“Seller’s right to cancel” controls when buyers fail to obtain financing

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In a recent decision by the California Court of Appeal, the Court confirmed that auto dealers cannot withhold a customer’s down payment after a sale is unwound as a result of the inability to secure financing, and that the DMV has authority to discipline a dealer for doing so, including suspension or revocation of the dealer’s license. In Front Line Motor Cars v. Kathleen K. Webb (2019) 247 Cal.Rptr.3d 32, the Court considered two separate consumer transactions where the customers purchased vehicles pursuant to a retail installment sale contract, paid a down payment prior to delivery, with the balance to be financed. In both transactions, the dealership was unable to assign the contract to a lender and ultimately repossessed the vehicle. Following the repossessions, the dealership refused to refund the down payments, claiming that the buyers were in breach of the contract. Both customers filed complaints with the DMV. Following an investigation, the DMV instructed the dealership to refund the down payments, but the dealership refused asserting that under the Rees-Levering Motor Vehicle Sales and Finance Act (Civil Code § 2981, et seq.) (hereinafter referred to as the “Act”) it was not required to refund the down payment, and that the DMV lacked the power to sanction the dealer. The DMV then brought a disciplinary action against the dealership. At the hearing, the administrative law judge ordered that the dealer’s license be conditionally revoked for two years, and the dealer appealed the decision.

On appeal, the Fourth Appellate District focused on the alleged violation of Civil Code § 2982.5. Specifically, subdivisions (b) and (d) of Section 2982.5 apply to seller-assisted loans and establish an exemption if certain specified conditions are met. Among these conditions is the requirement that if the buyer is not approved for a loan on the terms stated in the conditional sale contract, then the conditional sale contract shall be deemed rescinded and all consideration thereupon shall be returned by the respective parties without demand. The gist of the DMV’s accusation was simply that the dealership failed to return the buyer’s down payment after the buyer was unable to obtain financing.

According to the Court of Appeal, “implicit in a bona fide credit sale is (1) the buyer’s intent to purchase the property and pay contractually required installments; and (2) the seller’s intent to sell the property in a binding contract, but—if financing is denied—to rescind the contract and return the buyer’s down payment as provided in the contract.” Front Line Motor Cars v. Kathleen K. Webb (2019) 247 Cal.Rptr.3d 32, 44. The Court found that the overwhelming weight of the evidence was that the dealership intended to be bound to the contracts only if it was able to assign the contracts to a finance company and, if unable to do so, to reclaim the vehicle without restoring the buyer’s down payment. Intent is a factual question elevating substance over form and taking into account all the circumstances, and that this dealer’s intent must be viewed in light of (1) its conduct of repossessing used cars and reselling them while keeping the prior buyers’ down payments—a behavioral pattern which recurred in a significant portion of its sales requiring the buyer’s deferred down payment; (2) its failure to abide by the contractual provision governing the seller’s right to cancel, which required the seller to refund the buyer’s consideration; (3) its challenging the buyers to sue it in court; (4) the dealer’s sophistication resulting from 14 years of prior employment in the automobile sale finance industry; and (5) the dealer’s presumption that it could act without impunity under the Act. The Court found these circumstances show the dealer intended to enter into a binding contract only if and when the condition of financing was met, and consequently, under these particular facts, the transactions involved attempted seller-assisted loans. The Court also found that the dealership failed to establish a default by the customers under the terms of the contract; “they simply failed to qualify for the loan, not an event of default under the contracts.” Front Line Motor Cars v. Kathleen K. Webb (2019) 247 Cal.Rptr.3d 32, 46.

The essential contractual provision at issue was the “Seller’s Right to Cancel,” and the dealership did not exercise its rights under that provision. That provision is the only contractual remedy available upon a failure to obtain financing, and the exercise of that remedy plainly required Dealer to return the down payments when financing failed. In other words, “if Dealer considered itself bound by each contract upon the document’s execution by the parties, Dealer’s only remedy when it discovered its inability to assign the contract was to cancel the contract pursuant to the seller’s right to cancel provision.” Front Line Motor Cars v. Kathleen K. Webb (2019) 247 Cal.Rptr.3d 32, 47 (emphasis in original). Accordingly, the Court concluded the dealership violated Civil Code § 2982.5(d) and therefore the DMV properly exercised its authority to sanction it.

This decision serves as an important reminder to dealers that: (1) they are bound by the terms of retail installment sale contracts and the remedies provided therein; (2) it is unlawful to retain a buyer’s down payment after a sale is unwound as a result of an inability to secure financing; and (3) the DMV has authority to discipline dealers for violating Civil Code § 2982.5.