RACEWAY FORD CASES.
S222211
IN THE SUPREME COURT OF CALIFORNIA
December 15, 2016
Ct.App. 4/2 E054517, E056595; Riverside County Super. Ct. JCCP No. 4476
We conclude (1) that Raceway‘s practice of backdating contracts did not violate ASFA and (2) that Raceway did violate ASFA when it disclosed inaccurate smog fees, but plaintiffs are not entitled to a remedy under ASFA because the violation was due to an “accidental or bona fide error in computation.” (
ASFA, which took effect on January 1, 1962, “is a consumer protection law governing the sale of cars in which the buyer finances some, or all, of the car‘s purchase price.” (Rojas v. Platinum Auto Group, Inc. (2013) 212 Cal.App.4th 997, 1002.) “The act replaced the 1945 Automobile Sales Act and was designed to provide a more comprehensive protection for the unsophisticated motor vehicle customer.” (Hernandez v. Atlantic Finance Co. (1980) 105 Cal.App.3d 65, 69 (Hernandez).) The act was “clearly designed to protect the purchaser of a motor vehicle from economic hazards which the Assembly Interim Committee on Finance and Insurance and the courts had found prevalent under the old act . . . .” (Ibid.) The Assembly interim committee was concerned with specific abuses by dealers, including “excessive interest charges; lack of full disclosures to the buyer; taking of security in addition to the car to assure repayment; the use of more than one document in connection with the sale and financing; and lack of protection in the event of default and repossession.” (Kunert v. Mission Financial Services Corp. (2003) 110 Cal.App.4th 242, 257–258; see Assem. Interim Com. on Finance and Ins. Final Rep. (Dec. 1960), 1 Appen. to Assem. J. (1961 Reg. Sess.) pp. 8–29 (Final Report).) In determining whether the act applies to a particular transaction “we look to the substance of the transaction and do not allow mere form to dictate the result.” (Bermudez v. Fulton Auto Depot, LLC (2009) 179 Cal.App.4th 1318, 1323 (Bermudez).) Whether the act “appl[ies] to a particular transaction, is determined in light of the policies of the Act.” (Salenga v. Mitsubishi Motors Credit of America, Inc. (2010) 183 Cal.App.4th 986, 998, disapproved on other grounds in Aryeh v. Canon Business Solutions Inc. (2013) 55 Cal.4th 1185, 1196–1197.)
ASFA applies to a “conditional sale contract,” that is, “[a] contract for the sale of a motor vehicle . . . under which possession is delivered to the buyer” and
In addition to the disclosures listed in section 2982(a), the introductory paragraph of section 2982 says that “[a] conditional sale contract subject to this chapter shall contain the disclosures required by Regulation Z, whether or not Regulation Z applies to the transaction.” (
A buyer is entitled to rescission and restitution for certain violations of ASFA. Section 2983, subdivision (a) says: “Except as provided in subdivision (b), if the seller, except as the result of an accidental or bona fide error in computation, violates any provision of Section 2981.9, or of subdivision (a), (j), or (k) of Section 2982, the conditional sale contract shall not be enforceable, except by a bona fide purchaser, assignee, or pledgee for value, or until after the violation is corrected as provided in Section 2984, and, if the violation is not corrected, the buyer may recover from the seller the total amount paid, pursuant to the terms of the contract, by the buyer to the seller or his or her assignee.” And section 2983.1, subdivision (d) says: “When a conditional sale contract is not enforceable under Section 2983 or this section, the buyer may elect to retain the motor vehicle and continue the contract in force, or may, with reasonable diligence, elect to rescind the contract and return the motor vehicle.”
II.
Plaintiffs are consumers who purchased vehicles from Raceway, an automobile dealership. The plaintiffs alleged 18 causes of action, including claims on behalf of several separate classes, and other claims on behalf of certain individual plaintiffs. The claims at issue in this appeal relate to two plaintiff classes labeled as “Class One” and “Class Two” in the complaint.
The trial court certified Class One as consisting of “[a]ll persons who, since January 12, 2001, (1) purchased a vehicle from Raceway Ford, for personal use, (2) on a later date rescinded their original purchase contract, and (3) signed a subsequent or second contract for the purchase of the same vehicle, which contract was dated the date of the original purchase contract and involved financing at an annual percentage rate greater than 0.00%.” According to plaintiffs, there are 1,100 members in this class.
