In a ruling that is a win for dealers, on Tuesday, the Court of Appeal for the Fourth District of California, Division Two, in Raceway Ford Cases, declined to follow Nelson v. Pearson Ford and held: (1) not all backdated contracts violate ASFA, calling into question whether backdating class actions are certifiable; (2) ASFA, the CLRA and the UCL provide no remedies for backdating; (3) the Single Document rule does not apply to backdating claims and is merely a rule of document formatting that has very limited application; and (4) the ASFA is not violated where the parties’ agreement is accurately disclosed, even if the amounts disclosed on the sale contract are not actually owed.
This is a marked departure from Nelson v. Pearson Ford, which is often cited for the proposition that backdating is illegal under California law and always subject to rescission as a class remedy. Raceway beats back Nelson’s unsupported expansion of the Single Document Rule to its legislatively-intended application. And it applies a different approach to statutory interpretation of ASFA to reflect its goal of mandating a sale contract that mirrors the agreement of the parties. Finally, dealers have some respite from the onslaught of judicial opinions that seemingly impose draconian “lights out” remedies for unintentional or unavoidable defects in the form of sale contracts.
Raceway’s several holdings are great news for dealers. But because the Raceway court is a peer of the Nelson court (and not a court that can overturn Nelson – like the California Supreme Court) plaintiffs can still cite to the Nelson decision, allowing a trial court to choose which result it wants to obtain. Accordingly, dealers should be cautioned not to backdate contracts. That said, most trial courts will apply sound reasoning and analysis when given the opportunity and Raceway, as the more recent decision,provides a sound analysis that painstakingly deconstructs Nelson, making it the more logical choice for application by trial courts. Here are its holdings:
Backdating liability is not a given.
Backdating is the practice of dating a rewritten conditional installment sale contract (usually occurring when the dealership is unable to obtain financing under the terms of the original contract within 10 days after the sale) the same day as the original contract. Under Nelson v. Pearson Ford, that practice violates the Automobile Sales Finance Act for which rescission is a remedy.
In Raceway, after a backdating class had been certified and after a bench trial, the trial court applied a blanket rule holding that backdating does not violate ASFA. The Court of Appeal did not agree with the trial court’s analysis and finding. But it nonetheless held that backdating is not always illegal. As a result, the Court of Appeal reversed and remanded the case back to the trial court to determine how best to adjudicate the case given the potentially differing circumstances of the various members of the backdating class, as it is currently defined—thus, suggesting that class certification should be revisited.
Both the Nelson and Raceway courts conducted a statutory analysis of federal and state law that underpins their holdings, which analysis is the sort of thing that gets us automobile dealer lawyers salivating, but is generally boring and uninteresting to dealers, so we do not get into it here. What is important for dealers to know is that the Court of Appeal held that not all backdated contracts are created equal. This is important because backdating cases are usually brought as class actions and to certify a class backdating claim, the plaintiff must establish that the claims of the class are common (i.e., the same). But the Court of Appeal in Raceway held that many circumstances exist in which a second set of disclosures are not required when a conditional installment sale contract is rewritten, which include:
- Where the rewritten contract is identical to the first, except that the APR is reduced with a corresponding change in the payment schedule, no new disclosures would be required at all with respect to the terms of the new contract; and
- Where the rewritten contract is backdated only a short period of time such that the actual difference in the APR calculation caused by the backdating does not exceed a difference of 1/8 of 1 percentage point from the APR on the original contract.
Thus, Raceway’s holding lends support for an argument against class certification of backdating claims. Some commentators may say that these defenses to class certification of backdating claims have existed for some time and Raceway provides nothing new. While it may be true that these defense arguments have existed for some time, we now have a published California Court of Appeal decision saying so, which further limits the discretion that trial courts previously enjoyed to ignore dealer arguments against certification of these claims.
But more importantly, under Raceway, backdating does not cause any injury to the consumer under ASFA. Nelson held that any finance charge accruing with respect to a second or subsequent contract prior to the consummation date of that contract constitutes an “illegal finance charge” in the form of “preconsummation interest.” But the Raceway court declined to follow Nelson and eviscerated its “preconsummation interest” analysis and holding, finding that nothing in Regulation Z prohibits or makes illegal the parties agreement for interest to be calculated from a date prior to the consummation of the contract, opening the door for Raceway’s next holding that ASFA contains no remedies for backdating.
There are no state law remedies for backdating.
Having eviscerated Nelson’s “preconsummation interest” holding, Raceway analyzed whether any state law remedies exist for backdating a contract (assuming the backdated contract constitutes a “refinancing” under Regulation Z or its APR difference falls outside of the 1/8 of 1 percentage point safe harbor) and found none. Specifically, the ASFA does not provide for statutory damages and, under its terms, damages are available for only specifically enumerated violations that are not relevant in this case. Plaintiff argued, under Nelson, that rescission and restitution were available because a backdated contract is unenforceable. Here, again, the Raceway court declined to follow Nelson.
The court acknowledged that under Civil Code § 2983 (part of the ASFA), only violations of section 2981.9 or subdivisions (a), (j), or (k) of section 2982 make a contract unenforceable. But it found that the only disclosure that backdating affects is the APR and APR is not an enumerated disclosure in the ASFA. While improperly disclosed APR is a violation of Regulation Z, which implements the federal Truth-In-Lending Act and is incorporated into portions of the ASFA, Regulation Z is not incorporated into any of those ASFA provisions that would provide the remedy of rescission and restitution.
