Perils of Back Dating

Dealers and finance managers are often confused about how best to re-write a contract.  One dealer’s back dating of a contract, along with the failure to properly disclose the purchase of insurance, led to a very costly lesson.

In a recent 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.  See Nelson v. Pearson Ford,  186 Cal. App. 4th 983 (4th Dist. 2010).

     Single Document Rule, TILA and    CLRA Violations

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 seperate 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.

     Insurance Error

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.

     Class Action

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.

     Flawed CCP 998 Settlement Offer

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.

The Pearson Ford case is every dealers nightmare.  The dealership was trying to comply with very technical laws.  Dealers should review their finance department procedures very carefully in light of this decision.