By Thomas B. Hudson*

In the March issue, we reported on the experiences of a young woman who makes her living training dealers in the area of sales and financing compliance. A dealer F&I fellow, not suspecting that she was more knowledgeable about the sales and financing process than he, unsuccessfully tried to pick her pocket in several ways that constituted unfair and deceptive acts and practices and violated federal disclosure laws. We titled the article “A Wolf in Sheep’s Clothing.”

The young woman is the daughter of a good friend of mine. We’ll call her “Mama Wolf.” Shortly after the article appeared, Mama Wolf, who also teaches car dealers about sales and financing compliance, had a dealership experience of her own. Here’s her account:

So… I am the kind of person who likes to drive a car a long time, but my MiniCooper had proved to be unreliable. Since I take this as a personal betrayal, I decided it was time to find a new road partner. I have been eyeing the Audi Q5 for awhile, and I found a very gently used one at the local Audi dealership. My accountant advised me it was time to buy a car in the business name, a new experience for me but I don’t know that it made any difference in the process.

The salesman was actually very good – an older gentleman who figured out quickly that I was making the buying decision (and not my husband, who was with me). He knew the car well and encouraged me to have fun with it on the test drive, and spent a lot of time explaining all the newfangled technology.

But then it was time to deal with F & I.

I told the F & I guy what I do for a living. He pulled out his “menu,” and I told him that while I knew he may have been told he has to go over all the options, I wasn’t interested in most. He seemed personally offended that I didn’t want to buy GAP, but he didn’t try to tell me it was required.

He quoted me an interest rate that I could live with, so we signed the paperwork. He put a temp tag on the car, and off I drove. That was on Friday. On Monday, the F & I guy called me and told me that they hadn’t been able to get me financed at the rate he quoted me, and that the rate would be almost 1.5% higher. He asked when it would be convenient for me to come in to sign a new contract, or, if I preferred, he could send someone to my house with the new contract.

I thought about it for a few minutes and told him that I had signed a contract that I was happy with and that I had not signed a conditional delivery or spot delivery agreement. On top of that, the Dealer Reassignment form was signed and notarized, and he put a temp tag on the car, meaning, at least in North Carolina, that ownership had been transferred, and the car was mine.

He was very quiet, then said he thought a conditional delivery agreement was included in the Buyer’s Order, then asked me again when I could come sign a new contract! I told him I was familiar with the LAW ® Buyer’s Order and that it did not include a conditional delivery agreement. I told him I’d think about it, and maybe call my attorney and talk about it, but since I was happy with my current contract, I didn’t think it would be convenient to come back and sign a new contract any time soon.

About an hour later, the F & I manager called me and said, “Good news! We have a lender at your current rate! No need for a new contract.”

Mama Wolf’s story illustrates a legal point we’ve made in this publication for decades. When a dealer sells and finances a vehicle by having a buyer sign a retail installment contract, the dealer has agreed to sell the car and collect the buyer’s payments until the car is paid for. The dealer may assign the contract to a bank, finance company, or credit union, but if no potential assignee will agree to buy the contract, the dealer is stuck with it unless the dealer has entered into an agreement with the buyer to unwind the deal if no assignee can be found. If the dealer has no unwind agreement, the dealer has no right to undo a deal and must hold the contract and collect the buyer’s payment. In other words, the failure to use an unwind agreement turns the dealer into a buy-here, pay-here dealer.

Her story also makes me wonder. If we give her F&I guy the benefit of the doubt and assume that he wasn’t purposely spotting a car with the intention of pulling the deal back in and bumping the rate on the buyer, then we are left with a couple of conclusions.

Conclusion #1 – This F&I fellow doesn’t understand the most basic aspect of dealership financing, namely that the dealership is the initial creditor in a car sales and finance transaction.

Conclusion #2 – Here’s an experienced F&I operator who has not read and committed to memory the terms and conditions of the retail installment contract he is asking buyers to sign. He simply doesn’t know what is and (more importantly in this case) what isn’t in the contract. He ought to know that contract’s terms backward and forward.

