The CARLAWYER©

By Thomas B. Hudson and Nicole Frush Munro

Happy new year!  Here’s our monthly collection of selected legislative and enforcement highlights, and a recap of some of the many auto sale and financing lawsuits we follow each month.  Remember - what we report here is not every recent development. We select those we think should be important to car dealers. Note that this column does not offer legal advice.  You should consult your dealership lawyer with any legal questions.

We include items from other states.  Why?  We want you to be able to see new legal developments and trends.  Also, another state’s laws might be a lot like your own state’s laws – if AGs or plaintiffs’ lawyers are pursuing particular types of claims, those laws and claims might soon appear in your state.  As always, though, there is no substitute for checking with your own lawyer before you rely on anything we report or if you have any questions.

Federal Law

All the federal news this month deals with the Consumer Financial Protection Bureau.

On December 8, Republicans in the U.S. Senate voted to block the nomination of Richard Cordray to be the first director of the Bureau. The vote was 53-45, with 60 votes required to move the nomination ahead. Republicans seek significant structural changes to the CFPB, including having the director position replaced with a 5-member commission and increased oversight. President Obama nevertheless appointed Mr. Cordray as the Bureau’s new chief, using his powers to make recess appointments, a move that bypasses the Senate’s confirmation process altogether.  The move will provoke a hostile reaction from Senate Republicans, who claim that Mr. Obama did not have the power to make the appointment.  We expect that the dispute will end up in court.

The Bureau recently published for public comment interim final rules establishing a new Regulation M (Consumer Leasing), Regulation F (Fair Debt Collection), Regulation P (Privacy of Consumer Financial Information), Regulation V (Fair Credit Reporting), Regulation B (Equal Credit Opportunity), and Regulation Z (Truth in Lending). The interim final rules do not impose any new substantive obligations, but make only certain non-substantive, technical, formatting, and stylistic changes. To minimize confusion, the CFPB is preserving the numbering of the Regulations, other than the new part number. While the interim final rules generally incorporate the existing regulatory text, appendices (including model forms and clauses), and supplements, as amended, the rules have been edited as necessary to reflect nomenclature and other technical amendments required by the Dodd-Frank Act. The interim final rules were effective December 30, 2011. Comments on the rules are due 60 days after publication in the Federal Register, which has already occurred.

On November 29, the Bureau announced that it is requesting specific suggestions from the public for streamlining regulations it recently inherited from other federal agencies. The inherited regulations include those issued pursuant to the Consumer Leasing Act, the Electronic Fund Transfer Act (except with respect to Section 920 of that Act), the Equal Credit Opportunity Act, the Fair Credit Reporting Act (except with respect to Sections 615(e) and 628 of that Act), the Fair Debt Collection Practices Act, Subsections (b) through (f) of Section 43 of the Federal Deposit Insurance Act, Sections 502 through 509 of the Gramm-Leach-Bliley Act (except for Section 505 as it applies to Section 501(b)), and the Truth in Lending Act. The Notice asked the public to identify provisions of the inherited regulations that the CFPB should make the highest priority for updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary. The Notice discussed several specific requirements that may warrant review, and sought suggestions for practical measures to make complying with the regulations easier. Comments are due by March 5, 2012. Commenters will have 30 additional days, until April 3, 2012, to respond to other comments.

Have you fired anyone lately?  Are they mad with you?  If you are doing bad stuff at your dealership, would they be interested in “blowing the whistle” on you?  Now they can.  On December 15, the Bureau issued a blog post, news release, and bulletin in order to solicit information from whistleblowers and other knowledgeable sources about potential violations of federal consumer financial laws. The CFPB is welcoming information from current or former employees, contractors, vendors, and competitor companies. People who submit tips may do so through the email address whistleblower@cfpb.gov and a toll-free number. Early next year, the CFPB plans to introduce an online tips portal accessible through its website. Whistleblowers may request confidentiality or even remain anonymous to the extent permitted by law, although the Bureau notes that providing contact information may assist it in investigating and remediating potential violations. Certain employees who provide information about potential violations of federal consumer financial laws are protected from retaliation from their employers under Section 1057 of the Dodd-Frank Act.

