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F Superior Court of California F
KNIGHT LAW GROUP, LLP County of Butte
Steve Mikhov (SBN 224676) |
stevem@knightlaw.com 5/13/2020 L
Deepak Devabose (SBN 298890)
deepakd@knightlaw.com
10250 Constellation Blvd., Suite 2500
D D
Los Angeles, CA 90067 By uty
Electronically FILED
Telephone: (310) 552-2250
Fax: (310) 552-7973
WIRTZ LAW APC
Richard M. Wirtz (SBN 137812)
rwittz@wirtzlaw.com
Amy R. Rotman (SBN 286128)
arotman@wirtzlaw.com
10 Jessica R. Underwood (SBN 306481)
11 junderwood@wirtzlaw.com
4370 La Jolla Village Drive, Suite 800
12 San Diego, CA 92122
Telephone: (858) 259-5009
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14 Attorneys for Plaintiffs,
MELISSA A. WILLIAMS and
15 GEOFFREY G. WILLIAMS
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SUPERIOR COURT OF CALIFORNIA
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COUNTY OF BUTTE
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MELISSA A. WILLIAMS and Case No: 17CV02617
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GEOFFREY G. WILLIAMS,
20 DECLARATION OF STEVE MIKHOV
Plaintiffs, IN OPPOSITION TO DEFENDANT’S
21 vs. MOTION TO TAX COSTS
22 [Filed concurrently with Opposition and
FCA US LLC, a Delaware Limited Liability
the Declarations of Richard Wirtz and
23 Company; CHUCK PATTERSON INC., a Guadalupe Lopez]
California Corporation dba, CHUCK
24 PATTERSON TOYOTA SCION DODGE Date: May 27, 2020
25 JEEP RAM CHRYSLER; and DOES 1
Time: 9:00 a.m.
through 10, inclusive,
Dept.: 10
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Defendants.
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DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX
DECLARATION OF STEVE MIKHOV
I, Steve Mikhov, declare as follows:
1 I am an attorney at law duly licensed to practice before the courts of the State of
California and attorney of record for Plaintiffs MELISSA A. WILLIAMS and GEOFFREY G.
WILLIAMS (“Plaintiffs”) in the instant action. I have personal knowledge of the following facts
and, if sworn as a witness, I could and would testify to them competently.
2 Plaintiffs Melissa and Geoffrey Williams (“Plaintiffs”) purchased a used 2012
Dodge Ram 2500 in 2013 from John L. Sullivan Dodge Chrysler in Marysville, California for
$37,499. They made a $5,000 down payment and financed the remainder. The vehicle was
10 manufactured and warranted by FCA US LLC (Chrysler). Plaintiffs experienced repeated engine
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and electrical issues that Chrysler was unable to fix. Chrysler’s inability to fix the vehicle pushed
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Plaintiffs to trade in their Dodge, so that they could purchase another—safer, reliable—vehicle. At
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first, Plaintiffs tried to get the dealership to buy back the car in exchange for a new Dodge, but the
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salesman refused to accept a trade in. So, Plaintiffs decided to purchase a new truck from GMC.
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In connection with their purchase of a new GMC Sierra, the GMC dealer purported to give
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Plaintiffs a trade-in credit for their lemon of $29,500.00. The word “purported” is used because
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trade in amounts do not represent funds that a consumer actually receives. Rather, as the
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Department of Consumer Affairs has observed, dealers often inflate trade-in credits, while
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simultaneously inflating the price of the new car. Attached here to as Exhibit A is true and correct
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21 copy of this Memorandum from the Department of Consumer Affairs (“DCA Letter”). This makes
22 sense, because manipulating these values influences a buyer’s psychology—people who believe
23 they’re receiving discounts are more likely to buy new cars. A dealer’s trade-in credit thus isn’t
24 designed to approximate the value of the traded-in vehicle, nor does it reflect any actual discount
25 on the purchase price. Indeed, it does not approximate the value ofa legally-defective car which
26 should have already been branded as a “lemon” and removed from the open market altogether. Of
27 course, they still owed $34,953.33 on their lemon, which means that they were forced to roll
28 $5,453.33 in negative equity into the purchase of their replacement vehicle.
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DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX
3 Plaintiffs filed their complaint on November 7, 2016. On January 3, 2017, FCA
served its first C.C.P. §998 offer, in which it vague offered to “make restitution pursuant to Civil
Code 1793.2(d)(2)(B)”, minus the trade in value. Because this offer did not even specify an
amount, did not provide a date for payment, did not allow for entry of judgment, did not address
interest, and did not make clear whether post-acceptance fees and costs would be recoverable,
Plaintiffs served objections thereto. The offer also did not include any payment of civil penalties.
Furthermore, this offer stated that it was made pursuant to Goodstein
v Bank of San Pedro, in that
judgment would not be interest, but it also did not include the signature of, nor any place for FCA
(or the Plaintiffs) to sign. In fact, FCA’s counsel has taken the position that such offers are not
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enforceable pursuant to C.C.P §664.6, and only enforceable via a separate lawsuit for breach of
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contract. The uncertainty of a path for enforcement and the costs thereof made this offer incapable
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of valuation. A true and correct copy of FCA’s 998 Offer, as served on my office, is attached as
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Exhibit B. A true and correct copy of Plaintiffs’ objections thereto is attached as Exhibit C.
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4 Over two years later, on January 25, 2019, FCA served its second 998 Offer. This
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16 time FCA offered a sum certain -- $50,000 — but again it failed to provide a date for payment, did
17 not allow for entry of judgment, did not address interest, and did not make clear whether post-
18 acceptance fees and costs would be recoverable (despite Plaintiffs’ earlier objections to these
19 deficiencies), and did not have any place for FCA or the Plaintiffs to sign. Accordingly, Plaintiffs
20 did not accept this vague and invalid offer. This case proceeded to trial. A true and correct copy
21 of this 998 Offer, as served on my office, is attached as Exhibit D. As Richard Wirtz was lead
22 trial counsel, I refer the Court to his declaration for an explanation of the events that proceeded at
23 trial.
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5 Following a jury trial, this Court entered judgment on January 6, 2020, in favor of
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Plaintiffs and against FCA US LLC (“FCA”) for restitution, incidental and consequential damages,
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and maximum civil penalties, which it (incorrectly) calculated to be $46,716.54. A true and correct
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copy of the entered judgment is attached hereto as Exhibit E.
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DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX
6. FCA served its memorandum of costs on or about February 13, 2020, seeking
$32,508.04 in costs.
7 Plaintiffs anticipate that FCA will argue that the timing of payment is not a
significant term that must be spelled out in light of the fact that it is a large company with the
resources to pay settlement amounts quickly. This could not be farther from the truth. My firm
litigates against FCA very regularly. FCA regularly delays the payment of funds, often for months.
In fact, we have been forced to regularly file motions to enforce settlement and for sanctions when
vague offers such as these ones (with no date certain for payment) are accepted by plaintiffs.
8 Plaintiffs’ Memorandum of Costs filed with the Court was drafted by my office
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staff. It is a ministerial duty that involves reviewing receipts that the law office keeps in an
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organized manner as they are incurred in each case. Each cost and expense item listed in the
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Memorandum of Costs and the supporting Worksheet was incurred in the commencement and
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prosecution of this action only. After reviewing the Memorandum of Costs and the Worksheet, I
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15 signed the document knowing of the duties imposed upon me under the law. At all times, my firm
16 tries to keep costs and expenses as low as possible and they are incurred only when necessary and
17 reasonable. It is in the firm’s best interests to keep costs down due to the risk that they may not
18 be reimbursed in the event the client does not prevail in the action
19 9 Attached hereto as Exhibit F is a true and correct copy of my firm’s internal
20 spreadsheet which provides a line-by-line itemization of all expenditures to which FCA has lodged
21 an objection.
22 10. FCA is right that there is an error on the memorandum of costs. On page 4 (the
23 attachment) Item Number 3 (Depositions), the costs for the deposition of Jeremiah Stepan are
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listed as just $58.35. That is incorrect. That sum is just for the mileage to drive to the deposition.
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As Exhibit F shows the total costs associated with travel to and from and taking the deposition of
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Mr. Stepan were $2,353.74. Furthermore, true and correct copies of the invoices for the costs
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related to the deposition of Mr. Stepan are attached hereto as Exhibit G. The total listed under
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Item 4 (Deposition Costs--$7,366.49) is accurate.
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DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX
11. True and correct copies of Mr. Blasjo’s invoices for this case are attached as
Exhibit H.
12. True and correct copies of Mr. Micale’s invoices for this case are attached as
Exhibit I. This includes the April 11, 2020 Invoice that my office just recently received, and the
reason for the filing of Plaintiffs’ second amended memorandum of costs.
13. True and correct copies of the invoices for the purchase of trial transcripts for this
case are attached as Exhibit J.
14. In several recent cases, manufacturers, including FCA, have served 998 offers
virtually identical to the one served in this case which state that the case will be dismissed pursuant
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to Goodstein but also only contain the signature of defendant’s counsel. In those cases,
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manufacturers have started to repeatedly take the position that the resulting settlement agreement
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is not enforceable as a judgment, not enforceable pursuant to C.C.P. §664.6, and that plaintiff's
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only recourse for defendant’s non-performance of its settlement obligations is a completely
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15 separate lawsuit for breach of the settlement agreement. For example, in the recent case of Lealv.
16 Mercedes Benz USA, LLC (Los Angeles Superior Court, BC689308), the law firm of Universal
17 and Shannon (one of the law firms that regularly represents FCA in lemon law litigation), took the
18 position that any 998 offers that provide for dismissal instead of judgment pursuant to section
19 664.6 and do not include the signatures of both parties are only enforceable in contract (in other
20 words, by filing a separate lawsuit for breach of the settlement agreement). Attached hereto as
21 Exhibit K is a true and correct copy of Universal and Shannon’s Opposition to Plaintiff's Motion
22 For Enforcement of Settlement in the Leal case. Attached hereto as Exhibit L is a true and correct
23 copy of an email thread with Universal and Shannon in which they make clear their position that
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such 998 offers are only enforceable in contract, i.e. via a separate lawsuit for breach of settlement
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agreement.
