Representing Consumer in Failed Yo-Yo Transactions

A. Background of Yo-Yo Sales, aka Spot Deliveries

A yo-yo or spot delivery is a very common sales practice with both new and used car dealers, and it is probably the most insidious practice affecting consumers with poor credit histories. This is how it works. In response to advertising offering “second chance financing,” a consumer with a less than sterling credit history appears at a dealership seeking to buy an automobile. After choosing a particular car to purchase and permitting his trade-in vehicle to be appraised, the consumer will be asked to provide a substantial cash downpayment, and sometimes a trade-in, and sign all of the usual paperwork, including a buyer’s order, a retail installment contract, a title application, a promise to obtain insurance sheet and odometer disclosure documents, and, in addition, the consumer will be asked to sign a document usually referred to as a “bailment agreement” or “courtesy delivery agreement.”

Some wags refer to these documents as “MacArthur agreements.” This is based on General Douglas MacArthur’s famous promise that “I shall return” after he was forced to depart the Philippines in World War II. The relevance of this moniker will soon become apparent.

In the bailment agreement, the dealer typically promises to seek financing on the terms set forth in the other documents, but, if the dealer is unable to obtain financing on those terms, then the consumer is obligated to return the vehicle upon request and the dealer can apply daily and mileage use charges against any cash downpayment provided by the consumer. Many of these bailment agreements even provide that the trade-in may be sold immediately, even if the dealer later claims the deal was not completed due to the failure to “obtain financing.” Leaving his trade-in, if any, with the dealer, the consumer then drives away, often with a temporary dealer plate stating that a sale occurred that day, but often the consumer is only allowed to retain a copy of one document, the bailment agreement. Frequently, consumers in these transactions are told that they will receive a copy of the retail installment contract in the mail or when they come to pick up their permanent license plates. Most of these consumers drive away assuming that the deal is final.

After driving off in a new vehicle, the dealer attempts to sell the retail installment contract, and the right to receive the monthly payments, to a sub-prime finance company. If the dealer is unable for any reason to sell the contract or at least not on the terms set forth in the contract, the dealer will usually call the consumer and ask for either the car to be returned or the consumer to sign a new retail installment contract, frequently back-dated to the date of delivery, with terms less favorable to the consumer, such as a higher downpayment, a higher interest rate and consequently higher monthly payments, or the addition of a co-signor. In fact, sometimes dealers ask consumers to return and sign several different retail installment contracts. 

When the retail installment contract is not sold or renegotiated and sold, the dealer takes the position that no sale was ever consummated, as it has not transferred title (which only occurs when the dealer is paid in full by a finance company). Instead, because no financing has occurred, the argument goes that the transaction was merely a form of rental and an objecting consumer will have daily and mileage rental charges assessed against their downpayment. When such a deal goes south and a consumer demands the return of the trade-in and cash downpayment, the dealer frequently says the trade-in has already been sold and that the consumer is not entitled to any refund due to significant use, relying on the “bailment agreement.” (Marvin Zindler calls this process “dehorsing” when consumers are denied the return of their tradein.) To avoid arguments over the existence of a sale on specific terms, dealers have alternated between providing no copies of the retail installment contract until after funding at the time of assignment or by providing a copy of the retail installment contract with no dealer signature (based on the feeble argument that it was not a final agreement without such a signature).

Not surprisingly, the dealer will typically assert that the retail installment contract was consummated on the day the consumer signed when it is able to sell that contract and obtain funding from a finance company, but, on the other hand, the dealer will assert that no sales transaction was ever consummated if it was not able to sell the finance contract even though the consumer has already signed. Talk about a one-sided agreement! This is one of the best examples of a “tails I win/heads you lose” transaction.

B. Are such transactions even subject to challenge?

The legal effect of the “bailment agreement” and the eventual failure to sell the retail installment contract turns largely on whether there is a “condition precedent” or “condition subsequent” contractual transaction. If this is a “condition precedent” deal, the dealer must retain title, the plates must be dealer use license plates and the dealer must provide the insurance coverage. In a “condition precedent” deal, the transaction is not consummated until the dealer sells the retail installment contract. In short, with a condition precedent contract, no agreement exists until the condition is met. If this is a “condition subsequent” deal, the dealer would be entitled to rescind the contract if the subsequent condition of contract sale is not met. With a “condition subsequent” deal, title should pass immediately, temporary dealer sale plates are permissible and the consumer-buyer is responsible for insuring the vehicle. Thus, if a condition is not met, one or both of the parties are entitled to cancel an agreement that has already been consummated.