At trial, Class One asserted claims under ASFA, the Consumer Legal Remedies Act (CLRA;
Class Two‘s claims stem from Raceway‘s concession that it erroneously charged purchasers of diesel vehicles certain fees for performing a smog check and obtaining state smog certification that should only have been charged to purchasers of gasoline-powered vehicles. Raceway relied on a computer program that calculated the smog fee based on an inventory clerk‘s entry for whether the car used diesel fuel or gasoline. If the clerk classified a car as diesel, the computer system was supposed to default the smog fees to zero. The clerk correctly classified vehicles as diesel, but due to a programming error, the computer system for a period of time incorrectly charged smog fees for diesel vehicles. Raceway first learned of this problem when plaintiffs’ attorneys notified Raceway of the incorrect charges on January 14, 2005. Raceway was unable to fix the program on its own and had to call an outside technician. Upon notification of the charges, Raceway refunded the smog fees, plus taxes and interest, to all customers who had been incorrectly charged.
The trial court classified Class Two as consisting of all persons “who, since January 12, 2001, purchased a diesel vehicle from Raceway for personal use and were charged a smog fee and a smog certification fee.” According to plaintiffs, there are 48 members of Class Two. At trial, Class Two asserted an ASFA claim alleging that Raceway violated section 2982(a).
After a bench trial, the trial court on April 16, 2010, issued a statement of decision that found in favor of Raceway on all claims relevant to this appeal. As to the backdating claims, the trial court held that “[a] rewritten contract does not generate a new consummation date under either federal or state law, so there was no incorrectly overcharged interest . . . .” As to the smog fee claims, the trial court
The Court of Appeal affirmed the trial court‘s judgment with respect to plaintiffs’ smog fee claims. It found no ASFA violation because “[t]here are no hidden, undisclosed costs in the contracts entered into by the members of Class Two; the amounts charged for smog-related fees were accurately and explicitly stated in writing, and the terms of the deal, including the smog fees, were accepted by the customers when they signed their contracts.”
The Court of Appeal reversed the trial court‘s judgment in favor of Raceway with respect to plaintiffs’ backdating claims, explaining that customers did not become legally obligated to the terms of the credit transaction embodied in their second or subsequent contract with Raceway . . . until that second or subsequent contract was signed. [Citation.] Thus, the date the second or subsequent contract was signed would normally be the appropriate date to use as the beginning of the term for purposes of calculating the APR . . ., under the method required by Regulation Z.” But the Court of Appeal held that judgment in favor of plaintiffs was not necessarily appropriate in all cases of backdating by Raceway because “Regulation Z contemplates certain circumstances where a
As to plaintiffs’ other claims concerning backdating, the Court of Appeal did not agree with Nelson that the backdating imposed an “illegal finance charge,” and it rejected plaintiffs’ argument that Raceway‘s actions violated sections 2981.9 and 2982(a). The court also rejected plaintiffs’ UCL and CLRA claims.
We granted review of plaintiffs’ ASFA claims.
III.
Plaintiffs in Class One contend that Raceway‘s practice of backdating contracts violated section 2982(a) because it resulted in an illegal finance charge. Specifically, they argue that because the second contracts were not consummated until the date of execution of the second contracts, Raceway was prohibited from charging interest from the date of the first contracts. Plaintiffs also argue that Raceway‘s backdating practice violated section 2981.9‘s “single document rule” because plaintiffs were required to examine multiple documents to determine that they paid an illegal pre-consummation charge.
At the outset, it is useful to further clarify the meaning of “finance charge” and “APR,” the two terms commonly used to quantify the cost of credit. As noted, Regulation Z and ASFA define a finance charge as the “the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” (
Although the finance charge and the APR are related, they are distinct metrics. The APR is “a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made.” (
B.
