The Scali Law Firm Defeats Class Certification in Fee Lumping Class Action

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What happened?

On Tuesday, October 22, 2013, Judge Jed Beebe in the Santa Barbara County Superior Court denied Arturo Martinez’s motion for class certification against Santa Maria Ford for alleged DMV fee lumping violations under the Automobile Sales Finance Act (ASFA) and the Unfair Competition Law (UCL). A copy of the trial court’s decision can be found here.

What lead to the filing of the lawsuit?

In May 2006, Arturo Martinez bought a used car from Santa Maria Ford. The purchase was financed by Wells Fargo Dealer Services. Martinez alleges that when he tried to trade in the car nearly four years later, he was told that it was a prior rental and that it had been damaged and repaired before he bought it from Santa Maria Ford; and he alleged that neither fact was disclosed to him. Without first addressing his concerns to the dealer, he went to Rosner, Barry & Babbitt.

What was the class claim?

On the eve of the fourth anniversary of his purchase of the vehicle, in May 2010, Martinez filed a class action lawsuit against Santa Maria Ford and Wells Fargo, seeking damages and rescission of four years worth of retail installment sale contracts (RISC) under the ASFA, the Consumers Legal Remedies Act (CLRA) and the UCL. The claim was that Santa Maria Ford improperly disclosed the registration/transfer/titling fee on Line 2.B. of the RISC as “N/A” and included the actual registration/transfer/titling fee owed to the DMV in connection with the transaction on Line 2.A. of the RISC, which is reserved for the disclosure of license fees owed to the DMV. Notably, Martinez didn’t dispute that the form accurately disclosed the sum that was paid to the DMV; nor did he dispute that the sum was owed to the DMV as the result of his purchase. His sole complaint was that the sum should have been disclosed on two different lines on the form, rather than added together on a single line.

How was it handled?

Over the next three years, Santa Maria Ford aggressively defended the case. First, consistent with past successes of the dealer’s counsel, the dealer attempted to obtain an early dismissal at the pleading stage. Failing that, the dealer and Wells Fargo brought a pre-certification motion to summarily dismiss Martinez’s fee lumping claims on the grounds that: (1) he lacked standing to prosecute a UCL claim because he had not been injured as a result of the alleged violations, and (2) his ASFA and CLRA DMV fee lumping claims were barred by the one and three year statutes of limitations, respectively, because he knew or should have known of his claims when he bought the car four years before. Santa Maria Ford argued that if Martinez’s individual ASFA, CLRA and UCL claims had no merit for these reasons, then he could not represent the class and the class action should also be dismissed.

The result of that motion was mixed. The trial court granted the motion with respect to the CLRA statute of limitations argument, correctly finding that the statute of limitations on such claims was only three years and since Martinez waited nearly four years before filing his claim, the CLRA claim was barred. This defect, the court reasoned, infected the CLRA class claim, resulting in its dismissal. But the trial court also found that Martinez could have been damaged by the alleged unlawful conduct and also applied a four year statute of limitations to the ASFA claim.

Santa Maria Ford and Wells Fargo filed an interlocutory appeal. Jonathan Morrison of the California New Car Dealers Association (CNCDA) filed an amicus brief on behalf of the CNCDA. The court of appeal summarily rejected the appeal and the dealer and Wells Fargo petitioned the California Supreme Court for review, which review was denied. The issues presented by that appeal were preserved so they could be raised again, if necessary, after a judgment is entered in the trial court. This is important due to the September 25, 2013 unpublished decision in Tiffini Harrelson v. Carmax Auto Superstores California, LLC, in which the Fourth District Court of Appeal found that the one year statute of limitations applies to claims under the ASFA, a harbinger of the result of any appeal of that issue in this case.

After that effort, Martinez amended his complaint to add a state-wide class action against Wells Fargo, independent of the claims against Santa Maria Ford. Mr. Barry attempted to bring other dealers into the dispute by subpoenaing their records and taking depositions. When that effort failed to produce satisfactory results, Barry brought a class certification motion against Santa Maria Ford and Wells Fargo.

What are the details of the class certification ruling?

Addressing the UCL class claims, Judge Beebe reasoned that the commonality and predominance elements of class certification were not met due to the uncontradicted evidence by the dealer’s F&I Manager that he discloses to all customers what “N/A” means on the RISC and that he informs every customer that the registration/transfer/titling fees are included in the total DMV fees. This, the court reasoned, was evidence that no customer had suffered actual economic injury, a necessary element to any UCL claim or, at the very least, would require mini-trials for each customer to determine whether they understood that their registration/transfer/titling fees were included in the total amount of DMV fees owed and paid on their purchase.

Turning to the ASFA claim, the court reasoned that this very same evidence precluded class certification. The court rejected plaintiff’s strict liability argument that since the disclosure of “N/A” appears on the face of the contract, the inquiry stops at the face of the contract. Rather, the court adopted Santa Maria Ford’s argument based on Brinker v. Restaurant Corporation v. Superior court (2012) 53 Cal.4th 1004 and Rojas v. Platinum Auto Group (2013) 212 Cal.App.4th 997. Specifically, Brinker stands for the proposition that merits issues must be resolved in the context of class certification when certification depends on disputed threshold legal or factual issues. And Rojas supports the proposition that the substantial compliance doctrine is a defense on the merits to a government fee lumping claim. Specifically, the dealer argued that the F&I Manager’s testimony, above, and the DMV clerk’s testimony, that it is not possible to determine in advance the exact amount of DMV fees owed in each transaction, is relevant and admissible in analyzing application of the substantial compliance doctrine and this testimony creates a genuine material issue about whether Santa Maria Ford substantially complied with ASFA despite the use of “N/A” on the RISC, necessitating focused and particularized inquiry on an individual basis, which defeats the commonality element of class certification.

