Successful Attacks on ASFA Class-Wide Rescission

In recent years, California dealerships have been attacked with a rash of class action lawsuits under the Automobile Sales Finance Act (“ASFA”) seeking to force dealerships to rescind thousands of transactions over a four-year period for alleged disclosure violations on Retail Installment Sales Contracts (“RISCs”).  Regardless of whether nor not these violations cause any actual damage or harm, the plaintiffs’ bar has sought to exploit such disclsoure violations - often very technical in nature - and the threat of large scale rescission to leverage substantial settlements.  Fortunately, Manning Leaver has found success convincing courts that the remedy of rescission of RISCs is not appropriate in class litigation.

Common types of alleged contractual disclosure violations

The alleged contractual disclosure violations commonly seen in class actions filed under the ASFA include failing to separately itemize license and registration/transfer/titling fees (“lumping”), disclosing deferred downpayments as cash (“hold check”), backdating contracts, charging tire fees on used tires, and the use of ten day payoffs on trade-in vehicles.  Because members of the purported class can be identified by reviewing dealership records, many courts have found that these ASFA claims are readily amendable to class treatment.[1] 

What is Rescission Under the ASFA?

Under the ASFA, a contract may be deemed unenforceable based on these alleged disclosure violations, no matter how minor or trivial, and even if the customer suffers no cognizable harm.[2]  If the customer demands rescission of the purchase contract, and a court finds in his or her favor, the customer is entitled to a refund of all payments made on the vehicle, and payment by the dealership of the remaining balance due on the RISC, in exchange for returning the vehicle to the dealership.  The dealership may be entitled to an offset for the customer’s use of the vehicle, but offsets may be discretionary, and do not account for the passage of time.[3]   This essentially results in a windfall for the customer. 

While rescission of any individual deal will be painful for a dealership, the prospect of having to buy back thousands of class members’ vehicles represents a potentially catastrophic result.  For example, a recent case handled by Manning Leaver involved ASFA class claims that sought to rescind the contracts of over 3,300 class members over a four year period.[4]  In a hypothetical verdict granting all class members the right to rescind their contracts, and assuming a conservative response rate of 25%, the dealership was faced with the prospect of repurchasing over 800 vehicles.  The capital required for such a repurchase would likely have exceed $15 million.[5]  Many of these vehicles would be ineligible under the dealership’s flooring line due to age and/or mileage.  Additionally, disposing of this excess inventory would place an extensive burden on the dealership.  Through the whole process, we conservatively estimated that the dealership would incur losses in excess of $4 million.[6]  Further compounding the danger, many insurance companies have taken the position that “rescission” does not constitute “damages” under the terms of dealerships’ insurance policies, thus leaving dealerships to fend for themselves in the event of a judgment of class-wide rescission.

Plaintiffs’ attorneys are well aware of the potential catastrophic impact of class-wide rescission on dealerships, and thus regularly make exorbitant settlement demands of $2,000 or more per class member.[7]  When the dealership rejects these excessive demands, plaintiffs’ counsel continues litigating the matter, knowing that they are likely to recover all of their attorneys’ fees as the prevailing party, thus compounding the expense of the case.[8] 

Attacking Class-Wide Rescission at the Outset

Dealerships should first consider attacking class-wide rescission at the pleading stage by filing a motion to strike class-wide rescission within 30 days after the dealership is served with the lawsuit.  A pleading stage motion to strike is based solely on the allegations in the written Complaint, and the dealership is not permitted to submit additional evidence in support of the motion.  This makes prevailing on this particular motion challenging.  Additionally, motions to strike class remedies are generally disfavored at the pleadings stage.  Nonetheless, Manning Leaver has successfully pursued this motion in some cases, thus eliminating the remedy which gives the case its potential value at the outset of the case.  Even in instances where the trial court does not grant the pleading stage motion to strike, the pleading stage motion presents an opportunity to portray the class claims as patently unreasonable to the presiding judge.  Additionally, in hearing the motion, the judge will often reveal his or her feelings about the manageability of class-wide rescission and the case in general, which can be very useful in pursuing later motions to eliminate class-wide rescission from the lawsuit.

A Second Attack on Class-Wide Rescission Prior to Class Certification

If the pleading stage attack on class-wide rescission is not granted, the dealership can again attack the remedy of class-wide rescission with a motion to strike class-wide rescission prior to plaintiffs filing their motion for class certification.  This type of motion (referred to herein as a “BCBG Motion”) was discussed at length in the matter of In re BCBG Overtime Cases (2008) [78 Cal. Rptr. 3d 257].  In BCBG, the Court held that a party can move to strike class allegations based on evidence outside the pleadings after the pleading stage but prior to class certification, and that in doing so, the defendant is essentially initiating the class certification process.  In doing so, the dealership can launch a targeted attack on class-wide rescission as a remedy, instead of having it lost amid the host of certification issues the plaintiffs would address if they initiate the motion for class certification.  This allows the Court to focus on this singular issue, and also forces plaintiff’s counsel to grapple with the weakness in their class claims before they can present any strengths.  Unlike a pleading stage motion, the dealership can and should submit evidence in support of a BCBG Motion regarding the unmanageability of class-wide rescission, including class size, cost of repurchasing inventory, man-hours required to repurchase/recondition/resell inventory, and additional staffing requirements.

