Federal courts in the Northern District of Illinois deliver a large number of opinions addressing various lemon law and auto fraud issues, the result, no doubt, of the presence of an active plaintiff’s bar in the Chicago area. Recently, in three published opinions, the courts addressed several novel theories dealing with the purchase and financing of cars. This article will survey these theories and the cases that discussed them, and offer some tips for the practitioner.
There are several federal and state statutes that are relevant to lemon law litigation.1 In addition, the creative lawyer can also utilize various common law causes of action.
A. Truth in Lending Act
One of the most pernicious practices of car dealers (and one of the most effective sales techniques) is committing the customer to the deal on the spot. We have all heard the line: "If I get you this deal, will you buy today?"
Typically, a consumer is given multi-page contract documents (between half-a-dozen and a dozen in number) to sign in the finance manager’s office. Of course, no one reads those documents, nor is it reasonable to expect consumers, perhaps even lawyer-consumers, to read them, small print and all.
If a car is financed (and most of them are), one of these documents is a finance contract. This area is ripe for abuse, because, when dealers arrange for financing, they have an incentive to "up" the interest rate offered by a bank and pocket the difference. Surprisingly, dealers are allowed by statute2 not to disclose that fact.
One of the ways a consumer may protect himself (or herself) is to take the unsigned finance contract and shop around for better rates. Naturally, car dealers do not like allowing people to go across the street seeking a better deal with unsigned contract documents in hand. The question, then, is whether it is against the Truth in Lending Act to give buyers the finance documents after they have decided to buy and require them to sign the documents on the spot.
Last summer, the Fourth Circuit Court of Appeals addressed this practice in the case of Polk v. Crown Auto, Inc.3 The issue in Polk was the interpretation of the provisions of Regulation Z4 that call for the consumer to be able to get the Truth in Lending disclosures (contained in the finance contract) "in writing, in a form that the consumer may keep,"5 "before consummation of the transaction."6
In a terse unpublished per curiam opinion, the Polk court held that the regulations meant what they said, and that, therefore, the disclosures had to be given to prospective buyers prior to the time that they had to sign the finance documents.7 The car dealer’s attorney wrote a letter to the court asking it not to publish Polk, whereupon the Fourth Circuit decided to publish it.
What are the kinds of damages that must be pleaded in order to survive a motion to dismiss? The answer in the Northern District of Illinois is complicated by the Seventh Circuit opinion holding that statutory damages of $1,000 under the Truth in Lending Act are not available for the kind of violation that Polk addressed.8 Therefore, to allege what now is commonly referred to as the "Polk violation," a party has to allege actual damages.
Here is where the practice of "upping" the interest rate becomes important. If the consumer could take the finance contract across the street before becoming obligated, he or she is likely to discover the upcharge, or the "yield spread premium," which the dealer is statutorily permitted to hide. Therefore, if the consumer were able to take the disclosures with him or her for purposes of comparison shopping, and if the consumer would have sought and obtained a better interest rate, the actual damages would equal the spread between the two interest rates.
Indeed, this is the result recently reached by two federal courts in the Northern District of Illinois. In the case of Brugger v. Elmhurst Kia,9 Judge Kennelly wrote, denying defendant’s motion to dismiss: "[Plaintiff] has adequately alleged actual damages—that he could have taken the disclosures and obtained better financing terms from some other source."10 Judge Hibbler, in the case of Crowe v. Joliet Dodge,11 agreed: "Plaintiff adequately alleged actual damages."12
Coupled with another Northern District case that dealt with this issue in the context of a motion for summary judgment,13 these decisions represent a significant victory for car buyers, who now are clearly entitled to receive and keep copies of their finance contracts before signing on the dotted line.
Practice tip. Because the availability of this cause of action seems to hinge on being able to allege actual damages, one should not allege the Polk violation unless the interest rate in the buyer’s contract is sufficiently high, so that the existence of the yield-spread premium is a virtual certainty.
Another issue that often arises in auto fraud practice is the failure of car dealers to comply with their obligations under the Illinois Commercial Code.
