By Eric L. Johnson
Here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world. This month, the developments involve the U.S. Department of Justice, Consumer Financial Protection Bureau (CFPB), and Federal Trade Commission (FTC). As usual, our article features the “Case(s) of the Month” and our “Compliance Tip.” Note that this column does not offer legal advice. Always check with your lawyer to learn how what we report might apply to you or if you have questions.
Federal Developments
On May 8, the U.S. Department of Justice entered a proposed consent order with Hyundai Capital America, a vehicle finance company, resolving allegations that the company violated the Servicemembers Civil Relief Act by unlawfully repossessing 26 motor vehicles leased or owned by SCRA-protected servicemembers without obtaining court orders. Section 3952 of the SCRA provides that “[a]fter a servicemember enters military service, a contract by [a] servicemember for … the purchase [or lease] of real or personal property (including a motor vehicle)” “for which a deposit or installment has been paid by the servicemember before the servicemember enters military service” “may not be rescinded or terminated for a breach of terms of the contract … nor may the property be repossessed for such breach without a court order.” A court may delay the repossession or condition the repossession on the refunding of all or part of the prior installments or deposits made by the servicemember. The DOJ’s complaint alleged that, on June 25, 2014, Jessica Johnson, a Navy Airman, financed the purchase of a vehicle. The financing contract was assigned to Hyundai Capital. On March 23, 2015, Johnson enlisted in the Navy. Her enlistment orders indicated that she would be ordered to active duty beginning on August 25, 2015. In June 2015, Johnson faxed her enlistment orders to Hyundai Capital and asserted that she was protected by the SCRA. While she was on deployment, her account became delinquent. On July 27, 2017, Johnson allegedly spoke with a Hyundai Capital customer service agent about her account and stated that she was no longer deployed but was still in the military. On the same day, a Hyundai Capital employee allegedly recommended to its recovery department that Johnson’s vehicle be repossessed. The written recommendation noted that “customer confirmed she is not deployed today.” Attached to the recommendation was a report from the Defense Department’s Defense Manpower Data Center database dated July 27, 2017, which indicated that Johnson had been on active duty since August 25, 2015, and was still on active duty as of July 27, 2017. On July 28, 2017, Hyundai Capital approved the repossession, allegedly based on the fact that Johnson was on “active [duty], but … confirmed not deployed.” Hyundai Capital then repossessed the vehicle without a court order and sold it in October 2017. Based on its review of documents provided by Hyundai Capital related to its vehicle repossessions from April 15, 2015, through May 21, 2023, the DOJ’s complaint also alleged that the company repossessed, without court orders, 25 additional motor vehicles owned or leased by SCRA-protected servicemembers. The consent order requires Hyundai Capital to pay $10,000 plus any lost equity to each servicemember whose vehicle was repossessed and pay a civil penalty of $74,941. The consent order also requires Hyundai Capital to provide credit repair to affected servicemembers, provide SCRA training to its employees, and implement policies and procedures for vehicle repossessions that comply with the SCRA.
On May 16, the U.S. Supreme Court, by a vote of 7-2, rebuffed a challenge to the constitutionality of the CFPB’s funding structure, lifting a cloud that threatened the agency’s enforcement and rulemaking efforts and clearing the way for final implementation of the Payday Lending Rule. The Supreme Court reversed the Fifth Circuit’s decision. Justice Thomas wrote the majority opinion, joined by all three of the traditionally liberal Justices (Kagan, Sotomayor, and Jackson) as well as Justices Kavanaugh and Barrett and Chief Justice Roberts. The Court stressed that “an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes” and that the CFPB’s funding scheme “fits comfortably” within that framework, consistent with historical practice. The Court highlighted two founding-era agencies—the Customs Service and the Post Office—and described how their fee-based, standing appropriations serve as precedent for the CFPB’s funding structure. Also important for the Court was the statutory cap on the agency’s spending, which it likened to the common historical practice of Congressional appropriations for a “sum not exceeding” a specified amount. Justice Jackson wrote a separate concurring opinion to emphasize that the political branches of government are better suited and intended to address policy concerns like the mortgage and financial crisis giving rise to the Dodd-Frank Act. She noted that the judicial branch “should not lightly assume” to place limits on other branches’
powers. In a dissenting opinion, Justice Alito (joined by Justice Gorsuch) echoed many of the themes in the Fifth Circuit’s opinion. They focused on the novelty of the CFPB’s funding arrangement and the robust rulemaking and enforcement powers exercised by the agency, concluding that the CFPB enjoys “the very kind of financial independence that the Appropriations Clause was designed to prevent.” The ruling removes a disability from the CFPB and provides the agency a freer hand in pursuing its rulemaking and enforcement agenda. Several CFPB investigations and enforcement actions were stayed pending resolution of this case, and the CFPB is poised now to push those matters forward (as the agency suggested in its own statement after the decision). On Capitol Hill, the chair of the House Financial Services Committee, Patrick McHenry issued a statement vowing to revisit the CFPB’s authority through reform legislation.
On May 20, the FTC provided its annual letter to the CFPB detailing its enforcement, rulemaking, research, and policy development activities and consumer and business education during 2023 related to the Truth in Lending Act, the Consumer Leasing Act, and the Electronic Fund Transfer Act. The letter highlights the FTC’s activities in the areas of vehicle sales, financing, and leasing, specifically the final Combatting Auto Retail Scams Trade Regulation Rule, and “junk fees,” specifically the proposed Trade Regulation Rule on Unfair and Deceptive Fees. The letter also highlights the FTC’s activities involving issues that affect American Indian and Alaska Native populations, as well as proposed changes to rules governing negative options. Finally, the letter discusses the agency’s Military Task Force, which focuses on various initiatives to assist military consumers, and other FTC work involving military lending.
