LEGAL BULLETIN: Recent Developments on Issues Impacting California Auto Dealerships

Amidst the worst recession in the last half century, California auto dealerships have suffered a few recent slings and arrows in cases involving regulatory and litigation developments, as well as winning a few key legal battles.  They also benefitted from new legislation that made it lawful for their vehicle salespersons to sell for more than one dealership, so long as the dealerships were “commonly controlled”.  We examine these and a few other recent developments below.

1.         Dealership Employment Arbitration Agreement Cannot Preclude Labor Claim.   In a case just issued on February 24, 2011, the California Supreme Court held that a dealership employment arbitration agreement cannot preclude an employee from filing a Labor Commission claim.  In Sonic-Calabasasa v. Moreno, 2011 Cal. LEXIS 1831, the Court held that sound public policy supported finding that the employee had a right to file his complaint with the Labor Commissioner.  The Court went on to hold, however, that the normal “appeal” process to Superior Court could be replaced with arbitration.

 2.         Court Finds Dealer Liable for “Back-Dating” of Sales Contracts.   Arguably the most significant case impacting California auto dealers in 2010 involved a common industry practice relating to the re-signing of contracts.  In Nelson v. Pearson Ford,  186 Cal. App. 4th 983 (4th Dist. 2010),  the Court essentially found that the way most California dealers had been doing “re-writes” of contracts after a “spot delivery” to a consumer was a violation of California’s Automobile Sales Finance Act.  In the July 2010 decision by California’s 4th District Court of Appeal, the Court held that a dealership violated several laws by back dating the retail installment sales contract and failing to properly itemize the purchase of insurance on the contract.  The case also illuminated some class action issues, including discussion of a flawed Offer to Compromise.

The Court held that a “back dated” contract re-written six days after the first contract violated California’s so-called “Single Document Rule,” the federal Truth in Lending Act (“TILA”) and the Consumer Legal Remedies Act (“CLRA”).  The Court found that the back dating violated the Single Document Rule because one could not look at the rewritten contract and determine that it was actually signed six days later than indicated.  The Court found that a person would have to look at a separate document, the Acknowledgement of Rewritten Contract, to make that determination.

The Court also held that the dealer violated TILA by calculating the interest for a period that was six days prior to the time of the second contract.

Finally, the Court decided that the dealer’s failure to properly itemize the insurance premium on the contract, as opposed to breaking it down on a “Due-Bill”, violated both the Automobile Sales Finance Act and the CLRA.

The Court granted class action status to two classes: a class of customers who had their contracts back dated, and a second class of customers who failed to have their insurance premium properly itemized. The Court gave the back dating class restitution of $50 each, which amounted to $222,785.  It also gave the insurance consumers the right to rescind their purchase, less an amount attributable to their use of the vehicle.  The Court awarded plaintiff’s attorneys fees and costs of $401,358.

The dealer argued that he should not have to pay Plaintiffs’ attorneys fees because of a Code of Civil Procedure 998 Offer to Settle in the amount of $500,000 which the Plaintiffs rejected.  However, the Court concluded that the CCP 998 Offer to settle was flawed because it was a lump sum settlement, instead of divided between the two classes.

3.         Dealer Not Liable For Excess Over-Charge of Vehicle License Fee.    In Fulton Auto Depot, 179 Cal. App. 4th 1318, 102 Cal. Rptr. 3d 413 (3d Dist. 2009), the Court held that an inaccurate estimate of vehicle license fees did not necessarily violate the Automobile Sales Finance Act so long as the dealer made the appropriate refund of any excess charge.  The Third District California Court of Appeal rejected plaintiffs’ argument that the dealer and the credit union note holder violated the Automobile Sales Finance Act (ASFA) by overestimating the DMV license fee and failing to submit the vehicle to a smog check for which buyers were charged in the purchase contract. 

Defendant dealer overestimated the DMV license fees by $2.00 and did not smog the vehicle before delivery to plaintiff.  After approximately four months, plaintiffs returned to the dealer to inquire why they had not received their registration from DMV.  The dealer immediately smogged the vehicle and processed the registration paperwork.  In their suit to rescind the contract plaintiffs argued that neither the dealer nor the holder corrected the erroneous charges on their sales contract within the ASFA’s safe harbor period. 

The court noted that the dealer had entered the word “estimate” next to the license fee charge on the sales contract.  The court also found that Vehicle Code §11713.4 allows dealers to estimate the DMV licensing fee.  With respect to the smog fee, the court noted that plaintiffs based their case on violating ASFA (arguing that the dealer made an untruthful statement on the sales purchase contract) not on violating §24007.   The court rejected plaintiffs’ contention that the dealer violated ASFA, noting that the dealer did eventually smog the vehicle, that doing so was a requirement for the sales transfer to be effective, and that therefore, the $58.25 charge stated on the sales contract for a smog fee was not an untruthful statement. 

4.         Auto Sales Contract Arbitration Provision Fails On Class Action, Waivor Claims.  The automotive industry has not been insulated from the class action warfare that has impacted so many other areas of the law.  In Amberlee Fisher v. DCH Temec-ULA Imports, LLC. 187 Cal. App. 4th 601, 114 Cal. Rptr. 3d 24 (4th Dist. 2010), the Court held that a mandatory arbitration provision contained in the standard Retail Installment Sales Contract could not compel class action arbitration of a claim falling under California’s Consumer Legal Remedies Act (“CLRA”).  The Court found that the consumer could not waive a statutory right to class action status under the CLRA.