Before the dealership files a BCBG Motion to strike class rescission, plaintiffs must first have had an opportunity to conduct discovery on class certification issues.  This means that the dealership cannot immediately file a BCBG Motion if the pleading stage attack is unsuccessful.  The dealership will have to respond to discovery propounded by plaintiff, produce witnesses for deposition, and provide class size estimates.  This often means that the BCBG Motion cannot be filed until several months into the litigation.  However, much of the same information provided in discovery will be used in support of the BCBG Motion to strike.

Legal Basis for Attack on Class-Wide Rescission

The ASFA neither authorizes nor prohibits rescission as a remedy available in class litigation.  While the California Supreme Court has held that rescission is an available class-wide remedy under certain circumstances, the ASFA is based at least in part on the Federal Truth in Lending Act (“TILA”), and California courts have held that TILA “serves as a backdrop for liability under the ASFA.”[9]    A recent spate of decisions under the TILA have held that rescission is not an available class-wide remedy in home mortgage cases for the following reasons:

1. The legislature did not intend for rescission to be a class-wide remedy;
2. Rescission is a personal remedy requiring an individualized inquiry inconsistent with the class action mechanism;
3. Class-wide rescission is impractical to administer; and
4. Class-wide rescission would have a potentially catastrophic impact on businesses.[10]

Manning Leaver has successfully applied these same four factors in the context of ASFA class actions through BCBG Motions to strike rescission as a class-wide remedy.

Factor #1: No Legislative Intent for Class-Wide Rescission

This purely legal argument focuses on the link between TILA and ASFA.  There is no mention of class actions in the ASFA statutory scheme.  While this factor on its own may not be persuasive, when evaluated in the context of the other factors, a compelling case can be made that the legislature had no intention to bog down courts and put dealerships out of business for mere technical disclosure errors.

Factor #2: Rescission is an Inherently Personal Remedy Incompatible with Class Litigation

In ruling on the TILA cases, the Federal courts repeatedly noted that rescission is a personal remedy requiring individualized inquiries that are inconsistent with class litigation.  This theme is reinforced by the text of the ASFA itself, which requires that customers electing to rescind their contracts act “with reasonable diligence.”[11]  This provision necessitates individualized inquiries for each class member concering (1) whether the buyer wants to rescind, (2) when the buyer learned of the right to rescind, (3) whether there was any delay in giving notice “substantially prejudicial” to the dealership,[12] (4) whether the buyer waived the right to rescind,[13] and (5) whether the buyer is estopped from seeking rescission based upon a default.[14]

Additionally, when a customer elects rescission under the ASFA, the dealership should be entitled to an offset for the customer’s use of the vehicle.[15]  Determining the applicable offset for each class member’s vehicle requires a detailed and highly individualized inspection to identify and assess the following:

• Mileage;
• Exterior damage;
• Frame damage;
• Interior damage;
• Functionality of equipment (power windows, locks, stereo, navigator, etc.);
• Mechanical condition;
• Whether proper maintenance has been performed;
• Optional and aftermarket equipment installed;
• Vehicle history report (Carfax, Autocheck, etc.).

Employees in the used car department and service department can provide declarations in support of the BCBG Motion affirming the need to inspect each of these items, and providing conservative time estimates.[16]  Determining the applicable offset for each class member’s vehicle will inevitably lead to disputes that will have to be resolved by the Court on an individual basis and requiring further individualized inquires. 

By presenting courts with evidence that fact-intensive individualized inquiries will be required for hundred or thousands of class members electing rescission, dealerships can successfully persuade courts that class-wide rescission of motor vehicle purchase contracts is inherently inconsistent with the class action mechanism.

Factor #3: Impractical to Administer

The individualized inquires discussed above that courts would have to oversee will likely evolve into mini-trials, making a strong case that class-wide rescission would be impractical to administer by the court.  However, the dealership can further bolster this point by illustrating how impractical it would be to administer both the surrender of each class member’s vehicle, and the eventual disposal of the excess inventory that would result.

By using declarations from finance, sales, and service personnel, the dealership can eestimate the time it would take for the return of each vehicle.  This estimate is based on the need to (1) contact the class member and arrange for the return, (2) inspect the vehicle, (3) prepare and explain the necessary paperwork, (4) determine and calculate the lien payoff and payment history, (5) confirm the applicable offset for use, (6) determine the amount to be refunded to the class member, and (7) preparing the necessary checks. 

