By Thomas B. Hudson*
During the 2011 Federal Trade Commission Roundtables, consumer advocates railed about the evils of spot delivery transactions. The common dealer practice of entering into a retail installment sale contract with a credit buyer before the dealer identifies the financing source to which the dealer will assign the RISC is illegal, or so the advocates claimed.
Roundtable participants who represented dealers disagreed and claimed that when spot deliveries are done properly, there is nothing unfair or deceptive, much less illegal, in the process.
In 2012, the attorneys general of 32 states seemed to agree with the industry’s position by asking the FTC to regulate the spot delivery practice. We reported the AG’s recommendations in a May 2012 article. As yet, the FTC has not addressed the practice with rulemaking, but the recommendations of the AGs should be considered a “best practice” for dealers engaged in spot deliveries.
One of the AGs’ recommendations was: “Require dealers to offer consumers either a complete unwinding of the deal or credit under other terms, with the consumer having the choice to decide which of the two alternatives to accept, and bar dealers from making any representations to the contrary concerning the consumers’ obligations or rights.”
The failure to carefully review spot delivery practices can lead to trouble. A recent Michigan case is instructive.
Brianna Jefferson bought a used car from United Car Company, Inc. She signed a RISC and a spot delivery agreement. The spot delivery agreement provided that United could unilaterally cancel the RISC if it was unable to assign the contract to a third party or could require Jefferson to sign a second RISC with different terms.
United unilaterally cancelled Jefferson’s contract, repossessed the car, and demanded that she pay a repossession fee and forfeit her down payment. After Jefferson repaired another car so that she would have reliable transportation, United advised her that it had obtained financing.
Jefferson sued United for violating the Truth in Lending Act and Regulation Z. She claimed that United used illusory disclosures in the RISC because, at the time of consummation of the transaction, the disclosures were subject to change or cancellation at United’s sole discretion. Jefferson moved for a default judgment, and the U.S. District Court for the Eastern District of Michigan granted the motion.
The court found that cases in the district support Jefferson’s allegations that a dealer’s use of a spot delivery agreement that allows the dealer to cancel a RISC or substitute a second contract with different terms renders the RISC illusory, in violation of TILA. The court granted Jefferson $1,571 for her down payment, $2,000 in statutory damages, and $4,037 in attorneys’ fees and rescinded the RISC in light of United’s repudiation of the contract by demanding and repossessing Jefferson’s car.
Focusing on the court’s precise holding in this case – that a dealer’s use of a spot delivery agreement that allows the dealer to cancel a RISC or substitute a second contract with different terms renders the RISC illusory – the lesson from this case would seem to be that the spot delivery agreement language would have been acceptable if it had simply permitted the dealer to unilaterally cancel the RISC. However, the agreement was unacceptable, and a violation of TILA, because the dealer had the right to substitute another RISC, presumably with different terms and disclosures, for the cancelled contract. That provision conflicted with the recommendation of the AGs that the buyer be permitted to walk away from the deal if the dealer cancels the RISC.
What does your spot delivery language say? When was it drafted, and by whom? If it wasn’t recently drafted or reviewed by counsel knowledgeable about consumer protection laws, with the recommendations of the AGs in mind, it’s time to schedule another lunch with your lawyer.
Jefferson v. United Car Company, Inc., 2016 U.S. Dist. LEXIS 92657 (E.D. Mich. July 18, 2016).
*Tom Hudson is a partner in the law firm of Hudson Cook, LLP. Tom has written several books and is the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers. He is Editor in Chief of CARLAW®, a monthly report of legal developments for the auto finance and leasing industry. Tom can be reached at 410-865-5411 or by email at email@example.com.