By Shelley B. Fowler*

It’s no surprise when a car buyer defaults on his or her retail installment contract. It’s also no surprise when a creditor repossesses the car of a delinquent buyer and when the buyer whose car has been repossessed files a bankruptcy petition. But what may be surprising is that at least two views have developed on what steps a creditor may or may not take in this scenario. Let’s see how one of those views played out in a recent case.

After Joy Denby-Peterson defaulted on the retail installment contract she signed in connection with her car purchase, Nu2u Auto World repossessed the car. Denby-Peterson filed a Chapter 13 bankruptcy petition and demanded that Nu2u return the car. After Nu2u refused, Denby-Peterson filed a motion in her bankruptcy case for turnover of the car and for sanctions against Nu2u for violations of the automatic stay. Nu2u responded that Denby-Peterson surrendered all rights to the car by signing a document waiving her right to redeem the car when she visited Nu2u to retrieve her personal property that was in the car when it was repossessed.

The bankruptcy court found that Denby-Peterson was the lawful owner of the car, the waiver document was invalid, and Nu2u did not violate the automatic stay by retaining the car after the bankruptcy filing. The U.S. District Court for the District of New Jersey agreed and affirmed.

The district court noted that the bankruptcy court correctly followed the minority position, adopted in the District of New Jersey, that a creditor does not violate the automatic stay by retaining property that it repossessed pre-petition so long as it maintains the status quo in effect at the time of the bankruptcy filing. However, the district court noted that, under the minority view, if the creditor demands proof of insurance naming it as loss payee and the debtor complies, then the creditor will be in violation of the automatic stay unless it returns the vehicle to the debtor because both parties are protected in the event of an accident. In this case, the district court found that the bankruptcy court correctly concluded that there was insufficient evidence that the car was insured where the only evidence of insurance was Denby-Peterson’s testimony.

So, this case adopted what’s considered the minority position. The majority position requires that the creditor return the repossessed car immediately upon learning of the car owner’s bankruptcy filing. And some courts frequently require something in between the two positions.

Given that the law on this issue is constantly changing as courts continue to weigh in, now might be a good time for you to sit down with your dealership’s lawyer and understand where your state’s law on this issue stands.

Denby-Peterson v. Nu2u Auto World, 2018 U.S. Dist. LEXIS 187686 (D.N.J. November 1, 2018).

*Shelley B. Fowler is a managing editor at CounselorLibrary.com, LLC. She can be reached at 410.865.5406 or by email at rfowler@hudco.com.

On June 12, 2019, the Federal Trade Commission (FTC) settled with LightYear Dealer Technologies, LLC (LightYear) over a major data breach that occurred in October of 2016 and the subsequent allegations that LightYear’s data security was woefully insufficient.

LightYear, an auto dealer software provider operating under the name DealerBuilt, provides dealer-management system software and data processing and/or storage services to its dealership clients.  The company is one of the biggest operators in its field with some of the largest dealers in the country utilizing its software in their day-to-day operations.  The products licensed to these dealerships collect large quantities of personal and financial information, including consumers’ Social Security numbers and bank account information.

According to the FTC, LightYear’s problematic data security practices included:

• Storing information in clear text without any encryption or authentication protection (e.g., passwords).
• Failing to have a written information security policy in place.
• Failing to provide any data security training to employees or contractors.
• Failing to perform periodic risk assessments or vulnerability testing of its systems.
• Failing to use readily available security measures to monitor unauthorized transferring of sensitive information.
• Failing to put reasonable data access controls in place.
• Failing to have any reasonable processes to secure devices with access to sensitive personal information.

In order to address these issues, the proposed settlement:

• Prohibits LightYear from transferring, selling, sharing, collecting, maintaining or storing personal information until it implements and maintains a comprehensive information security program;
• Requires LightYear to implement specific, enforceable safeguards that address the issues outlined in the complaint (listed above);
• Requires a senior officer to provide the FTC with annual compliance certifications;
• Requires LightYear to retain a third-party, independent party to assess its information security program every two years;
• Gives the FTC authority to approve the third-party assessor.

This is an incredibly hands-on approach to enforcement and consistent with the direction the FTC has been moving in the realm of data security, as evidenced by Clixsense and iDressup settlements announced in April.

