Handling the Used Car Warranty Case
| Publication year | 1973 |
| Pages | 31 |
Marshall A. Snider and Tucker K. Trautman, J.
Marshall A. Snider, Denver, is director of the consumer division of the Legal Aid Society of Metropolitan Denver. Tucker K. Trautman is staff attorney within that division.
On May 14, 1973, Consumer purchased a used car from Auto Sales Company, where the salesman assured him that this was "a good-running car." Consumer put $300 down and financed the remaining $800 by taking out a loan with ABC Loan Company. Two days later Consumer noticed loud thumping noises coming from the engine and further observed that the brake pedal was "soft." He returned it to Auto Sales which told him there was nothing to worry about. The next day the car stopped running. When he returned the car to Auto Sales he was told that the car was sold "as is," without warranty, and that the company had no legal obligation to repair the car. ABC Loan Company was not concerned with Consumer's problem with Auto Sales and told Consumer that the car would be repossessed if it was not paid for and that Consumer would be liable for a deficiency. The above story is typical of a situation often presented by consumer-clients to attorneys (both private and legal services). While the facts may vary, the root problems are identical. This article discusses the basic legal problems involved in used car warranty cases and the strategies that may be employed in extricating a client from the warranty-financing vise. The article covers the effect that the form of financing has on the strategy to be used, applicable warranties and disclaimers of warranty, and techniques of obtaining relief.
Certain collateral issues will be raised in most, if not all, used car warranty cases. While these issues are outside the scope of this article, the attorney should always check out at least the following: whether disclosure violations exist under the Truth-in-Lending Act[1] or the Uniform Consumer Credit Code;[2] whether, where the car has been repossessed and resold, the very technical requirements of the Uniform Commercial Code[3] have been met; and whether the conduct of an automobile dealer constitutes fraud or unconscionable conduct in violation of the dealer's licensing statute.[4]
FORM OF FINANCING
A sale of a used car can be financed by four different methods: (1) the buyer can pay cash; (2) the buyer can execute an installment sale contract, promissory note, or other evidence of indebtedness in favor of the seller and thus be liable directly to that seller; (3) the buyer can execute any evidence of indebtedness as in (2) above but the seller will subsequently assign said instrument for value to a financing institution; (4) the buyer can obtain a direct loan from a financing institution and purchase the car with the proceeds therefrom. The method of financing will, in large part, affect the strategy that should be followed by the buyer in seeking redress for any alleged breach of. contract.
Cash
When the buyer has paid cash and the car subsequently develops problems, the buyer has a simple choice: he can affirmatively sue the seller either for recission[5] or for damages for breach of warranty.[6] Since no creditor with a security interest is involved, the buyer need not worry about repossession of the car. The buyer does have a problem in that he has paid cash for the car, the value of which may have substantially declined because of the warranty problems, and yet the buyer must now spend additional money to prosecute his case against the seller.
Sale Financed by Seller Alone
When the sale is being financed by the seller with no subsequent assignment to a financing institution, the buyer is in a good position to remedy any warranty problems that may develop. He can stop making payments to the seller and wait for the seller to take the initiative. However, the buyer must still be concerned about the possibility of repossession of his car by the seller who has a purchase money security interest[7] and thus the rights of a secured party outlined in Article 9 of the Uniform Commercial Code (UCC).[8] The buyer can avoid repossession only if he can lock up his car in a garage or other enclosure, since UCC § 9-503 sanctions self-help repossessions without resort to judicial process only if this can be done "without breach of the peace."[9]If the buyer's car is repossessed without judicial process, the buyer is deprived of his property without any opportunity to raise his warranty or other defenses[10] and he will be subject to a later action by the secured party for the deficiency if the proceeds from the resale of the car fail to pay off the unpaid balance of the debt plus costs of repossession and resale incurred by the secured party.[11]
Of course, if the buyer is later sued for a deficiency, he can raise his warranty defenses as a bar to that action, as well as counterclaim for any downpayment and previous payments made, provided he has taken proper steps to rescind the transaction.[12] The attorney may advise the buyer to "let" the car be repossessed if the buyer wants to rescind the transaction, if the car has substantial problems making its retention useless to the buyer, if the buyer has paid very little at that point so as to be able to obtain alternative transportation, or if his warranty claims are meritorious so as to avoid a deficiency judgment at a later date. The problems that arise when the buyer wishes to retain the car are discussed at "Remedies," infra.