The consummation date of a transaction is directly relevant to the calculation of the APR. Under Regulation Z, the transaction for purposes of calculating the APR “begins on the date of its consummation, except that if the finance charge or any portion of it is earned beginning on a later date, the term begins on the later date.” (
We agree with plaintiffs that the relevant consummation date in this case is the date the second contract was signed. Under Regulation Z, consummation occurs when a consumer “becomes legally obligated to accept a particular credit arrangement.” (Off. Staff Interpretations,
Raceway argues that this interpretation runs contrary to state law deeming a vehicle sale “completed and consummated when the purchaser of the vehicle has paid the purchase price, or, in lieu thereof, has signed a purchase contract or security agreement, and has taken physical possession or delivery of the vehicle.” (
Although Raceway‘s practice of using the date of the initial contract to calculate the APR disclosed on the second contract appears inconsistent with Regulation Z, the APR disclosures on the second contracts do not necessarily violate Regulation Z for two reasons. First, under Regulation Z, the disclosed APR must only be accurate to within one-eighth of one percent of the properly calculated APR. (
Plaintiffs do not dispute that the APRs disclosed in the second contracts may be accurate within the tolerances allowed by Regulation Z. Plaintiffs contend that “[s]ince Petitioner sued for a violation of the disclosure requirements of the ASFA, and the charging of and failure to disclose the charge for pre-consummation interest violates Civil Code Section 2982(a), it is irrelevant for purposes of this lawsuit whether the APRs were accurate within the tolerances permitted by Regulation Z.” Plaintiffs’ expert suggested at trial that the APRs disclosed were inaccurate but within the tolerance permitted by Regulation Z, noting that the accuracy of the APRs was “not even an issue in this case.” Accordingly, we conclude that the Court of Appeal erred when it remanded this case to the trial court for further proceedings involving the calculation of APRs.
Plaintiffs argue that regardless of whether the APR was accurately disclosed, Raceway‘s backdating practice violates ASFA because Raceway erroneously charged plaintiffs for interest that accrued before they signed the second contract. At trial, plaintiffs’ expert argued that because Raceway was not permitted to include in the finance charge interest accrued before consummation of the second contract, the finance charges disclosed to plaintiffs on the second contracts were overstated. Plaintiffs rely on Nelson, supra, 186 Cal.App.4th 983, where consumers similarly argued that a car dealer‘s practice of backdating second or subsequent contracts violated ASFA. Nelson recognized that “the second contract contained all the disclosures required by subdivision (a) of section 2982 . . . . However, [the defendant‘s] act of backdating the second contract resulted in Nelson paying a finance charge before consummation of the contract. [Citations.] Accordingly, the backdating of the second contract caused Nelson to pay interest on a contract that did not exist. We consider this pre-consummation interest to be an illegal finance charge.” (Nelson, at p. 1003.)
In reaching this holding, the court in Nelson relied on dicta from Krenisky, supra, 728 F.2d 64, and Rucker v. Sheehy Alexandria, Inc. (E.D. Va. 2002) 228 F.Supp.2d 711 (Rucker I), but neither case is on point. As the Court of Appeal below recognized, those cases stand for the proposition that the APR may not be calculated using a date prior to the date of consummation. (Krenisky, supra, 728 F.2d at p. 67, fn. 3; Rucker I, supra, 228 F.Supp.2d at p. 717.) Neither case holds that the finance charge cannot include interest that accrued under an initial contract prior to the consummation date of a subsequent contract.
Although Regulation Z instructs that the APR is to be calculated by reference to the consummation date of a financing agreement, nothing in Regulation Z or ASFA suggests that when a consumer signs an initial contract that
The court in Rucker v. Sheehy Alexandria, Inc. (E.D. Va. 2003) 244 F.Supp.2d 618 (Rucker II) recognized the distinction between a finance charge and an APR in assessing the significance of the consummation date of a second contract. There the court found that a car dealership had violated TILA by backdating the contract at issue because the APR was incorrectly calculated using the date of the first contract rather than the date of the second contract. (Rucker II, at p. 623.) But the court held that “the parties here could have entered into precisely the same agreement reached here with regard to the amount financed, the payment schedule, and the finance charge; all that TILA requires is that the APR be disclosed as 25.35%, reflecting the April 13 consummation date, not 24.95%, reflecting the April 3 effective date.” (Id. at p. 626, italics added.) Rucker II confirms that the APR, but not the finance charge, must be calculated by reference to the consummation date of the second contract.