Suppose your shining brand-new car turns out to have a defect that substantially impairs its value to you. The Commercial Code allows you to revoke your acceptance of the car.14
So you go to your friendly car dealer and say: "The car you sold me has a defect I did not know about when I bought it. Therefore, I revoke my acceptance of the car. Here’s the car. Give me my money back."
The car dealer, all of a sudden not so friendly, is unlikely to be impressed. In fact, the response is probably going to range from the unprintable to "You signed a legally binding contract. The car is yours. Don’t bother us."
One of the theories advanced by car buyers in federal courts is that, by refusing to honor their revocations of acceptance, car dealers commit unfair acts in violation of the Illinois Consumer Fraud Act. Suing under the Consumer Fraud Act has obvious
advantages over a suit under the Illinois Commercial Code to confirm the buyer’s rightful revocation of acceptance. A usual car transaction does not involve enough money to warrant hiring a lawyer; additionally, regular people cannot afford lawyers, anyway. A suit under the Consumer Fraud Act, on the other hand, would allow the car buyer to vindicate his or her statutory rights by making access to attorneys within reach, because the Act contains an attorney fee-shifting provision for the prevailing consumer.15
But is refusal to accept revocation of acceptance a violation of the Consumer Fraud Act? At least two federal courts, interpreting Illinois law, answered "Yes."
The starting point for the analysis is the Act itself, which distinguishes between "unfair or deceptive acts or practices."16 The test for deceptive acts is different from that for unfair acts.17 The prevailing authority is that one may plead unfair acts or practices without pleading deception.18
The test for unfair act or practice under the Consumer Fraud Act is:
[O]therwise lawful practices that offend public policy, or are immoral, unethical, oppressive or unscrupulous, and cause substantial injury to consumers. People ex rel. Hartigan v. Knecht Services, Inc., 21 Ill.App.3d 843, 854 (Ill.App. 1991) (citing FTC standard for unfairness).19
Applying the law to the facts in a standard 1L fashion, one would argue that refusing to accept justified revocation of acceptance is an unfair act or practice under the Act because: (1) such refusal falls within an established concept of unfairness, offending the public policy of Illinois as expressed in Section 2-608 of the Illinois Commercial Code; (2) such refusal is oppressive to car buyers in that, instead of resolving the dispute summarily, they are forced to file suits and must wait years for the damages to which they are entitled; and (3) such refusal causes injury to car buyers by forcing them either to file suit or to forego redress. Of particular significance is the fact that such refusals may be the car dealer’s pattern or practice. The courts are hostile to finding that mere breaches of contracts violate the Consumer Fraud Act; however, when defendant has a pattern or practice of breaching its contracts, such conduct is deemed unfair.20
Indeed, in the case of Gaddy v. Galarza Motor Sport L.T.D.,21 Judge Conlon, after quoting the unfairness test, correctly concluded that the allegation that the car dealer’s assignee "refused to accept plaintiffs’ revocation of acceptance" stated a cause of action under the Consumer Fraud Act.22 Similarly, in Crowe v. Joliet Dodge, Judge Hibbler, although not engaging in a detailed analysis, also refused to dismiss plaintiff’s allegations of failure to accept a revocation of acceptance made under the Consumer Fraud Act.23 While the authority cited above is, admittedly, scant, the legislative history and cases from other jurisdictions that addressed this issue give additional support to the proposition that failing to accept proper revocation is an unfair act or practice.24
Practice tip. Unfairness is a question of fact.25 Therefore, in alleging failure to accept revocation of acceptance, one must allege the facts that make such a failure unfair. A Rule 2-615 dismissal then would be improper.
Emerging Issues. A common scenario: (1) a consumer, who is otherwise not in default, asserts revocation of acceptance and turns the car over to the selling dealer; (2) the consumer stops paying under the finance contract; (3) the finance company, which stands in the shoes of the dealer by virtue of the FTC Holder Rule,26 comes and takes possession of the car; (4) the financing company reports the car as either voluntarily or involuntarily repossessed; (5) the finance company sells the car. Queries: has the finance company (and/or dealer) exercised sufficient control and dominion over the car to find that they accepted the revocation as a matter of law? Does falsely reporting the turn-over of the car as a repossession, rather than revocation of acceptance, lead to liability under the Fair Credit Reporting Act or under the Illinois Consumer Fraud Act? In the above scenario, does the finance company’s failure to return the purchase price amount to conversion? Does "repossession" by a wholly-owned subsidiary of a manufacturer (such as Ford Motor Credit, or Chrysler Financial) amount to the manufacturer’s taking the car back, and failing to refund the purchase price in violation of its warranties? These issues are likely to be resolved as lemon law litigation comes of age.