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DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX
I declare under penalty of perjury under the laws of the State of California that the foregoing
is true and correct.
Executed this May 13, 2020 at Los Angeles, California.
/
S E MIKHOV
Declarant
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DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX
EXHIBITA
State of California ; oO Dep hent of Consumer Affairs
MEMORANDUM
Ta: PETER BRIGHTBILL Date: April 10, 1997
tox
Chief, Arbitratio: io view Program
From: JOHN ( LAMB: Services Unit
Re: "Negative itv" _in Arbitrators’ at cement/Repurcl ¢ Decisions —
’ February 17, 1997 Lemer
Margaret OWE!
You asked me to respond to Peggy Bowers’ letter on behalf of Ford Motor Company
which argues that the buyer of a defective vehicle should not be reimbursed for "negative
equity” under a repurchase decision in a lemon law arbitration proceeding.
As described in Ms. Bowers’ letter, "negative equity" -is the difference between the
Joan: balance on the buyer’s trade-in and the value which the dealer and the buyer have
assigned to the trade-in, when that difference is financed as part of the buyer's purchase (or
jease) of a new vehicle. This so-called "negative equity" becomes an issue when the new
vehicle is defective and an arbitrator orders its repurchase. Ms. Bowers argues that the
"negative equity" is not part of the purchase price paid by the buyer, and that the
manufacturer therefore is not required to reimburse it in this simation.
As explained in detail below, I-have concluded that any “negative equiry" is part of » Me
the actual price pavable by the buyer, and that the manufacturer therefore is required to
reimburse it as part of a repurchase decision. I also have concluded that reimbursing
“negative equity" does not unjustly enrich the buyer and is not unfair to the manufacmurer.
Finally, I have concluded that some dealers’ practice of “rolling” a buyer’s “negative equity"
into the purchase price of a new vehicle is probably unlawful and may not create an
a obligation against the buyer to repay the "negative equity" amount.
I. BACKGRO’
A. PURCHASE TRANSACTIONS WHERE "NEGATIVE EQUITY" IS FINANCED
Automobile dealers often agree to pay off the amount due on a trade-in in order to
close a deal, even though the dealer knows that the pay-off amount might be greater than the
trade-in’s true value. The dealer either adds the amount paid to the price of the new vehicle, .
inflates the value of the trade-in so that its net value equals the amount of the "negative
eguity," or uses some combination of these techniques to include the amount of "negative
equity" in the amount financed.
It is essential to understand that the new vehicle’s purchase price, the value of the
trade-in, and the amount of "negative equity" usually are not “hard” numbers, even though
they appear to be after the fact. The amount assigned to "negative equity" to be financed
may vary depending on the agreed price of the purchased vehicle.and the agreed value of the
trade-in vehicle. This in turn may be a function of factors that are not related to the trade-
in’s actual valué, such as: the buyer’s awareness and bargaining skills, the dealer’s
impression of the salability of the trade-in, the current sales performance of the new vehicle, ©
April 10, 1997
page 2
and even whether the dealer is having a successful month. When the buyer is negotiating the
purchase, his or her focus will not be-on these factors, but rather on the amount of monthly
payments, and possibly, on the total amount to be financed and the annual percentage rate.
In the course of the purchase negotiations, the dealer may adjust the purchase price to
compensate for the amount to be allowed on the trade-in and the amount of "negative equity"
that‘the dealer will have to pay. In the end, the buyer will be responsible for paying a stated
amount, which will be the sum of the agreed purchase price and the amount of the "negative
equity" that is financed. In reading the following’ analysis, it should be remembered that
these amounts often are highly fluid-until the buyer signs the contract.
B. THE ARP’S PRESENT POSITION ON "NEGATIVE EQUITY”
In October 1996, I reviewed a Program Summary submitted by the Council of Better
Business Bureaus ("CBBB") as part of a manufacturer’s application for certification. The
ARP was particularly concerned about the applicant’s proposal that arbitrators be permitted
to deduct the "negative equity” in trade-ins when making awards in cases involving leased
vehicles.
I concluded that California law does not allow an arbitrator to deduct any “negative
equity" in a lessee’s trade-in from an award in a decision to repurchase or replace a defective
leased vehicle. The ARP communicated this position to the CBBB, and subsequently, to the
several certified arbitration programs.
My analysis, repeated in the margin in relevant part;! continues to be an accurate
1 The Song-Beverly Act ("Act") and the Arbitration Review Program regulations (“regulations”) do not
allow an arbirration award that requires restitution or replacement to be reduced by the ainount of negative
equity in the buyer’s or lessee’s trade-in. Civil Code §§ 1793.2(d)(2)(A)-(C) strictly limit permissible
deductions in replacement and repurchase situations: the only deduction permitted is an offset for use calculated
Ppursvant to the formula at CC § 1793.2(d)(2)(C). The regulations; at 16 CCR § 3398.11(c), also allow
deduction for the buyer’s/lessee’s over-use or abuse of the vehicle.
These are the only deductions permitted by California law. Indeed, the purpose of 16 CCR §
3398.11(c) was to counter some arbitrators’ practice of not strictly applying §§ 1793.2(d)(2) (A)-(C)s' remedies,
and to require manufacturers to adhere to them in repurchase/replacement decisions, (Set Initial Starement of
Reasons, Arbitration Program Certification Regulations, California Department of Consumer Affairs, p. 25
(May 23, 1989).)
Deducting for negative equity in a trade-in is impermissible for another reason: it effectively penalizes
the consumer for the manufacturer’s inability to conform the vehicle to the manufacrurer's express warranties.-
This is contrary to the philosophy behind the Act and the regulations, as expressed in the Commercial Code and
the regulations’ Final Statement of Reasons. The Commercial Cade’s Article 2 remedy provisions, incorporated
into the Act by CC § 1794(b), are to be liberally administered “to the end that the aggrieved parry [here, the
consumer] may be put in as good a position as if the other party [here, the manufacturer/warrantor] had fully
performed ....” (Com. Code § 1106; see CC § 1794(b).)
This concept also is woven into the regulations. The Final Statement of Reasons states: “In
transactions in which the manufacture? has been unable to carry out the terms of its warranty — has been unable
to repair a vehicle after a reasonable number of attempts ~ it is more appropriate to place the burden on the
manufacturer, than on the consumer who js not responsible for the default." (Final Statement of Reasons,
April 10, 1997
page 3
legal interpretation of the Act and regulations. My expanded analysis in response to Ms.
Bowers’ letter provides additional persuasive support for this analysis and its conclusions
B FORD’S ARGUMENTS
Ms. Bowers’ letter argues that "negative equity” is not part of the purchase price of
the defective vehicle. She also argues that not allowing "negative equiry" to be deducted
from the reimbursement award (or in her terms, requiring the manufacmrer to refund the
‘negative equity") is unjust to the manufacmrer and creates a windfall to the consumer, She
apparently agrees with the ARP’s position that “negative equity” cannot be deducted from the
purchase price that the arbitrator orders to be reimbursed. (Bowers letter, page 1.)
Whether “negative equity" is part of the purchase price mums on the following
Janguage in CC § 1793.2(d)(2)(B)
"In the case’ of restitution, the manufacturer shall make restimtion in an
amount equal to the actual price paid o1 ayable by. e buver," including
incidental damages and numerous other charges, but excluding
monmanufacturer items installed by a dealer or the buyer. (Emphasis added. d-
Ignoring the words "or payable,” Ms. Bowers argues that the intent of the quoted language is
to require the manufacturer to reimburse the consumer for the costs incurred in the present
transaction. In her view, “Amounts refinanced from another loan on a trade-in are not
part of the vehicle price paid by the buyer. (Bowers letter , page 2.) She concludes that
the manufacturer therefore is not deducting “negative equity” from the purchase price of the
vehicle; rather, in her view, the manufacturer 4is determining the actual price paid by the
buyer for the vehicle.
Ms. Bowers’ unjust enrichment and windfall arguments follow from this conclusion.
Tt. ANALYSIS
REIMBURSING THE AMOUNT OF "NEGATIVE EQUITY" FINANCED DOES
NOT UNJUSTLY ENRICH THE BUYER AND IS NOT UNFAIR TO THE
MANUFACTURER
Ms. Bowers argues that requiring the manufacturer to reimburse so-called "negative
equity” in a repurchase situation would result in a windfall to the buyer and would be
Arbiration Program Certification Regulations, California Department of Consumer Affairs, Responses to
Objections/Recommendations {incidental damages}, p. 28 (September 13, 1989).)
Allowing the consumer's arbitration award to be reduced by the amount of the negative equity in the
consumer’s trade-in clearly does not put the consumer in as good a position as if the manufacturer had fully
performed by making the defective vehicle conform to the express warranties, and impermissibly puts the
Durden for the manufacturer's failure on the consumer.
Finally, the proposed deduction for negative equity essentially would require the lessee to waive the
Tights described above. Any waiver of the Act's provisions by the consumer is expressly prohibited by the Act:
(CC § 1790.1.)
April 10, 1997
page 4
imequitable to the manufacturer. The practical consequence of requiring the manufacturer to
reimburse "negative equity" is not as Ms. Bowers states. This becomes clear when the
totality of the purchase-transaction and the buyer’s obligation thereunder is considered, rather
than just the terms of thé, arbitrator’s decision.
As explained at I.A., the amount of "negative equity" can‘be highly arbitrary, even in
a transaction where the buyer is.a skillful negotiator. The amount of "negative equity” may
be determined by factors which have no direct relationship to the true fair market value of
the trade-in or the unpaid balance on the loan for which the trade-in stood as security. In
pYictice, dealers often agree to pay off the amount due on a trade-in in order to close a deal,
even though the dealer knows that the pay-off amount is greater than the trade-in’s value. In
effect, the dealer takes a calculated risk that the buyer will fulfill his or her obligations under
the new purchase contract.