Contrary to what Nelson suggests, Raceway did not cause plaintiffs “to pay interest on a contract that did not exist.” (Nelson, supra, 186 Cal.App.4th at p. 1003.) What Nelson and plaintiffs here describe as “pre-consummation interest” (ibid.) was interest that accrued under the initial contract. Plaintiffs agreed to pay that interest under that contract, and there is nothing improper about a finance charge in a second contract that includes interest already accrued under the first contract before execution of the second contract.
Section 2982(a) lists the specific itemized disclosures that make up the “amount financed.” For example, it requires an itemized disclosure of the cash price (
While acknowledging that the contracts in that case contained all of the disclosures required by section 2982(a), the court in Nelson relied on Thompson v. 10,000 RV Sales, Inc. (2005) 130 Cal.App.4th 950 (Thompson) to suggest that the fact that all of the relevant disclosures were made is not sufficient. In Thompson, the dealer manipulated the numbers in Thompson‘s contract, causing several of the itemized disclosures required by section 2982(a) to be inaccurate. (Thompson, at pp. 970–973.) The dealer also failed to adequately disclose the finance charge by overinflating the cash price. The court recognized that “the evidence . . . showed that although the cash price, the value of the trade-in vehicle and the amount financed were stated in the contract signed by Thompson, [the defendant] did not disclose that the $24,000 trade-in over-allowance or the amount still owing on
But here, by contrast, because the interest charged prior to consummation of the second contract was accurately disclosed as part of the finance charge, Raceway did not run afoul of the disclosures required by section 2982(a). Plaintiffs’ own expert acknowledged that the interest charged between the date of the initial contract and second contract was included in the finance charge listed on the second contract, and plaintiffs do not contend that the interest charged was inaccurate.
Our holding on this point is consistent with the goals of ASFA. Plaintiffs were first extended financing and allowed to take possession of the vehicle on the date of the first contract. It is neither abusive nor deceptive to allow the creditor to charge interest during the period between the first and second contracts. The court in Nelson suggested that “[w]hile it may have been logical for [the dealer] to backdate the contract because Nelson used the car for six days before consummating the transaction, there were other methods it could use in the event an original contract is voided due to the failure to obtain financing,” including charging a rental fee. (Nelson, supra, 186 Cal.App.4th at p. 1003.) We do not see why such an arrangement would be appropriate if charging interest that accrued
D.
Plaintiffs also contend that Raceway‘s backdating practice violated section 2981.9‘s requirement that a conditional sale contract “contain in a single document all of the agreements of the buyer and seller with respect to the total cost and the terms of payment for the motor vehicle, including any promissory notes or any other evidences of indebtedness.” The purpose of the single document rule is “the facilitation of the consumer‘s review of all of the parties’ agreements before the consumer signs the sale or lease contract, so that the consumer has complete and accurate information.” (92 Ops.Cal.Atty.Gen. 97 (2009) p. 3.) The single document rule is also designed to prevent the use of side-note financing agreements. (Comment, Recent Legislation: The Rees-Levering Motor Vehicle Sales and Finance Act (1962) 10 UCLA L.Rev. 125, 132.) In a side-note financing agreement, “the buyer informs the seller of the maximum monthly payment that he can afford. The seller then sets the payment amount at that figure for a specified period of time, and the buyer believes that this payment amount will represent his total monthly obligation. The seller then tells the buyer to go to a finance company to sign some papers. These papers are for a side-note to finance a down payment which had not been previously discussed. Coupled with his obligation under the conditional sale contract, the buyer must now make two payments each period instead of one—an undertaking which he did not anticipate.” (Ibid., fn. omitted.)
But the analysis in Nelson is not convincing. Nothing in the original contract or the “Acknowledgment of Rescinded Contract” or “Acknowledgment of Rewritten Contract” signed by the consumer set forth an agreement that was not included in the operative contract. The acknowledgments did not include any additional terms, and it explicitly rendered the initial contract void. Moreover, the consumer, having signed both the original contract and the subsequent contract, can be presumed to know which contract is the operative one, and the operative contract did contain the APR. The plaintiffs’ arguments regarding the accuracy of the APR and the finance charge implicated the disclosure requirements of section 2982(a), not the single document rule of section 2981.9. As the Court of Appeal below observed, Nelson‘s interpretation suggesting otherwise would render the disclosure requirements of section 2982(a) superfluous. Finally, because there is nothing illegal about imposing an interest charge for the period between execution of the initial contract and execution of the subsequent contract, there is no merit to Nelson‘s assertion that the backdated rewritten contract violated the single document rule because it “provided for a finance charge when no contract existed.” (Nelson, supra, 186 Cal.App.4th at p. 1004.) For these reasons, we
IV.
