that when consumers disputed the accuracy of the information provided by TAA to the credit reporting agency, TAA referred them to the credit reporting agency instead of conducting an investigation as required under the Furnisher Rule. In addition to the civil penalty, TAA will be permanently barred from any further violations of the Furnisher Rule.
How Are Your Phone Manners? On September 11, the FCC’s Enforcement Bureau cited First National Bank (“FNB”) and Lyft, Inc., a ride-sharing service, for violating rules implementing the Telephone Consumer Protection Act by making autodialed and/or prerecorded marketing calls and texts to consumers’ cell phones without the consumers’ prior express consent. Under the TCPA rules, a company may not require consumers to agree to receive autodialed calls and texts as a condition of buying any good, service, or property. FNB allegedly required consumers to agree to receive autodialed marketing text messages in order to use its online banking services and Apple Pay service. Lyft’s terms of service allegedly allowed consumers to opt out of receiving autodialed and/or prerecorded marketing texts and calls, but the FCC contended that the opt-out feature on the company’s website was not easy to locate, and even if consumers were able to opt-out, they were unable to use Lyft’s services until they opted back into receiving such marketing calls and texts. The citations are a warning to the companies that if they continue to violate the law, the Commission may impose sanctions.
Another CFPB Enforcement Action on Discrimination. On September 28, the CFPB announced an action against Fifth Third Bank, for allegedly discriminatory auto finance pricing. The joint CFPB and Department of Justice auto-finance enforcement action requires Fifth Third to change its pricing and compensation system to minimize the risks of discrimination, and to pay $18 million to harmed African-American and Hispanic car buyers. Under the order, Fifth Third will reduce dealer discretion to mark up the interest rate to only 125 basis points above the buy rate for auto credit contracts with terms of 5 years or less, and 100 basis points for auto credit contracts with longer terms. The order gives Fifth Third the option to move to non-discretionary dealer compensation. The Bureau says that it did not assess penalties against Fifth Third because of the steps the company is taking that directly address the fair lending risk of discretionary pricing and compensation systems by substantially reducing or eliminating that discretion altogether.
Loser-Pays Arbitration Provision Stricken from Arbitration Agreement as Unconscionable. A car buyer sued an online seller, alleging that when the car was delivered, agreed upon repairs were not completed. The trial court stayed the proceeding pending arbitration. The buyer appealed, arguing that the arbitration agreement was invalid because it contained a loser-pays provision that was against public policy. The appellate court affirmed the trial court’s stay of the proceedings pending arbitration, but struck the loser-pays provision from the agreement. The appellate court concluded that the provision was substantively unconscionable because it shifted the burden of all arbitration costs and expenses to the consumer, which would be prohibitive to the average car buyer. In addition, the appellate court found that the loser-pays provision was procedurally unconscionable because it was buried in a standard adhesion contract with no realistic option for negotiation or alteration of the terms, and the provision failed to provide adequate explanation of its actual effect. Last, the appellate court concluded that the loser-pays provision attempted to circumvent the attorneys’ fees provision in the Ohio Consumer Sales Practices Act, which imposes attorneys’ fees on the losing party when the action is maintained in bad faith. Because the bad faith requirement was removed in the loser-pays provision, the appellate court concluded the provision was against the CSPA’s long-standing public policy of not requiring consumers to pay the supplier’s attorneys’ fees when the action is brought in good faith. See Devito v. Autos Direct Online, Inc., 2015 Ohio App. LEXIS 3357 (Ohio App. August 20, 2015).
One-Sided Arbitration Agreement Unenforceable. In connection with a title loan, the borrower signed an arbitration agreement that stated that the consumer and lender agree that all claims, disputes, demands, or controversies concerning the vehicle, its sale, or its financing must be settled by binding arbitration. The agreement contained another clause stating that actions in law or equity by the lender to collect any debt owed by the consumer, enforce the security agreement securing such debt, or exercise any right resulting from the consumer’s failure to comply with the provisions of any agreement concerning the debt or security agreement, including repossession, were excepted from the arbitration agreement. Finally, the arbitration agreement stated that if the lender or its assignees bring an action not subject to the arbitration agreement, “any counterclaim or offset claim that is asserted by the consumer must nonetheless be arbitrated.” The borrower defaulted, and the lender repossessed the vehicle and filed a collection action to recover the balance, interest, costs, and attorney’s fees. The borrower answered and counterclaimed, asserting that the lender violated the sale notice requirements of the UCC and the Merchandising Practices Act. The lender moved to compel arbitration of the counterclaim. The trial court denied the motion, finding that the arbitration agreement was unenforceable due to lack of consideration. The lender dismissed its collection action and appealed the denial of its motion to compel arbitration, arguing that the trial court erred in finding the agreement unenforceable. The appellate court affirmed the trial court’s decision, concluding that the arbitration agreement was unenforceable for lack of consideration due to lack of mutuality because the lender could pursue its claims in court, but the borrower could not. See Motormax Financial Services Corporation v. Knight, 2015 Mo. App. LEXIS 815 (Mo. App. August 18, 2015).