One of the most obscure consumer protection statutes is the Credit Services Organizations Act.27 It provides that, if an entity is a credit services organization, the entity must allow the consumer what is commonly assumed to exist in car purchase cases, and what usually does not: a three-day rescission period.28
The future of a cause of action under the Credit Services Organizations Act is in the hands of the Illinois Supreme Court, which granted a petition for leave to appeal in the case of Midstate Siding & Window Co., Inc. v. Rogers.29 Nevertheless, several federal and state courts, refusing to speculate that the Illinois Supreme Court would overrule Midstate Siding, held that an allegation that a car dealer has acted as a credit services organization states a cause of action under the Act.30
Of particular note is the holding in Crowe, where the plaintiff brought a petition for injunctive relief and declaratory judgment as part of his complaint. In his ruling on the defendant’s motion to dismiss, Judge Hibbler not only refused to dismiss the petition, but also found that defendant Joliet Dodge was a credit services organization.31 The court refused to find that Joliet Dodge’s documents did not comply with the Act only because, as a factual matter, the issue required discovery.32
Thus, provisionally, unless the Supreme Court rules otherwise, the Act and the case law provide plausible authority to help aggrieved car buyers where the car dealer arranged for financing (thereby becoming a credit services organization) and where the purchase documents do not include the three-day rescission period (which is the case in virtually all car transactions).
The foregoing represents only a sampling of exciting new theories being litigated by the Greater Chicago auto fraud plaintiff’s bar. The size of this article does not permit me to report on the new developments in the Fair Credit Reporting Act area (which has rapidly become one of the most potent theories available in auto fraud litigation), or the recent stunning pronouncements by the otherwise conservative Seventh Circuit regarding the protections afforded to businesses (and, by implication, to the consumers) by the Illinois Consumer Fraud Act.33 One thing is certain: the collection of legal talent available in the Chicago area guarantees many more cutting-edge developments in the field of auto fraud litigation.
1 These include: Truth in Lending Act, 15 U.S.C. §1601 et seq.; Motor Vehicle Information and Cost Act (the Odometer Act), 49 U.S.C. §32101 et seq.; Equal Credit Opportunity Act, 15 U.S.C. §1691 et seq.; Fair Credit Reporting Act, 15 U.S.C. §1681 et seq.; Magnuson-Moss Warranty Act, 15 U.S.C. §2301 et seq.; Illinois Consumer Fraud Act, 815 ILCS 5/1 et seq.; Illinois Credit Services Organizations Act, 815 ILCS 605/1 et seq; breaches of warranties under UCC; rejection or revocation of acceptance under UCC; common law fraud, conversion, wrongful repossession, and the like.
2 815 ILCS 375/5 (2000) ("Notwithstanding any other provision of this Act or any other law of this state, there is no obligation or duty to disclose to an obligor under a retail installment contract: (i) any agreement to sell, assign, or otherwise transfer the contract to a third party for an amount which is equal to, in excess of, or less than the amount financed under the contract; or (ii) that the assignee of the contract or the person who funded it may pay the seller or the person who originated the contract all or a portion of the prepaid finance charges and other fees or a portion of the finance charge to be paid by the buyer over the term of the transaction or any other compensation irrespective of how the compensation is determined"). I leave without further comment the obvious "special legislation" implications of such a provision.
3 Polk v. Crown Auto, Inc., 221 F.3d 691 (4th Cir. 2000).
4 The Truth in Lending Act implementing regulations issued by the Federal Reserve Board, 12 C.F.R. § 226 et. seq.
5 12 C.F.R. ¶226.17(a)(1).
