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California New Car Dealers Association
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1415 L Street, Suite 700 ◦ Sacramento, California 95814 ◦ Office: 916.441.2599 ◦ Fax: 916.441.5612 ◦ www.cncda.org

April 17, 2009

The Honorable Christine Kehoe Chairperson, Senate Appropriations Committee State Capitol, Room 5050 Sacramento, California 95814

Re: SB 95 (Corbett),
As Amended April 14, 2009 –
Dealer Bonds & Trade-in Vehicles Position: OPPOSE Hearing: Senate Appropriations Committee, April 27, 2009

Dear Senator Kehoe:

The California New Car Dealers Association (CNCDA) is a statewide trade association that represents the interests of over 1200 franchised new car and truck dealer members.

CNCDA members are primarily engaged in the retail sale and lease of new and used motor vehicles, but also engage in automotive service, repair and part sales. We are writing in opposition to SB 95 because it interferes with the implementation of the Consumer Motor Vehicle Recovery Fund which will provide financial relief to consumers harmed by insolvent dealers.

In addition, we oppose the bill because it would inhibit the free flow of commerce through excessive restrictions on the sale of trade-in vehicles, and cause many dealerships to close because of unnecessary changes to dealer bond requirements.

With respect to the bill’s fiscal impact, the Department of Motor Vehicles (DMV) is likely to incur significant costs in implementing and monitoring the provisions of SB 95.

Our opposition to the measure is more fully explained below.

SB 95 is the Wrong Solution Due to the current severe recession, our dealer members sold fewer new and used vehicles than at any time since 1994.

Nevertheless, California’s new car dealers sold over 2.5 million new and used vehicles in 2008 (1,447,460 new and 1,067,068 used) with around 60% of those transactions involving trade-ins. (1.5 million trades-ins).

According to the DMV, the number of consumer complaints involving a dealer’s failure to pay off a trade-in has risen significantly from prior years.

As of the end of February 2009, DMV advises us that it was investigating 256 active cases where a dealer failed to pay off a consumer’s trade-in and 564 additional complaints from consumers that, for one reason or another, had not yet received verification that title to a vehicle bought or sold had been transferred.

CNCDA cannot condone any case in which a dealer fails to honor a legitimate obligation to pay off a vehicle taken in trade.

However, as the above-numbers illustrate, 99.9% or more of trade-in transactions take place without incident.

We must oppose any measure that would slow the trade of commerce for legitimate trade-in transactions and/or unnecessarily tie up valuable dealer working capital.

Moreover, there are legitimate reasons why a dealer may not payoff a trade-in vehicle, e.g., the trade-in customer bounces a down payment check; intentionally or unintentionally misrepresents the amount of the pay off balance at the time the vehicle is traded; switches out equipment or accessories on the trade-in vehicle in between the time it is appraised and traded-in, etc.

Two years ago CNCDA actively supported legislation authored by Senator Padilla to create the Consumer Motor Vehicle Consumer Recovery Fund (the “Recovery Fund”) [SB 729, Chap. 437, Stat. of 2007].

Under the provisions of SB 729, if an insolvent dealer fails to pay off a trade-in, an injured trade-in consumer can apply to the Recovery Fund for payment of up to $35,000.

Commencing July 1, 2008, every dealer in the state started paying $1 per vehicle sold into the Recovery Fund which now has a balance over $720,000.

Although political appointments to the Recovery Fund’s board took longer than anticipated, each vacancy has been filled, the Recovery Fund is now up and running and consumers can file claim forms to seek relief (http://www.dmv.ca.gov/pubs/olin/09_olin/09olin06.pdf).

Despite any past delays, no consumer has been prejudiced since any claim incurred on and after July 1, 2008 will accrue until paid.

Creating cumbersome restrictions on all trade-in transactions and imposing disproportionate penalties on all dealers because of the insolvency of a minority of dealers is the wrong solution for the trade-in problem.

The Recovery Fund should first be given an opportunity to succeed and, if necessary, be modified to ensure its success.

Trade-In Vehicles
Proposed Vehicle Code Section 4456.5.

Proposed Vehicle Code Section 4456.5 is supposedly designed to protect consumers in the event that a dealer breaches its contractual obligation to pay off a prior balance owing on a vehicle taken in trade.

However, the breadth and vagueness of the provision would lead to innumerable unintended and harsh consequences.

The proposed statute is triggered and takes control in every possible situation when a dealer “purchases” a used vehicle “with a balance due to a secured party.”