If the vehicle conforms to the mamufacturer’s warranties, the ‘buyer will pay off the
amount of "negative equity," together with the purchase price, over the course of the
contract. In this simation,-all parties will have benefitted from the dealer’s action: the buyer
benefits by paying off the total debt and having a properly functioning vehicle; the dealer and
manufacturer benefit by making the sale; and, the manufacturer often also benefits by
collecting interest on the amount of "negative equity" financed.
However, on occasion, vehicles prove to be defective, and the manufacturer is unable
to conform them to the warranties that it has given as part of the purchase transaction. In
this situation, the dealer has miscalculated the risk, and the manufacturer has failed to fulfill
its warranty obligations. The buyer should not be forced to bear the burden of the dealer’s
miscalculation or the manufacturer’s inability to conform the vehicle to its own warranties.
Reducing this concepmal conclusion to hard reality, the fact is that many buyers will
not be able to pay off the amount of "negative equity" that is financed, and thus will be
Tequired to accept a replacement vehicle rather than the reimbursement awarded. This
practical realiry violates the regulations’ mandate that decisions must be fair (16 CCR §
3398.10(a)), as well as the Act’s requirement that the buyer must be able to choose
reimbursement in lieu of replacement (see page 5). It also may be unfair to the buyer, since
the amount of "negative equity" that the buyer now must pay may have been manipulated by
the dealer (perhaps, with
' the buyer’s unwitting concurrence) during the purchase
negotiations.
Finally on this point, Ms. Bowers argues that the manufacturer should nottbe
responsible for "debt the consumer incurred that was completely unrelated to the purchase of
the vehicle at issue." This misrepresents the tme nature of the “negative equity," which is
inextricably intertwined with all aspects of the purchase transaction. Financing the “negative
equity” also is related to the purchase of the new vehicle because otherwise the purchase
could not occur. Further, both the manufacturer and the dealer benefit by making the sale,
as explained above.
in sum, when the totality of the transaction is considered, requiring reimbursement of
the buyer’s total contractual obligation (purchase price plus "negative equity") does not
provide the buyer a windfall and is not inequitable to the manufacturer. Rather, this
April 10, 1997
page 5
conclusion properly places the burden of the manufacturer's inability to repair the warranted
vehicle on the manufacturer, avoids imposing an essentially arbitrary obligation on the buyer »
and assures that the buyer does not lose the option to choose reimbursement instead of
Teplacement.?
B FORD’S CONCLUSIONS. WOULD VIOLATE THE SONG-BEVERLY ACT
AND THE ARP’S REGULATIONS, AND WOULD NOT BE PRACTICAL
To accept Ms. Bowers’ conclusion that "negative equity” is not part of the purchase
price payable by the buyer would violate-the Song-Beverly Act ("Act") and the ARP’s
regulations.
First, as explained above, requiring the buyer to pay off the "negative equity" in
order to accept a repurchase decision in many cases will force the buyer to accept a
replacement vehicle instead. This would violate CC § 1793.2(d)(2)’s requirement that the
buyer must be able to choose reimbursement in lien of replacement.
Second, interpreting the Act so that the buyer is required to choose replacement
instead of restitution effectively requires the buyer to waivé a provision of the Act, which is
prohibited by ce § 1790.1.
Third, Ms. Bowers’ interpretation would improperly deprive the arbitrator of
decision-making authority. Her letter states that where it is clear that "negative equity” has
been rolled into the financing of the new vehicle, the manufacturer is able to determine the
Tespective amounts of the purchase price and the "negative equity." (Bowers leter, page 2.)
The amount of the purchase price is key to the buyer’s recovery in an arbitration proceeding,
and allowing the manufacturer to make this determination would constitute an improper
delegation of decision-making authority under 16 CCR §§ 3398.10 and 3398.11. Section
3398.10(a) states that "The arbitrator shall render a decision (Emphasis added.)
Section 3398.11(d) allows the arbitrator to delegate only the ministerial function of
calculating the amount of the mileage offset, but emphasizes that the decision-making
function shall be performed by the arbitrator only
Finally, assuming for the sake of argument that the financed "negative equity” is not
part of the purchase price, the arbitrator would be faced with a host of practical problems
For example, the arbitrator would have to identify the acmal purchase price and the amount
of "negative equity” that was financed, which the dealer often has obfuscated in the purchase
documents. Once this determination was made, the arbitrator would be required to calculate
the amount of the "negative equity" already repaid, and the amount still owing. In
calculating this, the arbitrator would have to choose and apply a "legally proper and fair"
method of calculating unearned interest on a loan that is terminated early through no fault of
the borrower This might be the Rule of 78s, the constant yield method, a pro rata payoff
? Vf manufacturers truly feel that reimbursing buyers for "negative equity” in these situations is unfair, the
solution seems obvious: manufacturers could enter into agreements with their dealers (who are their agents)
Tequiring that whenever a manufacturer is required to reimburse any “negative equity" under a lemon law
decision, the dealer must reimburse the manufacturer in the same amount.
April 10, 1997
page 6
method, or some other method of calculating unearned interest. Making these choices and
calculations are well beyond the expeftise of the arbitrators whom I have observed.
In light of all of these legal and practical problems, as well as the following legal
analysis, Ms. Bowers’ interpretation of “negative equity" is incorrect and should be rejected
Cc. THE COMMERCIAL CODE AND THE SONG-BEVERLY ACT REQUIRE
THAT "NEGATIVE EQUITY" BE REIMBURSED
The plain language of CC § 1793.2(d)(2)(B) requires that the manufacuurer reimburse
the-buyer for the so-called "negative equity” in the buyer’s trade-in, when that amount is
financed as part of the purchase of a vehicle that is defective, and when an arbitrator orders
restitution. The phrase the manufacturer shall make restinition in an amount equal to the
actual price payable by the buyer” is not susceptible to any other interpretation.
Assuming for purposes of argument that the quoted phrase is susceptible to a different
interpretation, the same conclusion is required by the Commercial Code, CC §
1793.2(d)(2)(B)’s legislative history and the mules of starutory construction.
1 Commercial Cod
The Commercial Code’s ("Code’s") remedies in sales transactions provide the
framework for, and are incorporated into, the Act’s remedy provisions. Therefore, it is
helpful to look to the Code to explain terms used in the Act.
In Commercial Code termmology, a buyer whose vebicle meets the lemon law criteria
and who has requested Teplacement or.reimbursement has “revoked acceptance” of the sale.
Under CC § 1794(b)(2), a buyer in such a simation has the remedies specified in
Commercial Code §§ 2711-2713.
Commercial Code § 2711 describes the buyer’s remedies after the buyer has revoked
acceptance of goods for breach of warranty, including damages for "nondelivery (Clark &
Smith, The Law of Product Warranties, Remedies of the Buyer After Proper Rejection or
Revocation, J 7.04[1].) This remedy is to be "liberally administered to the end that the
aggrieved party be put in as good a position as if the other patty had fully performed.”
(Com. Code § 1106(1); see Com. Code § 2711, Official Comment 3.)
The buyer’s nondelivery damages are based on the buyer’s “total legal obligation
under the contract. (Com. Code §§ 2711, 2173(1), 1201(11), 2301.) In order to understand
the buyer’s total Jegal obligation under the contract, the contract terms must be viewed in
their full commercial environment and in the context of the full factual surroundings of the
transaction. (Hawkland, Uniform Commercial Code Series, General Obligations and
Construction of Contract, Sec.’ 2-301:01 (Callaghan & Company 1984).) Thus, the buyer’s
total legal obligation under the contract would include the buyer’s obligation to repay
“negative equity” that was financed as part of the purchase transaction, even if this obligation
is not clear on the face of the contract.
> In few, if any, situations would a lemon law-required replacement or reimbursement situation not be one
in which the buyer could justifiably revoke acceptance under the Commercial Code.
April 10, 1997
page 7
Ford’s argument that "negative equity" is "not part of the acmal vehicle price paid by
the buyer" therefore is irrelevant. Whether or not "negative equity" is part of the actual
Price of the vehicle, it is part of the buyer’s total contractual obligation.
Turning to the Act, its provisions, even more specifically than the Code, are to be
construed to protect consumers (see Rules of Statutory Construction, below)
Applying the foregoing Code principles to the Act illuminates the meaning of the
phrase “actual price paid or payable by the buyer’ in CC § 1793.2(d)(2)(B). Where the
Code uses the buyer’s broadly defined "total legal obligation" under the contract as the basis
for determining. the buyer's damages, the Act uses "the actual price paid or payable by the
buyer" as the basis for determining the amount of restitution to which the buyer is entitled.
Just as the buyer’s “total legal obligation" would include any “negative equity" financed as
part of the new vehicle purchase if the buyer were revoking acceptance, so does, the “actual
price payable by the buyer” include any "negative equity” financed as part of the new
purchase when the buyer is entitled to restimtion under the lemon law
To conclude otherwise ignores the Act’s underpinnings in the Code, defeats the Act’s
purpose of protecting consumers, and destroys the symmety between the two sets of remedy
provisions.
2 islative Historv
Civil Code § 1793.2(d)(2)(B) originated as part of AB 3611 (Tanver) in 1986
Assemblywoman Tanner, the author of the original "lemon law sought to remedy problems
with the lemon Jaw as enacted, including dispute resolution programs’ failing to award
adequate reimbursement in refund decisions. (Assembly Third Reading Analysis, AB 3611
as amended May 19, 1986.)
In the section that ultimately became CC § 1793.2(d)(2)(B), the bill provided:
"(T]he manufacturer shall make ‘restinution in an amount equal to the full
contract price paid or payable by the buyer, including a charges and-
fees}."
The Senate Judiciary Comminee’s analysis of this section stated that "The purpose of this bill
is to provide for greater fairness both in automobile arbitration and in resulting restitution to
the consumer." (Senate Committee on Judiciary Analysis, AB 3611 as amended May 19.
