Resource Center - Industry Articles
What’s In YOUR Dealer Agreement?
by Thomas B. Hudson, May 15 2009
Looked at your dealer agreement with your financing sources lately, Bunkie? I'll bet you Mama's cornbread recipe that, in that agreement, your dealership makes a representation and warranty that it has complied with all state and federal laws in connection with the retail installment sales contracts that you sell to the financing source.
Did you ever wonder why such language appears in these contracts and how a financing source might use the language to make the dealer take back a contract? In times like these, after all, you can bet that financing sources will be examining the files containing defaulted contracts with a fine-toothed comb to find ways to avoid taking losses.
Well, wonder no longer. Here's a perfect example of how these provisions work.
First National Bank of Ottawa sued Rosemary Dillinger, Clifford Mounts, and Rub Chevrolet Buick Oldsmobile, Inc., in connection with the sale of a vehicle. The undisputed evidence at trial established the following facts. Mounts and Dillinger contracted to buy a truck from Rub Chevrolet. Mounts told a Rub Chevrolet employee that he made $9 per hour at his job. The employee was also told that Dillinger had income of about $1,200 per month from Social Security disability benefits. Nevertheless, the employee had Mounts and Dillinger sign a blank credit application and falsified the application by misrepresenting the annual incomes of Mounts and Dillinger as $21,600 and $30,000, respectively. The falsified application was faxed to the Bank, and the Bank agreed to buy the financing contract from Rub Chevrolet. Mounts and Dillinger defaulted on their monthly payments, and the truck was repossessed.
The Bank filed a 5-count complaint against the defendants. Count I alleged that Mounts and Dillinger breached their contract with the Bank. Counts II and III alleged that Rub Chevrolet fraudulently misrepresented the incomes of Mounts and Dillinger. Counts IV and V alleged that Rub Chevrolet breached its contract with the Bank, which contained a warranty by Rub Chevrolet that the sale of the vehicle "was completed in accordance with all applicable federal and state laws and regulations." Counts IV and V alleged that the sale of the vehicle violated a section of the Illinois criminal code that provided that one commits wire fraud when one "devises or intends to devise a scheme or artifice to defraud or to obtain money or property by means of false pretenses, representations, or promises" and transmits a document in furtherance of the scheme. The Bank alleged that Rub Chevrolet participated in a scheme to defraud the Bank of money based on its misrepresentations of the incomes of Mounts and Dillinger.
The trial court found that Mounts and Dillinger breached their contract with the Bank. In finding Rub Chevrolet liable on two counts of fraudulent misrepresentation, the court found that the Rub Chevrolet employee had Mounts and Dillinger sign a blank credit application and then falsified the incomes of Mounts and Dillinger to induce the Bank to buy the financing contract. However, the court found that Rub Chevrolet did not partake in a "scheme or artifice to defraud" the Bank as defined in the Illinois criminal code and, therefore, did not breach its contract with the Bank. The Bank appealed from the judgment for Rub Chevrolet on Counts IV and V.
On appeal, the Bank argued that the trial court erred when it found that Rub Chevrolet was not liable to the Bank on two counts of breach of contract. Specifically, the Bank argued that the trial court erred when it found that Rub Chevrolet did not partake in a scheme to defraud the Bank as defined in the criminal code.
The Appellate Court of Illinois reversed the trial court's decision that Rub Chevrolet did not partake in a "scheme or artifice to defraud" the Bank. The appellate court noted the undisputed evidence of falsification and faxing of the application presented at trial. The court observed that no argument was made that the employee acted outside the scope of his employment or that Rub was otherwise not liable for his conduct. The court stated that it believed that Rub Chevrolet's plan constituted a "scheme" to defraud the Bank through false representations, violating Illinois law, and that by engaging in such a scheme, it breached its contractual warranty to the Bank that the sale of the vehicle "was completed in accordance with all applicable federal and state laws and regulations."
This lawsuit involved only the civil claims of the Bank. Facts like the ones alleged in this civil case often interest state and federal prosecutors and, when they do, can lead to criminal charges. In fact, a dealer from the Carolinas with over 50 years of experience recently learned that lesson the hard way and has pled guilty in a plea deal that will earn him over a million dollars in penalties and will require him to stay away from his dealership for approximately two years.
You might want to post this article in the break room. It might just keep some of your folks from having to wear those orange jumpsuits.
First National Bank of Ottawa v. Dillinger, 897 N.E.2d 358 (Ill. App. October 23, 2008).
*Thomas B. Hudson, Esq. (tbhudson@hudco.com) is the Publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry. He is also a partner in the Maryland office of Hudson Cook, LLP. Spot Delivery and CARLAW are produced by CounselorLibrary.com LLC, 7250 Parkway Drive, 5th Floor, Hanover, MD 21076-1343. For information, call 410-865-5411 or visit www.counselorlibrary.com.