Financing Assigned to Institution
When the sale is originally financed by the seller and the evidence of indebtedness is subsequently assigned to a financing institution, the buyer is virtually in the same strategic position as when the seller is the sole financer. Prior to the adoption in 1971 of the Colorado Uniform Consumer Credit Code (UCCC), 1963, C.R.S. § 73-1-101 et seq. (as amended 1971), buyers were often precluded from raising defenses against the original seller in an action by the subsequent assignee for the unpaid balance of the debt. If the buyer executed a promissory note, the financing institution to whom the note was negotiated became a "holder-in-due-course," thus shielding it from any personal defenses the buyer may have against the seller.[13] If the buyer signed an installment contract or any other evidence of indebtedness which was not an instrument under Article 3 of the UCC, he would usually meet the same frustration when he attempted to raise his defenses against the seller in an action by the subsequent assignee because of the presence of a "waiver of defense clause" buried in the contract.[14]
However, there is a strong argument to be made that the UCCC has done away with the shielding effect of those two doctrines in a consumer transaction. With respect to "waiver of defense clauses" there can be no doubt that UCCC § 2-4O3(2)[15] has completely invalidated their intended effect. With respect to the "holder-in-due-course" status, UCCC § 2-403 is not so unequivocal. While the section is unclear, language in subsection (2) of § 2-403 indicates that the "holder-in-due-course" doctrine does not apply to consumer transactions. In practice, the authors' experience has been that assignees of consumer paper no longer assert "holder-in-due-course" status.
Direct Loan from Institution
In the situation in which the buyer has obtained a direct loan from a financing institution and purchased the car with the proceeds therefrom, the buyer is in his weakest strategic position. If warranty problems develop in the car, he must continue to pay the financing institution. Failure to do so will inevitably result in repossession and a subsequent deficiency judgment action in which, as a general rule, no defenses against the seller can be raised since the loan is a completely independent transaction from the purchase of the car. Thus, while continuing to make payments to the financing institution, the buyer must initiate an action against the seller for breach of warranties. If the buyer has stopped payment, the car has been repossessed and the buyer sued by the financing institution, the buyer can then initiate an action against the seller and move to consolidate.[16] As in the situation in which the buyer continues to pay the financing institution while suing the seller, this latter approach will allow the buyer to pay off the financing institution with any recovery from the seller,[17] and yet has the further advantage of letting the buyer use the money formerly paid to the bank for prosecution of his action against the seller and the purchase of another car.
One exception to the general rule precluding a buyer from raising defenses against a direct lender comes into play when the buyer can prove the existence of an "interlocking sale and loan." The buyer must prove that the seller and the lender are so closely related that knowledge of any defenses against the seller can be imputed to the lender.[18] Such close relation can be evidenced by a number of factors: (a) the seller and lender have a corporate-interlock or some other familial relation; (b) the seller refers the buyer to the lender and receives a referral fee; (c) the lender supplies the seller with the loan document and the seller significantly participates in the preparation of that document; (d) the seller guarantees the loan or otherwise assumes the risk of loss by the lender on the loan; (e) the loan is conditioned upon the buyer's purchase of goods or services from a particular seller; or (f) the seller refers the vast majority of its buyers to the lender. Not all of these factors are necessary; however, the more factors which are present, the better the case for establishing a "close relation." There is no Colorado caselaw on this point; however, a number of legal theories can be argued to establish the requisite nexus: (a)...
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