1996.) The Department of Consumer Affairs supported the bill because it would "reqnire[J
that the buyer be made ‘whole’ where he/she elects reimbursement or replacement" (Letter to
Hon. Sally Tanner, June 26, 1986), and because one of the problems addressed by the dill
was that buyers often were not made "whole” under the then-current law (Deparment of
Consumer Affairs, Bill Analysis, AB 2057 as amended June 11, 1987)
On August 11, 1986, the section that ultimately became CC § 1793.2(d)(2)(B) was
amended to read as it does today, including replacing the phrase “full contract" with the
word "actual." No obtainable legislative analysis comments on this amendment However,
the clear effect of the amendment is to implement the Code's policy, described above, that
the buyer's "total legal obligation" under the contract can transcend the description of the
April 10, 1997
page 8
transaction in the contract.‘
3 Rules of Statutory Construction
Ms. Bowers’ argues for Ford’s imerpretation of CC § 1793.2(d)(2)(b) by ignoring the
phrase “or payable by the buyer.”
A basic rule of stanatory construction requires that the plain meaning of a stamite be
given effect unless a compelling reason exists not'to do so:
"“[I}f stamtory language is ‘clear and unambiguous there is no need for
construction and courts should not indulge in it.’ [Citation.]’ Unless defendants
can demonstrate that the natmral and customary import of the stamute’s Janguage
is either ‘repugnant to the general purview of the act,’ or for some other
compelling reason, should be disregarded, this court must give effect to the
stamte’s 'plain meaning.’" (Tiernan v. Trustees of ‘California State
Universities (1982) 33 Cal.3d 211, 218-219 [188 Cal.Rpm. 115, 120].)
Here, the language at issue is clear and unambiguous, and Ford cannot establish that
the language is repugnant to the Act’s purview or that there is a compelling reason to
disregard it.
The Act is a‘remedial measure that is intended for the protection of the consumer,
and is to be construed to bring its benefits into action. (Kwan v. Mercedes-Benz (1994) 28
Cal.Rpw.2d 371, 377.) "Remedial statutes are construed to promote their purposes and
protect persons within their purview. Relief will be granted unless clearly forbidden by
statute." (Booth v. Robinson (1983) 195 Cal.Rptr. 130, 135.)
Interpreting the phrase "payable by the buyer” to exclude "negative equity" from the
amount payable by the buyer under the contract would violate these rules because: (a) the
buyer would not be made whole and the arbitration proceeding and resulting restitution,
would not be fair (see discussion of Legislative History, above); (b) the buyer, whom the Act
is designed to protect, would be penalized rather than protected (see next paragraph); and,
(c) interpreting the phrase to in clude "negative equity" is not forbidden by the statute.
In fact, as explained on page 4, excluding any "negative equity" from the amount
payable by the buyer under the contract would effectively penalize the buyer for the
manufacturer’s inability to conform the vehicle to its express warranties.
On the other-hand, interpreting the phrase broadly to include al] amounts payable by
the buyer under the contract (other than those amounts explicitly excluded) furthers the Act’s
purpose of protecting the consumer. This interpretation also is consistent with the Kwan and
Booth courts’ instructions and the preceding legal analysis.
“AB 3611 ultimarely died in the Senate Appropriations Committee for reasons unrelated to its substance.
Present CC § 1793.2(d)(2)(B) was enacted by AB 2057 (Tanner) in 1987 (Stats. 1987, ch. 1280). Probably
because the language of § 1793.2(d)(2)(B) was finalized in AB 3611, the analyses of AB 2057 contain mere rote
Tecitations of the section's contents, and do not reveal useful analysis or legislative intent.
April 10, 1997
page 9
D DEALERS’ PRESENT PRACTICE OF FINANCING "NEGATIVE EQUITY"
MAY BE UNLAWFUL AND MAY NOT CREATE AN ENFORCEABLE
OBLIGATION
When a dealer finances a buyer’s so-called "negative equity" (or “rolls” it into the
amount financed), the dealer typically adds the amount of "negative equity" to the purchase
Price, or inflates the stated value of the trade-in to show that its net value equals the
negative equity." In-either case, the “negative equity" is financed as part of the purchase
transaction, and the buyer pays the additional amount financed as part of the regular monthly
joan payment.
The following demonstrates that these dealer practices probably violate the California
Automobile Sales Finance (Rees-Levering) Act (CC §§ 2981-2984.4) ("RL Act”) and the
California Finance Lenders Law (Financial Code 22000-22780) ("CFL Law")
1 Financing "Negative Equity" Probably Violates the Rees-Levering Act
a. Background
The Rees-Levering Act* . Tegulates the sale and financing of automobiles" and also
applies ". . if the wansaction is a2 subterfuge to avoid the Act." Gernandez v. Atlantic
Finance Co. (1980) 164 Cal.Rptr. 279, 281, 288-289.) The purpose of the RL Act is to
‘protect purchasers of motor vehicles against excessive charges by requiring full disclosure
of all items of costs, and its provisions are mandatory (Storv v. Gatewav Chevrolet C
(1965) 47 Cal.Rptr. 267, 270.)
The following RL Act provisions are the most pertinent here: those requiring
disclosure of the terms of the sale, those regulating "side loans," those prohibiting
acceleration of the debt absent the buyer’s default, and those on the buyer’s remedies.
The conditional sale contract is-at the heart of installment sales covered by the RL
Act, and its contents are dictated by the CC § 2982. Required contract disclosures include
the cash price, the value of the buyer’s trade-in, and the amount financed.
The "cash price" is the amount for which the seller would sell the vehicle for cash at
the time and place of the sale. (CC § 2981(e).) The total of the cash price, document
preparation fees, smog certification fees, service contract charges and taxes must be disclosed
in the contract as the “total cash price." (CC § 2982(a)(1):)
The net agreed value of the buyer’s trade-in and any remaining amount of the
downpayment to be paid by the buyer also must be disclosed in the contract. (CC §
2982(a)(6)
The’ difference between: the total cash price (plus other amounts not relevant here).
minns the total amount of the buyer’s downpayment, must be disclosed in the contract as the
amount financed. (CC § 2982(a)(8).) This is the amount that the buyer must repay, along
with interest, over the life of the contract.
April 10, 1997
page 10
b. Violations
The amounts described immediately above are the key Rees-Levering contact
disclosures because they establish the terms of the buyer’s obligation. Notably, these
disclosures do not accommodate “negative equity” that is "rolled" into the amount financed
The seller cannot properly add the amount of "negative equity" to the cash price
because then the amount disclosed does not meet the RL Act’s definition of "cash price
The seller cannot properly inflate the value of the buyer’s trade-in because then the
disclosure of the trade-in’s net agreed value is inaccurate. Inaccurate disclosure of the made-
in’s net agreed value, in turn, makes the disclosure of the amount financed inaccurate. This
violates both CC § 2982(a) and the Truth in Lending Act (15 USC. §§ 1632(a), 1638(a),(b)
12-CFR §§ 226.17(a),(b).)
The RL Act does recognize that sometimes the buyer may need assistance in making
the downpayment or a payment toward the purchase price. CC § 2982.5 provides the means
for the seller to disclose and to assist the buyer in obtaining such Joans (called “side loans")
Under § 2982.5, the seller can:assist the buyer to obtain a loan from a third party for all or
part of the downpayment, or for part of the purchase price, as long as the amount and terms
of the side loan are separately disclosed. (CC §§ 2982.5(b),(d).)
By “rolling” the "negative equity” into the amounr financed, the seller actually is
assisting the buyer to obtain a side loan to pay part of the downpayment or the purchase
price. Therefore, the terms of such a loan properly should be disclosed separately as
tequired by CC §§ 2982.5(b),(d). Failure to do so violates these sections
Violating CC § 2982(a)’s disclosure provisions is very significant in terms of the RL
Act’s remedies. In the worst case for the seller, violation of § 2982(a)’s disclosure
Tequirements renders the contract unenforceable and the buyer can recover the total amount
paid, including the agreed cash value of the trade-in. (CC §§ 2983, 2983.1.) The buyer can
either keep the vehicle or-rescind the contact. (CC § 2983.1.) In the more likely case, the
contract remains enforceable, but the buyer is excused from paying the unpaid finance
charge. (CC § 2983.1.)
Two other RL Act provisions deserve mention. CC §.2983.3(a) prohibits acceleration
of any amount due under the contract absent the buyer’s default. CC § 2982()) allows the
buyer to repay the entire indebtedness evidenced by the contract at any time without penalty
Arguably, requiring the buyer to pay the amount of “negative equity” financed in order to
accept a reimbursement decision would violate one or both of these prohibitions. A violation
of § 2982(/) entitles the buyer to recover three times the amount of finance charge paid. (CC
§ 2983.1.)
2 Financing "Negative Equity" Probably Violates the California Financ
Lenders Law
a. Background
The Rees-Levering discussion suggests that dealers who roll "negative equity" into the,
amount financed are violating that Act. In California's scheme for regulating consumer
April 10, 1997
page 11
credit transactions, the only other mechanism that dealers might use to finance "negative
equity" is to make loans under the CFL Law. Since dealers are rarely licensed as finance
lenders, such loans would be unlawful and probably would be eee A cursory
review of relevant CFL Law provisions follows.