The lessons for this dealership? If the dealership is unwinding deals without the legal authority to do so, chances are it hasn’t had a legal review of its operations recently. And, if the dealership’s experienced F&I folks are as clueless as this fellow is, spending a few bucks on F&I training seems like a no-brainer. It just might keep the wolf from using the dealership as its prey.

* Tom is the CEO of CounselorLibrary.com and Of Counsel 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 thudson@hudco.com.

By Tillman Y. Coffey Fisher & Phillips LLP

Link to Article

When it comes to a dealership’s legal liability for employment-related problems, the basis of the liability generally falls in two categories – actions the dealership took and those it failed to take. And, when it comes to big dollar jury awards and settlements, a dealership’s failure to take immediate and appropriate action generally is a more significant factor than the inappropriate conduct itself. The law recognizes that an employer cannot control the actions of its employees 24/7. By the same token, the law (and juries) also understand that employers can control their responses when they know or should know about a problem. There is little sympathy for an employer who was ware of but still allowed a rogue employee to harm others. In many cases, the failure to act is viewed as the employer’s acceptance of the bad conduct and a disregard for employee safety and well-being.

To understand this basic principle, one need only consider the ongoing situation involving General Motors and the damage and harm allegedly caused by faulty ignition switches. Unfortunately, some deaths and damage are linked to these switches. Not surprisingly, the news coverage, congressional hearings and overall criticism have not focused on the switches themselves but rather on GM’s alleged failure to fix the problem when it first learned about it. Among other factors, GM’s alleged failure to act in a timely and appropriate manner will have a significant financial and reputational impact on GM, especially if the evidence supports the claim that the “fix” could have been easy and cheap.

In the employment law context, most “fixes” are easy and cheap. Two recent cases, while nowhere near as serious as the GM situation in relative terms, illustrate how a proper response influences the outcome. In one case, the EEOC sued a dealership after several male employees alleged that for several years, a manager had repeatedly made sexual comments to them, invited them to have sex and engaged horseplay of a sexual nature. The lawsuit also alleged that management not only knew about this conduct but in fact actually encouraged the conduct. Discipline or discharge would have been an easy and cheap fix to this problem but the dealership allegedly did nothing. The dealership’s failure to act resulted in a $2 million settlement. If the conduct occurred as alleged, perhaps the dealership did not find it objectionable based on a belief that it was nothing more than boys being boys (locker room stuff) and that such conduct is to be expected in the business. (Ask yourself, how many sales would it take to recover the $2 million?)

On the other end of the spectrum, a dealership prevailed in a case where the evidence established that it took immediate and decisive action upon learning of allegations from a customer that one of its employees allegedly touched and tried to touch her. The alleged incident occurred when the salesperson was taking the customer home after she dropped off her car for repairs. When the customer reported the incident the following day, the dealership immediately fired the salesperson. The customer sued the dealership for negligent hiring, and mental anguish under a theory that the dealership was responsible for the employee’s actions. The court disagreed, finding no evidence that the dealership had any reason to expect that the salesperson would engage in conduct of this nature or that the alleged conduct was within the scope of the salesperson’s employment.

Had the dealership not acted so decisively in response to the customer complaint, the outcome likely would have been different. Under the law, a theory of liability exists referred to as “ratification.” Under this theory, an employer may be held liable for their employees’ actions that fall outside the scope of their employment, if the employer knew or should have known about the conduct and took no steps to stop it. An employer’s failure to act in those situations may be seen as its approval or ratification of the inappropriate conduct. Conduct that is clearly outside the scope of someone’s duties, such as trying to touch a customer’s leg, can become the employer’s responsibility if it fails to act when it learns of the inappropriate conduct.

Similarly, had the salesperson had a history of bad conduct of this nature, the outcome likely would have been different. For example, an employee hired with a history of conduct issues exposes the dealership to a claim for negligent hiring if the dealership knew or should have known about the problems at the time of hire and the employee repeats the conduct. Potential claims for negligent supervision and negligent retention also exist if the dealership fails to properly address problems caused by employees. The basic legal theory for each of these claims is that the cause of the harm to employee was the employer’s action (hiring a known “bad guy’) and inaction (failing to address a bad guy’s conduct through appropriate discipline or discharge). In short, if the bad guy did not work there, the harm would not happened.