Case(s) of the Month
Dealership Effectively Disclaimed Implied Warranty of Merchantability When It Sold Used Vehicle to Consumer: An individual bought a used vehicle from a dealership and financed the purchase. At the time of the purchase, the dealership provided the buyer with a Buyers Guide, which stated that the dealership was selling the vehicle “AS IS — NO DEALER WARRANTY [and] THE DEALER DOES NOT PROVIDE A WARRANTY FOR ANY REPAIRS AFTER SALE.” The Buyers Guide was explicitly incorporated into the vehicle sales contract. The sales contract contained the following provision: “USED CAR BUYERS GUIDE. THE INFORMATION YOU SEE ON THE WINDOW FORM FOR THIS VEHICLE IS PART OF THIS CONTRACT. INFORMATION ON THE WINDOW FORM OVERRIDES ANY CONTRARY PROVISIONS IN THE CONTRACT OF SALE.” The same day, the buyer purchased a service contract from a provider. At some point, the following handwritten notation was added to the Buyers Guide: “Customer has purchased a 24 [month]/24,000 mile [provider] warranty.” A month later, the vehicle broke down. An auto repair shop informed the buyer that the vehicle was not worth repairing because, although some repairs would be covered by the service contract with the provider, approximately $2,500-$3,000 in repairs would not be covered. After the dealership refused to perform any repairs or arbitrate the matter, the buyer sued, alleging breach of the implied warranty of merchantability. The dealership moved for summary judgment, and the trial court granted the motion.
The Court of Appeals of Indiana affirmed. The appellate court concluded that the dealership, as a matter of law, had effectively disclaimed the implied warranty of merchantability when it sold the vehicle to the buyer. Pursuant to the Indiana Uniform Commercial Code, “[u]nless excluded or modified, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.” However, the appellate court noted that a used car dealer “may disclaim implied warranties through the use of conspicuous language containing expressions like ‘as is’ or ‘with all faults’ or other language which in common understanding call the buyer’s attention to the exclusion of warranties and makes plain there is no implied warranty.” The Buyers Guide, which was explicitly incorporated into the sales contract, provided that the vehicle was being sold as is. The personal representative of the buyer’s estate, who was substituted as plaintiff after the buyer died, did not dispute that the Buyers Guide language was sufficient to disclaim any and all implied warranties, but he argued that the dealership negated any implied warranty disclaimer contained in the sales contract by offering the service contract to the buyer the same day it sold her the vehicle.
The service contract stated: “YOU UNDERSTAND THAT THE SELLER IS NOT OFFERING ANY WARRANTIES AND THAT THERE ARE NO IMPLIED WARRANTIES OF MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE, OR ANY OTHER WARRANTIES, EXPRESS OR IMPLIED BY THE SELLER, COVERING THE VEHICLE UNLESS THE SELLER EXTENDS A WRITTEN WARRANTY OR SERVICE CONTRACT WITHIN 90 DAYS FROM THE DATE OF THIS CONTRACT [emphasis added].” The appellate court stated: “We need not address the particulars of this argument. As mentioned, in the event of conflict with other provisions of the sales contract, the provisions of the Buyers Guide control. The Buyers Guide disclaims all implied warranties without exception, overriding any other language in the sales contract suggesting that any exceptions exist.
Even if we assume, arguendo, that [the buyer’s] purchase of the Service Contract satisfied the exception laid out in the language above, it does not help [the plaintiff].” The plaintiff then argued that the handwritten notation added to the Buyers Guide – “Customer has purchased a 24 [month]/24,000 mile [provider] warranty” – served as an acknowledgment that the buyer’s purchase of the service contract negated the dealership’s warranty disclaimer. The appellate court disagreed, stating that “[t]he notation is nothing more than a simple acknowledgment that [the buyer] had purchased the service contract from [the] third-party [provider]; the notation does not mention the warranty-disclaimer exception in the sales contract, much less incorporate it. [The plaintiff] has failed to establish that the language of the Buyers Guide can be harmonized with the relevant language in the sales contract.” See Thomas v. Valpo Motors, Inc., 2024 Ind. App. Unpub. LEXIS 555 (Ind. App. May 2, 2024).
This Month’s CARLAWYER© Compliance Tip
The Case of the Month turned on whether the dealer had effectively disclaimed the implied warranty of merchantability when it sold the vehicle to the buyer. In this case, the Buyers Guide, which was explicitly incorporated into the sales contract, provided that the vehicle was being sold as is. The Buyers Guide disclaimed all implied warranties effectively overriding any other language in the sales contract suggesting that any exceptions exist. The fact that the buyer purchased a separate service contract from a third-party provider wasn’t relevant. What does your Buyers Guide say about the vehicle you’re selling and does it effectively disclaim the implied warranty of merchantability? Does your buyer’s order or purchase agreement incorporate the Buyers Guide? It’s time to pull up those documents and review what they may or may not say with your friendly counsel!
So, there’s this month’s roundup! Stay legal, and we’ll see you next month.
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Eric (ejohnson@hudco.com) is a Partner in the law firm of Hudson Cook, LLP, Editor in Chief of CounselorLibrary.com’s Spot Delivery®, a monthly legal newsletter for auto dealers, and a contributing author to the F&I Legal Desk Book. For information, visit www.counselorlibrary.com. ©CounselorLibrary.com 2024, all rights reserved. Single publication rights only to the Association. HC# 4872-0711-6227