Ford store's backdated contracts weren't improper, court rules
A Ford store in Riverside, Calif., didn’t violate the state’s Automobile Sales Finance Act when it backdated replacement contracts for finance deals rejected by lenders, the state Supreme Court unanimously ruled.
The dealership did violate the law, though, when it disclosed inaccurate smog fees, according to the court. Even so, customers aren’t entitled to rescind their contracts, the court said, because a computer error was responsible and because the store refunded the incorrect fees with interest.
The backdating controversy involved more than 1,100 situations in which Raceway Ford was unable to assign purchasers’ initial contracts to third-party lenders, according to the decision. Those customers rescinded their original contracts and signed replacement ones with different financing and sales terms.
The store backdated the second contracts to the dates of the first ones. That meant interest under the second contracts was charged from the date of the first contracts.
But there was no loss to consumers or disclosure of incorrect annual percentage rates because the store’s software automatically changed the loan termination dates as well, said Raceway Ford lawyer Kellie Christianson of Costa Mesa, Calif.
In an opinion written by Justice Goodwin Liu, the California Supreme Court said that plaintiffs “were first extended financing and allowed to take possession of the vehicle on the date of the first contract. It is neither abusive nor deceptive to allow the creditor to charge interest during the period between the first and second contracts.”
While use of the initial contract date to calculate the annual percentage rate on a second contract “appears inconsistent with Regulation Z,” the court said, the disclosures on the second contracts “do not necessarily violate Regulation Z.” That’s because the new APRs may have fallen within the one-eighth of 1 percent margin of error that Regulation Z allows. In addition, the court said, Regulation Z permits creditors to ignore short or long first-payment periods in their APR disclosures.
The plaintiffs did not dispute that the APRs in the second contracts “may be accurate within the tolerances allowed by Regulation Z,” the court said.
The court found “nothing improper” when the finance charge in a second contract includes interest accrued under the first contract because that’s what the borrowers initially agreed to pay.
Christianson called the decision “great news for car dealers” and said dealerships had adopted the backdating practice at the request of lenders concerned about their own liability if a financed vehicle were involved in an accident during the first contract period.
She also said the new ruling is important because it reversed a conflicting precedent opinion under which many California dealerships had settled consumers’ backdating suits.
But plaintiffs’ lawyer Hallen Rosner, of San Diego, said the Supreme Court “continues to be highly anti-consumer” and “has destroyed” the Automobile Sales Finance Act because “less than a handful” of law firms in the state handle such suits for consumers. “Allowing a dealership to blame the computer -- here clearly untrue -- will pretty much scare all attorneys from taking these cases,” he said.
The second aspect of the Supreme Court decision involved 44 purchasers of diesel vehicles who were erroneously charged fees and taxes for smog checks and state smog certification. Only gasoline-powered vehicles are subject to those fees, and Raceway Ford refunded the full amount when it learned of the error, the court said.
The smog fees were not hidden from the purchasers and the finance act violation was accidental, the court said, adding: “To allow the plaintiffs to now rescind their contracts after what could be years of using the vehicle would be to give them an undeserved windfall at the dealership’s expense and in disregard of the true intent of the legislature.”
Rosner called that part of the ruling inaccurate because his clients didn’t receive full refunds until more than nine months into the litigation.
The question of attorney fees remains on appeal, he said.
Christianson said the plaintiffs, who lost at trial, are already on the hook to Raceway Ford for $1.5 million in attorney fees and said the store probably will seek more fees for the appeal.
“We defended to the end,” she said. “Twelve years of litigation is hideously expensive.”
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