This goes well beyond acceptance of a trade-in with a prior credit or lease balance, and would extend, for example, to the following situations:

1. Purchase of a used vehicle with a clean title from another dealer but where the selling dealer’s used vehicle flooring lender has not been paid for the vehicle (Note: the statute does not require that the security interest of the “secured party” be perfected on the title, or otherwise, such as by a UCC-1 filing).

2. Purchase of a used vehicle with a clean title from another dealer but where the selling dealer’s landlord claims its lease with the dealer gives it a security interest in personal property located on the premises.

3. Taking a trade-in vehicle with a clean title but the customer failed to disclose that his uncle was given a promissory note secured by the vehicle to document a loan the proceeds of which were used to originally purchase the vehicle.

4. Purchase of a used vehicle from a major auction and with the warranty and representation of the auction and vehicle seller that the vehicle is free and clear of security interests, but the selling dealer’s used vehicle flooring lender later claims a security interest in the vehicle.

5. Purchase of a vehicle via lien sale under a mechanic’s lien for parts and labor furnished to repair a vehicle, where some form of security interest, unknown to the dealer, is claimed on the vehicle, and notwithstanding existing law intended to set appropriate priority between mechanic’s lien holders and other secured parties. See, e.g., Civil Code § 3068.

Once triggered, the statute obligates the dealer to pay off “the entire balance” before the earlier of (a) “transferring the vehicle” or (b) “when payment is due.”

Again, the breadth of this aspect of the statute creates harsh and unnecessary consequences.

A dealer would be required to make payment by the time “payment is due,” even though the dealer was never a party to the payment obligation and most likely never was informed of payment due dates, let alone being provided with a copy of the security agreement.

This would be true in almost all forms of vehicle acquisition, whether by trade-in or any other scenario where a third party claims to be a secured party with an interest in the vehicle.

In practical terms, requiring a dealer to pay off a vehicle by the “due date” would place dealers in violation of the statute the instant they accepted a trade-in vehicle, as most retail installment contracts are accelerated by their terms the moment the owner transfers ownership of the vehicle.

Unless the secured party was paid the moment the customer turned over the keys of the trade-in to the dealer, the dealer would be in violation of the statute.

It is unreasonable to impose satisfaction of a contractual commitment upon a dealer who never had an opportunity to negotiate or even read the commitment.

Nevertheless, by this unknown and perhaps unknowable due date, the dealer would be obligated to make “payment in full.”

Again, the dealer would be saddled with the full burden of a contractual commitment that was not of the dealer’s making.

As a result, the dealer is entirely at the mercy of the secured party, and in practical terms would be obligated to pay whatever the secured party claimed is owed.

The requirements that the dealer make “payment in full” by the “due date” also allow the statute to be used as a means of trickery and fraud.

For example, an unscrupulous dealer could defraud a purchasing dealer into believing that there was only a nominal payoff owing on a used vehicle.

But once the vehicle is “purchased,” the purchasing dealer becomes obligated to make payment in full of the actual amount owing to the secured party by the due date.

That payment – and the ability to tell the secured party that a new obligor is on the hook – may be just what the unscrupulous dealer needed to keep its doors open another day, or make payroll.

Any later claim or lawsuit by the purchasing dealer complaining of fraud against the selling dealer would be ineffective if the seller were insolvent or the debt otherwise uncollectable.

The example in the preceding paragraph demonstrates that the statute as drafted constitutes a wholesale shift of risk to otherwise innocent purchasing dealers and away from secured parties and vehicle sellers – businesses who are in much better positions to protect against such risk.

The statute is not reasonably limited to protecting used vehicle purchasers or trade-in customers.

By imposing strict liability on a dealer for an undefined amount of money by virtue of the dealer’s merely engaging in a lawful act, the statute strains if not violates constitutional due process protections.
See Gibbs v Tally
(1901) 133 Cal 373, 65 P 970
(statute imposing personal liability on property owners violates §1, Article 1, of the California Constitution).

Finally, the proposed statute requires a “notarized receipt” to evidence payment in full having been made to the secured party, and that the receipt be submitted to DMV prior to selling or transferring the vehicle.

The bill leaves to the imagination the form of such a receipt, the time frame within which it would be returned (keeping in mind that the secured party has the right to “payment in full” of all charges up until the time the receipt is returned to the dealer), the manner DMV would want it submitted, and how DMV would provide evidence of submission back to the dealer.

While waiting for these steps to take place, the dealer would need to not only refrain from transferring the vehicle – which might also be interpreted to prevent the dealer from transferring even a security interest in the vehicle to the dealer’s used car flooring lender.

Moreover, it would drain dealers of much needed working capital while they waited around for the lienholder bank or financing company to forward it a notarized receipt.