Plaintiffs in Class Two contend that Raceway violated section 2982(a) when it erroneously charged the plaintiffs for smog-related fees.
Under section 2982, subdivision (a)(1)(C), dealers must disclose, as part of the amount financed, “[t]he fee charged by the seller for certifying that the motor vehicle complies with applicable pollution control requirements.” Under section 2982(a)(4), the seller must disclose “[t]he amount of the state fee for issuance of a certificate of compliance, noncompliance, exemption, or waiver pursuant to any applicable pollution control statute.” Plaintiffs contend that because the smog-related fees listed on the contracts were inaccurate, the smog fee disclosures were not a “full and honest disclosure” as required by ASFA. Raceway, by contrast, urges us to adopt the Court of Appeal‘s reasoning and find ASFA to be inapplicable because there were no hidden fees, because the amounts charged for smog-related fees were accurately disclosed in writing, and because the fees were accepted by the customers when they signed their contracts. Raceway also argues that even if plaintiffs can establish a violation of section 2982(a), ASFA precludes rescission because the violation was due to an “accidental or bona fide error in computation.” (
Raceway is correct that the smog-related fees paid by plaintiffs were not hidden from them, and plaintiffs do not contend that they paid any more than the fees listed on their contracts. But in determining whether ASFA applies to a particular transaction, we must consider “its remedial purpose of protecting consumers from inaccurate and unfair credit practices through full and honest disclosures.” (Thompson, supra, 130 Cal.App.4th at p. 978.) Moreover, “we look to the substance of the transaction and do not allow mere form to dictate the
The purpose of ASFA is to ” ‘protect purchasers of motor vehicles against excessive charges by requiring full disclosure of all items of cost.’ ” (Hernandez, supra, 105 Cal.App.3d at p. 69.) An item of cost cannot be said to be “fully disclosed” to the consumer when the dealer concedes that the item was mistakenly included and when it has no intention of performing the task for which the fee was charged. (See Nigh v. Koons Buick Pontiac GMC, Inc. (4th Cir. 2003) 319 F.3d 119, 124, revd. on other grounds sub nom. Koons Buick Pontiac GMC, Inc. v. Nigh (2004) 543 U.S. 50.) The court‘s holding in Thompson is instructive. As noted, the court there made clear that the fact that disclosures are made is not sufficient to satisfy ASFA; the dealership‘s actions caused “cost items that comprised the amount financed [to be] inaccurate and violated the ASFA‘s disclosure provisions . . . .” (Thompson, supra, 130 Cal.App.4th at p. 973.) Similarly here, by causing the cost item comprising the smog-related fees to be inaccurate, Raceway violated ASFA‘s disclosure provisions.
As for the availability of a remedy, section 2983, subdivision (a) says: “Except as provided in subdivision (b), if the seller, except as the result of an accidental or bona fide error in computation, violates any provision of Section 2981.9, or of subdivision (a), (j), or (k) of Section 2982, the conditional sale contract shall not be enforceable . . . .” (Italics added.) And section 2983.1, subdivision (d) says: “When a conditional sale contract is not enforceable under Section 2983 or this section, the buyer may elect to retain the motor vehicle and continue the contract in force, or may, with reasonable diligence, elect to rescind the contract and return the motor vehicle.”
Plaintiffs further contend that the defense is inapplicable here because an “error in computation” is limited to those errors involving “mathematical calculations” and does not encompass the programming errors in this case. But the word “computation” is susceptible to a broader meaning. “Computation” is largely synonymous with “calculation.” (See Webster‘s Third New Internat. Dict. (1961) p. 468 [defining “computation” as “the act or action of computing: calculation, reckoning“].) A calculation may be understood to encompass both the arithmetic operation and the specification of the numbers to be included in the operation. For example, a football scoresheet that routinely assigned each field goal two points instead of three in the course of calculating final scores may readily be said to have committed an error in computation. Thus, section 2983, subdivision (a)‘s reference to an “error in computation” is broad enough to encompass the type of programming error that Raceway claims led to the incorrect calculations here.
