Founder and Managing Partner
Attorney of Counsel
Senior Associate Attorney
On December 15th, the California Supreme Court delivered its much-anticipated decision in the Raceway Ford Cases, holding that the practice of backdating second or subsequent contracts did not violate the Automobile Sales Finance Act (Cal. Civil Code §§ 2981, et seq. known as “ASFA”) and that the disclosure of inaccurate smog fees did not entitle buyers to the remedy of rescission under ASFA where the error was an accidental or bona fide error in computation. In so doing, the Supreme Court specifically overturned the Court of Appeal’s decision in the 2010 case of Nelson v. Pearson Ford, which held that the backdating of contracts violated ASFA because it resulted in an illegal finance charge, and also violated ASFA’s “single document rule.” Importantly, the Court also affirmed the large award of attorney’s fees to Raceway Ford on the backdating claims.
Backdating does not result in an illegal finance charge under ASFA
The primary claim asserted by the class plaintiffs in the Raceway cases was that Raceway Ford’s practice of backdating contracts resulted in an illegal finance charge, namely, the interest which accrued between the first contract and the date the second contract was signed. The plaintiffs relied on the Nelson case, which had held that the interest accruing before the second contract was signed was an illegal finance charge and thus in violation of ASFA.
The Supreme Court rejected Nelson’s ruling, holding that the interest which accrued before the second contract was not an illegal finance charge. The court cited the testimony of the plaintiffs’ own expert that the interest which had accrued before the second contract was included in the second contract’s finance charge, and thus the disclosure of the finance charge in the second contract was accurate. The Supreme Court stated that “it is neither abusive nor deceptive to allow a creditor to charge interest during the period between the first and second contracts.” Otherwise, the Court noted, the buyer would be receiving an interest-free loan for the period between the contracts, resulting in a windfall to the buyer not authorized by any statute or regulation.
Backdating does not violate the “single document rule”
ASFA’s single document rule provides that the total cost and terms of payment of a sale must be set forth in one document – the retail installment sale contract. The Raceway plaintiffs contended that one would be required to resort to three documents – the first contract, the Acknowledgment of Rewritten Contract, and the second contract – to ascertain a sale’s total cost and terms of payment. Again, the Raceway plaintiffs relied on Nelson and its holding that backdating violated the single document rule.
The Supreme Court flatly rejected Nelson’s reasoning, holding that the rule was not violated by the practice of backdating. The Supreme Court pointed out that there was nothing in the first contract or the Acknowledgment that was not included in the second (operative) contract, and that in any event the Acknowledgment did not include any additional terms of payment.
Raceway’s erroneous charge of smog-related fees did not entitle the Raceway plaintiffs to rescind their contracts
As the result of a programming error in Raceway’s computer system, many purchasers of diesel vehicles were incorrectly charged smog fees. Those purchasers were later identified and given refunds, including interest, but as plaintiffs in the Raceway cases, they nevertheless contended that the erroneous charge violated ASFA’s disclosure requirements, and sought rescission of their contracts. The Supreme Court held that under ASFA, the remedy of rescission is not available for a disclosure error which is the result of “an accidental or bona fide error in computation,” and that the erroneous smog fee charge in this instance was such an error. Thus, the affected purchasers were not entitled to the remedy of rescission. The Court observed that allowing purchasers to rescind their contracts even after receiving a full refund would unfairly provide them with a windfall.
A return to the original purpose of ASFA
The Court’s decision in Raceway and its overturning of Nelson represent a return to the original purpose of ASFA. The Court noted the twin aims of ASFA – deterring dealer misconduct and avoiding windfalls for plaintiffs – and its ruling was consistent with those aims. As the court stated, “[ASFA] constitute[s] a shield, not a sword, for the use of buyers in proper cases.”
The best practice is still to avoid backdating contracts.
The Raceway decision on the legality of backdating practices is limited to the holding that backdating does not result in an illegal finance charge in violation of ASFA. The Raceway plaintiffs did not advance and the Supreme Court did not rule on the question of whether backdating would violate federal Regulation Z by resulting in the incorrect disclosure of APR. Moreover, there may be backdating practices which violate retail dealer agreements or are yet to face legal scrutiny. With such continuing risks in mind, the best practice is for dealers to avoid backdating altogether.