Used vehicle inventory is a wasting asset that rapidly depreciates in value.

Dealers need the ability to sell trade-in vehicles as soon as they tender the pay off to a lienholder.

The fiscal effect of these provisions on the operations of the DMV cannot be underestimated.

Since dealers would be prohibited from selling or transferring vehicles until notarized receipts have been received by the DMV (and presumably communicated back to the dealer in some fashion) this will mean DMV will have to create a mechanism to track and monitor the disposition of hundreds of thousands of transactions to ensure liens have been paid and the proof received.

In light of DMV’s efforts to comply with federal REAL-ID requirements and other regulatory and statutory responsibilities, the Department is ill-equipped to take on this new, expensive, and poorly defined, responsibility.

Proposed Amendment of Civil Code

Section 1770. SB 95 would amend the Consumers Legal Remedies Act (CLRA) to make a violation of proposed Vehicle Code Section 4456.5 a violation of the CLRA.

CNCDA opposes an expansion of the CLRA, especially to incorporate a provision that is as defective as proposed Vehicle Code Section 4456.6.

Dealer Bond Provisions Vehicle Code Section 11710 currently sets the dealer bond at $50,000
(it was increased from $10,000 to $50,000 in 2002),
$10,000 for motorcycle dealers and $10,000 for wholesale dealers that sell fewer than 25 vehicles per year.

Vehicle Code Section 11711 currently permits any person that suffers loss or damage with a cause of action against the dealer, salesperson involved, and surety under the bond for amounts up to the value of the vehicle purchased or sold by the dealer arising from
(1) violations of the dealer’s written stipulation or guarantees that have been violated in the context of fraud or a fraudulent representation;
(2) violation of Division 3 of the Vehicle Code (Registration of Vehicles and Certificates of Title), or
(3) non-payment for a vehicle sold to a licensee.

Vehicle Code Section 11710 also gives statutory preference to claims filed by DMV over all claimants and preference to claims filed by consumers over those filed by other licensees.

Vehicle Code Section 11722 gives statutory preference to claims filed by DMV, consumers and licensees over claims file by a finance agency, unless the finance agency was defrauded by the licensee.

SB 95 would amended Vehicle Code Section 11710 to double the amount of an of the current dealer bond from $50,000 to $100,000.

Raising the bond to $100,000 would force many honest dealers out of business simply because no surety company would issue them a bond.

Last year Rhode Island increased its dealer bond from $15,000 to $100,000 and by emergency order issued
February 13, 2009
was forced to lower it to $50,000 because many dealers found it impossible to obtain a $100,000 bond.

http://www.sec.state.ri.us/rules/index.php?page=details&erlid=5595.

Unfortunately, SB 95 goes well beyond an increase in the dealer bond.

The bill would also amend Vehicle Code Section 11711 to eliminate its current limitation on liability (the value of the vehicle) and replace that limit with a provision imposing liability for “actual damages plus any incidental and consequential damages.”

Moreover, the grounds for liability would be greatly expanded to cover not only fraud, but any contract or statutory violation related to the retail purchase or lease of a vehicle, or any violation related to vehicle registration or titling.

These expansive new causes of action against a dealer bond would result in the following:

1. Private Right of Action for Every Statute.
SB 95 would create a private right of action for every single federal and state statute to which a dealer is subject during the sale of a vehicle – not only consumer protection statutes, but all others as well. This amounts to a wholesale repeal of California limiting certain private rights of action under California statutes.
See Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 305, and federal law with respect to federal statutes.
Gonzaga Univ. v. Doe (2002), 536 U.S. 273, 284 n. 3, absent clear legislative intent to create a private right of action.

2. Expanded Damages Recoverable for Every Statutory Violation.
Even as to statutes that make limited damages and/or injunctive relief available for private rights of action, this overly broad statute would strip away those limitations by allowing recovery in every case of actual, consequential, and incidential damages.
For example, the Song-Beverly Consumer Warranty Act (commencing with Civil Code Section 1790) provides in Civil Code Section 1792 that the retail seller (and manufacturer) impliedly warrant that goods sold are merchantable. Song-Beverly also provides a comprehensive statutory scheme relating to procedures for obtaining warranty repair and, ultimately, if repair is not appropriately completed, careful defined monetary relief.
Under SB 95, a bond claim could bypass Song-Beverly entirely by alleging the vehicle sold was not merchantable and that therefore the consumer is entitled to immediate payment of actual, consequential, and incidental damages.

Moreover, under the provisions of SB 95, if a statutory cause of action is asserted by a consumer against both a dealer and an auto manufacturer for an alleged warranty violation, the consumer could file a bond claim against the dealer’s surety company, but since auto manufacturers are not required to file bonds, no bond claim could be asserted against the auto manufacturer.