It is hard to determine whether the “spot delivery” transactions are either “condition precedent” or “condition subsequent,” because dealers set up the deals using elements of both types of transactions. For example, dealers typically retain title and do not apply for a new certificate of title showing ownership in the name of the consumer-buyer until the deal is funded following the sale of a retail installment contract to a finance company, and this suggests the transaction is a “condition precedent” transaction.

Under Tex. Bus. & Com. Code § 2.401, however, it can be argued that title passes immediately upon delivery of the vehicle and that retention of the certificate of title only means the dealer has retained a security interest. See, e.g., In re Johnson, 230 B.R. 466, 468-469 (Bkrtcy.D.D.C. 1999).

On the other hand, dealers typically provide temporary license plates that can only be used when a vehicle has been sold according to Tex. Transp. Code § 503.603, and they require the consumer-buyer to maintain insurance on the vehicle. Moreover, under Tex. Fin. Code § 348.101(b)(4), a retail installment contract for the purchase of a vehicle can only be tendered for signature when it is “complete as to all particulars,” which suggests that the contract must be binding when tendered for signature. Also, if these are “condition precedent” transactions, the trade-in should not be sold until the condition of contract sale has occurred, but dealers frequently sell the trade-ins very quickly, or at least represent that to the consumers caught in the web of these transactions. In addition, if these are “condition precedent” transactions, no interest can be earned until the condition of contract sale occurs, and yet dealers always allege that interest can be earned from the date the first contract was signed and delivery of the vehicle was made. Finally, the execution of a retail installment contract with an entirety clause and no language on the sale being conditional could render invalid all other documents with contrary language.

For example, many retail installment contracts used in Houston have language indicating that the contract “contains the entire agreement between you and us relating to this contract.”

1. Attacks on “condition subsequent yo-yo’s

I believe that these transactions should ordinarily be considered “condition subsequent” transactions, which means that there has been a consummated transaction. For TILA purposes, the transaction is consummated when the consumer is obligated and, according to the only two courts of appeals to rule on the issue, that is when the consumer signs the retail installment contract. Nigh v. Koons Buick Pontiac GMC, Inc., 319 F.3d 119, 123-124 (4th Cir. 2003), cert. granted on other grounds, 2004 U.S. LEXIS 677 (2004); Bragg v. Bill Heard Chevrolet, Inc., 374 F.3d 1060, 1066-1068 (11th Cir. 2004).

From that conclusion, a number of consequences follow. First of all, the failure to provide copies of the retail installment contract to the sub-prime consumers in these transactions constitutes a violation of the Truth-in-Lending Act. The finance company which is the assignee on the retail installment contract probably has no liability for this TILA violation, because it is not apparent from the face of the contract paperwork which followed the assignment. See 15 U.S.C. § 1641(a).

Polk v. Crown Auto, Inc., 221 F.3d 691, 692 (4th Cir. 2000); Lozada v. Dale Baker Oldsmobile, Inc., 197 F.R.D. 321 (W.D. Mich. 2000); In re Williams, 232 B.R. 629 (Bkrtcy.E.D. Pa.), aff’d as corrected, 237 B.R. 590 (E.D. Pa. 1999). See Revisions to Official Staff Commentary to Regulation Z, 67 F.R. 16980, 16982-16983 (April 9, 2002). Unfortunately, consumers can only recover for this type of violation if there are “actual damages.” Baker v. Sunny Chevrolet, 349 F.3d 862 (6th Cir. 2003). Second, antedating the contract can render the APR disclosure inaccurate, entitling the consumer buyer to recover statutory damages under TILA. See Rucker v. Sheehy Alexandria, Inc., 228 F.Supp.2d 711 (E.D. Va. 2002). Third, representing a right to repossess the automobile subject to spot delivery and/or a right to retain the downpayment and the trade-in or the proceeds from its sale may violate the DTPA, and in particular § 17.46(b)(12), if the contract had been consummated and the consumer had not defaulted. Fourth, if the transaction was of the “condition subsequent” variety, the dealer was required to comply with Article 9 of the UCC when it repossessed and disposed of the vehicle following repossession. If the repossession was not performed in a peaceable manner or no notice of sale was given after repossession, the dealer will be subject to minimum statutory damages under Tex. Bus. & Com. Code § 9.625(c)(2).