Car Buyer Not Entitled to Recover Attorneys’ Fees and Costs Incurred in Action Against Dealership Brought After Dealership’s Correction Offer. After driving a vehicle for over a year, the buyer asserted that it had a damaged frame and demanded that the seller rescind the purchase contract, return his payments, and pay a penalty and incidental damages. The buyer did not wait for a response to his demands and instead filed a complaint alleging numerous causes of action against the seller, including violation of California’s Consumers Legal Remedies Act. Within 30 days of receiving the buyer’s demand letters, the seller offered to settle the matter by rescinding the contract, having the buyer return the vehicle, refunding all payments, satisfying the debt to the finance company, paying $2,500 for incidental damages and attorney’s fees, waiving any claim for mileage, and executing a mutual settlement and release agreement. The buyer did not accept this offer and demanded a higher amount to settle the case.
The seller eventually stipulated to a judgment against it and agreed to waive the balance owed. The buyer agreed to return the vehicle. The settlement included a release of all claims. The buyer then moved for attorney’s fees and costs, and the trial court denied the motion. The trial court noted that, under the CLRA, a plaintiff cannot maintain a suit for damages if the defendant made an appropriate and timely correction offer. The buyer appealed, arguing that what the seller had offered was not appropriate because, among other things, it included a settlement and release of all his claims, not just his CLRA claim. The appellate court affirmed, concluding that the trial court did not abuse its discretion in deeming the seller’s correction offer appropriate and timely. The appellate court also rejected the buyer’s argument that the release of his other non-CLRA claims rendered the correction offer inappropriate, finding that the buyer could not have obtained any more relief from the other causes of action based on the same alleged conduct. See Benson v. Southern California Auto Sales, Inc., 2015 Cal. App. LEXIS 752 (Cal. App. August 27, 2015).
“As Is” Clause Did Not Preclude Claims Against Dealer for Fraud and Breach of Statutory Duty to Disclose Damage. A company bought a used Jaguar at auction, had warranty work done on it at a Jaguar dealership and listed it for sale. The company sold the car, telling the buyer that the Jaguar had a clean repair history and that a Jaguar dealer had conducted a pre-purchase inspection, so the buyer did not need to inspect the car. The seller gave the buyer an AutoCheck vehicle repair history, and the buyer bought a Carfax report. Neither report listed any significant damage or repair history for the car. The purchase contract stated that the car was sold “as is” with no warranties except for the balance of any factory warranty.
When the car arrived, the buyer found extensive body and engine damage. The seller refused to repair the car, so the buyer sued for breach of contract, intentional misrepresentation, negligent misrepresentation, breach of express and implied warranties, unfair, false, misleading or deceptive acts and practices, and breach of a seller’s statutory duty to disclose damage to the car. The trial court granted the seller summary judgment. The appellate court affirmed the trial court’s decision to dismiss the claims for breach of contract, breach of express and implied warranties, and negligent misrepresentation, but reversed the trial court’s decision to dismiss the claims for intentional misrepresentation and for failing to disclose pre-existing damage to the car. The appellate court found that the buyer could not sue for breach of contract, breach of an express warranty, or breach of an implied warranty even if he could prove the seller knew the car was damaged or defective because an “as is” clause in a sale contract shifts the risk of damage or defects in the goods from the seller to the buyer. The appellate court also found that the buyer could not sue for negligent misrepresentation.
An “as is” clause makes the buyer solely responsible for inspecting the car and determining the condition of the car, so the buyer is not justified in relying on any statements the seller makes about the goods’ condition. The appellate court decided that the buyer could make a claim for fraud. A seller may not use an “as is” clause in a contract to shield itself from a claim that it fraudulently induced the buyer to enter into the contract. The appellate court also found that the buyer could bring a claim that the seller violated Kentucky law, which requires a damage disclosure to a buyer if the seller has direct knowledge of the damage, the damage resulted in repairs or repair estimates that cost more than $1,000, and the damage occurred while the car was in the seller’s possession and prior to delivery to a purchaser. The buyer alleged that the seller knew the car had undergone more than $1,000 in repairs for collision damage. The seller knew that the auctioneer made $612 worth of repairs and that some warranty work had also been completed. The appellate court disagreed with the seller’s claim that the Kentucky statute does not require a seller to include the cost of warranty repairs in the $1,000 threshold, finding that a seller must include the value of warranty repairs completed while the car is in the seller’s possession toward the $1,000 threshold. See Evans v. JNT, Inc., 2015 Ky. App. LEXIS 124 (Ky. App. August 21, 2015).
Garnishing Wages in the Peach State? A federal trial court has ruled that Georgia’s post-judgment garnishment statute is unconstitutional. See Strickland v. Alexander, 2015 U.S. Dist, LEXIS 121958 (N.D. Ga. September 8, 2015).
So there’s this month’s roundup! Stay legal, and we’ll see you next month.
Tom (firstname.lastname@example.org) and Nikki (email@example.com) are partners in the law firm of Hudson Cook, LLP. Tom has written several books and is the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers. He is Editor in Chief of CARLAW®, a monthly report of legal developments for the auto finance and leasing industry. Nikki is a contributing author to the F&I Legal Desk Book and frequently writes for Spot Delivery. For information, visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2015, all rights reserved. Single publication rights only, to the Association. (10/15). HC# 4834-9578-6537.