Such a scenario would put a dealer in the untenable position of defending a bond claim without the warrantor of the vehicle being a party to the claim.

3. Expanded Damages Recoverable for Every Contractual Violation.

The statute would dispense with the rule relating to available damages under both contract law and the actual terms and provisions of the contract itself and in every case require damages be available for any “violation” of contract (whether or not cured) equal to actual damages plus any incidental and consequential damages. In this respect, the bill readily supports absurd results, such as damage claims for contract violations that are not material or that result from mistake or are otherwise made in good faith.

4. Expanded Strict Liability For Actions of Rogue Employees.
While the existing statute also makes the dealer (and surety under the bond) liable for certain acts of salespeople, the proposed statute does so under the auspices of its incredibly wide scope of coverage and available damages.

5. No Upper Limit on Claims.

Under existing law, bond claims are not to exceed the value of the vehicle. This limitation establishes a level playing field among bond claimants. Removing this check on the maximum claim will permit bond resources to be exhausted in satisfaction of claims exceeding the value of the vehicle for items such as lost income, lost profits, value of the bargain,replacement transportation, etc. It is easy to see how some claimants may receive zero while others receive windfalls worth much more than the value of the vehicle.

6. Private Adjudication of Disputes Would Predominate.

It was never the purpose of a dealer bond to replace the court system for the adjudication of claims against a dealer. However, SB 95 would channel most disputes with dealers toward the bonding company and away from courts and administrative agencies. With the prospect of universal private rights of action and enhanced damages backed up by bonded sums to facilitate collection it would be malpractice for a plaintiff’s counsel not to file a claim against a dealer bond for any alleged contractual or statutory violation. If enacted, all breach of contract claims, no matter how small or meritorious, and all claims arising out of statute, including all lemon law and other warranty claims, would be filed against the bond.

7. Virtually No Surety Company Would Issue Dealer Bonds.

Given the breadth and scope of causes of actions that could be asserted against a dealer bond under SB 95 and the amount of damages that could be collected, it is doubtful that many bonding companies, if any, would be willing to underwrite the risk of indemnifying dealers under such a scheme. Even without SB 95, the number of bonding companies willing to issue dealer bonds in California has been dwindling. Any surety company willing to issue a California dealer bond would have to adopt strict underwriting guidelines that few dealers would be able to meet and charge premiums that few dealers could afford. Moreover, because dealers are required to replenish the bond every time its value decreases (or face automatic license suspension), the myriad of new bond claims that SB 95 would generate would make it extremely difficult for a dealer to continuously maintain a sufficient bond.

SB 95 would also amend Vehicle Code Section 11711 to exclude DMV licensees from filing claims against a dealer bond by limiting the universe of persons eligible to file a claim to persons who bought or leased a vehicle at retail and who suffered loss or damage related to that purchase or lease. This means that SB 95 would strip dealers of their current right to file a bond claim against another dealer (even a wholesale dealer that sells no vehicles at retail) unless the claim was for a vehicle purchased by a dealer for his or her own use and consumption. There is no justification for such a restriction, especially since dealer claims are already subordinate to claims of consumers and DMV.

The fiscal effect of the dealer bond increase, coupled with the expansion of the scope of claims available against the bonds, will create tremendous administrative and enforcement problems for DMV, at significant financial cost.

Since dealers are required to have a bond at the prescribed statutory amount ($100,000 as proposed), for each successful claim against the bond the DMV will have to monitor whether the dealer has posted cash sufficient to meet the threshold or the dealer has to replenish the bond to the required amount.

This could mean intensive interactions with potentially hundreds or thousands of claims against dealer bonds – a role for which DMV lacks sufficient financial resources.

BOTTOM LINE: SB 95 is poor public policy and would result in a severe contraction in the number of honest dealers that would be able to operate in California; cause thousands of dealership employees to lose their jobs; and, result in less consumer choice and diminished competition.

With respect to its state fiscal effect, the bill will result in significant additional financial costs to the DMV and therefore should be referred to the committee’s suspense file.

For these reasons, we must oppose SB 95 and ask for your “NO” vote when it comes before your for a vote.

Very truly yours,
Brian Maas
Director of Government Affairs
cc: The Honorable Ellen Corbett
Members of the Senate Judiciary Committee
Jacqueline Wong-Hernandez, Consultant, Senate Appropriations Committee
Mike Petersen, Senate Republican Caucus
Ralph Simoni, California Advocates

we could not agree more
well written and on point

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