LEGAL ALERT: Backdating Controversy Continues

Signing contract.The controversy over “backdating” of automobile sales contracts continues in California, despite a Court of Appeal decision last year that ruled against a new car dealer for engaging in such alleged practices.  See Nelson v. Pearson Ford,  186 Cal. App. 4th 983 (4th Dist. 2010).  To further confuse matters, the Pearson Ford Appellate panel later ordered a Trial judge to reinstate his initial decision in a case involving Raceway Ford,  rejecting the backdating legal theory, despite the fact that the lower court’s ruling seemingly conflicted with Pearson.   Meanwhile, the conflicting cases and legal theories have created uncertainty in one of the most important areas of automobile retail sales – the rewriting of automobile sales contracts – and highlight the contentious relationship between the auto industry and the law firm pursuing the backdating cases, the Rosner Law Firm of San Diego.

In the Pearson Ford decision last year, the California Court of Appeal, 4th District, held that an auto dealer who placed the original date of the sale on a rewritten contract was “backdating” a contract in violation of certain state and federal laws.  However, prior to the publication of Pearson Ford  on July 15, 2010, retired Judge Dallas Holmes issued an earlier decision in the Raceway Ford case on April 16, 2010, rejecting the backdating legal theory.  Instead, Judge Holmes agreed with the dealership that the rewritten contract constituted a “novation” of the original contract.

A legal “novation” is when a second contract is substituted for the original contract to reflect or correct terms in the initial drafting of the document.  The substituted contract remains effective as of the date the first contract was entered into.  The “novation” theory is distinct from the
conflicting legal theory that views the first contract as having been rescinded and the “second” contract as a completely new contract requiring that it be dated as of the date the rewritten contract was signed.

Because the Pearson Ford case was issued after Judge Holmes rendered his decision, the Judge “vacated” his decision, that is he reissued it saying that he felt legally compelled to change his decision as a result of the Pearson Ford opinion.   However, the dealer appealed to the Appellate Court, arguing that the trial Court had waited too long to change its mind and was legally obligated to enter its initial decision in favor of the dealership.  The Appellate Court agreed, and ordered the Trial Judge to reinstate his initial decision in favor of the dealership.

Despite Raceway Ford’s initial victory, it seems likely that the case will be appealed to the same Appellate Court that decided  Pearson Ford, raising the specter that the Raceway Ford decision could force the Fourth District to reconsider its Pearson  decision, distinguish the two cases, or
reaffirm Pearson.  Raceway Ford’s lawyers have been arguing that the Appellate Court wrongly decided Pearson, and that the Trial Judge in the Raceway Ford case had it right.  The Raceway Ford decision could put the brakes on at least a half dozen similar lawsuits against dealers throughout the state as legal analysts wait for the Fourth District to provide further guidance.

Meanwhile, the General Manager of Raceway Ford has created a website attacking the plaintiffs’ law firm, the Rosner Law Firm of San Diego. See http://halrosner.com.  The dealership says that it has spent over a million dollars in the Raceway Ford defense, and that it intends to recover its attorney fees from the plaintiffs, encouraging the losing plaintiffs who might be on the hook for the fees to sue their attorney for legal malpractice.

Stay tuned for continuing developments in this remarkable litigation.

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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