Under the CFL Law, a consumer Joan is a loan that the borrower intends to use for
personal, family or household purposes, or a loan of Jess than $5,000 for any purpose. (FC
§§ 22203, 22204.) "Finance lenders" make consumer loans (FC § 22009), and must be
licensed by the Department of Corporations beforé doing so (FC § 22100). Finance lenders
can make motor vehicle loans.’ (See FC §§ 22328, 22329.)
b. Violations
A loan by a dealer to a buyer to finance the buyer’s "negative equity" raises several
legal issues. First, ‘the dealer most likely is not licensed as a finance lender, and thus is
violating the CFL Law. (FC § 22100.) Second, because separate disclosures are not made
for the "negative equity” loan, the’ Truth in Lending Act’s disclosure requirements are
violated. (15 USC §§ 1638(a),(b); 12 CFR §§ 226.17(a),(b).) Third, if the interest rate is
more than 10 percent, the loan is usurious because an unlicensed finance lender cannot
quality for the CFL Law’s'usury exemption. (See FC §§ 22100, 22002.) Fourth, requirmg
the buyer to repay the "negative equity" in order to accept the arbitrator’s reimbursement
decision is effectively the same as accelerating the maturit
Preview
F Superior Court of California F KNIGHT LAW GROUP, LLP County of Butte Steve Mikhov (SBN 224676) | stevem@knightlaw.com 5/13/2020 L Deepak Devabose (SBN 298890) deepakd@knightlaw.com 10250 Constellation Blvd., Suite 2500 D D Los Angeles, CA 90067 By uty Electronically FILED Telephone: (310) 552-2250 Fax: (310) 552-7973 WIRTZ LAW APC Richard M. Wirtz (SBN 137812) rwittz@wirtzlaw.com Amy R. Rotman (SBN 286128) arotman@wirtzlaw.com 10 Jessica R. Underwood (SBN 306481) 11 junderwood@wirtzlaw.com 4370 La Jolla Village Drive, Suite 800 12 San Diego, CA 92122 Telephone: (858) 259-5009 13 14 Attorneys for Plaintiffs, MELISSA A. WILLIAMS and 15 GEOFFREY G. WILLIAMS 16 SUPERIOR COURT OF CALIFORNIA 17 COUNTY OF BUTTE 18 MELISSA A. WILLIAMS and Case No: 17CV02617 19 GEOFFREY G. WILLIAMS, 20 DECLARATION OF STEVE MIKHOV Plaintiffs, IN OPPOSITION TO DEFENDANT’S 21 vs. MOTION TO TAX COSTS 22 [Filed concurrently with Opposition and FCA US LLC, a Delaware Limited Liability the Declarations of Richard Wirtz and 23 Company; CHUCK PATTERSON INC., a Guadalupe Lopez] California Corporation dba, CHUCK 24 PATTERSON TOYOTA SCION DODGE Date: May 27, 2020 25 JEEP RAM CHRYSLER; and DOES 1 Time: 9:00 a.m. through 10, inclusive, Dept.: 10 26 Defendants. 27 28 DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX DECLARATION OF STEVE MIKHOV I, Steve Mikhov, declare as follows: 1 I am an attorney at law duly licensed to practice before the courts of the State of California and attorney of record for Plaintiffs MELISSA A. WILLIAMS and GEOFFREY G. WILLIAMS (“Plaintiffs”) in the instant action. I have personal knowledge of the following facts and, if sworn as a witness, I could and would testify to them competently. 2 Plaintiffs Melissa and Geoffrey Williams (“Plaintiffs”) purchased a used 2012 Dodge Ram 2500 in 2013 from John L. Sullivan Dodge Chrysler in Marysville, California for $37,499. They made a $5,000 down payment and financed the remainder. The vehicle was 10 manufactured and warranted by FCA US LLC (Chrysler). Plaintiffs experienced repeated engine 11 and electrical issues that Chrysler was unable to fix. Chrysler’s inability to fix the vehicle pushed 12 Plaintiffs to trade in their Dodge, so that they could purchase another—safer, reliable—vehicle. At 13 first, Plaintiffs tried to get the dealership to buy back the car in exchange for a new Dodge, but the 14 salesman refused to accept a trade in. So, Plaintiffs decided to purchase a new truck from GMC. 15 In connection with their purchase of a new GMC Sierra, the GMC dealer purported to give 16 Plaintiffs a trade-in credit for their lemon of $29,500.00. The word “purported” is used because 17 trade in amounts do not represent funds that a consumer actually receives. Rather, as the 18 Department of Consumer Affairs has observed, dealers often inflate trade-in credits, while 19 simultaneously inflating the price of the new car. Attached here to as Exhibit A is true and correct 20 21 copy of this Memorandum from the Department of Consumer Affairs (“DCA Letter”). This makes 22 sense, because manipulating these values influences a buyer’s psychology—people who believe 23 they’re receiving discounts are more likely to buy new cars. A dealer’s trade-in credit thus isn’t 24 designed to approximate the value of the traded-in vehicle, nor does it reflect any actual discount 25 on the purchase price. Indeed, it does not approximate the value ofa legally-defective car which 26 should have already been branded as a “lemon” and removed from the open market altogether. Of 27 course, they still owed $34,953.33 on their lemon, which means that they were forced to roll 28 $5,453.33 in negative equity into the purchase of their replacement vehicle. 1 DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX 3 Plaintiffs filed their complaint on November 7, 2016. On January 3, 2017, FCA served its first C.C.P. §998 offer, in which it vague offered to “make restitution pursuant to Civil Code 1793.2(d)(2)(B)”, minus the trade in value. Because this offer did not even specify an amount, did not provide a date for payment, did not allow for entry of judgment, did not address interest, and did not make clear whether post-acceptance fees and costs would be recoverable, Plaintiffs served objections thereto. The offer also did not include any payment of civil penalties. Furthermore, this offer stated that it was made pursuant to Goodstein v Bank of San Pedro, in that judgment would not be interest, but it also did not include the signature of, nor any place for FCA (or the Plaintiffs) to sign. In fact, FCA’s counsel has taken the position that such offers are not 10 enforceable pursuant to C.C.P §664.6, and only enforceable via a separate lawsuit for breach of 11 contract. The uncertainty of a path for enforcement and the costs thereof made this offer incapable 12 of valuation. A true and correct copy of FCA’s 998 Offer, as served on my office, is attached as 13 Exhibit B. A true and correct copy of Plaintiffs’ objections thereto is attached as Exhibit C. 14 4 Over two years later, on January 25, 2019, FCA served its second 998 Offer. This 15 16 time FCA offered a sum certain -- $50,000 — but again it failed to provide a date for payment, did 17 not allow for entry of judgment, did not address interest, and did not make clear whether post- 18 acceptance fees and costs would be recoverable (despite Plaintiffs’ earlier objections to these 19 deficiencies), and did not have any place for FCA or the Plaintiffs to sign. Accordingly, Plaintiffs 20 did not accept this vague and invalid offer. This case proceeded to trial. A true and correct copy 21 of this 998 Offer, as served on my office, is attached as Exhibit D. As Richard Wirtz was lead 22 trial counsel, I refer the Court to his declaration for an explanation of the events that proceeded at 23 trial. 24 5 Following a jury trial, this Court entered judgment on January 6, 2020, in favor of 25 Plaintiffs and against FCA US LLC (“FCA”) for restitution, incidental and consequential damages, 26 and maximum civil penalties, which it (incorrectly) calculated to be $46,716.54. A true and correct 27 copy of the entered judgment is attached hereto as Exhibit E. 28 2 DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX 6. FCA served its memorandum of costs on or about February 13, 2020, seeking $32,508.04 in costs. 7 Plaintiffs anticipate that FCA will argue that the timing of payment is not a significant term that must be spelled out in light of the fact that it is a large company with the resources to pay settlement amounts quickly. This could not be farther from the truth. My firm litigates against FCA very regularly. FCA regularly delays the payment of funds, often for months. In fact, we have been forced to regularly file motions to enforce settlement and for sanctions when vague offers such as these ones (with no date certain for payment) are accepted by plaintiffs. 8 Plaintiffs’ Memorandum of Costs filed with the Court was drafted by my office 10 staff. It is a ministerial duty that involves reviewing receipts that the law office keeps in an 11 organized manner as they are incurred in each case. Each cost and expense item listed in the 12 Memorandum of Costs and the supporting Worksheet was incurred in the commencement and 13 prosecution of this action only. After reviewing the Memorandum of Costs and the Worksheet, I 14 15 signed the document knowing of the duties imposed upon me under the law. At all times, my firm 16 tries to keep costs and expenses as low as possible and they are incurred only when necessary and 17 reasonable. It is in the firm’s best interests to keep costs down due to the risk that they may not 18 be reimbursed in the event the client does not prevail in the action 19 9 Attached hereto as Exhibit F is a true and correct copy of my firm’s internal 20 spreadsheet which provides a line-by-line itemization of all expenditures to which FCA has lodged 21 an objection. 22 10. FCA is right that there is an error on the memorandum of costs. On page 4 (the 23 attachment) Item Number 3 (Depositions), the costs for the deposition of Jeremiah Stepan are 24 listed as just $58.35. That is incorrect. That sum is just for the mileage to drive to the deposition. 25 As Exhibit F shows the total costs associated with travel to and from and taking the deposition of 26 Mr. Stepan were $2,353.74. Furthermore, true and correct copies of the invoices for the costs 27 related to the deposition of Mr. Stepan are attached hereto as Exhibit G. The total listed under 28 Item 4 (Deposition Costs--$7,366.49) is accurate. 3 DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX 11. True and correct copies of Mr. Blasjo’s invoices for this case are attached as Exhibit H. 12. True and correct copies of Mr. Micale’s invoices for this case are attached as Exhibit I. This includes the April 11, 2020 Invoice that my office just recently received, and the reason for the filing of Plaintiffs’ second amended memorandum of costs. 13. True and correct copies of the invoices for the purchase of trial transcripts for this case are attached as Exhibit J. 14. In several recent cases, manufacturers, including FCA, have served 998 offers virtually identical to the one served in this case which state that the case will be dismissed pursuant 10 to Goodstein but also only contain the signature of defendant’s counsel. In those cases, 11 manufacturers have started to repeatedly take the position that the resulting settlement agreement 12 is not enforceable as a judgment, not enforceable pursuant to C.C.P. §664.6, and that plaintiff's 13 only recourse for defendant’s non-performance of its settlement obligations is a completely 14 15 separate lawsuit for breach of the settlement agreement. For example, in the recent case of Lealv. 