On December 8, the Bureau announced that it has established an Ombudsman Office to assist in the resolution of issues that a depository entity, non-depository entity, or consumer has with the CFPB in an “independent, impartial, and confidential way.” The CFPB notes that people may use the Ombudsman’s Office when they have not had success with the existing CFPB processes, to achieve an informal resolution, or to keep their concerns confidential.

State Enforcement Actions

On December 15, the Colorado Motor Vehicle Dealer Board issued an advisory concerning advertising violations in TrueCar materials and on its website. The advisory notes that any Colorado licensed dealer using TrueCar to promote and list its vehicles to consumers is ultimately responsible for any such violations.

Oregon Attorney General John Kroger and two Oregon-based used car dealerships recently settled allegations that their business practices misled consumers. Among other requirements under the settlement, the dealerships are required to post the advertised price on a vehicle, not misrepresent the market price in negotiations, disclose material defects, not misrepresent that a service contract is a warranty, provide required disclosures about financing offers, not use the name “broker” when they are not acting on behalf of the consumer, sell vehicles that are roadworthy, and not sell vehicles as “parts only” rather than disclose serious defects. Both dealerships are required to pay $10,000 each for the alleged violations.

Washington Attorney General Rob McKenna entered into a settlement with a car dealership to resolve allegations of deceptive sales and advertising practices, including allegations that it “power booked” loans by misrepresenting the value of vehicles to banks. “Power booking” involves a dealer listing phantom options such as sun roofs, luggage racks, and sport packages, in order to qualify customers for financing.

Litigation

Federal Arbitration Act Did Not Preempt State Restrictions on Arbitration of Insurance Contracts: When car buyers bought and financed their cars, they signed a credit application that included an arbitration agreement. In connection with the car purchases, they bought credit life insurance. After paying off the retail installment contract early, the buyers sued the insurer, seeking a refund of unearned credit life insurance premiums. The insurer moved to compel arbitration. The buyers argued that the claim was not subject to arbitration because the Arkansas Uniform Arbitration Act provides that an insurer cannot compel an insured to arbitrate claims arising under an insurance policy. The trial court denied the motion to compel arbitration, and the Supreme Court of Arkansas affirmed. The high court noted that although the Federal Arbitration Act would ordinarily preempt conflicting state law, the McCarran-Ferguson Act operates to bar application of the FAA and leaves the regulation of the insurance industry to the states if the applicable federal statute does not specifically relate to insurance, the state statute was enacted to regulate insurance, and application of the federal statute would invalidate, impair, or supersede the state law. The high court determined that reverse preemption under the McCarran-Ferguson Act applied to the car buyers’ claims and found that the FAA did not preempt the Arkansas prohibition on arbitration of insurance disputes. See Southern Pioneer Life Insurance Co. v. Thomas, 2011 Ark. LEXIS 573 (Ark. November 17, 2011).

Florida Statutes of Limitations Not Applicable to Arbitration Claims Unless Expressly Provided: Account holders at a financial services company filed arbitration claims with the National Association of Securities Dealers, Inc., and the company moved to dismiss the claims as barred by Florida’s statutes of limitations. The account holders then filed an action in state court seeking a declaratory judgment. The trial court issued a final declaratory judgment stating that Florida’s statutes of limitations were not applicable to the arbitration claims because arbitrations are not “civil actions” or “proceedings” for purposes of Section 95.011, Florida Statutes. The Court of Appeal of Florida affirmed, concluding that Florida’s statutes of limitations are not applicable to arbitration claims when the parties have not expressly included a provision in their arbitration agreement stating that they are applicable. The appellate court found that the language in the account agreements at issue did not expressly state that Florida’s statutes of limitations applied to arbitration claims. However, the appellate court certified to the Florida Supreme Court the following question: “Does Section 95.011, Florida Statutes, apply to arbitration when the parties have not expressly included a provision in their arbitration agreement stating that it is applicable?” See Raymond James Financial Services, Inc. v. Phillips, 2011 Fla. App. LEXIS 18182 (Fla. App. November 16, 2011).

