(Originally published at Dealer magazine)
Last week, a California Court of Appeals judge determined that a dealer violated several California state laws and ruled in favor of the plaintiff in a class-action lawsuit that will have huge ramifications for dealers within the state. The ruling was the result of some poor decisions from start to finish. Ultimately, this ruling will allow 1,500 car buyers the right to have their purchase contracts rescinded, which is estimated to potentially cost the dealership upwards of $30 million.
The story began in 2004 when Reginald Nelson purchased a vehicle from Pearson Ford (now Kearny Pearson Ford) in San Diego, CA. The car cost $9,995 and was spot-delivered without financing being secured. The customer also did not have existing auto insurance, so a binder was purchased for $250. This was added to the purchase price of the vehicle as well as some rims that were promised the customer. The insurance binder was on a “due bill,” but it is unclear whether the rims were. (My guess is that the rims were initially on a due bill but, once the approval came through, either the profit was reduced or the structure didn’t meet the approval’s financing restrictions. So, to keep the car on the road, the rims were taken out of the deal.) Six days later, the dealership contacted Reginald asking him to return to the dealership to fill out more paperwork. The paperwork reflected a change in the financing terms per the actual approval received by the dealership and was dated the date the vehicle was spot-delivered. Mr. Nelson signed the new contracts.
In interviews with Mr. Nelson, he says that he repeatedly tried to get the rims he was promised by the dealership but the dealership would not give them to him. Eventually, this led Mr. Nelson to contact an attorney. Unfortunately for the dealer, he contacted Hal Rosner, a consumer-advocate and auto law expert attorney specializing in automobile transactions and dealerships.
Mr. Rosner immediately identified several things that the dealership did that were not in compliance with state laws:
1. The second contract was backdated to the date Mr. Nelson took delivery of the vehicle, not the date in which he signed the new contract.
2. The insurance binder was added to the price of the vehicle, not itemized separately on the contract.
Both of these are violations of the state’s one document rule. Through discovery, Mr. Rosner was able to determine that these violations had occurred many times at this dealership. The 1,500 occurrences that Pearson Ford manipulated were all illegal. “That’s more than once a day for five years that they’re telling people, ‘We gave you the wrong financials,’”said Rosner. “That’s hardly an accident.” Rosner was able to get the lawsuit converted into a class-action in March 2007.
Prior to the class-action trial, Pearson Ford made a settlement offer of $500,000 which was accepted. After the settlement was approved, both sides asked for their attorney’s fees to be paid by the opposing party. The trial court awarded attorney’s fees to Mr. Nelson and denied them to Pearson Ford. Upon further review, the judgment was vacated and trial moved forward.
The initial trial court found no violation save for a “technical violation” and awarded restitution in the amount of $50 per class member ($75,000). Both parties disagreed with the ruling (for different reasons) and it was taken to the California State Court of Appeals.
The California State Court of Appeals found that both actions described above were, in fact, violations of the Automomobile Sales Finance Act, the Unfair Competition Law and the Consumers Legal Remedies Act by backdating the contract and including the insurance in the cost of the vehicle, effectively costing Mr. Nelson an additional $27 in interest plus the sales tax on the $250 insurance binder wrapped into the vehicle purchase price (then approximately $19). This ruling effectively will give the 1,500 class members the right to have their contracts rescinded.
Keep in mind that these contracts are at least 7 years old, some much older. Assuming some of these vehicles were used at the time of purchase, this dealership will have to buy back contracts IN FULL for vehicles that could be 10+ years old.
I personally know that the practice of backdating contracts is common in Cailfornia, as is wrapping in insurance into the purchase price. In the past 3 years or so, dealers have slowly been changing those practices, but this ruling sets a dangerous precedent. I’m sure there are plenty of civil attorneys itching to get their hands on a consumer with a backdated contract right now.
This story started as a credit challenged consumer, with no car insurance, that wanted some rims for the 1998 Infiniti I30 that he bought from the dealer. This vehicle was already 6 years old when he purchased it. Had the dealer honored their promise to the consumer and given him his rims, legal action probably would never have happened. Once legal action happened, the dealer argued against paying the plaintiff’s attorney’s fees on top of an accepted settlement offer.
Those rims and $46 ultimately put the dealership on the hook for an estimated $30 million.
Those have got to be the most expensive rims in history.
Click here for ABC news 10 story: Pearson Ford Ordered to Buy Back Over 1,500 Vehicles