16 Mercedes Benz USA, LLC (Los Angeles Superior Court, BC689308), the law firm of Universal 17 and Shannon (one of the law firms that regularly represents FCA in lemon law litigation), took the 18 position that any 998 offers that provide for dismissal instead of judgment pursuant to section 19 664.6 and do not include the signatures of both parties are only enforceable in contract (in other 20 words, by filing a separate lawsuit for breach of the settlement agreement). Attached hereto as 21 Exhibit K is a true and correct copy of Universal and Shannon’s Opposition to Plaintiff's Motion 22 For Enforcement of Settlement in the Leal case. Attached hereto as Exhibit L is a true and correct 23 copy of an email thread with Universal and Shannon in which they make clear their position that 24 such 998 offers are only enforceable in contract, i.e. via a separate lawsuit for breach of settlement 25 agreement. 26 Ml 27 Ml 28 Ml 4 DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed this May 13, 2020 at Los Angeles, California. / S E MIKHOV Declarant 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 DECLARATION OF STEVE MIKHOV IN OPPOSITION TO DEFENDANT’S MOTION TO TAX EXHIBITA State of California ; oO Dep hent of Consumer Affairs MEMORANDUM Ta: PETER BRIGHTBILL Date: April 10, 1997 tox Chief, Arbitratio: io view Program From: JOHN ( LAMB: Services Unit Re: "Negative itv" _in Arbitrators’ at cement/Repurcl ¢ Decisions — ’ February 17, 1997 Lemer Margaret OWE! You asked me to respond to Peggy Bowers’ letter on behalf of Ford Motor Company which argues that the buyer of a defective vehicle should not be reimbursed for "negative equity” under a repurchase decision in a lemon law arbitration proceeding. As described in Ms. Bowers’ letter, "negative equity" -is the difference between the Joan: balance on the buyer’s trade-in and the value which the dealer and the buyer have assigned to the trade-in, when that difference is financed as part of the buyer's purchase (or jease) of a new vehicle. This so-called "negative equity" becomes an issue when the new vehicle is defective and an arbitrator orders its repurchase. Ms. Bowers argues that the "negative equity" is not part of the purchase price paid by the buyer, and that the manufacturer therefore is not required to reimburse it in this simation. As explained in detail below, I-have concluded that any “negative equiry" is part of » Me the actual price pavable by the buyer, and that the manufacturer therefore is required to reimburse it as part of a repurchase decision. I also have concluded that reimbursing “negative equity" does not unjustly enrich the buyer and is not unfair to the manufacmurer. Finally, I have concluded that some dealers’ practice of “rolling” a buyer’s “negative equity" into the purchase price of a new vehicle is probably unlawful and may not create an a obligation against the buyer to repay the "negative equity" amount. I. BACKGRO’ A. PURCHASE TRANSACTIONS WHERE "NEGATIVE EQUITY" IS FINANCED Automobile dealers often agree to pay off the amount due on a trade-in in order to close a deal, even though the dealer knows that the pay-off amount might be greater than the trade-in’s true value. The dealer either adds the amount paid to the price of the new vehicle, . inflates the value of the trade-in so that its net value equals the amount of the "negative eguity," or uses some combination of these techniques to include the amount of "negative equity" in the amount financed. It is essential to understand that the new vehicle’s purchase price, the value of the trade-in, and the amount of "negative equity" usually are not “hard” numbers, even though they appear to be after the fact. The amount assigned to "negative equity" to be financed may vary depending on the agreed price of the purchased vehicle.and the agreed value of the trade-in vehicle. This in turn may be a function of factors that are not related to the trade- in’s actual valué, such as: the buyer’s awareness and bargaining skills, the dealer’s impression of the salability of the trade-in, the current sales performance of the new vehicle, © April 10, 1997 page 2 and even whether the dealer is having a successful month. When the buyer is negotiating the purchase, his or her focus will not be-on these factors, but rather on the amount of monthly payments, and possibly, on the total amount to be financed and the annual percentage rate. In the course of the purchase negotiations, the dealer may adjust the purchase price to compensate for the amount to be allowed on the trade-in and the amount of "negative equity" that‘the dealer will have to pay. In the end, the buyer will be responsible for paying a stated amount, which will be the sum of the agreed purchase price and the amount of the "negative equity" that is financed. In reading the following’ analysis, it should be remembered that these amounts often are highly fluid-until the buyer signs the contract. B. THE ARP’S PRESENT POSITION ON "NEGATIVE EQUITY” In October 1996, I reviewed a Program Summary submitted by the Council of Better Business Bureaus ("CBBB") as part of a manufacturer’s application for certification. The ARP was particularly concerned about the applicant’s proposal that arbitrators be permitted to deduct the "negative equity” in trade-ins when making awards in cases involving leased vehicles. I concluded that California law does not allow an arbitrator to deduct any “negative equity" in a lessee’s trade-in from an award in a decision to repurchase or replace a defective leased vehicle. The ARP communicated this position to the CBBB, and subsequently, to the several certified arbitration programs. My analysis, repeated in the margin in relevant part;! continues to be an accurate 1 The Song-Beverly Act ("Act") and the Arbitration Review Program regulations (“regulations”) do not allow an arbirration award that requires restitution or replacement to be reduced by the ainount of negative equity in the buyer’s or lessee’s trade-in. Civil Code §§ 1793.2(d)(2)(A)-(C) strictly limit permissible deductions in replacement and repurchase situations: the only deduction permitted is an offset for use calculated Ppursvant to the formula at CC § 1793.2(d)(2)(C). The regulations; at 16 CCR § 3398.11(c), also allow deduction for the buyer’s/lessee’s over-use or abuse of the vehicle. These are the only deductions permitted by California law. Indeed, the purpose of 16 CCR § 3398.11(c) was to counter some arbitrators’ practice of not strictly applying §§ 1793.2(d)(2) (A)-(C)s' remedies, and to require manufacturers to adhere to them in repurchase/replacement decisions, (Set Initial Starement of Reasons, Arbitration Program Certification Regulations, California Department of Consumer Affairs, p. 25 (May 23, 1989).) Deducting for negative equity in a trade-in is impermissible for another reason: it effectively penalizes the consumer for the manufacturer’s inability to conform the vehicle to the manufacrurer's express warranties.- This is contrary to the philosophy behind the Act and the regulations, as expressed in the Commercial Code and the regulations’ Final Statement of Reasons. The Commercial Cade’s Article 2 remedy provisions, incorporated into the Act by CC § 1794(b), are to be liberally administered “to the end that the aggrieved parry [here, the consumer] may be put in as good a position as if the other party [here, the manufacturer/warrantor] had fully performed ....” (Com. Code § 1106; see CC § 1794(b).) This concept also is woven into the regulations. The Final Statement of Reasons states: “In transactions in which the manufacture? has been unable to carry out the terms of its warranty — has been unable to repair a vehicle after a reasonable number of attempts ~ it is more appropriate to place the burden on the manufacturer, than on the consumer who js not responsible for the default." (Final Statement of Reasons, April 10, 1997 page 3 legal interpretation of the Act and regulations. My expanded analysis in response to Ms. Bowers’ letter provides additional persuasive support for this analysis and its conclusions B FORD’S ARGUMENTS Ms. Bowers’ letter argues that "negative equity” is not part of the purchase price of the defective vehicle. She also argues that not allowing "negative equiry" to be deducted from the reimbursement award (or in her terms, requiring the manufacmrer to refund the ‘negative equity") is unjust to the manufacmrer and creates a windfall to the consumer, She apparently agrees with the ARP’s position that “negative equity” cannot be deducted from the purchase price that the arbitrator orders to be reimbursed. (Bowers letter, page 1.) Whether “negative equity" is part of the purchase price mums on the following Janguage in CC § 1793.2(d)(2)(B) "In the case’ of restitution, the manufacturer shall make restimtion in an amount equal to the actual price paid o1 ayable by. e buver," including incidental damages and numerous other charges, but excluding monmanufacturer items installed by a dealer or the buyer. (Emphasis added. d- Ignoring the words "or payable,” Ms. Bowers argues that the intent of the quoted language is to require the manufacturer to reimburse the consumer for the costs incurred in the present transaction. In her view, “Amounts refinanced from another loan on a trade-in are not part of the vehicle price paid by the buyer. (Bowers letter , page 2.) She concludes that the manufacturer therefore is not deducting “negative equity” from the purchase price of the vehicle; rather, in her view, the manufacturer 4is determining the actual price paid by the buyer for the vehicle. Ms. Bowers’ unjust enrichment and windfall arguments follow from this conclusion. Tt. ANALYSIS REIMBURSING THE AMOUNT OF "NEGATIVE EQUITY" FINANCED DOES NOT UNJUSTLY ENRICH THE BUYER AND IS NOT UNFAIR TO THE MANUFACTURER Ms. Bowers argues that requiring the manufacturer to reimburse so-called "negative equity” in a repurchase situation would result in a windfall to the buyer and would be Arbiration Program Certification Regulations, California Department of Consumer Affairs, Responses to Objections/Recommendations {incidental damages}, p. 28 (September 13, 1989).) Allowing the consumer's arbitration award to be reduced by the amount of the negative equity in the consumer’s trade-in clearly does not put the consumer in as good a position as if the manufacturer had fully performed by making the defective vehicle conform to the express warranties, and impermissibly puts the Durden for the manufacturer's failure on the consumer. Finally, the proposed deduction for negative equity essentially would require the lessee to waive the Tights described above. Any waiver of the Act's provisions by the consumer is expressly prohibited by the Act: (CC § 1790.1.) April 10, 1997 page 4 imequitable to the manufacturer. The practical consequence of requiring the manufacturer to reimburse "negative equity" is not as Ms. Bowers states. This becomes clear when the totality of the purchase-transaction and the buyer’s obligation thereunder is considered, rather than just the terms of thé, arbitrator’s decision. As explained at I.A., the amount of "negative equity" can‘be highly arbitrary, even in a transaction where the buyer is.a skillful negotiator. The amount of "negative equity” may be determined by factors which have no direct relationship to the true fair market value of the trade-in or the unpaid balance on the loan for which the trade-in stood as security. In pYictice, dealers often agree to pay off the amount due on