Another arbitration case, Adolph v. Coastal Auto Sales, Inc., 184 Cal. App. 4th 1443, 110 Cal Rptr. 3d 104 (4th Dist. 2010), reminds us that a dealer cannot delay in trying to enforce a contract arbitration clause.  In the Coastal Auto Sales case, the Court found that the dealer had waived the contractual arbitration clause by participating in the civil suit for a protracted period of time, including engaging in discovery. 

5.         Unlicensed Salesperson Can Still Sue Dealer for Commissions.   In a state that has almost a zero-tolerance for lawsuits filed by unlicensed people, the Court in Wald v. TruSpeed Motorcars, LLC. 184 Cal. App. 4th 378 (4th Dist. 2010), held that an unlicensed salesperson could still file suit against the dealer for commissions owed.  The Court found that the dealer was not in the class of persons protected by the licensing statute and would be unjustly enriched by precluding the unlicensed salesperson from suing.  More to the point, the Court correctly observed that the dealer has a legal responsibility to ensure his salespeople are properly licensed.

6.         Court Holds Res-Judicata Prevents Using Unfair Competition Law To Set Aside Previous Judgments.   A six year legal war involving legally defective Notices of Intent to sell repossessed vehicles that previously went to the California Supreme Court finally appears to have had the last battle fought.  In Fireside Bank Cases v. Superior Court of Santa Clara, 187 Cal. App. 4th 1120, 115 Cal. Rptr. 3d 80 (6th Dist. 2010), the Court held that earlier deficiency judgments obtained by Fireside Bank against defaulting consumers could not be set aside under a theory that the judgments violated California’s Unfair Competition law.  The case was the “good news” to a lengthy history of “bad news” for the defendant; the final straw in a legal contest that went to the Supreme Court on certain critical class action issues, including the issue of one-way intervention and the order of determination of class certification versus adjudication on the merits.  For car dealers and finance companies, the Fireside case, along with a cadre of other class action cases brought against large financial institutions, presents an expensive lesson in the nuances of following every technical aspect of California’s Automobile Sales Finance Act, especially as regards notices to consumers served after repossession.

7.         Manufacturer Spanked for Delay In Lemon Law Compliance.   The Court in Lukather v. GM, 181 Cal. App. 4th 1041, 104 Cal. Rptr. 3d 853 (2d Dist. 2010), spanked a manufacturer for failing to comply with California’s “lemon-law” statute on a timely basis.  The Court opined that GM had almost five weeks within which to make a timely response to the consumer’s demand for repurchase of an alleged “lemon” vehicle, rejecting GM’s contention that it had responded reasonably to the consumer.  The Court upheld damages, penalties, fees, and costs in the amount of $185,306, sending a clear message to manufacturers that they better hop on demands made under the Song-Beverly Warranty Act.  The only good news coming out of the case for GM was that the Court declined to award sanctions for a frivolous appeal.

8.         Finance Company Not Liable for Attorney Fees in “Quartz” Action.   In Hyduke’s Valley Motors v. Lobel Financial Corp., 189 Cal. App. 4th 430, 117 Cal. Rptr. 3d 19 (4th Dist. 2010), the Court held that a finance company was not liable for attorney fees to a wholesaler after losing a “Quartz” action over certain vehicles fraudulently sold by a dealer.  The Court found that there was no statutory or contractual basis to award fees, declining to find that the action was “on a contract” within the meaning of California Civil Code §1717.  The underlying disputed pitted a wholesaler who sold the vehicles to the dealer as against Lobel, who bought the installment sales contracts from the dealer in what has come to be known as a “Quartz Action,” after the holding in  Quartz of Southern California, Inc. v. Mullen Bros., Inc., 151 Cal.App.4th 901, 61 Cal. Rptr. 3d 54 (2d Dist. 2007).  The trial Court found in favor of the wholesaler.  The wholesaler thereafter sought to recover attorney fees from the finance company.

9.       Vehicle Salespeople Can Sell At “Commonly Controlled” Dealerships.  SB 1004-Huff passed in 2010 by the California Legislature will help dealers and vehicle salespeople by making it easier for salespeople to work for more than one dealership, so long as the dealerships are “commonly controlled”.  

In addition to helping dealers and salespeople on the actual dealership lot,  the legislation will also help eliminate uncertainty and frustration at the local auto auction.  Some mega-dealers and chains have one buyer who buys for several dealerships all under common ownership.  Under the former law such a practice might have been declared unlawful because the buyer could only “hang his license” at one of the dealerships and technically was precluded from buying for the other dealerships.  This practice will now clearly be permissible under the new law.

SB 1004 became effective January 1, 2011.

About Lawrence Miles

Mr. Miles is founding attorney with The Miles Law Firm, A Professional Corporation. The firm practices civil and business law, including extensive work in the auto and aviation industries. For more information, please email Mr. Miles at larry@milesfirm.com or review the Firm's website.

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