The news is not all bad. The law offers several “carrots” to employers to encourage them to take appropriate actions before and after a problem arises. Appropriate policies and enforcement of same may eliminate or lessen the availability of punitive damages. The implementation of an effective no harassment policy, manager training on the policy and appropriate enforcement of the policy provide a defense in many harassment cases. Effective and documented investigations by someone trained to conduct investigations of these matters also in important. Hiring procedures and disciplinary policies that screen out or remove problem employees from the work place, even those who are high producers, also decrease the risks of negligence claims.

In almost every situation, the fix was or is relatively easy and inexpensive. Conversely, failing to take appropriate action can be expensive and disruptive and result in harm to others. For this reason, smart employers recognize that failing to respond is not an option.

This article was originally published on GADA.

By Catharine S. Andricos*

As a compliance attorney, I often advise clients about the need to limit their advertising claims and contractual promises. In a world where such limitations must be clear and conspicuous, it can be tricky to draft effective disclaimers. However, when it comes to disclaiming implied warranties, state law (in most states) simplifies things by providing that a dealer can disclaim the implied warranties of merchantability and fitness for a particular purpose by using the words “as is,” “with all faults,” or other language that, in common understanding, calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty. Even when a dealer uses these words, however, there are times when an implied warranty disclaimer may not be effective.

First, a number of states prohibit dealers from disclaiming implied warranties. In these states, there are no words a dealer can use to overcome this prohibition.

Second, for states that permit “as is” sales, federal law prohibits dealers from disclaiming implied warranties if the dealer offers a service contract within 90 days of the sale or provides a written warranty in connection with the sale. In these transactions, while the dealer may limit the duration of implied warranties to the duration of any written warranty, the dealer cannot disclaim implied warranties.

Finally, another (less typical) situation where an implied warranty disclaimer will not be effective is where the dealer’s fraudulent conduct precludes the dealer from effectively disclaiming implied warranties. That is what happened in a recent case in Minnesota.

Esmeralda Sorchaga bought a truck from Ride Auto, L.L.C. At the time of sale, the truck had a salvage title, and the check-engine light was on. During the test drive, the truck smoked. Ride Auto’s salesperson explained that the truck smoked because it was a diesel and that the check-engine light was due to a faulty oxygen sensor that would be easy to fix. Ride Auto sold the truck “as is” and provided Sorchaga with a third-party vehicle protection plan at no cost. Within days of purchase, the truck lacked power and continued to smoke. Ride Auto refused to diagnose or repair the truck. Sorchaga sued Ride Auto, alleging claims of fraud and breach of the implied warranty of merchantability and seeking attorneys’ fees under the Magnuson-Moss Warranty Act. The trial court granted judgment for Sorchaga. Ride Auto appealed.

On appeal, Ride Auto argued that the evidence was insufficient to establish the elements of fraud. The Court of Appeals of Minnesota disagreed, finding that Ride Auto’s failure to disclose known engine problems, as well as its representations that the truck was in working condition and the check-engine light was merely an oxygen sensor problem, misled Sorchaga. The appellate court agreed with the trial court’s finding that Ride Auto’s fraudulent misrepresentations rendered the warranty disclaimer ineffective because Sorchaga would not have bought the truck or agreed to the warranty disclaimer if she knew the truck had severe engine problems.

Not only did the appellate court agree with the trial court’s finding on Sorchaga’s breach of implied warranty claim, but it also upheld the trial court’s award of attorneys’ fees.

The lesson here is that a disclaimer of implied warranties can be a strong defense, but only when it is not rendered ineffective by the dealer’s conduct. Unfortunately, Ride Auto had to learn this lesson the hard way.

Sorchaga v. Ride Auto, LLC, 2017 Minn. App. LEXIS 39 (Minn. App. March 20, 2017).

*Catharine S. Andricos is a partner in the Washington, D.C., office of Hudson Cook, LLP. She can be reached at 202.327.9706 or by email at candricos@hudco.com.

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Spot Delivery®.  Reprinted with express permission from CounselorLibrary.com.