a trade-in in order to close a deal, even though the dealer knows that the pay-off amount is greater than the trade-in’s value. In effect, the dealer takes a calculated risk that the buyer will fulfill his or her obligations under the new purchase contract. If the vehicle conforms to the mamufacturer’s warranties, the ‘buyer will pay off the amount of "negative equity," together with the purchase price, over the course of the contract. In this simation,-all parties will have benefitted from the dealer’s action: the buyer benefits by paying off the total debt and having a properly functioning vehicle; the dealer and manufacturer benefit by making the sale; and, the manufacturer often also benefits by collecting interest on the amount of "negative equity" financed. However, on occasion, vehicles prove to be defective, and the manufacturer is unable to conform them to the warranties that it has given as part of the purchase transaction. In this situation, the dealer has miscalculated the risk, and the manufacturer has failed to fulfill its warranty obligations. The buyer should not be forced to bear the burden of the dealer’s miscalculation or the manufacturer’s inability to conform the vehicle to its own warranties. Reducing this concepmal conclusion to hard reality, the fact is that many buyers will not be able to pay off the amount of "negative equity" that is financed, and thus will be Tequired to accept a replacement vehicle rather than the reimbursement awarded. This practical realiry violates the regulations’ mandate that decisions must be fair (16 CCR § 3398.10(a)), as well as the Act’s requirement that the buyer must be able to choose reimbursement in lieu of replacement (see page 5). It also may be unfair to the buyer, since the amount of "negative equity" that the buyer now must pay may have been manipulated by the dealer (perhaps, with ' the buyer’s unwitting concurrence) during the purchase negotiations. Finally on this point, Ms. Bowers argues that the manufacturer should nottbe responsible for "debt the consumer incurred that was completely unrelated to the purchase of the vehicle at issue." This misrepresents the tme nature of the “negative equity," which is inextricably intertwined with all aspects of the purchase transaction. Financing the “negative equity” also is related to the purchase of the new vehicle because otherwise the purchase could not occur. Further, both the manufacturer and the dealer benefit by making the sale, as explained above. in sum, when the totality of the transaction is considered, requiring reimbursement of the buyer’s total contractual obligation (purchase price plus "negative equity") does not provide the buyer a windfall and is not inequitable to the manufacturer. Rather, this April 10, 1997 page 5 conclusion properly places the burden of the manufacturer's inability to repair the warranted vehicle on the manufacturer, avoids imposing an essentially arbitrary obligation on the buyer » and assures that the buyer does not lose the option to choose reimbursement instead of Teplacement.? B FORD’S CONCLUSIONS. WOULD VIOLATE THE SONG-BEVERLY ACT AND THE ARP’S REGULATIONS, AND WOULD NOT BE PRACTICAL To accept Ms. Bowers’ conclusion that "negative equity” is not part of the purchase price payable by the buyer would violate-the Song-Beverly Act ("Act") and the ARP’s regulations. First, as explained above, requiring the buyer to pay off the "negative equity" in order to accept a repurchase decision in many cases will force the buyer to accept a replacement vehicle instead. This would violate CC § 1793.2(d)(2)’s requirement that the buyer must be able to choose reimbursement in lien of replacement. Second, interpreting the Act so that the buyer is required to choose replacement instead of restitution effectively requires the buyer to waivé a provision of the Act, which is prohibited by ce § 1790.1. Third, Ms. Bowers’ interpretation would improperly deprive the arbitrator of decision-making authority. Her letter states that where it is clear that "negative equity” has been rolled into the financing of the new vehicle, the manufacturer is able to determine the Tespective amounts of the purchase price and the "negative equity." (Bowers leter, page 2.) The amount of the purchase price is key to the buyer’s recovery in an arbitration proceeding, and allowing the manufacturer to make this determination would constitute an improper delegation of decision-making authority under 16 CCR §§ 3398.10 and 3398.11. Section 3398.10(a) states that "The arbitrator shall render a decision (Emphasis added.) Section 3398.11(d) allows the arbitrator to delegate only the ministerial function of calculating the amount of the mileage offset, but emphasizes that the decision-making function shall be performed by the arbitrator only Finally, assuming for the sake of argument that the financed "negative equity” is not part of the purchase price, the arbitrator would be faced with a host of practical problems For example, the arbitrator would have to identify the acmal purchase price and the amount of "negative equity” that was financed, which the dealer often has obfuscated in the purchase documents. Once this determination was made, the arbitrator would be required to calculate the amount of the "negative equity" already repaid, and the amount still owing. In calculating this, the arbitrator would have to choose and apply a "legally proper and fair" method of calculating unearned interest on a loan that is terminated early through no fault of the borrower This might be the Rule of 78s, the constant yield method, a pro rata payoff ? Vf manufacturers truly feel that reimbursing buyers for "negative equity” in these situations is unfair, the solution seems obvious: manufacturers could enter into agreements with their dealers (who are their agents) Tequiring that whenever a manufacturer is required to reimburse any “negative equity" under a lemon law decision, the dealer must reimburse the manufacturer in the same amount. April 10, 1997 page 6 method, or some other method of calculating unearned interest. Making these choices and calculations are well beyond the expeftise of the arbitrators whom I have observed. In light of all of these legal and practical problems, as well as the following legal analysis, Ms. Bowers’ interpretation of “negative equity" is incorrect and should be rejected Cc. THE COMMERCIAL CODE AND THE SONG-BEVERLY ACT REQUIRE THAT "NEGATIVE EQUITY" BE REIMBURSED The plain language of CC § 1793.2(d)(2)(B) requires that the manufacuurer reimburse the-buyer for the so-called "negative equity” in the buyer’s trade-in, when that amount is financed as part of the purchase of a vehicle that is defective, and when an arbitrator orders restitution. The phrase the manufacturer shall make restinition in an amount equal to the actual price payable by the buyer” is not susceptible to any other interpretation. Assuming for purposes of argument that the quoted phrase is susceptible to a different interpretation, the same conclusion is required by the Commercial Code, CC § 1793.2(d)(2)(B)’s legislative history and the mules of starutory construction. 1 Commercial Cod The Commercial Code’s ("Code’s") remedies in sales transactions provide the framework for, and are incorporated into, the Act’s remedy provisions. Therefore, it is helpful to look to the Code to explain terms used in the Act. In Commercial Code termmology, a buyer whose vebicle meets the lemon law criteria and who has requested Teplacement or.reimbursement has “revoked acceptance” of the sale. Under CC § 1794(b)(2), a buyer in such a simation has the remedies specified in Commercial Code §§ 2711-2713. Commercial Code § 2711 describes the buyer’s remedies after the buyer has revoked acceptance of goods for breach of warranty, including damages for "nondelivery (Clark & Smith, The Law of Product Warranties, Remedies of the Buyer After Proper Rejection or Revocation, J 7.04[1].) This remedy is to be "liberally administered to the end that the aggrieved party be put in as good a position as if the other patty had fully performed.” (Com. Code § 1106(1); see Com. Code § 2711, Official Comment 3.) The buyer’s nondelivery damages are based on the buyer’s “total legal obligation under the contract. (Com. Code §§ 2711, 2173(1), 1201(11), 2301.) In order to understand the buyer’s total Jegal obligation under the contract, the contract terms must be viewed in their full commercial environment and in the context of the full factual surroundings of the transaction. (Hawkland, Uniform Commercial Code Series, General Obligations and Construction of Contract, Sec.’ 2-301:01 (Callaghan & Company 1984).) Thus, the buyer’s total legal obligation under the contract would include the buyer’s obligation to repay “negative equity” that was financed as part of the purchase transaction, even if this obligation is not clear on the face of the contract. > In few, if any, situations would a lemon law-required replacement or reimbursement situation not be one in which the buyer could justifiably revoke acceptance under the Commercial Code. April 10, 1997 page 7 Ford’s argument that "negative equity" is "not part of the acmal vehicle price paid by the buyer" therefore is irrelevant. Whether or not "negative equity" is part of the actual Price of the vehicle, it is part of the buyer’s total contractual obligation. Turning to the Act, its provisions, even more specifically than the Code, are to be construed to protect consumers (see Rules of Statutory Construction, below) Applying the foregoing Code principles to the Act illuminates the meaning of the phrase “actual price paid or payable by the buyer’ in CC § 1793.2(d)(2)(B). Where the Code uses the buyer’s broadly defined "total legal obligation" under the contract as the basis for determining. the buyer's damages, the Act uses "the actual price paid or payable by the buyer" as the basis for determining the amount of restitution to which the buyer is entitled. Just as the buyer’s “total legal obligation" would include any “negative equity" financed as part of the new vehicle purchase if the buyer were revoking acceptance, so does, the “actual price payable by the buyer” include any "negative equity” financed as part of the new purchase when the buyer is entitled to restimtion under the lemon law To conclude otherwise ignores the Act’s underpinnings in the Code, defeats the Act’s purpose of protecting consumers, and destroys the symmety between the two sets of remedy provisions. 2 islative Historv Civil Code § 1793.2(d)(2)(B) originated as part of AB 3611 (Tanver) in 1986 Assemblywoman Tanner, the author of the original "lemon law sought to remedy problems with the lemon Jaw as enacted, including dispute resolution programs’ failing to award adequate reimbursement in refund decisions. (Assembly Third Reading Analysis, AB 3611 as amended May 19, 1986.) In the section that ultimately became CC § 1793.2(d)(2)(B), the bill provided: "(T]he manufacturer shall make ‘restinution in an amount equal to the full contract price paid or payable by the buyer, including a charges and- fees}." The Senate Judiciary Comminee’s analysis of this section stated that "The purpose of this bill is to provide for greater fairness both in automobile arbitration and in resulting restitution to the consumer." (Senate Committee on Judiciary Analysis, AB 3611 as amended May 19. 