Rental Car Company Not Required to Equip New Vehicle Purchased from Reputable Manufacturer with Optional Side Airbags: An individual was ejected from a car he rented from a rental car company, The individual sued the rental car company and the car’s manufacturer, claiming that the vehicle should have been equipped with side airbags. After the manufacturer settled with the individual, the rental car company moved for summary judgment, claiming, among other arguments, that it could not be found liable for negligence because it owed no duty to equip the vehicle with optional side airbags. The trial court granted summary judgment in favor of the rental car company, and the U.S. Court of Appeals for the Second Circuit affirmed. The appellate court found that the rental car company had no duty to equip its rental vehicles with optional safety features where it bought the car as new from a reputable manufacturer and was entitled to assume “that the vehicles were not defectively designed, even absent the side curtain airbags.” See Noveck v. Avis Rent A Car System, LLC, 2011 U.S. App. LEXIS 23017 (2d Cir. (E.D.N.Y.) November 17, 2011).

Towing Company Converted Car Where it Took Car in Violation of Servicemembers Civil Relief Act: An individual sued a company for damages under the Servicemembers Civil Relief Act for towing his vehicle from the grounds of his apartment complex while he was deployed with the U.S. Navy. The trial court dismissed the lawsuit on its own motion because the SCRA did not provide a cause of action for damages. While the individual’s appeal was pending, Congress amended the SCRA to allow servicemembers to recover money damages and attorneys’ fees. The U.S. Court of Appeals for the Fourth Circuit reversed, holding that the damages provision added to the SCRA after the individual filed his lawsuit could be enforced where the damages were consistent with existing state law for conversion. The towing company conceded liability with respect to the SCRA claim, but contested liability with respect to the conversion claim. The U.S. District Court for the Eastern District of Virginia granted summary judgment on the conversion claim in favor of the individual. The court determined that the individual owned the vehicle at the time the towing company exercised dominion and control over it. The court found that the towing company failed to comply with the SCRA and, as a result, had no legal right to take the vehicle. See Gordon v. Pete’s Auto Service of Denbigh, Inc., 2011 U.S. Dist. LEXIS 139089 (E.D. Va. December 2, 2011).

Sale of Car for More than its Estimated Wholesale Value is Prima Facie Evidence of Commercially Reasonable Sale: A finance company repossessed a vehicle from an individual after default and sued for the deficiency after the vehicle was sold at auction. The individual argued that the vehicle was not sold in a commercially reasonable manner. The trial court entered summary judgment in the finance company’s favor, and the Supreme Court of New York, Appellate Division, affirmed. It found that because the vehicle sold for $1,700 more than its estimated wholesale value, there was no genuine issue of fact as to whether the vehicle was sold in a commercially reasonable manner. See GMAC v. Jones, 2011 N.Y. App. Div. LEXIS 8387 (N.Y. App. Div. November 23, 2011).

Tom (thudson@hudco.com) and Nikki (nmunro@hudco.com) are partners in the law firm of Hudson Cook, LLC.  Tom is the author of several books, available at www.counselorlibrary.com.  Tom is also the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry.  Nikki is a contributing author to the F&I Legal Desk Book and frequently writes for Spot Delivery.  Spot Delivery, CARLAW and the books are produced by CounselorLibrary.com LLC.  For information, call 410-865-5411 or visit www.counselorlibrary.com.  Copyright CounselorLibrary.com 2011, all rights reserved.  Single publication rights only, to the Association. (1/12) HC# 4846-1372-1870.