You may recall several years ago when the United States Department of Labor (USDOL) issued revised regulations concerning the “white collar” exemptions to minimum wage and overtime under the Fair Labor Standards Act (FLSA) that were slated to go into effect on December 1, 2016. Among other things, those revisions significantly would have increased the minimum salary requirement for employees who qualify for the “executive,” “administrative,” or “professional” exemptions, from $455 per week (which annualizes to $23,660) to $913 per week (which annualizes to $47,476 per year).

You also may recall the business community challenged those regulations in the courts and, ultimately, a court prohibited the USDOL from enforcing them. Since that time, the USDOL went back to the drawing board and, on March 7, 2019, finally issued notice of a new proposed rule. The current proposal appears to represent a middle ground: most importantly, it would increase the minimum salary requirement to $679 per week (which annualizes to $35,308). 

While the new proposed rule is not yet in effect, it is likely to go into effect in the not-so-distant future. What do dealerships need to know about this current proposal?

No Effect On Salesman, Partsman, Mechanic, Or Commission-Paid Exemptions

As you know, the FLSA contains a number of overtime exemptions in addition to the white collar exemptions that may apply to dealership employees, including salesmen, partsmen, mechanics, and those who earn a majority of their compensation over a representative period in the form of commissions. Fortunately, the USDOL’s new rules have no impact whatsoever on these exemptions, and dealers can continue to rely on them as they have in the past.

The “White Collar” Exemptions

To qualify for a white collar exemption, an employee must, in the first instance, satisfy its “duties” test.  For example, to qualify for the “executive” exemption, the employee, in fact, must: (1) be primarily engaged in managing your dealership or a customarily-recognized department or subdivision thereof, (2) customarily and regularly direct the work of at least two full-time employees (or their equivalent), and (3) have the authority to hire or fire employees (or make recommendations on such issues afforded significant weight). 

Similarly, to qualify for the “administrative” exemption, the employee’s primary duty must, in fact:  (1) be the performance of office or non-manual work directly related to the management or general business operations of your dealership, and (2) include the exercise of discretion and independent judgment with respect to “matters of significance.” Fortunately, the USDOL’s new proposed regulations do not impact the white collar exemptions’ duties tests.

If an employee meets the duties test for a white collar exemption, to be exempt, they must also satisfy the “salary or guarantee basis” test; that is, they must be paid a guaranteed amount per week regardless of the number of hours they work (subject to very narrow exceptions beyond the scope of this article). Since 2004, the salary threshold has been $455 per week.  As noted above, the new rules will increase that to $679 per week. 

Miscellaneous Other Changes

In addition to increasing the white collar salary threshold to $679, the new rules also will (1) provide that employers may attribute nondiscretionary bonuses, commissions, or other incentive payments to satisfy 10 percent of the salary threshold amount; (2) increase the total annual compensation required to qualify for the “highly compensated employee” exemption from $100,000 to $147,414; and (3) indicate a commitment by the USDOL to review (and increase) the salary threshold periodically.

What Does All This Mean And What Should You Do? 

In the (likely) event this rule ultimately goes into effect, employees currently exempt as “executives,” “administrators,” or “professionals”—generally speaking, your managers and higher-level office employees—earning less than the $679 per week salary/guarantee (or $611.10 plus at least $67.90 in incentive compensation) threshold no longer will be exempt from overtime pay. They will be entitled to one-and-a-half times their regular rate of pay for all hours worked over 40 each week. To maintain the exempt status of any such employees, you will need to increase their salary/guarantee accordingly.

In light of the USDOL’s announcement, you should consider reviewing your white collar employees’ pay plans to determine what, if any, changes you will need to make to ensure compliance if and when this new rule goes into effect. Focus particular attention on your managers to ensure you are in position to pay them a sufficient salary (separate and apart from commissions, which largely don’t count in this analysis). Failure to comply with the FLSA can result in significant time spent defending against class action lawsuits, hefty judgments, and sizeable attorneys’ fees and costs.

For more information, contact the authors at JAmbash@fisherphillips.com (617.532.9320) or JFritz@fisherphillips.com (617.532.9325).