6 12 C.F.R. ¶226.17(b) (emphasis added).
7 Polk, 221 F.3d at 692.
8 Brown v. Payday Loan Corp., 202 F.3d 987 (7th Cir. 2000).
9 Brugger v. Elmhurst Kia, 2001 WL 845472 (N.D. Ill. 2001).
10 2001 WL 845472, at *1.
11 Crowe v. Joliet Dodge, 2001 WL 811655 (N.D. Ill. 2001).
12 2001 WL 811655, at *3.
13 Holley v. Guree Volkswagen & Oldsmobile, Inc., 2001 WL 243191, at *3 (N.D. Ill. 2001).
14 810 ILCS 5/2-608.
15 815 ILCS 505/10a(c).
16 815 ILCS 505/2 (emphasis added).
17 Robinson v. Toyota Motor Credit Corp., 351 Ill.App.3d 1086, 1095, 735 N.E.2d 724, 733, 249 Ill.Dec. 120, 129 (1st Dist. 2000).
19 Gaddy v. Galarza Motor Sport L.T.D.,, 2000 WL 1364451, at *3-4 (N.D. Ill. 2000).
20 FTC v. Orkin Exterminating Co., 108 F.T.C. 263, 349 (1986), aff’d sub. nom., Orkin Exterminating Co. v. FTC, 849 F.2d 1354 (11th Cir. 1988) (systematic breaches of contracts held unfair).
21 Gaddy, 2000 WL 1364451.
22 2000 WL 1364451, at *4.
23 2001 WL 811655, at *9.
24 See, e.g., "Reauthorization of the Federal Trade Commission Before the Senate Committee on Commerce, Science and Transportation," 97th Cong., 2d Sess. 23, 27 (violation of UCC is unfair); Ford Motor Co. v. Mayes, 575 S.W.2d 480, 486 (Ky. App. 1978) (unreasonably refusing to allow a car purchaser to revoke acceptance is unfair); Town East Ford Sales, Inc. v. Gray, 730 S.W.2d 796, 807 (Tx. App. 1987) (same).
25 Gaddy, 2000 WL 1364451, at *4.
26 16 C.F.R. §433.
27 815 ILCS 605/1 et seq.
28 815 ILCS 605/7.
29 Midstate Siding & Window Co., Inc. v. Rogers, 309 Ill.App.3d 610, 722 N.E.2d 1156 (3d Dist. 1999), petition for leave to appeal granted, 189 Ill.2d 661, 731 N.E.2d 765 (2000) (applying the Act to a building contractor).
30 Brugger, 2001 WL 845472, at *2 (refusing to dismiss without guidance from the Supreme Court); Gaddy, 2000 WL 1364451, at *3 (as applicable to a financing institution); Jafri v. Lynch Ford, 99 CV 7852 (N.D. Ill. Aug. 25, 2000, Guzman, J.) (allegation states a cause of action); and Harris v. Castle Motor Sales, Inc., 2001 WL 477241 (N.D. Ill. 2001) (declining to predict that the Illinois Supreme Court will overrule the leading case and holding: "The Illinois Appellate Court’s decision presents plausible authority to hold Defendant [car dealer] liable under the CSOA"). Moreover, the Circuit Court of Cook County, on December 29, 2000, after a bench trial, found a car dealer liable under the Act in the case of Cannon v. William Chevrolet, 99 L 1102.
31 2001 WL 811655, at *13.
33 Cozzi Iron v. U.S. Office Equipment, Inc., 2001 WL 514124 (7th Cir. 2001) (complaint alleging oral misrepresentations contrary to written contract terms states a cause of action under the Illinois Consumer Fraud Act).
Dmitry Feofanov, a 1994 graduate of the Chicago-Kent College of Law, is a partner with Brooks, Adams and Tarulis in Naperville. Until the beginning of his association with Brooks, Adams and Tarulis in 1996, he was a clerk for Justice David Harris of the Iowa Supreme Court, and a staff attorney for the Illinois Appellate Court for the Fourth Circuit. Mr. Feofanov concentrates his practice in auto fraud and lemon law litigation.