Metropolitan News-Enterprise


Friday, December 19, 2014


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Supreme Court to Decide Extent of Rescission Remedy For Backdating of Auto Sales Finance Contracts


By a MetNews Staff Writer


The California Supreme Court has agreed to decide whether rescission is always available as a remedy for the backdating of automobile sales finance contracts.

The justices, at their weekly conference in San Francisco Wednesday, granted review to a class of plaintiffs in Raceway Ford Cases (2014) 229 Cal. App. 4th 1119. All six justices—there is one vacancy on the court—agreed to hear the case, in which the Fourth District Court of Appeal, Div. Two, joined the trial court in rejecting several claims by car buyers.

 One of those claims was that the defendant, a dealership in Riverside, violated the Automobile Sales Finance Act—commonly referred to as ASFA—and other consumer statutes through a since-discontinued practice of backdating sales contracts. This occurred, for example, when a customer bought a car, but the dealer was unable to sell the paper to a commercial lender; the dealership would then offer the customer different terms for financing.

The dealer in that circumstance would prepare a backdated contract for the purchase of the vehicle, along with a document by which the original purchase would be rescinded.

In Nelson v. Pearson Ford (2010) 186 Cal.App.4th 983, the Fourth District’s Div. One held that such backdating violates ASFA, as well as the Consumer Legal Remedies Act and the Unfair Competition Law. The Nelson court reasoned in part that the practice rendered inaccurate the sales contract’s “annual percentage rate” disclosure and imposed an illegal “finance charge” covering the period between the dates of the two contracts.

Justice Thomas Hollenhorst, however, in his opinion in Raceway Ford Cases, said not all backdated contracts violate ASFA.

He cited the Federal Reserve Board’s Regulation Z, which implements the Truth in Lending Act and which ASFA incorporates by reference. “[N]othing in Regulation Z forbids interest on consumer credit contracts to be calculated as accruing from a date prior to consummation of the contract, if the parties agree among themselves to such a calculation,” Hollenhorst wrote.

“In concluding otherwise, Nelson stretches an already thin thread of authority beyond the breaking point,” he wrote.

The justice added that there was “good reason” not to follow Nelson’s holding that a finance charge accruing with respect to a second contract prior to the consummation date of that contract constitutes an “illegal finance charge” in the form of “preconsummation interest.” Nothing in Regulation Z, Hollenhorst said, prohibits or makes illegal the parties’ agreement for interest to be calculated from a date prior to the consummation of the contract.

The plaintiffs are also challenging the holding of the Court of Appeal that Raceway Ford adequately rectified a claimed violation of consumer protection statutes by refunding, with interest, smog fees that it collected from buyers of diesel cars. The plaintiffs claim they should be allowed to rescind their purchases under the UCL and CLRA.


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