After finding no backdating remedy in ASFA, the court examined available remedies under the Consumers Legal Remedies Act (CLRA) and the Unfair Competition Law (UCL). Since the court rejected Nelson’s “preconsummation interest” analysis , finding that Regulation Z does not prohibit the parties from contracting for interest to be calculated from a date prior to the consummation of the contract, it found no violation of the CLRA. Following on this logic, the court found no standing under the UCL because payment of “preconsummation interest” is not illegal or prohibited and such payments do not constitute an injury. Accordingly, Raceway upheld the trial court’s finding for the dealership on the CLRA and UCL claims.
The Single Document Rule has narrow application and does not apply to backdating.
The Court also attacked Nelson’s Single Document Rule holding. It noted that “the single document rule is, at bottom, a technical rule about document format – a reading buttressed by the circumstance that it appears in a sentence dictating what font size may be used in the contract….It is questionable whether a formatting rule should have any applicability to alleged inaccuracies in the substance of the document.” The court found four reasons to disagree with Nelson’s expansive view of the single document rule:
- Nelson’s basis for the single document rule violation was the incorrect finding that a misstatement of the APR caused by backdating resulted in illegal “preconsummation” interest;
- The single document rule’s purpose is to facilitate a consumer’s review of the contract, not a third party’s and the consumer who participates in the transaction is presumed to know the date that they are signing it.
- ASFA contains no specific requirement that all information necessary to calculate the APR be disclosed to the buyer; and
- Nelson’s interpretation of the single document rule renders a portion of section 2983 superfluous, specifically, the reference to the disclosure requirements listed in subdivision (a) of section 2982. Statutes cannot be interpreted into meaninglessness and Nelson does so without authority in support of its expansive interpretation.
ASFA violations are limited.
Raceway involved another class for purported violations of ASFA caused by the dealer’s charge for smog fees when no smog fees were due. The class of consumers consisted of used diesel vehicle purchasers. Among the items that ASFA requires to be disclosed are “the fee charged by the seller for certifying that the motor vehicle complies with applicable pollution control requirements,” and “the amount of the state fee for issuance of a certificate of compliance, noncompliance, exemption, or waiver pursuant to any applicable pollution control issue.” The members of this class were charged such fees as a result of a computer error, even though, as purchasers of used diesel vehicles, no smog check was performed by Raceway on their vehicles, nor was any state fee for smog certification necessary back then. While the case was pending, the dealership refunded all of the members of this class the amount of the smog fees, plus an amount equal to the finance charge on those fees. The court of appeal did not disturb the finding that this was a result of a bona fide error. But it provided a roadmap for determining when a disclosure issue is a violation of ASFA and when it is not.
Specifically, Raceway stands for the proposition that where: (1) there are no hidden, undisclosed costs in the sale contract, (2) the amount charged was accurately and explicitly stated in writing, (3) the terms of the deal, including those charges, were accepted by the customers when they signed their contracts, and (4) the only purported inaccuracy in a sale contract is that, the parties agree, if they had more closely considered the provisions regarding those charges at the time of the transaction, the contract they agreed to enter into would have been different, there is no violation of the ASFA. The court distinguished the facts of this case (where the disclosures required by ASFA are made, and are true in the sense of accurately describing the terms of the parties’ agreement, the contract comports with the requirements for the “formalities” of conditional sale contracts – the charges are accurately described, but erroneously included in the contracts), from other cases:
- Nelson. The improperly calculated APR figure disclosed in the contracts at issue provided false information about the transaction – specifically, the cost of credit expressed as a yearly rate – to the customer;
- Bratta. The contract recites that the consumer had paid a cash down payment, but in fact only a promissory note for the amount of the down payment had been executed; and
- Thompson.The disclosures incorporating “phantom” numbers designed to mislead potential lenders, among others, did not come close to describing the true transaction between dealer and buyer.
The wrongdoing in Nelson, Bratta and Thompson described above were all violations of ASFA. In contrast, contracts that accurately disclose the economics of the transaction agreed to by the parties in all respects, does not. The Raceway Ford court went so far as to say “we disagree that a contract can disclose accurately every dollar that is part of a transaction agreed to by the parties, and nevertheless constitute a violation of ASFA disclosure provisions.” In Raceway, despite full disclosure of all items of costs, the members of the class were charged fees that the parties now agree should not have been charged, so the goal of protecting purchasers from excessive charges was not initially achieved. But it does not follow that the “informational purpose of the ASFA was not served.”
It is also important to note that in Raceway, the dealer refunded the erroneous smog charges and the financing on those charges to the customers while the case was pending, which bolstered its position concerning the bona fide error defense and may have insulated it from liability for other consumer protection statutes that were not addressed in the Raceway opinion. But the Raceway court stated that while there is no ASFA violation for the conduct alleged, the consumers may have claims for fraud or under other consumer protection statutes not at issue there, i.e., the CLRA or UCL. But rescission is not a remedy under those other statutes, particularly when it has been judicially determined that the statutory remedy of rescission under the statute of more specific application (here the ASFA), does not apply.
- Do nothing differently than you have been doing, i.e., do not backdate and do not violate the single document rule. Raceway does not overturn Nelson. Instead, it creates a conflict in the districts that will ultimately have to be resolved by the California Supreme Court. It remains to be seen whether this case will be petitioned to the California Supreme Court and whether the California Supreme Court will take the case. If it is petitioned and if it is taken up, it will no longer be citable law, until the California Supreme Court makes its decision.
- Have some relief that your litigation attorneys now have some strong ammunition against certain class claims under the ASFA, particularly some claims brought under the single document rule.
While the purported ASFA violation here was erroneously charging for a smog fee when no smog fee was owed or due on that purchase, this case has broader application to other class claims under the ASFA. Speak with your attorney if you are involved in any of these types of cases to determine whether Raceway provides any defense to you in that case.