Martinez argued that Nelson v. Pearson Ford (2010) 186 Cal.App.4th 983 and Lewis v. Robinson Ford Sales, Inc. (2007) 156 Cal.App.4th 359 stand for the proposition that oral communications are irrelevant to determine ASFA liability. The court disagreed. It found that in contrast to Nelson where the true costs were hidden from the consumer, based on the F&I Manager’s uncontradicted testimony, here, the true costs were disclosed to the consumer. As for Lewis, the court found this case is factually distinguishable. “In Lewis, the evidence showed that only some of the customers were told about the adjusted cash prices. Here, by contrast, all customers were told about the government fee lumping. Additionally, unlike Nelson, there were no hidden taxes or fees associated with the use of ‘N/A.’ And as was true in Nelson, nothing in Lewis suggests a universal rule that oral disclosures are irrelevant in the ASFA context. Lewis is a slim reed on which to support the contention that oral conversations are universally irrelevant.”

Next, the court turned to the class certification element of superiority. It adopted Santa Maria Ford’s argument under Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 446 that a class action in Martinez’s case, either under the UCL or the ASFA, would not provide any more benefits than individual action, and would, in the end, simply clog the court by requiring mini-trials for each putative class member on the issues of liability and damage.

Why is this case important?

In recent years, the substantial compliance doctrine has received some criticism as a defense to ASFA claims, first in Nelson v. Pearson Ford (2010) 186 Cal.App.4th 983, then in Rojas v. Platinum Auto Group (2013) 212 Cal.App.4th 997. In this case the court held that at least in DMV fee lumping claims, the substantial compliance doctrine is a valid basis on which to defend on the merits.

This decision is also important because it provides a roadmap for distinguishing Nelson v. Pearson Ford (2010) 186 Cal.App.4th 983 and Lewis v. Robinson Ford Sales, Inc. (2007) 156 Cal.App.4th 359; two cases consumer attorneys often use to obtain class certification against auto dealers in California. And it further provides guidance on how to defeat class certification of ASFA rescission claims on the ground that the class action paradigm is not superior to individual actions.

What should dealers know if they get sued in a class action?

When selecting counsel to defend you in your class action, care should be taken to interview and hire an attorney that has a demonstrated track record of resolving these cases early and, when that cannot be done, has a record of defeating class certification. Some California dealer attorneys claim to be class action litigators, but very few have defeated firms like Rosner, Barry & Babbitt at class certification by convincing a court in the class certification battle of the lack of merit of their claims.

Consistent with our track record and philosophy of assessing risk and obtaining a favorable resolution early in a case, we attempted to do so here. In past cases, we have been very successful in obtaining dismissal of class claims at the pleading stage and negotiating favorable dealer settlements with insurance company funds, devising strategies to gut a class claim to make it unattractive for a plaintiff to proceed with it or simply marshaling the evidence, when appropriate, and presenting a case to the plaintiff’s counsel to establish that it has no merit.

Complicating factors in this case included: (1) an initial trial judge who went outside the facts provided by the parties to deny summary adjudication which, if granted, would have ended the class claims, (2) an aggressive plaintiff’s counsel who insisted on dragging the lender into the case on class claims independent of those against the dealer and refused to settle without compensation from the lender, (3) a lender that refused to waive its defense fees against the dealer; an impediment to the dealer's ability to settle with the customer, and (4) an insurance company that filed a lawsuit against the dealer for declaratory relief in federal court for an order that it did not have a coverage or defense obligation. Nonetheless, we defeated class certification, effectively eviscerating plaintiff’s case.

What are the lessons of this case?

  • Know your rights against your carrier. Have your policy reviewed by a knowledgeable coverage attorney. Discuss your policy with your broker in detail. Many carriers have been slipping language into their Truth-In-Lending Errors & Omissions Coverage Parts, their Supplemental Payments coverage parts, their definitions and other relevant sections of these policies for years aimed at eliminating coverage for ASFA claims. Additionally, some policies limit your right to counsel of your choice to defend you. However, class actions often go back for a four year period and seasoned and knowledgeable counsel can develop a successful argument to obtain coverage. In class actions, it is more important than ever to insist on your right, either under the policy or state law, to have your own counsel represent you, especially when coverage is going to be disputed and may be a strong impediment to resolution. Additionally, when rescission is a statutory remedy available under the ASFA, if the plaintiff is successful at convincing a judge that rescission is an available remedy in an ASFA class action, the result could be devastating for a dealer who is without coverage.
  • Know your rights against your lender. Lenders often include language in their dealer agreements requiring the dealer to defend and indemnify it in the event of a lawsuit involving the lender. But this language can be negotiated and you may be able to obtain a provision that gives you the sole right to select counsel for that defense, provided certain other protections are in place for the lender. This is important to minimize both the expense of litigation and a potential impediment to settlement. Contractual indemnity obligations are not covered by insurance, so you would be on the hook for any defense fees incurred by the lender to defend the case. In class actions, that could be well into the six figures and may serve as an additional impediment to settlement or at least greatly increase the cost of settlement.
  • Know your exposure. Many of the types of class actions that are brought under the ASFA can be made moot by auditing your deal files and correcting any violations you see. While an audit involves some time and expense, that inconvenience pales in comparison to the cost of a class action. Contact knowledgeable counsel on how to minimize your exposure to class claims under ASFA.

Who represented the parties in this case?

Santa Maria Ford was represented by Christian J. Scali of The Scali Law Firm and plaintiff, Arturo Martinez, was represented by Rosner, Barry & Babbitt’s Christopher “Hawk” Barry. Wells Fargo was represented by Mark D. Lonergan and Mary Kate Sullivan of Severson & Werson.