LEGAL BULLETIN: Two New Cases Impact Auto Dealers and Lenders

Two recent cases, one by California’s Court of Appeal and the other by the federal 9th Circuit Court of Appeal involving bankruptcy law, will be of interest to car dealers and lenders.

     Americredit Financial Services v. Penrod 

In the more controversial decision, the 9th Circuit Court of Appeal held in Americredit Financial Services, Inc. v. Penrod that a Chapter 13 debtor could “strip” away the negative equity that had been financed on the purchase of a vehicle and have it treated as unsecured debt. The Court’s decision is at odds with the eight other federal circuits which have decided that the negative equity is part of the purchase price for the vehicle and that the entire amount due under the contract should be treated as a secured debt.

The significance of the Americredit decision is that Chapter 13 debtors in the western United States, the area encompassed by the 9th Circuit, will be able to buy a car, get their negative equity paid off by their hapless dealer, and then eliminate that portion of their car loan while retaining their vehicle.

For example, let’s say that a customer pays $10,000 for a car but is “buried” in his trade by $3,000. The dealership pays off the $3,000 owed on the trade and puts it on the contract as “negative equity.” The deal goes out the door with the customer owing $13,000. Two weeks later the customer files a Chapter 13 and schedules the plan to pay-off just the $10,000, with the amount attributable to the negative equity treated as unsecured debt.

Four 9th Circuit Judges vigorously objected to the decision and thought that the entire 9th Circuit panel of Judges should reconsider the decision, noting that the 9th Circuit opinion was at odds with all eight of the remaining Circuits.

     Martinez v. Kia
In Martinez v. Kia Motors America, Inc, 2011 Cal. App. LEXIS 230, the California Court of Appeal held that a consumer does not have to retain a vehicle to pursue a violation of the state’s lemon law. In the Martinez case, the customer had complained of a problem and was told that her repairs were not covered under warranty. She then abandoned the vehicle at the dealership because it was inoperable and she couldn’t afford to repair it. The vehicle was repossessed and then Kia discovered that the vehicle’s alternator had been over-charging, creating the problems of which Mrs. Martinez had complained. Kia tried to defend the case on the theory that the consumer no longer owned or possessed the vehicle, but the Appeals Court rejected the argument.

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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