The Legislature is unlikely to have intended the narrow meaning of error in computation that plaintiffs urge as opposed to the broader meaning just discussed. The latter is consistent with the twin aims of ASFA: deterring dealer misconduct and avoiding windfalls for plaintiffs. (Comment, Recent Legislation: The Rees-
The trial court in this case made a factual determination that Raceway‘s inclusion of the smog fee charges was a bona fide error. Raceway relied upon a computer program that incorrectly calculated the smog fee for used diesel vehicles. Upon learning of the error, Raceway reimbursed all the plaintiffs the smog fees plus interest. This is not the type of “abuse and malpractice” that the act was designed to prevent. (Final Rep., 1 Appen. to Assem. J. at p. 8.) To allow the plaintiffs to now rescind their contracts, after what could be years of using the vehicle, “would be to give plaintiff[s] an undeserved windfall at defendant‘s expense and in disregard of the true intent of the Legislature.” (Stasher, supra, 58 Cal.2d at p. 33.) “[I]n some of [the dealers‘] relationships with customers . . . it will be the dealer rather than the customer who needs protection . . . . When appropriate facts are shown courts should be equally as alert to protect the one party to a contract as the other.” (Id. at p. 34.) This is such a case.
We note that other buyers who are charged excessive charges are not necessarily without a remedy. First, if the charges were not the result of an “accidental or bona fide error in computation” (
For the reasons above, we affirm in part and reverse in part the judgment of the Court of Appeal with respect to Class One‘s claims. Because plaintiffs do not assert the APRs disclosed on plaintiffs’ contracts are inaccurate within the tolerances permitted by Regulation Z, we reverse the judgment of the Court of Appeal to the extent it directs the trial court to conduct further proceedings concerning Class One‘s claims under the Rees-Levering Motor Vehicle Sales and Finance Act (
LIU, J.
WE CONCUR:
CANTIL-SAKAUYE, C. J.
WERDEGAR, J.
CHIN, J.
CORRIGAN, J.
CUÉLLAR, J.
KRUGER, J.
Name of Opinion Raceway Ford Cases
Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 229 Cal.App.4th 1119
Rehearing Granted
Opinion No. S222211
Date Filed: December 15, 2016
Court: Superior
County: Riverside
Judge: Dallas Holmes*
Counsel:
Rosner, Barry & Babbitt, Hallen D. Rosner, Christopher P. Barry, Angela J. Patrick and Lacee B. Smith for Plaintiffs and Appellants.
Arthur D. Levy for Consumers for Auto Reliability and Safety, Consumer Federation of California, CALPIRG and Consumer Action as Amici Curiae on behalf of Plaintiffs and Appellants.
Callahan, Thompson, Sherman & Caudill, Atkinson, Andelson, Loya, Ruud & Romo, Kellie S. Christianson and Yvette N. Siegel for Defendant and Respondent.
Arent Fox and Halbert B. Rasmussen for National Automobile Dealers Association as Amicus Curiae on behalf of Defendant and Respondent.
Greines, Martin, Stein & Richland, Robert A. Olson and David E. Hackett for California New Car Dealers Association as Amicus Curiae on behalf of Defendant and Respondent.
Severson & Werson, Jan T. Chilton and Mark J. Kenney for American Financial Services Association and California Financial Services Association as Amici Curiae on behalf of Defendant and Respondent.
*Retired judge of the Riverside Superior Court, assigned by the Chief Justice pursuant to article V, section 6 of the California Constitution.
Hallen D. Rosner
Rosner, Barry & Babbitt
10085 Carroll Canyon Road, Suite 100
San Diego, CA 92131
(858) 348-1005
Kellie S. Christianson
Atkinson, Andelson, Loya, Ruud & Romo
20 Pacifica, Suite 1100
Irvine, CA 92618-3371
(949) 453-4260