1996.) The Department of Consumer Affairs supported the bill because it would "reqnire[J that the buyer be made ‘whole’ where he/she elects reimbursement or replacement" (Letter to Hon. Sally Tanner, June 26, 1986), and because one of the problems addressed by the dill was that buyers often were not made "whole” under the then-current law (Deparment of Consumer Affairs, Bill Analysis, AB 2057 as amended June 11, 1987) On August 11, 1986, the section that ultimately became CC § 1793.2(d)(2)(B) was amended to read as it does today, including replacing the phrase “full contract" with the word "actual." No obtainable legislative analysis comments on this amendment However, the clear effect of the amendment is to implement the Code's policy, described above, that the buyer's "total legal obligation" under the contract can transcend the description of the April 10, 1997 page 8 transaction in the contract.‘ 3 Rules of Statutory Construction Ms. Bowers’ argues for Ford’s imerpretation of CC § 1793.2(d)(2)(b) by ignoring the phrase “or payable by the buyer.” A basic rule of stanatory construction requires that the plain meaning of a stamite be given effect unless a compelling reason exists not'to do so: "“[I}f stamtory language is ‘clear and unambiguous there is no need for construction and courts should not indulge in it.’ [Citation.]’ Unless defendants can demonstrate that the natmral and customary import of the stamute’s Janguage is either ‘repugnant to the general purview of the act,’ or for some other compelling reason, should be disregarded, this court must give effect to the stamte’s 'plain meaning.’" (Tiernan v. Trustees of ‘California State Universities (1982) 33 Cal.3d 211, 218-219 [188 Cal.Rpm. 115, 120].) Here, the language at issue is clear and unambiguous, and Ford cannot establish that the language is repugnant to the Act’s purview or that there is a compelling reason to disregard it. The Act is a‘remedial measure that is intended for the protection of the consumer, and is to be construed to bring its benefits into action. (Kwan v. Mercedes-Benz (1994) 28 Cal.Rpw.2d 371, 377.) "Remedial statutes are construed to promote their purposes and protect persons within their purview. Relief will be granted unless clearly forbidden by statute." (Booth v. Robinson (1983) 195 Cal.Rptr. 130, 135.) Interpreting the phrase "payable by the buyer” to exclude "negative equity" from the amount payable by the buyer under the contract would violate these rules because: (a) the buyer would not be made whole and the arbitration proceeding and resulting restitution, would not be fair (see discussion of Legislative History, above); (b) the buyer, whom the Act is designed to protect, would be penalized rather than protected (see next paragraph); and, (c) interpreting the phrase to in clude "negative equity" is not forbidden by the statute. In fact, as explained on page 4, excluding any "negative equity" from the amount payable by the buyer under the contract would effectively penalize the buyer for the manufacturer’s inability to conform the vehicle to its express warranties. On the other-hand, interpreting the phrase broadly to include al] amounts payable by the buyer under the contract (other than those amounts explicitly excluded) furthers the Act’s purpose of protecting the consumer. This interpretation also is consistent with the Kwan and Booth courts’ instructions and the preceding legal analysis. “AB 3611 ultimarely died in the Senate Appropriations Committee for reasons unrelated to its substance. Present CC § 1793.2(d)(2)(B) was enacted by AB 2057 (Tanner) in 1987 (Stats. 1987, ch. 1280). Probably because the language of § 1793.2(d)(2)(B) was finalized in AB 3611, the analyses of AB 2057 contain mere rote Tecitations of the section's contents, and do not reveal useful analysis or legislative intent. April 10, 1997 page 9 D DEALERS’ PRESENT PRACTICE OF FINANCING "NEGATIVE EQUITY" MAY BE UNLAWFUL AND MAY NOT CREATE AN ENFORCEABLE OBLIGATION When a dealer finances a buyer’s so-called "negative equity" (or “rolls” it into the amount financed), the dealer typically adds the amount of "negative equity" to the purchase Price, or inflates the stated value of the trade-in to show that its net value equals the negative equity." In-either case, the “negative equity" is financed as part of the purchase transaction, and the buyer pays the additional amount financed as part of the regular monthly joan payment. The following demonstrates that these dealer practices probably violate the California Automobile Sales Finance (Rees-Levering) Act (CC §§ 2981-2984.4) ("RL Act”) and the California Finance Lenders Law (Financial Code 22000-22780) ("CFL Law") 1 Financing "Negative Equity" Probably Violates the Rees-Levering Act a. Background The Rees-Levering Act* . Tegulates the sale and financing of automobiles" and also applies ". . if the wansaction is a2 subterfuge to avoid the Act." Gernandez v. Atlantic Finance Co. (1980) 164 Cal.Rptr. 279, 281, 288-289.) The purpose of the RL Act is to ‘protect purchasers of motor vehicles against excessive charges by requiring full disclosure of all items of costs, and its provisions are mandatory (Storv v. Gatewav Chevrolet C (1965) 47 Cal.Rptr. 267, 270.) The following RL Act provisions are the most pertinent here: those requiring disclosure of the terms of the sale, those regulating "side loans," those prohibiting acceleration of the debt absent the buyer’s default, and those on the buyer’s remedies. The conditional sale contract is-at the heart of installment sales covered by the RL Act, and its contents are dictated by the CC § 2982. Required contract disclosures include the cash price, the value of the buyer’s trade-in, and the amount financed. The "cash price" is the amount for which the seller would sell the vehicle for cash at the time and place of the sale. (CC § 2981(e).) The total of the cash price, document preparation fees, smog certification fees, service contract charges and taxes must be disclosed in the contract as the “total cash price." (CC § 2982(a)(1):) The net agreed value of the buyer’s trade-in and any remaining amount of the downpayment to be paid by the buyer also must be disclosed in the contract. (CC § 2982(a)(6) The’ difference between: the total cash price (plus other amounts not relevant here). minns the total amount of the buyer’s downpayment, must be disclosed in the contract as the amount financed. (CC § 2982(a)(8).) This is the amount that the buyer must repay, along with interest, over the life of the contract. April 10, 1997 page 10 b. Violations The amounts described immediately above are the key Rees-Levering contact disclosures because they establish the terms of the buyer’s obligation. Notably, these disclosures do not accommodate “negative equity” that is "rolled" into the amount financed The seller cannot properly add the amount of "negative equity" to the cash price because then the amount disclosed does not meet the RL Act’s definition of "cash price The seller cannot properly inflate the value of the buyer’s trade-in because then the disclosure of the trade-in’s net agreed value is inaccurate. Inaccurate disclosure of the made- in’s net agreed value, in turn, makes the disclosure of the amount financed inaccurate. This violates both CC § 2982(a) and the Truth in Lending Act (15 USC. §§ 1632(a), 1638(a),(b) 12-CFR §§ 226.17(a),(b).) The RL Act does recognize that sometimes the buyer may need assistance in making the downpayment or a payment toward the purchase price. CC § 2982.5 provides the means for the seller to disclose and to assist the buyer in obtaining such Joans (called “side loans") Under § 2982.5, the seller can:assist the buyer to obtain a loan from a third party for all or part of the downpayment, or for part of the purchase price, as long as the amount and terms of the side loan are separately disclosed. (CC §§ 2982.5(b),(d).) By “rolling” the "negative equity” into the amounr financed, the seller actually is assisting the buyer to obtain a side loan to pay part of the downpayment or the purchase price. Therefore, the terms of such a loan properly should be disclosed separately as tequired by CC §§ 2982.5(b),(d). Failure to do so violates these sections Violating CC § 2982(a)’s disclosure provisions is very significant in terms of the RL Act’s remedies. In the worst case for the seller, violation of § 2982(a)’s disclosure Tequirements renders the contract unenforceable and the buyer can recover the total amount paid, including the agreed cash value of the trade-in. (CC §§ 2983, 2983.1.) The buyer can either keep the vehicle or-rescind the contact. (CC § 2983.1.) In the more likely case, the contract remains enforceable, but the buyer is excused from paying the unpaid finance charge. (CC § 2983.1.) Two other RL Act provisions deserve mention. CC §.2983.3(a) prohibits acceleration of any amount due under the contract absent the buyer’s default. CC § 2982()) allows the buyer to repay the entire indebtedness evidenced by the contract at any time without penalty Arguably, requiring the buyer to pay the amount of “negative equity” financed in order to accept a reimbursement decision would violate one or both of these prohibitions. A violation of § 2982(/) entitles the buyer to recover three times the amount of finance charge paid. (CC § 2983.1.) 2 Financing "Negative Equity" Probably Violates the California Financ Lenders Law a. Background The Rees-Levering discussion suggests that dealers who roll "negative equity" into the, amount financed are violating that Act. In California's scheme for regulating consumer April 10, 1997 page 11 credit transactions, the only other mechanism that dealers might use to finance "negative equity" is to make loans under the CFL Law. Since dealers are rarely licensed as finance lenders, such loans would be unlawful and probably would be eee A cursory review of relevant CFL Law provisions follows. Under the CFL Law, a consumer Joan is a loan that the borrower intends to use for personal, family or household purposes, or a loan of Jess than $5,000 for any purpose. (FC §§ 22203, 22204.) "Finance lenders" make consumer loans (FC § 22009), and must be licensed by the Department of Corporations beforé doing so (FC § 22100). Finance lenders can make motor vehicle loans.’ (See FC §§ 22328, 22329.) b. Violations A loan by a dealer to a buyer to finance the buyer’s "negative equity" raises several legal issues. First, ‘the dealer most likely is not licensed as a finance lender, and thus is violating the CFL Law. (FC § 22100.) Second, because separate disclosures are not made for the "negative equity” loan, the’ Truth in Lending Act’s disclosure requirements are violated. (15 USC §§ 1638(a),(b); 12 CFR §§ 226.17(a),(b).) Third, if the interest rate is more than 10 percent, the loan is usurious because an unlicensed finance lender cannot quality for the CFL Law’s'usury exemption. (See FC §§ 22100, 22002.) Fourth, requirmg the buyer to repay the "negative equity" in order to accept the arbitrator’s reimbursement decision is effectively the same as accelerating the maturit