Failure to give notice or to sell the vehicle in a commercially reasonable manner will further preclude the dealer from seeking a deficiency judgment. See Comment 4 following Tex. Bus. & Com. Code § 9.626, the State Bar Comment following § 9.626, and Tanenbaum v. Economic Laboratory, Inc., 628 S.W.2d 769 (Tex. 1982).

2. Attacks on “condition precedent” yo-yo’s

Even if a court finds a “spot delivery” to be a “condition precedent” transaction, consumers may still challenge the dealer’s conduct. First, a consumer can sue under the DTPA for a misrepresentation if he was told that financing had been approved when it turned out otherwise. See Taylor v. Butler, 2003 Tenn. App. LEXIS 308 (Tenn. App. 2003). This is a fraud in the inducement claim. Second, if the consumer complied with his obligations under the bailment agreement after being informed that the retail installment contract could not be sold, the consumer may have a breach of contract claim if the downpayment is not returned. See Violette v. P.A. Days, Inc., 2002 U.S. Dist. LEXIS 23246, * 13-14 (S.D. Ohio 2002). Third, the failure to return the trade-in when a spot delivery fails may well be an unconscionable act, entitling the consumer to relief under the DTPA. Fourth, if the dealer relies on the absence of its signature on the retail installment contract to argue the absence of consummation and to support its right to keep all or a portion of the downpayment, the dealer may have violated Tex. Fin. Code § 348.101(b) by tendering a retail installment contract for signature by the consumer when it was not “completed as to all essential provisions.” See, e.g., Cannon v. Metro Ford, Inc., 242 F.Supp.2d 1322, 1332-1333 (S.D. Fla. 2002). As such, the consumer would be entitled to statutory damages and attorney’s fees under Tex. Fin. Code § 349.003(a) equal to three times the actual loss caused by the violation (conceivably three times the amount of the downpayment being withheld).

3. Possible changes in the regulatory environment

In the “spot delivery” context, the risk of loss associated with a failed transaction could fall on either the consumer or the dealer. There are indications, however, that the regulatory landscape in this area may possibly change, because, on October 22, 2004, the Finance Commission authorized the Office of the Consumer Credit Commissioner to publish a proposed rule on this issue. Specifically, the Commissioner sought leave to publish a proposed rule on the issue in the Texas Register to solicit comments from the public and the affected industry. See the text of this proposed rule at www.fc.state.tx.us by scrolling down to "meeting packets" and look in section "D" under the title of the Office of the Consumer Credit Commissioner. The proposed rule would legitimize yo-yo sales under state law, but it would explicitly prohibit some of the biggest abuses. For example, no trade-in could be sold by a dealer until the underlying retail installment contract was actually sold to a third-party lender. Likewise, the dealer is stuck with the retail installment contract unless the contract is rescinded or sold to a third-party lender within 10 days. On the other hand, the dealer is entitled to recover for loss of use from the consumer’s down payment if the bailment agreement so provides and the transaction is rescinded within 10 days. That could mean that many consumers in yo-yo deals will have lost their entire cash downpayment.

C. What yo-yo cases are worth taking?

In my practice, I have agreed to represent consumers in these matters only where the consumer has suffered a concrete loss. This happens when a dealer has retained the consumer’s cash downpayment, sold a trade-in owned outright by the consumer and/or repossessed the new car. When the consumer has lost no cash and the trade-in was worth less than the amount still owed (this is referred to in dealer parlance as being “overunder”), I am usually reluctant to take the case. 

I am more likely to accept this kind of case if the consumer has returned a number of times to sign new contracts, especially when the subsequent contracts impose progressively worse terms upon the consumer. Moreover, I am more likely to accept such a case when the dealer has repossessed the spot delivered vehicle and violated some UCC provision during the repossession or later sale of the vehicle. Given the prevalence of the practice and the frequent unfairness in the dealer’s conduct, attorneys willing to represent consumers should consider handling these types of cases. Acceptance of such cases in the future, however, must depend upon the effect of any OCCC rule that may be promulgated to legitimize and regulate the practice.