Once the vehicles are returned, dealership declarations can be used to show the time it would take to dispose of each returned vehicle, depending on whether it will be sold at wholesale or retained, and what reconditioning it may require.  Some of the required tasks include a safety/mechanical inspection, reconditioning, preparing the window sticker and buyer’s guide, and determining whether to sell the vehicle “As-Is” or with a warranty.

Factor #4: Potentially Catastrophic Impact on Dealership

The Federal TILA cases clearly articulated that the potential catastrophic impact on businesses was a major factor in their determination that class-wide rescission was inappropriate.  Class-wide rescission of motor vehicle purchase contracts dating back over a four year period would force the dealership to spend millions of dollars to repurchase the vehicles at severely inflated prices and hire additional staff to administer the repurchase and resale of the excess inventory, resulting in potentially millions of dollars in losses after the vehicles are disposed of.

By way of example, using the estimate of 800 class members electing rescission, a capital outlay in excess of $15 million may be required simply to pay off all remaining lien balances and to refund contract payments to class members. Many of these vehicles will not qualify for the dealership’s flooring line due to age or mileage.  Additionally, the dealership is likely to take an estimated loss of at least $5,000 to $10,000 on each vehicle repurchased.  Using a very conservative estimate of a $5,000 loss on each vehicle repurchased, a dealership stands to sustain losses in excess of $4 million from class wide-rescission for a class with approximately 3,300 members.  A declaration from dealership management should be submitted in support of the BCBG Motion in regard to the likelihood of substantial and potentially catastrophic losses resulting from class-wide rescission.

Conclusion

By employing both pleading stage motions to strike and BCBG Motions, Manning Leaver has had success convincing courts that rescission in an inappropriate class remedy, especially for alleged technical disclosure issues on RISCs.  Eliminating class-wide rescission as a remedy essentially eviscerates these class claims because class members generally have suffered nominal or no damage at all as a result of the alleged violation.  By successfully pursuing this strategy of attacking class-wide rescission, dealerships can hopefully discourage further ASFA class actions based on trivial disclosure issues.

Footnotes 

[1] Lewis v. Robinson Ford Sales, Inc. (2007) 156 Cal. App. 4th 359.

[2] Civil Code §2983; Rojas v. Platinum Auto Group, Inc. (2013) 212 Cal. App. 4th 997.

[3]  For example, if the customer purchased a new vehicle in 2010, put 50,000 miles on the vehicle, and then filed suit to rescind the contract in 2014, the dealership would only be entitled to an offset for the 50,000 miles driven by the customer, but will have to repurchase the vehicle at its 2010 value with 50,000 miles.  The dealership is forced to incur all depreciation in value over the four years, which, especially for a vehicle sold new, will be a substantial amount.

[4] 2008-2012.

[5] Based on a conservative estimate of $20,000 per vehicle.

[6] This is based on an conservative estimated loss of $5,000 per vehicle repurchased.  Actual losses may be closer to or even exceed $10,000 per vehicle in some instances.

[7] Alternatively, they make policy limit demands, and then refuse to negotiate.

[8] Civil Code §2983.4.

[9] Nelson v. Pearson Ford Co. (2010) 186 Cal. App. 4th 983, 997.

[10] See LaLiberte v. Pacific Mercantile Bank (2007) 147 Cal. App. 4th 1, 12, McKenna v. First Horizon Home Loan Corp. (1st Cir. 2007)475 F.3d 418; In re Community Bank of Northern Virginia (3d Cir. 2010) 622 F.3d 275, 308; James v. Home Constr. Co. of Mobile, Inc. (5th  Cir. 1980), 621 F.2d 727; and Andrews v. Chevy Chase Bank (7th Cir. 2008)545 F.3d 570. For further authority, see also Gibbons v. Interbank Funding Group (N.D.Cal.2002)208 F.R.D. 278, 285-286; Jefferson v. Sec. Pac. Fin. Servs., Inc. (N.D.Ill.1995)161 F.R.D. 63, 68-70; Handy v. Anchor Mortgage Corp., (7th Cir.2006) 464 F.3d 760, 765; Barrett v. JP Morgan Chase Bank, NA., (6th Cir.2006) 445 F.3d 874, 877; Belini v. Wash. Mut. Bank, FA, (1st Cir.2005) 412 F.3d 17.25.

[11] Civil Code §2983.1(d)

[12] Civil Code §1693

[13] E.g. Soon v. Beckman (1965) 234 Cal. App. 2d 33

[14] Integrated, Inc. v. Alec Fergusson Electrical Contractor (1967) 250 Cal. App. 2d 287.

[15] Nelson 186 Cal. App. 4th at 1012-13. 

[16] We recommend that all time estimates be as conservative as possible so as to shield them from attack from plaintiff’s counsel.